Will the Global crisis affect the Indian Stock Market

After maintaining a range of 17,500-20,500 for more than a year, the Sensex finally crashed below this crucial support last fortnight. This crash was triggered by major global events, such as the S&P downgrading US debt from AAA to AA+, concern about the AAA rating status of French debt, sovereign debt crisis spreading to bigger Euro zone economies like Italy and Spain. Hence, several global indices, like the Dow Jones Industrial Average (US), DAX (Germany), CAC (France), and FTSE (UK), broke their major supports. The market tanked with huge volatility, and the Volatility Index shot up by more than 100% both globally (measured by CBOE Vix) and in India (measured by NSE Vix). Despite the global central bankers' efforts-the US Federal Reserve's pledge to keep the interest rate close to 0% for two more years, and the European Central Bank's promise to buy Italian and Spanish bonds from the market- to cool the market, volatility continued. In fact, the markets rallied relying on this news, only to crash later. As is clear from the Dow versus the Sensex chart, the Indian markets had been underperforming the global equities, especially compared to the developed markets, for several quarters. However, the Indian markets and several Asian markets did not fall as much as the global indices in the recent crash. This has confused the domestic investors because they can't make out if the Indian market is nearing its bottom or not. This is why we decided to take expert opinion to find out whether they should jump into the market for bottom fishing or wait till things settle down.

Be cautious: While all experts agree that the Indian stock market will generate good returns in the long term, they advise investors to be a bit more cautious in the short term. "Equity investors must exercise caution and not jump into the market right now. It is not reasonable to expect India to remain unaffected when the entire world is going through a crisis," explains Jigar Shah, senior vicepresident and head of research, Kim Eng Securities. What is the intensity and time frame of this pain? "Strong hands have left the market, so it is going to take three to five months to settle down," says Rajesh Jain, EVP, and head, retail research, Religare Securities. "Be ready for another 7-10% downside from the recent bottom," says Harendra Kumar, head of research at Elara Capital. Correction or bear market? The question regarding the state of the market is whether it's a correction that will end after a few months of consolidation, or the beginning of another bear market, which may take a deeper cut as in 2008? "It is a correction," says Saket Misra, managing director, strategic equity solutions, global banking & markets, RBS. Two major factors will contribute to this, he says. First, the US slowdown. Though the country's economy was expected to pick up by the second half of 2011, it is now expected to do so only in 2013. "It will impact the corporate earnings, and hence, the valuations. Naturally, the bigger cut among the asset classes is happening in equities," he says. Second is the uncertainty created by the lack of clear response to the ongoing crisis, both in the US and the EU zones. Is this phase any different from 2008? Yes. In fact, there are very few similarities between the 2008 crisis and the ongoing one. The panic generated across the globe is probably the only similarity. The differences, on the other hand, are many. Firstly, 2008 witnessed a banking crisis, while the current one is the sovereign debt imbroglio. Secondly, the corporate balance sheets have improved. "The balance sheets of companies were in a bad shape in 2008 and the government supported them. Now, the companies have the money but the government does not," says Jain of Religare. Thirdly, the leveraged position in the equities and commodities market is lower today. Fourthly, while earlier the inflation was lower and global central bankers could pump in money to stabilise the market, their hands are tied now. Sovereign downgrades: The non-coherent actions taken by various governments to fight the sovereign downgrades is a threat to the global markets. The French president has already announced that the government will do everything possible to retain its AAA status "despite the state of the economy". Hence, these fiscal tightening measures, that is, increasing taxes and reducing spending, may bring the

global economy back to the recessionary situation. Note that the peripheral Euro zone countries, where strict fiscal measures have been imposed, are already in recession.

