Global meltdown...this time the French Connection
Just when the global investors were beginning to think that the storm had passed came a fresh round of bad news on the growing pain from the subprime mortgages in the US. Markets around the world tanked on the last two days of the week after French bank BNP Paribas said it had suspended redemptions and valuations in three funds with exposure to the US subprime mortgages, citing lack of liquidity. US insurance giant AIG too warned that the malaise of subprime mortgages could be much deeper and wider than anybody ever thought. Countrywide Financial Corp., the largest US mortgage lender, said a prolonged period of poor conditions "could have an adverse impact on our future earnings and financial condition." To calm nervous investors and tide over the liquidity crunch central banks in Europe, US, Canada, Japan and Australia injected cash into their respective banking systems. The ECB actually did it for two successive days.
Though the pressure on overnight rates eased, the moves were not enough to stem the carnage across equity markets. The Dow Jones had its second worst day of the year, sinking by 387 points on Aug. 9. Key European markets in Germany, France and the UK lost 2% each. Emerging markets were not spared either with the Bovespa in Brazil tanking 3.3%, the RTS index in Russia crashing 2.4% and the ISE National-30 index in Turkey plunging 4.2%. The next day, Asian markets collapsed with the Nikkei in Tokyo and the Hang Seng in Hong Kong losing 2.4% and 2.9% respectively. Australia's S&P/ASX 200 slumped 3.7% to 5,936, South Korea's Kospi dived 4.2%. India's BSE Sensitive index staged a remarkable recovery from the lows of the day to close down 1.5%.
Looks like the turbulent times may last for a while before some stability and sanity returns to markets. Following the warnings from BNP Paribas and AIG, investors are now worried which part of the world the next bad news is going to come from. Right now nobody seems to have a clue how deep this contagion is and how long it will take for the global markets to get over this crisis. For now though, one can only wait and watch the mess unfold.
Govt unveils fresh ECB curbs
Even as the central banks across the world scrambled to boost liquidity and help banks deal with the cash crunch, here in India the Government and the Reserve Bank of India (RBI) were busy doing the opposite. The central bank announced new norms for overseas borrowings to prevent the relentless flow of foreign money from pushing inflation and the rupee higher. Restricting the use of foreign borrowings for domestic expenditure had been one of the measures recommended by the Prime Minister's economic advisory council headed by Dr C Rangarajan last month, to insulate the economy from excessive capital inflows.
As per the revised ECB norms, companies will now be able to raise only up to US$20mn abroad for rupee expenditure and that too with prior approval from the RBI. This means, companies can raise a maximum of Rs800mn abroad via debt for domestic expenditure. For the rest, they will have to look for local financing. Such funds cannot be brought into India until actual requirement in India, the RBI said. All ECBs above US$20mn will be allowed only for foreign currency expenditure for permissible end uses. This restriction will be applicable to ECBs permitted both under automatic route as well as approval route. ECBs up to US$20mn for foreign currency expenditure can be availed for permissible end-uses under automatic route.
All other aspects of ECB policy such as US$500mn limit per company per year under the automatic route, eligible borrower, recognised lender, average maturity period, etc remain unchanged. The new rules will not be applicable to borrowers who have already entered into loan agreement and obtained loan registration numbers from the RBI. Also, borrowers who have taken verifiable and effective steps, wherein the loan agreement has been entered into to avail of ECB in the previous dispensation, and not obtained the loan registration number, may apply to RBI.
Bulls run for cover amid global selloff
There’s a place so dark you can’t see the end…
a spot of light floods the floor
The market was extremely volatile this week as the bulls had a tough time charting their course for the future amid continuing concerns over the US subprime mortgage crisis and its impact globally. IT stocks made a comeback following the tightening of ECB norms and Fed's soothing remarks on the state of the US economy. However, soon the drive turned rocky for the bulls, as concerns mounted about the wider fallout of the slump in the American housing market. New evidence emerged that the subprime mortgage contagion in the US was spreading to other regions of the world.
Markets across the globe sank after French bank BNP Paribas said it had suspended redemptions in three funds with exposure to the US subprime mortgages. US Insurance major AIG too warned about the subprime mortgages and the largest US mortgage lender said a prolonged period of poor conditions could have an adverse impact on future earnings and financial conditions.
As a result, the key indices wiped off early gains of the week to close lower. The benchmark BSE Sensex lost 270 points or 1.8% to close the week at 14868 and the NSE Nifty fell 1.5% or 68 points to close at 4333. However, some value buying was seen on Friday in IT stocks, lifting the key indices from the one-month lows. Otherwise, it could have been much worse. Only, IT stocks survived the carnage, which took all the major sectoral indices deep into the red.
