Global cyclical industries account for as much as 37.9% of the contribution to Sensex earnings in fiscal 2007.
Add to that another 12.5% on account of information technology (IT) and a large chunk of the earnings of pharma companies (2.2%), and more than half the earnings of the Sensex companies is dependent on global factors. Despite high growth in the domestic economy, therefore, the Sensex may very well “decouple” from gross domestic product, as it is doing currently.
That’s not all. Data from broking firm Motilal Oswal Financial Services Ltd point out that the market’s global links have been increasing—in fiscal 2002, global cyclicals and IT were 32.9% and 8.2%, respectively, of Sensex earnings. In fiscal 2010, Motilal says, they will be 41.1% and 10.5%, respectively.
That’s why analyst estimates of a Sensex earnings per share of around Rs1,040 for fiscal 2009 need to be taken with large doses of salt. For, how many analysts have actually factored in a fall in global prices as a result of a recession in the US? To take one instance, global refining margins will be hit badly if the US goes into a recession, but that hasn’t been factored into the earnings of Reliance Industries Ltd. The recent past is no guide to the future, and earnings of many companies will see reversion to the mean. The consolation is that the prospects of companies relying purely on domestic demand should remain unchanged. When sanity returns to the markets, they’re the ones that should see fresh buying.
Falling in line
The Indian market has fallen in line with its peers. It had, for a while, continued to soar while other markets were falling like Australian wickets. But that was then. The savage cuts of the last few days have remedied matters and, measured from its highs, the Indian benchmark indices are now down to around the same extent as other emerging markets. As the table shows, the Nifty is down 22.9% from the high it reached on 8 January, while the Sensex is down 21.1%. In terms of the extent of the fall, we are in the middle of the pack. Note that emerging markets have taken a bigger hit than the developing markets, justifying their high risk status. What goes up higher comes down harder. Now that we have made up the lost ground on the way?down, our next move will depend entirely on global markets.
Who buys, who sells?
Foreign institutional investors (FIIs) have taken net short positions worth Rs15,340 crore ($3.87 billion), taking the cash and futures market together, since 10 January. They sold stock worth Rs4,920 crore in the cash segment, which was offset by domestic institutional investors buying stock worth Rs5,125 crore.
But FII sales in the recent past are only an extension of the negative stance foreign investors have taken since late October, after restrictions were imposed on participatory notes. Since then, FIIs have taken net short positions worth Rs50,144 crore in the secondary markets, adjusted for purchases in primary issuances such as qualified institutional placements (QIPs) and initial public offerings (IPOs). Domestic institutional investors bought stock worth Rs22,770 crore in the cash segment, less than half the sales by FIIs. The fact that the markets rose about 13% to a high of 21,206 since late October signifies that domestic operators and retail and high net worth individual investors were buying heavily. These investors have capitulated in the past two days.
Bank of India
That the markets had not lost all trace of rationality on Tuesday was evident from its reaction to Bank of India’s excellent results, with the stock up 2.5% amid the carnage. Net interest income for the December quarter was up 25.6% year-on-year, net interest margin had expanded from 3% to 3.14%, and net profit was up 100.8%. True, treasury income was higher, but even core operating profit (net of treasury) was up 71.7%. Nor is this result a flash in the pan. In the September quarter too, net profit growth was 100%. Growth in advances was 29.9%—well above the rate of growth of the industry. Fee incomes rose 46%. What’s more, the bank’s gross non-performing assets (NPAs) fell from 2.1% at end-September to 1.9%, while net NPAs were reduced from 0.75% at end-September to 0.62%.
The bank is a play on the domestic economy and its results underline the fact that, despite the panic, growth in the economy remains strong.
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