US recession fears: Since the US occupies centrestage in the global economy, the biggest worry that faces the global markets is that the country might slip back into recession, or the double dip. Though the market is still betting on the third quantitative easing program (popularly known as QE3) from the US Federal Reserve, experts warn that their hands are tied. "The US Federal Reserve has already exhausted most options. If it prints more money, inflation will shoot up," says Jain. Does it mean that the US recession is a foregone conclusion? Not really, because the US Fed will take every possible step to keep the country out of recession. Where does that leave us? "The US may not face the double dip, but perhaps it is in a long period of low, sluggish growth, say, 1%," says Misra. RBI moves: High domestic inflation and the RBI's response to it is another problem faced by the Indian markets. Experts warn that this trend will carry on for some time. "The RBI will continue to do its job and may not be influenced with what is going on in the stock market," says Shah. "Since inflation is not totally under control, the RBI will continue with its rate action; 25 bps rate hike in the coming meeting and another 25 bps later this year," says Kumar. Though most of these inflationary pressures are linked to global commodity prices, the RBI won't be able to ignore them. This is because as long as the global interest rates are at low levels, the main foreign currencies (US dollar and Euro) will remain weak, keeping the commodities at elevated levels. The increasing demand from emerging markets like India and China, where the current per capita consumption of oil is low, is another factor that may keep oil at high levels. EPS downgrades to continue: Though India will weather this global crisis (with a lower growth rate), the corporate earnings may take a bigger knock as in the 2008 crisis. This is because the margin squeeze was set off by high input costs and spiralling interest rates. The high rates may dampen the demand, thereby putting pressure on the top lines, especially for rate-sensitive sectors like auto. The capital goods
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companies will be affected by the deferment of capex decisions by manufacturing firms. "It will take time for all these to play out. So things may become worse before they become better," says Shah. The consensus Sensex EPS has come down from Rs 1,280 to around Rs 1,200. Note that the earnings downgrade started well before the current crisis erupted at the global level. Money flow: The stock market performance is linked more to the money flow and less to the long-term fundamentals. The general consensus is that there may not be huge inflows into the Indian stock market through the FII route. So be ready for more pain in the short term. However, experts are hopeful about foreign money coming to other segments. "The flow may come to the debt market due to higher yields and also as a long-term play on currencies (Indian rupee is expected to appreciate in the long term)," says Misra. The April-June quarter has seen good FDI inflow and experts are hopeful about a similar trend if the government continues with reforms and opens up sectors like insurance, retail, etc. Sectors to avoid: It is best to avoid sectors that are directly linked to the developed markets. The stocks with high exposure to these developed markets through the subsidiary routes (such as Tata Steel, Tata Motors) will also bear the brunt of the current turmoil. It is best to avoid companies with a high leverage, even if they are catering to the domestic markets, because of the rising interest rate regime in India. Besides, these companies' plans to raise cheap debt from foreign markets through ECB, FCCB, etc, have also taken a hit. Sectors to buy now: Stick to the companies restricted to the domestic consumption theme. "FMCG continues to be a good story and companies like ITC and Marico still offer good values," says Jain. Consider going in for gas distribution companies, such as Petronet LNG, Indraprastha Gas and GAIL. Also, the companies with strong balance sheets will be able to ride the storm better than the rest.

For equity investors, the past two weeks have been a replay of the 2008 nightmare. The Nifty has not exactly fallen off the cliff as it did in September 2008, but the 8% decline since 1 August is worrying chartists and fundamentalists alike. Some analysts say the Nifty is headed for 4,500 levels. Others claim this is an oversold market and stock prices will eventually bounce back. What should the investors do?

