Saturday, October 18, 2008
Investors and speculators watched the Indian stock markets crash and a key index dip to the four-digit level with a distinct sense of déjà vu during the week ended Friday with sentiments completely battered by the fears of a US recession and an overall global slowdown.
Looking ahead, they feared more losses in the ensuing sessions, since some key measures by India's Finance Ministry and the central bank to infuse additional liquidity into the country's financial system over the past week had failed to lift the market sentiments.
As the market saw one of the worst drubbings in recent years, the sensitive index (Sensex) of the Bombay Stock Exchange (BSE) ended with a loss of 5.25 percent over the week, completely negating the impressive gain of 7.42 percent and 1.54 percent, respectively, during the first two days of trading.
"The fall was in line with what is happening across the globe. I'd expect the market to touch 9,500 points by next week," said Amitabh Chakrabarty, president of Religare Securities.
On most of the five trading days of the week, Finance Minister P Chidambaram sought to calm the nerves of anxious investors, saying there was no need to fear and that steps had been taken to infuse additional liquidity into the coffers of commercial banks to help them extend more corporate credit.
And the statements did work on the first two days.
But on each of the last three days of trading during the week, the index took a major beating - falling as much as 606.14 points, or 5.73 percent, on Friday alone.
The Sensex, which was ruling at an all-time high of 21,206 points barely nine months ago, has fallen nearly 25 percent over the past month and more than 45 percent over the past 52 weeks.
As many as 24 out of 30 shares that go into the Sensex basket ended with losses. The other six were led by Hindustan Unilever, up 8.56 percent and ICICI Bank, up 7.58 percent.
Hindalco led the losers, down as much as 20.40 percent over the week, followed by Tata Motors, down 16.49 percent, Oil and Natural Gas Corp, down 15.28 percent, Reliance Industries, down 14.52 percent, and Tata Steel, down 13.67 percent.
Foreign funds, which have been the main drivers of India's stock market upswing in recent years, were net sellers of equity in Indian bourses on each of the five days of trading this week, pulling out over a billion dollars.
These foreign institutional investors have been net sellers of equity worth USD 2.46 billion in October and USD 11.56 billion during the calendar year, latest data with the markets watchdog showed.
"There is a lack of interest from foreign institutional investors as well as retail investors due to the financial meltdown," said Ashok Jainani, head of research with Khandelwal Securities.
"Everybody is holding back on investing, as most of them feel the market will crash further."
The Sensex plunged to 53%, falling to four digits for the first time in more than two years on concerns of a sharp global economic slowdown and sluggish corporate earning. Bearish sentiment in global markets and heavy selling by FIIs drove many blue chips to all- time lows.
In nine months after hitting its all-time peak of 21,206.77 on January 10, 2008, the index dipped below 10,000 in more than two years. It had taken 21 months for the Sensex to touch the 20,000 level from the 10,000 level.
A series of measures announced by the government and the Reserve Bank of India failed to check rising capital outflow by foreign funds. Even inflation numbers did not helped.
The wholesale price index (WPI) Inflation declined further to 11.44% for the week ended Oct. 4, 2008, as compared to 11.80% in the week before due to moderation in the prices of essential commodities and also on account of falling crude oil prices. Government`s fiscal and monetary measures have helped to moderate the rising prices.
In an effort to pump liquidity into the global crisis stricken market, the Reserve Bank of India (RBI) decided to slash Cash Reserve Ratio (CRR) further by 100 basis points to 6.5% from the current level of 7.5%. This cut in CRR was made to inject additional liquidity into the system of the order of Rs 400 billion.
The 30 share index, Sensex plunged 552.5 points, or 5.25%, to 9,975.35 in the week ended Oct. 17, 2008. On the other hand, the broad based NSE Nifty plunged 205.6 points, or 6.27%, to 3,074.35 in the same period.
Mid-cap stocks dropped 131.16 points, or 3.57%, to 3,544.84 in the week. While small-cap shares plunged 187.59 points, or 4.31%, to 4,167.86 during the week.
Major gainers over the week in the sectoral indices were Realty which gained 0.07%, FMCG rose (0.08%), HC climbed (0.13%), IT went up (1.82%), and TECk rose (2.08%).
Among major losers in the sectoral indices over the week, Metal dropped 11.32%, Oil & Gas fell 10.9%, Capital Goods lost 9.29%, Power declined 7.7%, and PSU went down 5.43%.
