All that glitters is not gold !

Don’t get carried away by recovery, further downside ahead

Stock markets stage good recovery last week with BSE gaining nearly 5% and NSE gaining around 4 %. The recovery was backed by similar story in the global markets. However, Investment Guru is of the view that one should refrain from buying at current levels and should actually try to get out if one is getting good price or recovery in any stock. The global economic downtrend continues unabated and we are still in the mid of economic slowdown. The pull back rally should not be considered as a sign of recovery of economy. Let’s take a look at some indicators.

FII’’s continue to be Sellers

 

Looks like Foreign Institutional investors have forgot buying ! They have been net sellers to the tune of 53,000 Crore in Year 2008 and have already become net seller to the tune of 9,217 Crore in Year 2009. There has been a significant drop in the FII attraction towards the emerging markets more so due to higher redemptions faced by India Centric funds. Same has been the case with MF’s who have seen rise in redemption pressure and have been net sellers of 2,983 Crores in 2009 as against Net buyer of 11,728 Crores in 2008. With US economy already in Recession and European countries joining the list, the probability of FII’s Investment returning to India in big way is ruled out even at current levels. This is further going to put pressure on Indian markets who are looking for buying support ….but investors seem to be in mood to loose more and are waiting for dust to settle before they make a call.

India witnesses Slowdown in growth

The claims of 10% growth rate are a thing of past. Realistic targets are being talked about in view of global meltdown and the new estimates are somewhere between 4-6% of GDP growth for India. Though it has been though for the markets to digest these numbers after they became used to hear about 10% growth, Investment guru is of the view that even at these lower levels India would be second only to china in terms of growth rate. Look at china, these guys have virtually forgot to talk in terms of single digit after delivering double digit growth for years and are now set to post a single digit growth of 6-7%. Most of the developed economies are expected to post negative growth confirming their recessionary trends.

The slowdown in growth coupled with deflationary trend trends in economy would act as a deterrent to the sensex to move up sharply. There is a need to readjust our expectation in line with current growth estimates and I think the current levels of sensex are not extremely cheap. Corporate profits are bound to shrink resulting in shortfall in tax collection targets of government and reduced expenditure on infrastructure and public spend. The deflationary economy would create a situation of deferred consumption which may further detoriate the situation. There is a further downside left in markets and current rally would be just a eye wash.  These short spurts would keep coming and going due to short term demand –supply mismatch and market reactions to short term developments. Use them to adjust your portfolios.

Global Economy Updates

US is still in pretty bad shape. Looks like the giants have still not learnt the lesson, AIG is learnt to pay retention bonuses from the bailout package it received. The company was saved after a $170 billion bailout package by US Treasury. The recession gripping the U.S. deepened last month as factories and home builders scaled back even more. Bloomberg reports that industrial output fell by 1.3% in February. Former St. Louis Federal Reserve Bank President William Poole said the U.S. is “in a terrible situation,” led by officials who are unsure how to avert the rescue of financial companies and unwind current bailouts.

“Morgan Stanley has said in its outlook that the S&P 500 Index may fall 25 percent in the next few months as earnings slump for a seventh quarter and the recession deepens. U.S. stocks are still expensive even after the S&P 500 dropped 52 percent in 17 months, according to a method used by Benjamin Graham, the father of value investing and mentor of Warren Buffett. He measured equities against a decade of profits to smooth out distortions, a method that shows the S&P 500 traded at 14.5 times earnings yesterday, according to data compiled by Yale University Professor Robert Shiller. At the bottom of the three worst recessions since 1929, the average ratio fell below 10. To reach that, the S&P 500 would have to sink more than 30 percent.”

There is a interesting Global recession Status update on Moody’s Economy.com website. You can see the chart here. It shows the whole of US, Canada, Russian Federation, Most of the European region, African region, part of Asia such as Singapore, Thailand and Japan already under recession and Countries such as India, Brazil,Argentina,Mexico, China, Middle East Asia, Australia and Pakistan under Risk of recession. 