"The worst thing to do right now is panic," writes Dhirendra Kumar, CEO of Value Research. He points out that overleveraged speculators and panic-stricken investors were the only ones who lost money in the 2008-9 crash. For the disciplined long-term investor, the spectacular decline in the markets that saw the Sensex hitting a multi-year low was actually an opportunity.
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He is correct. We did a bit of data crunching and found that there is virtually no risk if you invest in stocks for the very long term. The Nifty data for the past 15 years shows that if you remain invested for longer periods, the risk of loss comes down progressively (see graphic). If an investor had held the Nifty shares for at least seven years, he would have made no loss. If he had held these for at least 10 years, he would have earned a minimum return of 12.13%. On the other hand, short-term investors, who exited within 1-2 years, had higher chances of running into losses. It's difficult to get this argument across when investors are staring at an 8% dip in the index, the world's largest economy has been downgraded, and other developed nations are on the brink of debt defaults. Even so, here are a few steps that can help cushion the impact of volatility and ensure that investors don't get carried away by the predictions of doomsayers. Dont stop the SIPs Don't even think about terminating your SIPs at this point. It's the worst thing you can do to your portfolio and would defeat the very purpose of the SIP. If you stop now, you are effectively turning down the chance to buy more at lower prices. It's a common mistake that can prevent your attempt at rupee-cost averaging. "The impact cost of stopping a Ulip premium is higher than terminating an SIP, so many investors opt for the latter. Investors tend to be cavalier about their mutual fund investments, but are very diligent about Ulips," says Jayant Pai, vice-president, Parag Parikh Financial Advisory Services. He advises that investors should automate their investments so that there is no discretion in their reaction to the noise emanating from the stock market. Stick to Blue Chips It's now amply clear that the economy will take some time to regain momentum. Slower growth rates, high inflation and high interest rates are here to stay. When the economy was growing at 9%, the tide had lifted all boats and the mid-cap and small-cap companies flourished. Now, with economists projecting a GDP growth of 7-7.5%, only large companies will be able to clock good growth, while the mid-sized companies will barely manage to stay in the green. Smaller companies will have to struggle and could easily slip into losses if the situation worsens. It's best to stick to large-cap stocks in the coming months instead of risky mid-caps and small-caps. Be choosy Even within the large-cap universe, you will have to be careful while picking stocks and sectors. Metal stocks, for instance, may be in for an extended downturn because of falling commodity prices. IT stocks that depend on foreign markets for revenue may also be under pressure. FMCG stocks may be overpriced. Conduct thorough research before you place that buy order with your broker.
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Diversify your bets The infrastructure sector has been badly beaten down but analysts expect it to do well when the economy revives. "It's a good time to start nibbling at some infrastructure stocks at these beaten down levels," says Dipen Shah, senior vice-president and head of research, Kotak Securities. Even so, don't put all your eggs in the infrastructure basket. Spread your bets-and risk-across a basket of stocks and sectors. If investing in mutual funds, go for the stability of large-cap diversified equity funds. Avoid sectoral funds that take a focused exposure to a certain theme or industry. Rupee Cost Averaging The markets are down to attractive levels but there is no knowing where the bottom is. It's best not to anchor yourself to an index -say 4,700 or 15,000. To avoid buying high, don't invest lumpsum amounts, but do so in monthly instalments. In this manner, you will be able to gain the advantage of the rupee-cost averaging that the SIPs offer.

Stocks slump on US recession fears, Europe woes

Asian stocks tumbled as much as 4% on 19.08 on growing fears that the US economy was sliding into recession and as some European lenders faced short-term funding strains, raising fears of a systemic banking crisis on the continent. Gold jumped to a fresh high of $1,836.46 an ounce and US Treasuries surged as investors rushed into safe-havens after heavy losses on US and European markets overnight. The precious metal has gained about $350 per ounce since 1 July as investors recoiled from riskier assets. S&P 500 futures fell 0.8% in Asia, adding to a slump of nearly 4.5% overnight and pointing to more losses for battered Western markets later in the day. The MSCI global stock index fell 0.6%, taking its losses since late July to around 15%. European equities suffered their biggest daily slide in 2-years on Thursday. In Asia on Friday, Japans Nikkei 225 index fell 2.1% for a third day of declines, while stocks elsewhere in Asia as measured by MSCI lost 2.9%, taking their losses to nearly 15% in August. But pressure on markets with more exposure to hi-tech shares was more intense, with Koreas KOSPI tumbling more than 4% and Taiwan down 2.7 %.

