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A case for further tightening?

A case for further tightening?
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First Published: Sat, May 31 2008. 01 08 AM IST

Updated: Sat, May 31 2008. 01 08 AM IST
The market rarely gets excited by data on gross domestic product (GDP) and Friday was no exception. Despite GDP for the March quarter growing by a much better-than-exp-ected 8.8%, there was no sense of relief. One reason is because with most firms having already reported their quarterly earnings, the numbers are not useful as a guide to the future. In fact, the news that inflation based on the Wholesale Price Index has crossed the 8% mark is of far greater importance to the market.
A closer look shows that while GDP growth was 8.8% in the third as well as in the fourth quarter, the composition of growth was very different. Manufacturing growth, of course, was much lower in the fourth quarter, but that was already evident from the industrial production data. Growth in the services sector, on the other hand, has been remarkably robust, with construction showing a sharp jump. Community, social and personal services have also shown an uptick in growth, possibly because of increased government spending on social schemes. Some economists believe, however, that this divorce between the manufacturing and services growth rate is unsustainable, as the two sectors have tended to move in tandem in the past.
The story of the past few years has been the rising importance of investment in the economy, while growth in consumption demand has tapered off a bit. The fiscal 2008 numbers support that trend: private final consumption expenditure (PFCE) went down from 60% of GDP at market prices in fiscal 2006 to 58.6% the next year and further to 58.2% in FY08.
Gross fixed capital formation (GFCF), a measure of capital invested in fixed assets, improved from 29.2% of GDP at market prices in FY06 to 30.6% in FY07 and further to 31.9% in FY08. However, these trends have been well-known for quite some time. In fact, the GDP advance estimates for FY08 estimated PFCE to be lower at 57.6% of GDP and GFCF to be higher, at 32.6% of GDP.
Nevertheless, the trend of slowing consumption and rising investment held true in the March quarter, with PFCE at 53.4% of GDP and GFCF at 31.6%. That should be good news for the beleaguered capital goods sector.
Capital goods firms did rather well on Friday, with the Bombay Stock Exchange’s Capital Goods index rising by 2.37%. But that’s hardly because of the GDP numbers—what moved them was the relaxation on external commercial borrowings, particularly for infrastructure firms. That could drive down interest costs.With agriculture doing well (growth at 4.5% against 2.6% in the advance estimates), consumption demand should get a boost and the pay commission awards should add to that.
Inflation, on the other hand, will become worse if there’s an oil price hike. A. Prasanna, senior economist with ICICI Securities, says the better GDP numbers as well as the rise in inflationary pressures in a number of sectors indicate that there’s still a case to be made for further restricting demand.
Trends show April was tough on banking, auto?stocks
What has been the market reaction to the March quarter corporate results and the rise in international oil prices?
One way of answering that question would be to consider the market capitalization of a sector and gauge whether it has declined relative to the whole market.
On 1 April,for instance, the market cap of the Bombay Stock Exchange’s Oil and Gas index was 29.22% of the total market cap and it has since declined to 27.64% of the total (see chart). In view of the huge losses being notched up by the oil marketing companies, that’s hardly surprising. Similarly, the rise in commodity prices has led to the market cap of the BSE Metals index rising from 11.49% of the total market cap to 12.9%. With inflation shooting up, interest-rate sensitive sectors such as banking, autos and realty have all seen a decline in their relative market capitalizations.
The capital goods sector, too, has seen a decline, not only because of worries about execution, but also on account of its relatively high valuations.
The biggest beneficiary has, of course, been the information technology sector, with its relative market cap improving from 10.69% to 13.1%.
The health care segment, too, has benefited since it is a classic defensive sector, while the fast moving consumer goods sector has been more or less flat.
Two trends emerge from recent market trends after the announcement of the March results. One of them is that action in the market will be increasingly stock-specific. And two, yesterday’s leading sectors, such as capital goods or power, are unlikely to come back in favour anytime soon.
Write to us at marktomarket@livemint.com
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First Published: Sat, May 31 2008. 01 08 AM IST
More Topics: Manufacturing | Services | GDP | Construction | Banking |