Apart from economic and industry- and company-specific developments, the market is sensitive to policy makers
By Mohan Sule
Never before has the outlook been so uncertain. Integration with the global economy has boosted liquidity and valuations but also made the market vulnerable to volatility not restricted to domestic events. If the low interest rates in the developed world saw unprecedented foreign portfolio investment during the boom period of 2003-09, the global credit crunch, slow recovery of the US economy, and the fluctuations in the future of the euro zone have turned the market range-bound. The variables affecting stock movements have increased. Besides company-specific projections capable of impacting market performance, earning estimates based on economic growth calculations also contribute to the flux. Projection of hardening of interest rates prompt investors to reduce exposure to automobile and consumer durables stocks, while a depreciating rupee spells opportunities in export-related stocks. Capital goods stocks slip with a slowing economy, which proves to be a boon to the FMCG sector. This cycle has predictability in its occurrence and also the response. Heating up of the economy, as indicated by inflation, stock market indices, and commodity prices, is required to be cooled by ramping up the cost of money, tightening money injection, and even imposing some sort of barriers to control the entry of overseas capital.
The market second-guesses how the central bank would act. Yields on government securities goes up in anticipation and valuations of interest-rate sensitive stocks plateau off. Institutional investors hedge their positions by taking contra bets in the derivatives market to cushion any price weakness in the cash segment. Companies implementing capital expenditure plans suffer on signs of recession in the form of four consecutive quarters of falling growth. Increasingly, the role of central banks around the world has assumed critical importance in investors’ decision making. The Federal Reserve’s resolve to keep interest rates near static till 2014 signalled the timeframe for the US economy’s recovery. Recent rate cuts by the European Central Bank and China’s central bank were a reaction to the slowing global economy, evident from the fall in prices of copper and other commodities including crude oil. Another source of stress in India is budget making. Every year the market displays nervousness or excitement in the run-up, depending on its expectation. It is a mystery why the government has to wait for one year to make major policy announcements when the annual exercise should be restricted to recalibrating tax rates. Instead, the presidential speech can spell out the agenda for the ensuing session. Even the tax rate can be kept stable and uniform for a longer period. The Direct Taxes Code, requiring three-fourth votes for any alteration in rates instead of a simple majority necessary to pass the finance bill, and the Good and Services Tax would have achieved this feat.
Not only economic indicators, the market also factors in expected political developments. Investors display withdrawal symptoms if polls suggest election of a populist government. The expected win of a socialist candidate in France’s presidential election and left-of-the-center party in Greece caused a temporary liquidity freeze around the world. As if these routine disturbances do not make the already complex life of an investor more confusing, there is a new kind of uncertainty. It stems from abrupt changes in policies, applying brakes to the reform process, or reversing some of the entrenched decisions. The unexpected springing up of the General Anti-Avoidance Rule in the last budget and retrospective amendment in income tax laws on transfer of foreign companies’ Indian assets, rolling back 51% FDI in multibrand retail, and the Supreme Court’s decision to cancel 2G licences allotted in 2008 and the inability of the government to take a call on the base price for the 2G spectrum auction could be included in this category. Similarly, the eruption of the scandal involving about 20 banks in the US, Europe, Australia and Japan in rigging the London Inter-Bank Offer Rate used to borrow dollars for three months, threatens to shake up the foundation of the financial services industry, which has been recovering from government bailouts after the collapse of Lehman Brothers in September 2008. The most wrenching aspect is the alleged involvement of the British government, which wanted to keep interest rates low, in brining pressure on Bank of England. Increasingly, investors not only would have to be bothered about promoters diluting their stakes or equity but also the shift of ministers in the cabinet as was evident by the market’s spurt after the resignation of presidential candidate Pranab Mukherjee as finance minister.
Mohan Sule
By Mohan Sule
Never before has the outlook been so uncertain. Integration with the global economy has boosted liquidity and valuations but also made the market vulnerable to volatility not restricted to domestic events. If the low interest rates in the developed world saw unprecedented foreign portfolio investment during the boom period of 2003-09, the global credit crunch, slow recovery of the US economy, and the fluctuations in the future of the euro zone have turned the market range-bound. The variables affecting stock movements have increased. Besides company-specific projections capable of impacting market performance, earning estimates based on economic growth calculations also contribute to the flux. Projection of hardening of interest rates prompt investors to reduce exposure to automobile and consumer durables stocks, while a depreciating rupee spells opportunities in export-related stocks. Capital goods stocks slip with a slowing economy, which proves to be a boon to the FMCG sector. This cycle has predictability in its occurrence and also the response. Heating up of the economy, as indicated by inflation, stock market indices, and commodity prices, is required to be cooled by ramping up the cost of money, tightening money injection, and even imposing some sort of barriers to control the entry of overseas capital.
The market second-guesses how the central bank would act. Yields on government securities goes up in anticipation and valuations of interest-rate sensitive stocks plateau off. Institutional investors hedge their positions by taking contra bets in the derivatives market to cushion any price weakness in the cash segment. Companies implementing capital expenditure plans suffer on signs of recession in the form of four consecutive quarters of falling growth. Increasingly, the role of central banks around the world has assumed critical importance in investors’ decision making. The Federal Reserve’s resolve to keep interest rates near static till 2014 signalled the timeframe for the US economy’s recovery. Recent rate cuts by the European Central Bank and China’s central bank were a reaction to the slowing global economy, evident from the fall in prices of copper and other commodities including crude oil. Another source of stress in India is budget making. Every year the market displays nervousness or excitement in the run-up, depending on its expectation. It is a mystery why the government has to wait for one year to make major policy announcements when the annual exercise should be restricted to recalibrating tax rates. Instead, the presidential speech can spell out the agenda for the ensuing session. Even the tax rate can be kept stable and uniform for a longer period. The Direct Taxes Code, requiring three-fourth votes for any alteration in rates instead of a simple majority necessary to pass the finance bill, and the Good and Services Tax would have achieved this feat.
Not only economic indicators, the market also factors in expected political developments. Investors display withdrawal symptoms if polls suggest election of a populist government. The expected win of a socialist candidate in France’s presidential election and left-of-the-center party in Greece caused a temporary liquidity freeze around the world. As if these routine disturbances do not make the already complex life of an investor more confusing, there is a new kind of uncertainty. It stems from abrupt changes in policies, applying brakes to the reform process, or reversing some of the entrenched decisions. The unexpected springing up of the General Anti-Avoidance Rule in the last budget and retrospective amendment in income tax laws on transfer of foreign companies’ Indian assets, rolling back 51% FDI in multibrand retail, and the Supreme Court’s decision to cancel 2G licences allotted in 2008 and the inability of the government to take a call on the base price for the 2G spectrum auction could be included in this category. Similarly, the eruption of the scandal involving about 20 banks in the US, Europe, Australia and Japan in rigging the London Inter-Bank Offer Rate used to borrow dollars for three months, threatens to shake up the foundation of the financial services industry, which has been recovering from government bailouts after the collapse of Lehman Brothers in September 2008. The most wrenching aspect is the alleged involvement of the British government, which wanted to keep interest rates low, in brining pressure on Bank of England. Increasingly, investors not only would have to be bothered about promoters diluting their stakes or equity but also the shift of ministers in the cabinet as was evident by the market’s spurt after the resignation of presidential candidate Pranab Mukherjee as finance minister.
Mohan Sule
No comments:
Post a Comment