Several global industry heavyweights such as Dell , Hewlett-Packard and LG Electronics have cut sales forecasts this week as the outlook for corporate, government and consumer tech spending dims. A drop in factory activity in the US Mid-Atlantic region to the lowest level since March 2009 stunned investors, as the data from the Philadelphia Federal Reserve Bank is viewed as a forward-looking indicator of national manufacturing. Investors have been spooked by these data. They are now focusing on next weeks data such as US GDP, said Yumi Nishimura, a senior market analyst at Daiwa Securities. Retail investors may buy defensive stocks on dips, but such buying may not have an impact on the overall index. An unexpected fall in existing US home sales in July and a greater-than-expected rise in new claims for jobless benefits in the latest week also added to fears that the US economic recovery could stall and possibly slide into recession. In Europe, renewed fears that the euro zone debt crisis could infect the regions financial system put pressure on short-term funding markets, forcing some European banks to pay higher rates for US dollar loans and reviving memories of the dark days of late 2009 after the collapse of US investment bank Lehman Brothers as funding dried up. The US dollar was flat in Asia after earlier modest gains as investors piled into the safety of US Treasuries despite falling yields. US 30-year Treasuries surged more than a full point in Asia, with traders saying the papers were getting an added boost from vague rumours about an emergency Fed meeting later on Friday. US crude oil futures fell almost 2% over fears energy demand will be hit by slower economic growth.

Gold rally makes Government Richer by $ 5 Billion in August so far.

The bullion traders and investors are not alone in reaping rich benefits from the glittering gold prices and the strategy of keeping a substantial holding of the yellow metal seems to be working well for the government too. A sharp rally of over 20 per cent in gold prices so far this month has led to a surge of about $ 5 billion (over Rs 22,000 crore) in the value of gold held by RBI, which acts as a custodian of the yellow metal for the government of India. The central bank keeps the yellow metal in the country's international reserves portfolio, where it had gold worth Rs 1,11,940 crore ($ 25.35 billion) at the end of last month.
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The gold prices in domestic market has appreciated by 20.4 per cent since the beginning of this month to hit a record high of Rs 28,230 per 10 grams. The prices have also appreciated sharply by over 16 per cent in the international market from $ 1,616 per ounce to $ 1,880 currently. Taking into account a price rise of 20 per cent, the value of gold held by RBI has appreciated by over Rs 22,000 crore or about $ 5 billion dollar so far in August. The experts are anticipating further rise and believe that the gold prices might even touch Rs 30,000 level well before Diwali as investors are increasingly shifting funds to gold amid a free fall in equity markets. Gold has traditionally been a preferred high-value purchase for Indians, but mostly for jewellery purposes and as a means of preserving the family wealth. However, the trend is also picking up for gold as a pure investment play. RBI has also been increasing its exposure to gold in its international reserve portfolio in the past few years. RBI's gold holding had seen a significant increase of about $ 7 billion after it purchased 200 metric tonnes of gold from IMF on November 3, 2009. Before this purchase, gold accounted for only about 3 per cent of RBI's total international reserves, but it has now increased to nearly 8 per cent. The central bank is currently estimated to hold a total of 557.75 tonnes of gold. As per RBI data, its gold reserves have grown by Rs 22,376 crore ($ 6 billion) over the past one year, while it has gone up by Rs 11,254 crore ($ 2.9 billion) so far in the current calendar year 2011. RBI figures among 10 largest central banks across the world in terms of gold holding in foreign reserves portfolio. Gold set a record high on 19.08 on safe-haven buying but US stocks and commodities rebounded after the US dollar plunged to a record low against the Japanese yen on speculation authorities will not halt the yens surge.