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EAC Outlook for 2008-09 on Indian Economy

Has Indian economy Peaked ?

The Economic Advisroy council to the prime minister,headed by Dr. C. Rangarajan, has come out with the Economic outlook for the year 2008-09. The Report has thrown some interesting parameters to gauge the present condition of our India's economic growth in past several years and estimates for current year. The report has pegged India's economy to grow at 7.7% in the year 2008-09 against 9% last year. The council has expressed concern over negative global clues like crude oil and sub prime on one hand and inflation and slowdown in consumption and investment rate on the other. What does this suggest ? Has the Indian economy reached the peak of its economic growth cycle and has it started to slow down ? Let us look at some of the facts and figures and try to find out the truth behind India's story.

Economic Growth- Stepping down the ladder

• Indian economy has grown 9% in 2007-08 against 9.6% in 2006-07 and 9.4% in 2005-06. Our economy has grown at an average rate of 8.8% in the last 5 years. However, we are expected to clock a growth rate of just 7.7% for the current year 2008-09.

• The farm sector has seen tremendous growth in the last 4 years with average growth of 3.5%. However, the growth rate looks unsustainable in absence of focussed approach on rural infrastructure and technical improvements in productivity.

• The Manufacturing sector, after posting a record high growth of 12% in 2006-07 is expected to grow by 7.2% in 2008-09 which signifies that this sector is witnessing increased pressure of slowdown in consumption which again is a factor of rising inflation.

• Other sectors such as Construction,Trade, Hotels,Transport etc. are all expected to post a single digit growth against double digit growth recorded last year. This doesn't auger well for companies operating in these sectors.

• Finance,Insurance, Real Estate and Business Services are expected to post 10% growth against 13.9% growth posted in 2006-07.

• Per Capita GDP growth is also expected to be at 6.2% against 8.1% clocked in 2006-07.

• India's population is expected to stand at 1.154 billion against 1.106 billion registered in 2005-06.

International Economics- Ugly Picture

• The global economy has been subjected to the twin onslaught of a financial
  crisis that has gripped capital markets, and a sharp increase in the prices of primary goods, particularly those of crude petroleum and food. Simultaneous turmoil in financial, energy, and food sectors is unprecedented in recent world economic history.

• This has adversely affected consumer confidence and prospects for world economic growth, dented a range of asset prices, heightened inflationary expectations and is severely testing theories of ‘decoupling’ through global contagion.

• While expected losses from US subprime exposures have by now been mostly acknowledged, and banks have been able to raise capital in response, delinquencies and foreclosures in the US housing markets continue to rise sharply, house prices continue to plummet, loan deterioration has moved beyond subprime and housing portfolios, bank balance sheets and equity prices continue to be under pressure, and credit markets are still to normalize. It is therefore too early to assess whether the worst of the turmoil and loss of asset values is behind us.

Consumption Vs. Investment Driven Growth

The contribution of investment to growth has actually been as greater than that of consumption till 2005-06. The contribution of domestic consumption expenditure to overall GDP growth has been fairly steady since 2005-06, while its relative share in growth has risen over the past two years. This trend is projected to continue in 2008-09 also. Incurrent year, we expect to see both investment and consumption expenditure growth to slow down a bit.

Inflation - Enemy at Home

Inflation has skyrocketed from 3.8% at the end of December,2007 to 7.8% at the end of March,2008. It moved up further at 12.44 % as of 2nd August,2008. The rise in inflation is primarily contributed by rise in prices of Crude Oil, Commodities like Steel, and food prices of late.

The council is of the view that tight monetary policy, cooling down of Crude Oil and good monsoon can bring the inflation rate down to 8-9 percent by March 2008-09.