Satyam, global consulting and IT services company, registered a substantial gain in consolidated net profit in the quarter ended September 2008. During the quarter, the profit of the company climbed 41.98% to Rs 5,808.50 million from Rs 4,090.90 million in the same quarter previous year. Consolidated total income for the quarter rose 35.31% to Rs 28,988.70 million compared with Rs 21,422.60 million in the prior year period.
NIIT Technologies, provider of services in application development on consolidated basis reported a rise of 7% on year on year (Y-o-Y) basis for the quarter ended September 2008. The net profit for the quarter stood at Rs. 367 million as compared to Rs 344 million in the previous year`s same quarter. The revenues were Rs 2587 million as against Rs 2,299 million for quarter ended September 2007, a growth of 13% on Y-o-Y basis.
Biocon, integrated healthcare company delivering biopharmaceutical solutions, registered a sharp fall of 53.64% in the consolidated net profit in the quarter ended September 2008. During the quarter, the profit of the company climbed 32.25% to Rs 250.20 million from Rs 539.70 million in the same quarter previous year. Consolidated total income for the quarter jumped 63.17% to Rs 4,577.30 million compared with the prior year period.
Larsen & Toubro (L&T), India`s largest engineering and construction conglomerate, registered a substantial rise in its standalone net profit for the quarter ended September 2008 driven by strong sales growth. During the quarter, the profit of the company climbed 32.25% to Rs 4,602.60 million from Rs 3,480.20 million in the same quarter previous year. Total income for the quarter jumped 41.99% to Rs 78,422.60 million, when compared with the prior year period.
Fundamentals and technicals are hardly heeded these days as investors and market participants across the globe wait for some signs of relief. Nothing seems to be very forthcoming despite guarded measures world over, including India. The only thing the bulls could bank on were some banking stocks which managed to clock some gains even as the Sensex fell below a psychological mark of 10,000.
The results season is on and there is no solace. When the big boys on the street start tumbling like nine pins the situation does get scary. Among the heavyweights, Reliance too will announce its numbers.
Global credit crisis and headwinds in the domestic economy have influenced heavy selling by FIIs in India. Over the last five days, FIIs have sold worth Rs5,042cr. Year to date, the figures stand at an alarming Rs47,838cr.
The Nifty is yet to find a bottom. We expect Nifty to trade within a range of 2,800-3,000 levels on the lower side. On the upside, we believe intermediate resistance will be witnessed at 3,350 levels.
Amid all the gloom and doom in global financial markets, the Indian skies witnessed a major strategic deal, with Jet Airways and Kingfisher Airlines joining forces to survive the turbulent business environment. However, the alliance came under pressure, with Air Deccan founder Capt. Gopinath slamming the move and expressed the desire to buy back his low-cost carrier from Vijay Mallya. Though later Mallya pacified Gopinath and assured him that Kingfisher Red (erstwhile Air Deccan) will not be scrapped. Even government regulators started scrutinising the alliance for any anti-competitive elements despite receiving Civil Aviation Minister Praful Patel's blessings. Jet and Kingfisher invited Air India to join the alliance, but the latter termed the deal as cartelisation.
Separately, Jet announced that it was laying off 800 cabin crew employees as it tries to fight off the crippling downturn in the local aviation industry. The company also announced that it was planning to axe 1,100 more people from its rolls over the next few days, sparking widespread public outrage. Political parties like Mumbai-based Maharashtra Navnirman Sena and West Bengal's CPI too asked Jet to rollback the retrenchments and threatened to disrupt the companies operations. Petroleum Minister Murli Deora too lambasted Jet's move, saying it was a wrong call as it came just before Diwali. Jet management said the job cuts were necessary to cut losses and enable the airline to become more efficient. But, under pressure from several quarters, Jet chairman Naresh Goyal finally reversed the 800 job cuts and asked the sacked employees to rejoin the company.
There were reports that Air India was planning to send 15,000 non-operations employees on unpaid leave for up to five years. However, the Civil Aviation Minister denied such a move. Separately, Oil Minister Deora accused Jet, Kingfisher and Air India of defaulting on payments of over rs9bn towards the purchase of ATF from public sector oil marketing companies. The Ministry even threatened to stop fuel supply to these airlines if the dues were not paid up.
Separately, reports said that India's struggling airlines may cancel orders for new Airbus and Boeing planes as banks refuse to lend to unprofitable carriers amid the global tightening of credit. At risk are about 300 aircraft due to arrive in India in the next five years from Airbus and Boeing. Jet has already held talks about delaying Boeing planes, while Kingfishers Airlines has scrapped three Airbus o
Inflation, crude oil prices, interest rates, FII investments, currency exchange rates and global risks add to the stock market confusion, and sometimes even a professional investor finds the going tough.
