Sensex (17,833.5)
Even Paul, the clairvoyant octopus could not have had a hundred per cent hit-rate had he been asked to predict stock market movement. Who could have expected global markets to shake off the despondent mood, in which they were wallowing towards the end of the previous week to record such a brilliant comeback, just a week later, and that too for no ostensible reason? Indian stock prices too perked up to take the Sensex within arm's reach of the 18,000 mark once again.
The going could however get a trifle choppy in the week ahead as quarterly earning season kicks-off. Benchmarks closing in on their previous highs would also lead to some volatility.
Volumes were subdued on Monday, the day of the Bharat bandh, but it picked up thereafter. Open interest in the derivative segment is however reaching record levels once again at over Rs 1, 40,000 crore. But our market is appearing increasingly comfortable with these high levels of open derivative positions. Stance of foreign institutional investors too turned positive in the later part of the week.
The Sensex utilised the toe-hold at 17,400 to pull itself 372-points higher. Oscillators in the daily chart have managed to clamber on to positive zone and weekly oscillators are poised in the neutral zone pointing upward. In other words, if the rally sustains next week, it would signal resumption of the medium-term uptrend.
The Indian benchmark did not decline below the near-term support at 17,373 indicated in our previous column. This implies a bullish undercurrent and the positive scenario that we had outlined last week could now unfold — that is, a consolidation between 17,000 and 18,000 for a few weeks followed by another attempt to move beyond 18,000. Close below 17,170 is needed to roil the positive medium-term outlook.
If we consider the up move from 15,960 low, one leg was completed on June 21. The index is now correcting this up-move from 15,960. One-third of this move has already been retraced. There are two possible trajectories that the Sensex can take over the ensuing weeks,
If the index makes a strong move above 18,000 it will mean that the third part of the move from 15,960 is unfolding that has the minimum target of 18,581.
Should the Sensex falter around 18,000 again, it would imply that the consolidation between 17,000 and 18,000 would prolong for few more weeks.
Since the charts of other global benchmarks have not yet shaken off their medium-term downtrends, investors are advised caution in the week ahead. The strong ceiling around 18,000 can once more peg the index back, should other benchmarks reverse downward again. We retain the medium-term range for the Sensex between 15,500 and 18,000. But the higher troughs formed within this range since last November at 15,330, 15,650 and 15,960 denotes a positive bias with the possibility of an upward break-out from this range.
The short-term outlook for the Sensex is positive and it can attempt to move up to 17,920, 18,047 or 18,120 in the days ahead. But the resistance zone around 18,000 is not one that can be shrugged away that easily and short-term investors should exercise abundant caution around this level. Supports for the week are at 17,370, 17,330 and 17,170.
The Nifty ((5,352.4) too ended the week on a strong note with 115 points gain.
What is more important is the fact that the index is once more on the verge of testing its 52-week high of 5,400. The medium-term uptrend from May 25 low continues to be in force and we stay with the view that close below 5,150 is needed to reverse this trend. However, if the index is unable to move past the resistance zone between 5,350 and 5,400, sideways move between 5,200 and 5,350 can continue for few more weeks. Strong close above 5,400 will give the next medium-term target at 5,570.
The short-term trend in the index is also up and it can move higher to 5,400, 5,420 or 5,474. Supports for the week are at 5,214, 5,167 and 5,150.
Equity across geographies bounced upward last week as investors decided that stocks were oversold and rushed in to buy them near at key support levels.
Most benchmarks ended the week with gains ranging between 2-5 per cent.
Though the strength in the recovery took many by surprise, it is a little early to say that this is the end of the correction that commenced in April.
CBOE volatility index declined below 28 as investors exulted in last week's rally. Decline below 23.3 is needed to signal an end to this correction.
The Dow reversed from the support around 9,600 indicated in our previous column. This rally will face impediments at 10,250 and 10,650. Close above the second resistance is required to signal the end of the current correction. Else a decline toward 9,093 will be in the offing over the medium term.
Many of the Asian indices such as the Jakarta Composite Index, KLSE Composite, Philippines PSE Composite Index have again recovered following a minor dip and appear to be on their way to a new yearly high.
In fact Thailand's SET Index has already achieved this feat.
Since June 14, RIL has been trading sideways in a narrow band between Rs 1,050 and Rs 1,100. Last week's movement was with in this range and the stock witnessed trivial loss of Rs 12 for the week. The volume traded was below average. The immediate resistances are at Rs 1,075, Rs 1,090 and Rs 1,100. The stock's 200-day moving average is still positioned at Rs 1,050 and the next support levels are at Rs 1,020 and Rs 1,000. We reiterate our prior view that fresh short positions are recommended only on a close below Rs 1,050. Short-term downward targets would be Rs 1,020 and Rs 1,000. Stop-loss can maintained at Rs 1,075 levels.