US stocks, after paring early losses, turned lower, as crude oil and other commodities rebounded on the dollars slump. The dollar fell as low as 75.941 on trading platform EBS. It last traded at 76.245, down 0.4%. Traders were emboldened by a Wall Street Journal report citing Japans top currency official as saying that Japanese authorities do not plan to intervene in the market often. The dollars slump galvanized commodity markets, where crude oil prices rose almost 2%. ICE Brent October crude rose $1.93 to $108.92 a barrel. The turn in commodity prices lifted material and energy stocks, and helped turn Wall Street. Commodities are trading well with the weakness in the dollar, said Peter Bookvar, equity strategist at Miller Tabak & Co in New York. The euro rallied to the high of the day and some bottom-pickers from yesterdays sell-off have us higher. The Dow Jones industrial average was down 76.59 points, or 0.70%, at 10,913.99. The Standard & Poors 500 Index was down 5.74 points, or 0.50%, at 1,134.91. The Nasdaq Composite Index was down 2.89 points, or 0.12%, at 2,377.54. Gold prices early in the session rallied almost 3% as investors sought refuge from hefty losses in stocks on Thursday. Gold retraced earlier record highs as European shares lifted from lows and the euro recovered some lost ground. Spot gold jumped to record $1,877 an ounce and was last trading near $1,850, still on track for its biggest one-month rise in nearly 12 years in August. Any time in the current environment you just need a little positive news (for the gold) market to retrace quite a bit, before stabilizing and resuming its uptrend, said Credit Suisse analyst Tobias Merath. There is clearly a stable uptrend over many, many months. European shares flirted with two-year lows, but the FTSEurofirst 300 index of top European shares pared some losses to trade 1.1% lower. MSCIs all-country world stock index was off 0.7%. US Treasury yields inched up from lows last seen in at least 60 years on as some investors took profits from Thursdays bond rally. The benchmark 10-year US Treasury note was down 2/32 in price to yield 2.07%. The yield at one point on Thursday fell to 1.97%. Yields have dropped almost a full percentage point on the 10-year note in August as disappointing economic data, the Federal Reserves low interest rate policy and jitters over rising bank funding costs drove investors to safe-haven bonds.
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At the moment the market is just looking for relative safe havens, said Mitsui Precious Metals analyst David Jollie. You can see that in the sell-offs across equity markets overnight. The strength of gold is the other side of the coin from that. The US dollar index slipped 0.6% to 73.827. The euro was up 0.6% at $1.441.

Indias inflation rate is far above the threshold level and policy makers need to slow economic growth to curb price gains In the short term the econmoy may have to sacrifice growth to generate an environment of rapid growth and steady inflation in the medium term. Some data show that 5 percent inflation is the threshold level, so at 9.4 percent we are far above the threshold level. Indias stance contrasts with Europe, Japan and Switzerland, which are either adding cash into their economies or seeking to stem appreciating exchange rates to support expansion. Price gains in India are the highest among the BRICS nations that include Brazil, Russia, China and South Africa. The Reserve Bank of India has to hike rates further given the inflation situation, considering the rate increases so far and the growing global uncertainties, it would be hard to continue tightening aggressively though. Indias 10-year bonds rose, driving yields down this week by the most since June, as investors sought the relative safety of government debt on increasing signs the global recovery is faltering. Bond Yields The yield on the 7.8 percent bonds due April 2021 declined 15 basis points this week, or 0.15 percentage point, to 8.31 percent as of in Mumbai, according to the central banks trading system. The rate was the lowest since July 25. The yield fell 9 basis points on August 05. Asian stocks fell, extending a global rout, and the regions bonds gained, while commodities dropped for an eighth day amid concern of slowing global economic growth. The MSCI Asia Pacific Index fell 3.7 percent, taking its weekly loss to 7.8 percent. That will be the steepest one-week drop since October 2008. The Bombay Stock Exchange Sensitive Index declined 2 percent to the lowest level in almost 14 months and the rupee weakened 0.6 percent to 44.8 against the dollar today. Market Determined Indias rupee is essentially a market-determined currency and there is no policy position in terms of intervening to prevent the movement of the rupee. The concern will obviously be with
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liquidity, as RBI does not want markets to be disrupted by constraints of liquidity. The central banks monetary stance will be guided by demand pressures in the economy and commodity prices. Monetary Tightening The Reserve Bank of India has raised its repurchase rate 11 times since the start of 2010 and last increased it by 50 basis points on July 26 to 8 percent to damp rising living costs. Indias benchmark wholesale-price inflation accelerated to 9.44 percent in June. By comparison, consumer prices rose 6.7 percent in Brazil, 9.4 percent in Russia, 6.4 percent in China and 5 percent in South Africa. . Indian policy makers need to worry about the economic cost only if the expansion dips below 8 percent. The central bank has maintained its growth forecast of 8 percent for the current fiscal year ending March 31, even after citing dangers from Europes debt crisis to the outlook for exports. The economy expanded 8.5 percent the previous year. Europes Stance European Central Bank President Jean-Claude Trichet yesterday said the ECB has resumed bond purchases and will offer banks more cash to stop the regions debt crisis from engulfing Italy and Spain and hurting the economy. The ECB kept its benchmark rate at 1.5 percent. European officials are trying to put a firewall around Italy and Spain on concern they will have to follow Greece, Ireland and Portugal in seeking bailouts. Japan yesterday followed Switzerland in seeking to stem appreciating exchange rates that threatened to damage export competitiveness, selling the yen and pledging to inject 10 trillion yen ($126 billion) in funds into the economy. The moves also reflect deepening concern of a U.S. return to recession that might force the Federal Reserve into another round of asset purchases. U.S. gross domestic product expanded at an annual rate of 1.3 percent last quarter, from a near-stall of 0.4 percent in January to March. Switzerland Aug. 3 unexpectedly cut interest rates and pledged to boost the supply of the franc in money markets to stem a surge in the massively overvalued currency. Inflation Priority In India, the governments priority is to reduce inflation to an acceptable level of 5 percent to 6 percent because the poor are the hardest hit by higher living costs, according to the Planning Commission.