IT index stood firm in this volatile week after IT the tightening of ECB norms, which will result in lesser dollar inflows. Also, over the week, Rupee lost some ground against the US Dollar closing at 40.62. The revised ECB norms could prove good for export-centric sectors like IT and Textiles in the near term. Rupee had its biggest weekly decline in two months following a sell-off in local equity markets amid growing concerns U.S. subprime mortgage issue could spread to different regions. Index heavyweight TCS rose by over 4.5% to Rs1145, Wipro advanced 2.1% to Rs480, Infosys was up by 1.7% to Rs1952 and Satyam added 1.6% to Rs471. HCL-Tech rallied by over 7% to Rs319.
Metal stocks were among the major losers over the week, as a sell-off in LME got the better off the Metal stocks on Dalal Street. Also, the tremors of Subprime issues were also felt among the global metal prices. BSE Metal index fell by 4.1% during the week. JSW Steel fell by over 7.5% to Rs627, Tata Steel was down by 2.6% to Rs634, Sterlite Industries lost over 5.5% to Rs592 and Hindustan Zinc slipped 1% to Rs710.
Exposure to credit market was the talking point for the banking & Financial service stocks. Concerns grew among investors on Banks exposure to US sub prime market. Index heavyweight ICICI Bank was the second biggest loser among the 30-scriop’s of Sensex, it fell by over 5.5% to Rs864, HDFC Bank was down by 2.1% to Rs1130 and SBI declined 1.7% to Rs1606. While, Corporation Bank, Kotak Bank and Syndicate Bank were the major losers among the Mid-Cap stocks.
Profit booking was seen in FMCG stocks. Hindustan Unilever slipped 4.4% to Rs195, Tata Tea lost 4.6% to Rs695, ITC declined 3.5% to Rs163, Nirma was down by 3.5% to Rs162 and Britannia dropped 2% to Rs1599.
All eyes on global markets
"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."
The problems are a plenty and when the woes set in, it appears we have just scratched the surface. The movements of global markets have become an important part of the Indian indices. Things have been extremely choppy over the past few trading sessions. Expect another Manic Monday as global cues may well point to a weak opening. It may take a miracle on Wall Street to resurrect the hopes of bulls across the globe. Any bounce back should be used to pare your exposure to the equity market for the short term. Long term investors can remain invested and watch the show from the sidelines. U.S. Securities and Exchange Commission is checking the books at top Wall Street brokerage firms and banks to make sure they aren't hiding losses in the subprime mortgage meltdown. Another choppy week is in store.
Mutual funds: Everybody`s darlings
Once upon a time it was Reliance Industries (RIL). Then Infosys Technologies joined the bandwagon. And now, Bharti Airtel is the latest addition. The darlings of the mutual fund (MF) fraternity seldom change.
In a raging market where valuations may appear stretched, index stocks continue to dominate the 'buy' list of every fund manager. It seems that fund managers seem to hold some portion of their portfolio in index heavyweights to avoid missing the market rally by a wide margin. So, even when profit-booking takes place in these counters, mutual funds continue to hold at least some of these shares.
Reliance Industries is a classic example. One can't say the same for mid caps though. Fund managers' favourite mid-cap holdings change rapidly. The latest ones that are dominating the holding charts are Crompton Greaves, United Phosphorous and Cummins India.
It's not difficult to figure out why these stocks dominate the list. As the equity market continued to rise, retail interest in equities surged as well. Many MFs, which were flush with cash raised through their new fund offerings (NFOs) - had to plough in this cash somewhere.
Hence, companies which already had proven track records appeared to be safe bets. So, more money was pumped into these darling stocks. This is evident from the fact that the total number of shares of these companies with mutual funds has surged significantly as market valuations turned ripe. The Sensex was trading at 20 times historical earnings at the beginning of July '07, and 21 times historical earnings as in June '07.
A sustained rise in corporate earnings aided the surge in the Sensex. However, the Sensex has been trading above its historical averages. With the India Growth story intact and excess liquidity in the market, the demand-supply mismatch of quality stocks pushed up premiums.
So, the price of safe counters such as Reliance Industries shot up from around Rs 1,400 to Rs 2,000 levels, while Bharti Airtel and Crompton Greaves stocks have almost doubled in the past three-to-four months.
Technology and financial services are the most sought-after sectors, with Rs 22,000 crore and Rs 14,500 crore worth of share investments, respectively, as in June '07. The mutual fund industry has grown rapidly in the past few years, and this is evident from the rise in the assets under management (AUM).
According to the Association of Mutual Funds in India (Amfi), the AUM of mutual funds has increased 52% in the past one year to Rs 400,842 crore in June '07 from Rs 263,949 crore in June '06. To a large extent, retail money has been invested in equity mutual funds. Equity savings as a percentage of total financial savings has also moved up significantly.
Though the latest collated data is not yet available with the Reserve Bank of India (RBI) and Central Statistical Organisation (CSO), this figure is understood to have moved up from around 2% to more than 6% as of '06.