Gopal Krishna Murthy of Vijayawada is a seasoned investor. Equities, mutual funds, real estate, fixed deposits...they all find a place in his portfolio. But as his investment surplus increased, Murthy began relying heavily on his broker. It worked fine till I was involved. But once I started to depend on intermediaries to manage my portfolio, it went all over the place, he says.
The relationship manager at his brokerage firm dangled the lure of quick profits in futures and options (F & amp;O) and Murthy shifted from delivery-based investment to speculating without understanding or realising the potential risks. In the cash segment too, Murthy's investments are in the red. He bought IFCI shares at Rs 95 but didn't sell even after they appreciated by 30%. His relationship manager insisted that the stock would double in value. It is now down to Rs 47.
Murthy is one of the thousands of investors who have turned traders thanks to the four-year bull run. There is a huge difference between a trader and an investor; an investor needs to define a time frame for an investment, whereas a trader looks at profits, says Manish Shah, associate director, Motilal Oswal Securities. Market experts see no room for confusing the two. The basic tenet of investing is to stick to asset allocation.
This is a simple rule, but it's difficult to follow because most investors get carried away by the prospect of earning 100% or more. In their greed, they forget that the stock market functions on a risk-reward equation; the higher the risk, the higher the return. That the reward can be negative is a fact that most players simply don't seem to comprehend.
Inflation, crude oil prices, interest rates, FII investments, currency exchange rates and global risks add to the stock market confusion, and sometimes even a professional investor finds the going tough. Most investors would rather trust an intermediary than go beyond the basics and learn about the new risks associated with their investments.
These risks will ultimately affect their financial goals and plans. Those who enter the stock market without understanding their risk profiles will not be able to invest in instruments that best suit their needs.
Another common mistake that investors make is to buy and forget. It's important to track your investments regularly and book profits to gain from them. Remember, investment calls for discipline and patience. Blindly following what friends, colleagues, even overzealous brokers and relationship managers recommend, could lead to greater losses than you are willing to bear. It's your money at stake and you're the one who has to deal with any losses.
Meanwhile in India, the Government stepped up efforts to ease the credit crunch, as last week's measures failed to boost liquidity, especially for Mutual Funds, who were facing severe redemption pressure in money market funds. The Finance Minister continued to swear by the inherent strength of the India growth story, and even cited a recent note by IMF's research department that had stated that the Indian economy would continue to do well despite the impact of the global liquidity crunch. He added that the root cause of the present uncertainty is liquidity and not any dramatic change in the fundamentals of the economy.
The RBI pulled up banks for not parting with loans in the wake of the global financial crisis and the tightening of domestic liquidity. The central bank also chided banks for not restructuring the dues of the SMEs, under the prudential guidelines. The RBI decided to allow banks to take trading positions in Interest Rate Futures (IRFs). The central bank decided to further tighten the prudential norms for banks’ exposure to derivative instruments. The RBI said that overdue receivables from corporates on account of mark-to-market (MTM) value of a derivative contract will be treated as a non-performing asset (NPA), if these remain unpaid for 90 days or more.
The RBI decided to conduct a special 14-day repo at 9% per annum for a notified amount of Rs200bn with a view to enabling banks to meet the liquidity requirements of Mutual Funds. The central bank also allowed banks to accept as collateral certificate of deposits (CDs) held by mutual funds for 15 days. However, banks borrowed only Rs35bn on Tuesday through the special LAF window, prompting the RBI to extend the special 14 day repo facility everyday until further notice. The money market remained stressed, forcing the RBI to slash the CRR by another 100 basis points with retrospective effect (Oct. 11).
In addition, the central bank allowed banks a further leeway of 0.5% in SLR to meet the cash requirements of mutual funds. On Sept. 16, the RBI had permitted banks to avail of additional liquidity support to the extent of up to 1% of SLR. The RBI said it will set up Special Market Operations (SMO) for public sector oil marketing companies when oil bonds become available. It also released the Rs250bn reimbursements to banks towards the farm loan waiver. The RBI also increased the interest rates on NRI deposits and FCNR (B) deposits by 0.5%.