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Indias parliament has been debating rising prices this week and the opposition stepped up their offensive against Prime Minister Manmohan Singhs coalition for failing to control inflation, which erodes spending power in a nation where the World Bank estimates more than threequarters of the people live on less than $2 a day. The rupee fell to a five-month low on speculation that international investors would increase sales of local assets on signs the regions economies are weakening. Morgan Stanley cut its growth forecast for India to 7.2 per cent for the year ending March from 7.7 per cent earlier, citing a less favorable global environment, according to a research note released on Thursday. Japans exports fell faster in July and Malaysias economy expanded the least since 2009 last quarter, separate reports showed this week. Indias Sensitive Index of local shares lost 2.2 per cent, as exchange data showed foreigners cut holdings by $1.3 billion this month. The economic climate has caused concerns about inflows into India, The drop in the stock market is affecting the rupee. The rupee declined 0.7 per cent to 45.7475 per dollar at the close in Mumbai, according to data compiled by Bloomberg. That is the biggest drop since February 24. It fell to 45.75 earlier, the weakest level since March 17. Offshore forwards indicate the rupee would trade at 46.09 to the dollar in three months, compared with expectations for a rate of 45.82 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Bonds recover Government securities recovered on fresh buying by banks and companies. The 7.80 per cent government security maturing in 2021 rose to Rs 97.00 from Rs 96.57, while its yield declined to 8.26 per cent from 8.32 per cent yesterday. The 8.08 per cent government security maturing in 2022 also shot up to Rs 97.8750 from Rs 97.54, while its yield dropped to 8.38 per cent from 8.43 per cent previously. The 8.13 per cent government security maturing in 2022 also firmed up to Rs 98.26 from the last close of Rs 97.90, while its yield slipped to 8.37 per cent from 8.42 per cent. The 7.83 per cent government security maturing in 2018, the 7.59 per cent government security maturing in 2016 and the 8.30 per cent government security maturing in 2040 also ended higher at Rs 97.76, Rs 97.40 and Rs 97.05, respectively. The Reserve Bank of India, under the Liquidity Adjustment Facility, purchased securities worth Rs 50,110 crore from 27 bids at the four-day repo auction at a fixed rate of eight cent.
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Call rate edges up The call rate edged up on the overnight call money market on Thursday on stray demand from borrowing banks, ahead of long weekend holidays. The overnight call money rate settled slightly better at 8.05 per cent, from 8.00 per cent yesterday. Foreign exchange reserves (also called Forex reserves or FX reserves) in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro, the UK pound, and the Japanese yen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions.

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