The Indian equity market, after three weeks of consecutive rise fell during the previous week due to weak global cues, mainly from China.
However, the week started on a positive note, after witnessing a highly choppy and range bound trading for the next couple of days, the market fell significantly during the last couple of days, losing an average of 2.5% each day.
On a week-on-week basis,
BSE Sensex plunged 510 points or 3.25% to close at 15160.24
Nifty ended at 4481.4, down by 155 points or 3.3%.
Better-than-expected results for most major companies across the globe so far have been supporting the market to remain strong.
During this week, however, indications that China may restrict lending, deteriorating monsoon in major parts of India, some weaker-than-expected global economic data and a very high valuation for the market attracted profit booking. This further accelerated, as both important indices breached some important levels.
Auto, Realty and Metals remained among the top losers in the previous week.
Week Ahead
After rallying significantly for the last five months with only one correction in between, the market is likely to pause for some time. We saw this during the previous week.
It would be interesting to note whether the previous week’s fall was only a breather or it has the potential to drag the market further. This would be clear only in the coming week.
The recent rally was mainly driven by better prospects of economic recovery in emerging markets, mainly China and India.
Some indication of restrictions in lending and over-valuation of some sectors, coupled with skepticism on the latest consumption of certain raw materials raised concerns over the potential of the rally. This attracted profit booking.
Though some occasional buying may emerge at lower levels, the market is likely to maintain its weaker undertone in the coming week also.
As million thronged Capitol Hill earlier today, an aura surrounding Barack Obama lived upto the expectations. A something for all inauguration address was laden with hope and promise. Since so much is expected out of this one man – the inauguration speech was on familiar lines. Now is the tough road ahead – When each decision and action of Obama will be watched and evaluated by the world. Today, for worthy reasons global economy is looking for direction from him- while he chases a $825 BUSD bailout package to Congress.
Equity market like actions and not promises as was evident in the intra-day sell off on Wall-Street as the 44th President spoke. It probably needed more than assurances. Obama’s confession of the magnitude of the economic distress ensured that there is no honeymoon period for this “Change”. A change which historically will go down as epitome of the Civil Rights Movement.
Braving -2degC some 2 million came not only to see any other man becoming US President but to see – in-order to believe that their biggest inner hope could be true.
Legacy of Bush regime will be remembered as “War on Terrorism” ever since terror struck New York on 09/11. During his leadership, economy touched dizzy heights – however he stumbled near the finish line as “sub-prime reality” melted the entire success story in a flash. Today US reels under slow growth, high un-employment, a wide current account deposit, a depleted treasury account, a partisan atmosphere in Washington DC, list of endless companies at the verge of filing chapter-11 and some historic majors like Retail, General Motors and leading Banks like Bank of America and Citigroup on sick beds. No one knows the bottom of the carnage – and the confidence level is “Low”.
There would be no luxury of bed of roses for Obama to fight all this and beyond bailout he needs to sew a self healing mechanism to pull the economy out of this rut. While we may not directly equate “The Great Depression” and the current version of downturn but we may not be far off.America requires long term solution and not quick fixes of bail-outs. Obama vision of creating millions of jobs needs the plan and the execution team fast on board.
Supply is far outstripping the consumer demand leading to excess inventories in Industrial warehouses. These excess inventories threaten the existence of Industrial set up here- as consumers cut down on their expenditure fearing on the continuity of their pay checks and mortgage pressure.
Americans had lived far to easy with the ease of transaction associated with the plastic money. It is realization time, for many to see how the bills for those expenses incurred on credit cards can be paid. In absence of solutions it has shaken the walls of service providers itself.
Outsourcing remains an “If and a But” topic – and will remain so. There will be executive orders to effect changes to existing federal policy towards all these- some will be go happy and some will be somber decisions. Some will sound hope while other might sound hopeless to the outside world, but these are the times Americans for once needs to think and fix their own problem rather than looking beyond there borders.
Wall Street has shown the direction to the President – which he needs to buckle up and run – Time, is the essence. Obama has given “Hope” – For just that.
What’s an economic stimulus plan, really? Is it a cure for the corporate illnesses and rotting losses? No, it isn’t. It’s just an analgesic to kill pain for sometime. Then what is the cure – go to a doctor-seek advise (consulting), change your lifestyle (corporate planning), and let your immune system kick in.
Pumping in billions of dollars by various federal governments is nothing but aggravating the problem. It will only encourage corporate showing dismal numbers and making a beeline to have a pie of the cake. If today a Lehmann Brothers or a Citigroup or a GE is in trouble then there are reasons for that- in a level playing field. If WAMU and Barclays are in similar domains of work then it is imperative to discuss why WAMU failed and Barclays remained afloat. ICICI while reporting a huge M-to-M loss has to look into its portfolio to investigate why it find itself in a soup.