Medium-term trend is down for the stock. If the stock resists moving beyond Rs 1,100, it would signal that a decline to Rs 100 or Rs 975 could be in the pipeline. On the other hand, a move above this level will push the stock higher to Rs 1,130 or Rs 1,150 in the medium-term.
State Bank of India (Rs 2,368.8)
Negating our prior short-term view, the stock jumped more than 4 per cent in the previous week. The weekly volume is below average, which signals caution. The stock breached its 21 and 50-day moving average last week and is facing immediate significant resistance at Rs 2,400. Short-term traders can initiate long position only if the stock exceeds Rs 2,400. Targets above this resistance are at Rs 2,460 and Rs 2,500. Failure to move above Rs 2,400 can result in a sideways movement between Rs 2,350 and Rs 2,400. Key supports for the stock are at Rs 2,300 and Rs 2,250.
The medium-term trend in the stock continues to be sideways in the range between Rs 1,900 and Rs 2,500.
Tata Steel (Rs 495.9)
The stock gradually rallied last week to record a weekly gain of 4.4 per cent. The stock is pausing just below its short-term resistance band between Rs 500 and Rs 510. Only a strong move above Rs 510 would sign that the stock is in a short-term uptrend. In that scenario, the stock can rally up Rs 525 or even to Rs 540 in the short-term. Short-term traders are advised to initiate fresh long position only above Rs 510. If the resistance level Rs 510 limits its move beyond, it could result in the stock continuing its sideways movement in the zone between Rs 470 and Rs 510. Supports are pegged at Rs 470 and Rs 450.
The medium-term trend has been down since the stock's April peak of Rs 701. A spectacular move beyond Rs 550 would mitigate this downtrend.
Infosys Technologies (Rs 2,871.9)
The stock surged more than 5 per cent in the previous week and recorded an all-time high of Rs 2,882 on Friday. This up-move was contrary to our expectation. As the stock is trading at its all-time high, investors should tread cautiously around this level. Short-term target for the stock is at Rs 2,985.
Medium-term trend is up for the stock since February trough of Rs 2,333. Medium-term investors can consider holding the stock with stop at Rs 2,600. The near-term supports for the stock are at Rs 2,800 and Rs 2,725. —
Hindalco (Rs 149): The stock has been on a recovery mode since mid-June and has bounced back from a key support level of Rs 138.
As long as it holds this crucial support level, it has the potential to reach the important resistance level of Rs 169. The overall outlook, however, remains negative for Hindalco, as long as it rules below Rs 169.
F&O pointers: The Hindalco futures (market lot: 2,000) closed with a marginal premium over the spot close of Rs 149. Option trading suggests positive bias, as Hindalco 150 and 160 calls witnessed unwinding of long positions. On the other hand, the 140 put saw heavy accumulation of open interest. This indicates that 140 will be a strong support for Hindalco.
Strategy: Traders can consider initiating long on Hindalco keeping the stop-loss at Rs 145 with an initial target of Rs 158. Risk-willing traders can aim for a target of Rs 168, while keeping the stop-loss at Rs 139.
DLF (Rs 297): After registering its 52-week low on Rs 254.5, the stock has been witnessing a steady progress. If the current trend sustains, it has the potential to reach the immediate resistance of Rs 324. It faces an immediate support at Rs 282. We expect the stock to move in a narrow range with a positive bias. However, as long as it stays below Rs 405, the overall outlook remains negative for the stock.
F&O pointers: DLF futures (market lot 1,000) shed open interest on Friday, despite a sharp gain in value, indicating cautious trade. Option trading presents a positive signal as 300 call shed open interest even as the 280 put saw heavy accumulation.
Strategy: Consider going long on DLF futures, with a stop-loss at Rs 282 for an initial target of Rs 324. Adjust the stop-loss progressively, as DLF is a high-beta counter. Alternatively, traders can consider buying DLF 300 call, which closed on Friday at Rs 8.20. Consider booking profits, however small, as time value tends to eats the option value.