Banks were also allowed to borrow funds from their overseas branches and correspondent banks up to a limit of 50% of their unimpaired Tier I capital as at the close of the previous quarter or US$10mn, whichever is higher, as against the existing limit of 25%. Meanwhile, capital market regulator SEBI too swung into action to stem the selloff in stock markets. It hiked the exposure margins for gross open positions in the Futures & Options segment to cut down volatility. The regulator also tightened the disclosure norms for FIIs and their sub-accounts to clamp down on 'illegal' short selling in overseas markets.
Global stock markets were quite volatile this week, and the bias remained negative, as investors continued to be skeptical of the series of measures taken to shore up the banking system and unclog the credit markets. Sure, the money market rates did improve from last week, but still remained much above the levels just before the Lehman Brothers' bankruptcy filing. Also, the logjam in credit markets put several large scale M&A deals in jeopardy. On the whole though, this week was much better after last week's carnage, which was one of the worst ever for the global equity markets.
Britain led the way this week's government initiatives to lift troubled banks out of a deep hole, unlock the credit markets and stop the bloodletting in stocks. The UK unveiled a plan partially to nationalise some of its biggest banks. £20bn (US$35bn) of public money will be injected into Royal Bank of Scotland and £17bn into HBOS and Lloyds TSB (which have announced a merger) in return for substantial stakes - around 60% in RBS and 40% in Lloyds TSB-HBOS.
The US followed suit by providing US$250bn for bank recapitalisation; half of which will go to nine banks, including Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley. In return, the government will get non-voting preference shares that pay a 5% dividend, rising to 9% after five years. In a sign of growing tensions among policymakers, Sheila Bair, head of the US Federal Deposit Insurance Corporation, criticised the $700bn rescue package for banks for not doing more to help homeowners avoid foreclosure.
Germany said it would guarantee bank debt to the tune of €400bn (US$540bn) and supply an extra €100bn to stabilise financial markets; France unveiled a €360bn package of measures, including €40bn of capital funding for banks; and the Netherlands guaranteed €200bn in interbank lending. Austria, Italy, Spain and others also produced proposals.
UBS also got a bail-out. The Swiss government took a 9% stake in the bank and created a fund that allows UBS to offload US$60bn in toxic assets. Credit Suisse said that it won't follow compatriot UBS in transferring bad assets to a mostly Swiss National Bank-funded entity. However, it increased its Tier 1 capital base to 13.7% from 10.4% by raising 10 billion Swiss francs of new capital from major investors, including a subsidiary of the Qatar Investment Authority.
The Bank of Japan held an emergency meeting and decided to loosen up companies’ access to cash. Hong Kong provided a blanket guarantee on all bank deposits. And Australia introduced a stimulus bill to boost the economy, including funding for first-time homebuyers. South Korea's policy makers held an emergency summit, seeking steps to restore confidence after shares plunged to a three-year low and the won declined by the most since the 1997 Asian crisis.
The United Arab Emirates (UAE) pledged an extra US$19bn for its banks. Qatar said it would take stakes of up to 20% in banks so that they could continue to fund regional infrastructure projects. Some questioned whether the Gulf states’ sovereign-wealth funds still had an appetite to invest abroad, a lifeline to many earlier in the credit crunch.
Concerted efforts by governments around the world to unfreeze the short-term credit markets started to bear some fruit. The cost of borrowing dollars in London for three months was headed for a weekly decline, the first one since July, after central banks injected billions of dollars into money markets and governments guaranteed loans. Money-market rates jumped after Lehman Brothers went bankrupt on Sept. 15.
The dollar rate will drop about 10 basis points to 4.4% on Friday. It was 4.82% a week ago. Global money market rates fell this week after central banks joined forces to offer lenders an unlimited supply of dollars and the ECB did the same with euros. Still, lending costs among banks remain near record highs relative to the Federal Reserve's benchmark rate of 1.5%.
Meanwhile, European leaders called for an overhaul of the global financial system to avert another major crisis. Europe demanded a global summit to discuss the creation of a new form of capitalism, based on moral values, and the effective regulation and supervision of all corners of the financial world, including hedge funds and rating agencies.
The proposed global summit has been described as the starting point for a new "Bretton Woods", the 1944 meeting of Western leaders that led to the foundation of the World Bank and the IMF. It would probably happen in November or December. Britain’s prime minister, Gordon Brown, said the world needs more transparency, integrity and systems of global governance. He wants to see cross-border colleges of national supervisors to assume oversight of the 30 largest financial institutions in the world, by the end of the year, and to see the IMF become an early warning system for problems looming in the world economy.