Graphics: Yogesh Kumar / Mint

Graphics: Yogesh Kumar / Mint

Road to recovery? Strong global cues spur markets into action

Road to recovery? Strong global cues spur markets into action

After correcting from its 17,000-plus mark on the Sensex in October, markets rebounded in November on the back of strong global cues and sustained flow of funds to emerging markets, including India. Global as well as domestic macro indicators have been positive and are reflecting that the global economy is stabilizing and recovering, in parts.

Graphics: Yogesh Kumar / Mint

Telecom stocks were major losers with concerns on competition and profitability emerging after rate reductions by most telecom operators. Sugar stocks fell after the government restored the cane pricing power of the states.

The government has said that the state-administered price will prevail. The difference between fair and remunerative price and state advisory price will be borne by the mills, as was the earlier practice, rather than the states.

Latest data from the National Council for Applied Economic Research pointed towards better business sentiment among Indian companies due to improved economic conditions. The Business Confidence Index has reportedly risen 21% over the quarter ended October and is now above the pre-crisis levels.

Global markets traded in a narrow range and failed to make any decisive move in either direction. Developed economies have shown improvement on the back of the fiscal stimulus provided by their respective governments. While this has improved liquidity with the banking system and has given relief on the housing front, the same is yet to be fully reflected in employment, personal incomes and consumer demand.

Later in the month, the markets sold off following concerns over losses stemming from Dubai’s attempt to reschedule its debt. The emirate of Dubai announced that it wanted creditors of Dubai World and property group Nakheel to agree a debt standstill as it restructures Dubai World, the conglomerate that spearheaded the emirate’s massive construction boom.

Dubai’s surprise move upset investors who had been reassured by local officials for months that the city would meet all debt repayment obligations on its $80 billion (Rs3.7 trillion) gross debt. Asian markets reacted with a fall of 3-5% following Dubai’s announcement.

The Index of Industrial Production (IIP) for September rose 9.1% on the back of strong growth in all the three major segments—manufacturing, mining and electricity which grew at 9.3%, 8.6% and 7.9%, respectively. As per use-based classification, basic goods, capital goods and intermediate goods delivered strong growth at 6.7%, 12.8% and 10.8%, respectively.

Consumer durables have also delivered strong growth in the last three months by growing over 20% levels. Recovery in basic goods as well as intermediate goods indicates that economic recovery is underway.

We would be waiting for more positive surprises in the future to get a clear signal about the pace of recovery.

We need to be more watchful on the future IIP numbers as the above mentioned effects wear out. On policy front, we feel that, we need to see continued and sustained trend in the economic indicators before the Reserve Bank of India moves to increase interest rates.

Foreign institutional investors (FIIs) pumped in about Rs5,300 crore in the cash market on a net basis during the month. This took the overall net investment for the calendar to almost $15.9 billion.

Markets cheered the government’s new disinvestment policy whereby it plans to list all public sector units (PSUs) by bringing in public ownership of at least 10%. The government plans to divest stakes in all PSUs with positive net worth and net profits in at least the previous three years.

On the market outlook, we have been indicating in our previous notes that, at above 17,000 levels, most positives based on FY10E earnings were firmly in the price. In the near term, we do not see any major trigger for the markets and in the absence of the same, markets may continue to move sideways.

Any progress on reforms, including PSU disinvestment, could make the markets rally from here. At the same time, one should be watchful of the global cues (dollar movement and economic data) and any development (further bankruptcies) that can derail the global recovery may result in a selloff.

The Indian economy’s fundamentals continue to be strong and are clearly on a recovery path which should keep foreign investors interested in the India story.

Our stance on the markets has been that, for the rally to continue, optimism needs to be backed by higher earnings visibility for FY11 and also earnings upgrades. We continue to maintain that and recommend a bottoms-up approach towards the Indian equity markets.

Kotak Securities