Risk reward ratio is a complex game, the riskier it get higher the rewards. The investment banker plays with the riskiest of assets class sometimes riskier than even the bad named hedge funds. They made merry when the going was good, why cry when the screws got tightened. People who kept money in fixed deposits were considered morons while the investors who parked money with headline making ‘sizzling’ fund-managers laughed all the way to the bank during the hay days in which the Indian Sensex kissed 21000. Of course, the story has reversed by 180 degrees now.
Sub-prime mortgage is more of excuse then a valid reason for the plight of the present economic downtrend. Any bank which gives away loans to individuals needs thorough reading of the credentials of the individual. Home loans are a long term engagement, payment of which runs into decades. ICICI in India offers you the disbursement cheque in a matter of 72 hours. A similar size nationalised bank in India might take months – there lies the strength of due diligence. The down trend should give the opportunity to banks and financial institution re-visits the way they handle their business. Its not the time to cry and blame external forces.
Depleting the government coffers can only mitigate the problem in short term – in the long run, it will result in a very disturbing set of fiscal numbers. A wide current account misery can have drastic repercussion and US for instance is sitting on that bubble.
A 13 trillion dollar economy cannot afford to have a 10% CAD where it stands now and more rescue measure will leave nothing to play with when economy goes deep. India can learn a lesson or two of its own mis-adventure in early 90’s with a bad set of GDP and fiscal numbers and a horrible BoP situation.
Equity and derivative markets will remain a risky business and thus the return are bound to be lofty. Funds from government treasuries composing of federal revenue collection is no way to save those who indulged in riskier business unless there exists a provision by which they paid a higher differential tax during their hay days.
All these macroeconomic factors boil down to two questions:
(1) Can the government stay idle? And (2) On broader side, have we seen the worst of Capitalism? Answers, to these questions can’t be a firm “YES” or a “No”. It’s a shade between the two.
India, has often been blamed for two much protection and we are still long way from convertibility and easing of FDI investment norms. During these down trends- exactly this is what is reflecting as robustness of Indian economy. The downtrend has come and stayed but the flight of capital is still under control and not many companies have unfolded. A CRR here, a SLR there have ensured that portion of the funds remains un-utlized but safe. These are small bargains a country needs to do be safe then sorry. Non-existent convertibility on capital account have ensured that the global companies India wing continues to do decent business while their parents in advanced west economies are gasping. This is apparent from the retrenchment number of a company like Yahoo when, one compares the numbers of Americas and India.
Let’s also examine what is happening by virtue of these bailout packages. Well it is reverse privatization or globalization as one may call in simplistic term. When US treasury bailed out Citigroup it came with the rider that Citigroup gets this cheque and pledges this much of right to federal authorities.This is bringing the US banks organized like those of Indian banks, which has a big RBI to live by.
Probably, this is the right middle path where the risk reward is safe. Bail out to a GM Inc. would mean a similar structure like a Maruti Suzuki. Our school of thought believes that this is probably the way to go as long as federal intervention is related to corporate governance and proper usage of funds rather than intervening in core operations.
Is the rescue package necessary – Yes!! Now that many have handled operations in the risky way and are down to the surgery table, they albeit deserve a second chance. It was easier for these corporate to grow in an environment with close to double digits GDP growth and ample liquidity and believe that it will be same always – but reality bites and gravity exists for sure.
Banks have to now believe that there is nothing called a sub-prime lending in the near term. Lending has to happen at PLR and round about and those who cannot get a loan because of a bad credit history needs to wait. As growth plateaued even a low earning individual working in an un-organised sector with no decent job security went for a loan – and a bank gave him, without accessing the risks in an elaborate way. Now this is a recipe for disaster in simple common sense terms.
Obama has announced a lofty bailout package and many other governments are following suit. Being a welfare state this is need of the hour, but at the same time the respective government needs to quickly put in place a watch dog which monitors the use of these funds. Obama has already told that monitoring will be tough – but so be it. If time has given Obama the opportunity to do a recovery of magnitude post the “The great depression of 1930’s, then he has the opportunity to be a Hero for the generations. Victory for Obama can be a renaissance for the globe in terms of economy pull back – while on the softer side, it will ensure that dark side of globe does not get any darker.
Some may argue that by giving big rescue packages probably the respective governments are not saving for the rainy day…but come on “its already raining heavily out there”!!