Besides the above factors, the employment rate has shown significant improvement in last 5 years nut the rate of growth is expected to slow down a bit. We have also witnessed wide variations in state wise emplyment growth which suggests huge divide between states.

To sum up, Year 2006-07 was the golden year for the Indian economy in which most of the sectors have given highest growth rates. However, the growth rate has slowed down significantly due to negative gloabl cues and pressure of rising inflation back at home. Hence , we can say that a brake has got applied to the economy which was operating in th top gear. We are still much behind china in terms of economic growth and the overall assessemnt says that though the pace of growth has slowed down, it's not the end of the world. The shape of India's growth story in the coming years would depend on how it deals with these evils of growth and resume its fast track growth. The peak is yet to come.

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Govt. approves Sixth Pay commission report

Independence Day gift for Govt. Employees

Good news for Central Government employees and defence forces. UPA Government has approved the 6th Pay commission report which was submitted to it in March,2008. The Six Pay commission was headed by Justice B N Srikrishna.

Highlights of Sixth Pay Commission Report

• The average increase in salaries is to the tune of 21%.

• The hike is with effect from January 1,2006. You can download the Salary Calculator spreadsheet to find out your Revised Salary after the pay hike.

• The hiked salary would be given to the employees beginning September this year and the arrears from January 2006 would be given in cash in two installments - 40 per cent this fiscal and 60 per cent in 2009-10.

• The government has increased the minimum entry level salary of a government employee to Rs 7,000 against Rs 6,660 recommended by the Commission.

• The rate of Annual Increment has also been increased from 2.5% to 3%.

• At least three assured promotions for all defence forces personnel and civilian employees under the modified Assured Career Progression scheme.

• While civilians would get this after 10, 20 and 30 years of service, defence forces jawans would be promoted under ACP after 8, 16 and 24 years.

• The government has also approved Military Service Pay for armed forces personnel, under which officers would get Rs 6,000 over and above their pay per month.

• The lowest limit of disability pension for defence personnel has been doubled to Rs 3100 a month.

• The Revision in pay structure would increase the total emoluments of an employee at the lowest level beyond Rs. 10,000 per month (including allowances)

• In a significant modification of the Pay Commission recommendation, the government has raised the fitment rate, which helps in arriving at higher allowances in view of merger of 50 per cent DA with basic pay, in revised pay bands to 40 per cent as against 28 per cent.

Impact of Pay Commission recommendations

• Well, this is a three cheers news for the Central government employees as well as the armed forces since they would get 21% higher pay than what they used to get earlier. Their friends in private sector may feel jealous about it.

• Since a large chuck of the Government employees come under the Middle Class segment, this would help increase their purchasing power and hence standard of living. The arrears from January,2006 would be an additional bonus and would mainly be used as saving corpus.

• The Pay hike would cost the exchequer Rs 22,131 crore -- Rs 15,717 crore on the General Budget and Rs 6,414 crore on the Railway Budget -- in 2008-09. This would increase the fiscal deficit as a % of GDP.

• The government would have to find additional sources of funds to bridge the deficit. Since the Macro environment is already worsening due to higher inflation, lower IIP and lower GDP growth estimates, the pay revision would be an additional challenge for the government.

Download Your Salary Calculator

Download Sixth Pay commission Report

Update:

Salary Calculator (Modified as per Cabinet approved recomendations ) from Staff Corner (staffcorner.com) Click below to download

Sixth Pay Commission Calculator Option 1

Sixth Pay Commission Calculator Option 2

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Global & Domestic cues continue to haunt

Markets still in Red Zone

For those who are getting a comfort factor with this week’s dramatic rise of sensex, I do not have a good news to share. The sentiments still remain shaky for the markets and the macro environment is still having a negative bias.

