By Manik K. Malakar
The stock markets in India are never ruled by just the performance of the companies alone. There are a whole host of external and extraneous factors that also affect market sentiments. Thus, an item as esoteric as the extension of tax benefits in the US may have an indirect impact on the Indian economy.
“We have grown more confident of the economic recovery in Western Economies in 2011,” says Nischal Maheshwari – the Head of Research at Edelweiss Capital. Also the extension of tax benefits has boosted the possibility of growth in the US economy. Since the US still boasts of being the world’s largest economy this is turn will augur well for the rest of the world’s economies.
“Global cues will definitely have an impact on the markets back home. Rising commodity prices around the world is one of the main concerns with crude oil price becoming a major concern. Many predict that the crude prices would touch $100 in 2011 which would definitely put pressure on the cost of fuel for manufacturing units and will put holes in the pockets of the common man,” said Alex Mathews, Head Research, Geojit BNP Paribas.
As far as the rest of the world goes, Europe too will see good prospects though some areas will grow more than others, i.e. there will be a regional disparity. As far as the emerging markets go, the trend will be that of growth consolidating. The private sector will replace the public sector as the driver of the economy according to inputs from Edelweiss.
Yet there are domestic factors too that may yet harm the economic spectrum. For one thing, India’s current account deficit is at a record high. The current account deficit is now at a historic high of 4.1 per cent of GDP in the July-September quarter. This is significantly higher the than 3.2 per cent of GDP (downward revised from 3.6% of GDP) in the previous quarter.
Also there is a burgeoning trade deficit. The trade deficit widened to $35.4 billion in the current quarter from US$31.6 billion in the April-June quarter as the improvement in exports was more than offset by strong imports driven by robust domestic demand, according to inputs from Goldman Sachs Global ECS Research. This current account deficit is being increasingly financed by short-term inflows.
Inflation has again hit the roof and is ruling around the 18% mark. The key question as to the contours of the Indian bourses in 2011 has some interesting answers.
“We favour a defensive bias within the portfolio,” says Maheshwari. “We recommend focussing on low capital intensive industries with secular growth rates and industries with global interfaces, while avoiding rate sensitive cyclicals and financials,” he continued.
Thus the Edelweiss team have noted that they are moving energy, metals, utilities and healthcare from equal-weight to overweight. “We are downgrading BFSI from equal-weight to under-weight and are moving both industrials and real estate from over-weight to under-weight. We remain bullish on IT and maintain our over-weight stance on the sector. We continue to remain bearish on cement and telecom,” noted the Edelweiss’ team of Nischal Maheshwari, Kapil Gupta and Dipojjal Saha.
And it not just Indians who find our bourses attractive, but the FII’s (Foreign Institutional Investors) a key driver on the markets, will also be buying in. “FIIs consider India as a major investment opportunity as India has shown its resilience to the financial crisis and the growth that it achieved in the last year. They will continue to invest in India given the fact the India stock markets have given more returns compared to other major exchanges,” noted Mathews.
“High inflation keeps the rupee under pressure; indirectly it will help the exporters, which includes IT sector. IT, Pharma and Metals stocks are expected to out perform the broader market in the short-medium term. Telecommunication sectoral stocks and Scam tainted stocks should be avoided till we get a clear picture,” noted BNP Paribas’ Mathews.
“I hope the Government of India will succeed to tame inflation below 5.5 per cent by March 2011. This will help the markets to recover. The union budget and railway budget are the key factors which can affect the market,” Mathews concluded.
Sectors that would be affected by rising commodity prices
Rising commodity prices will keep the input cost up as most of the agri-commodities are in short supply. India being one of the major producers and the largest consumer of Sugar has seen major rise in its prices due to production halts in major producing countries like Brazil and Thailand and rising demand from the country. Wheat prices are also on the up as other major producers like Thailand, Indonesia, Pakistan witnessed wide spread crop damage due to floods increasing the export demand and driving the domestic price to the top. Rising fuel cost also pose a threat to the sector.
b) MINING & METAL
Rising metal prices will have a positive impact on this sector. We have seen the price of copper at all time highs on increasing demand from the industrial sector of major economies. The recent floods in Australia have left three quarters of Queensland coal mines underwater predicting a billion dollar loss in export income from a country which is the largest exporter of coal. This flood will take weeks to recede and even more time for restarting the mining activities. This has already triggered a jump in coal prices which is expected to continue due to the supply deficit. Same is the case of other base metals like lead, zinc etc. In the case of precious metals, Gold and Silver had touched their highest levels recently and it is expected that these metals will continue their upside this year also. Usually investors buy precious metals as an inflationary hedge.
The Rising crude oil price will help the oil refiners shrug off some of their burden but the oil marketing companies will find it difficult to push sales when the fuel rates are exorbitant.
d) BANKING AND REAL ESTATE
Rising commodity prices will keep the inflation rates at the top prompting the Central Bank to raise the interest rates further or adopt other liquidity cutting measures. This will affect the rate sensitive sectors like banking and realty.
— Alex Mathews, Geojit BNP Paribas