Yesterday, I was thinking about the way Indian markets are behaving and a question that came to my mind was “Are Indian markets too emotional”? or in other words “Are Indian markets too irrational “? Irrational markets typically display bouts of extreme volatility both on positive and negative side and we have witnessed similar pattern in last one year or so. Initially the market was swamped with positive “bias” and went on rocketing to 21K levels as if there was no tomorrow and this year what we have witnessed is the other face of it i.e., Negative “bias” followed by global concerns, Inflation and political instability.

What went wrong ?
What are markets? We say markets have negative /positive bias. But what is market made up of? Aren’t they made up of Investors who put in their money for a better return? So If I say markets are displaying irrationality, doesn’t it mean that the Investors in Indian markets are showing immaturity or lack of understanding about the macro environment. The market statistics are nothing but sum total of Investor behavior as depicted in their buying and selling patterns. A major factor that drives Indian and other emerging markets is that FII’s are a major force in driven the market behavior. So do we say that FII’s have realized that these emerging economies may not satisfy their hunger for quick bucks and are fleeing the scene? Were they caught on wrong footing? Did they overestimated the potential of these economies?

If one see the pattern of Indian markets vs. US markets (In the above chart Nasdaq trend is depicted in Blue, Sensex in Red and Dow in Green), it is visible that even though the global factors are weighing heavily on the markets, most of the bad news is emerging out of the US, the US markets have shown more maturity in terms of movement of their indices. While US markets are down only 14%, Indian markets have tanked by more than 30% during the same period.

FII’s are still selling, MF’s do some shopping

If we looks ate the current pattern of Investments of FII’s and mutual funds, FII’s are still selling heavily. They have already sold 6 Billion worth of stocks on a net basis in this year. The month of June saw second highest selling after January’08. Mutual funds came out to do some shopping in June and are net buyers even in July so far, but the volumes is much low as compared to FII’s. Moreover, Mutual funds has also not being major buyers in the stocks and hence are not able to provide major support to the indices. HNI' had been reported to already cut down their exposue in equity markets significantly. One thing is very clear, If markets have to go up strongly Institutional interest is a must. In the current circumstances this doesn’t seem to be the case and hence any short covering (or say technical correction) should not be read as resumption of buying interest in the markets.

Crude is down but not out

The crude oil surge showed some signs of cooling (currently trading at $128.5) after hitting highs of $145 in July. Experts are of the view that this might be a temporary correction. I have been reading various articles on crude oil and the common consensus is that the crude at settle at $100 levels by the end of this year. Any increase in crude prices from here would act as negative news for the markets. I have explained in one of my earlier post as how rise in crude oil aids in increasing the inflation and hence Inflation which is another big dragger of the markets would also get help if crude cools off faster.

Domestic cues are Negative
Morgan Stanley has revised its GDP growth estimates for India down from 7.4% to 7.1% for FY09 and from 7.8% to 7.6% for F2010. Rating Agency Fitch has revised its local currency grade outlook for India to negative citing deteriorating public finances, mainly due to subsidies (Read the article in Reuters )

As expected, Inflation rose marginally to 11.91 as compared to 11.89% last week. Analyst are of view that Inflation might touch 12% before settling down at the end of the year or early next year.

However, there is good news on the Corporate tax and direct tax fronts. Belying fears of slowdown in economic growth affecting government revenue, direct tax collections have grown 38.6% to Rs57,373 crore in the first quarter this fiscal. Corporate tax collections rose 32.65% to Rs34,566 crore for April-June period this fiscal, against Rs26,058 crore during the corresponding period last fiscal.

Political drama continues and the coming week is very crucial in deciding the fate of the UPA government. The confidence motion on Tuesday would decide the short term trend in the market. The fall of UPA government may add to the woes of market as it may lead to further pull out by FII’s. However, the general opinion is that the UPA would manage to save its face.

Investment Guru’s Outlook
My opinion remains same as I gave in my previous post on market outlook. The sentiments are still negative and one should not expect markets to zoom. However, at the same time, long term investor should cherry pick fundamentally strong companies for investing with at least 1 year horizon.

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