Follow-up
Last week, we had advised traders to consider shorting MTNL and write 70-call. The counter however hit the stop loss.
 | Technical Analysis |
Nifty has formed inverted head and shoulder pattern with resistance at 5,360
Nifty surged during the week and traded in range of 5,230 to 5,350. On daily chart Nifty has formed inverted head and shoulder pattern with resistance at 5360. On the upside, any sustained move above 5,360 may take it to 5,400- 5,450 levels and on downside if trades below 5360 we may see some correction in nifty. 5,260 and 5,225 will act as strong supports in short term. However, forthcoming IIP and inflation data will remain crucial factor for deciding the market movement. . Expecting IIP number to remain inline with previous one or slightly higher which could take market to a new year high. Simultaneously increase in IIP numbers would result in rise in inflation which could create negative sentiment of RBI interference to raise the key interest rates further to rein in inflation sooner than latter. Nifty is likely to move higher on day of IIP disclosure and lower on day of inflation outcome. Technical momentum indicators are currently suggesting continuation of uptrend as most of them are currently hovering in positive territory. Stochastic is currently moving towards overbought territory from neutral one and showing positive divergence. RSI (14 Days) is currently moving in neutral zone and on the brink of entering into overbought zone suggesting further upside in Nifty. MACD is about to show positive divergence and currently moving in positive zone suggesting upside in forthcoming trading sessions. Nifty is trading above 7 and 14 day EWMA. If Nifty manages to breach the 5 day EWMA (5,296) decisively then we could see downside probably upto 5,200 first and thereafter upto 5,140 mark. Nifty put call open interest data is currently suggesting that Nifty has very strong support at 5,200. Expecting Nifty to remain range bound in between 5,240 and 5,380 in short term. Nifty is likely to remain in tandem with its global counterparts and would remain depended on them for any major breakthrough on either side.
 | Stocks to Watch |
ICICI BANK (Sell)
| Particulars | Rs. |
| CMP | 875.90 |
| Target Price | 817 |
| Stop Loss | 900 |
| Support-Resistance | 815/905 |
Comment
- Stock is in uptrend from last four trading sessions. Technical indictors Stochastic is showing maximum positive divergence and on the edge of entering into overbought territory.
- RSI is currently moving in neutral zone and showing uptrend while MACD is moving in negative zone. Though the stock is trading above 7 and 14 day EWMA expecting correction in stock from close to 890, from where stock could reverse its direction.
BHEL (Buy)
| Particulars | Rs. |
| CMP | 2,393.55 |
| Target Price | 2,453 |
| Stop Loss | 2,363 |
| Support-Resistance | 2,350/2,480 |
Comment
- Stock is managed to close above 5 day EWMA while trading below 13 day EWMA. Stock is likely to cross 5 day EWMA as suggested by technical indicators. Stochastic oscillator after showing positive divergence moved in neutral territory from overbought.
- RSI is also currently hovering in neutral zone and moving towards overbought zone. MACD is showing negative divergence and on the brink of entering into negative zone from positive one by crossing neutral line from above, which is cause of concern.
 | Indian Equity Market |
The Week Gone By
Indian markets wrapped the week on a positive note as anticipation of robust corporate financial performance boosted the domestic bourses. Indices belled the week on a subdued note as lack of participation from retail investors due to a one-day bandh called by opposition political parties. However thereafter markets rebound smartly as the expectations of good quarterly numbers from the corporate in the last quarter as well as the revival in the monsoon rains uplifted the sentiments. Moreover the support of positive global cues boosted investors' sentiment. Later in the week, SEBI's decision to reduce exposure margins for stock derivatives and upbeat US retail sales data also helped to pull Indian bourses higher.
Looking Forward
Indian markets medium term outlook is looking bright as IMF raised India's growth forecast for 2010 to 9.5% It stated that favorable financing conditions and massive corporate profits will boost economic growth. Strong corporate tax collections that grew by 21.7% in Q1FY11 substantiated IMF's assumptions of robust corporate profits. Further, the improvement in the monsoon will also help the economy achieve better growth. However, the government's move to decontrol petrol prices has triggered skepticism among investors over how long this rally can sustain and it is likely to dampen their risk appetite during the coming week. Valuations have also turned expensive and the support of uninterrupted foreign fund flows will be required if the benchmark indices have to scale fresh intermediate peaks. The market will continue to take cues from global markets; fund flows and risk appetite. Next week, buying is expected in FMCG, Healthcare and Fertilizer stocks while selling positions can be accumulated in metals, realty, IT and BFSI if the Nifty fails to sustain above 5,300. Investors will also eye on industrial production data, monthly inflation and the Infosys earnings which are due on next week.
Nifty Top Gainers
| Company | % Weekly Return |
| Bharti Airtel | 16.60 |
| Idea | 15.00 |
| BPCL | 6.61 |
Nifty Top Loser
| Company | % Weekly Return |
| ACC | (3.5) |
| Hindustan Unilever | (2.2) |
| NTPC | (2.1) |
Daily Movement of Nifty
Daily Movement of Sensex, Net FIIs & MF investment
Source for FII & MF: Sebi
Weekly return on BSE Sectoral Indices
| Security Name | Price (USD) | % change |
| L&T | 38.94 | (0.15) |
| RIL | 45.37 | (1.84) |
| SBI | 101.15 | 3.11 |
| Security Name | Price (USD) as on 08-07-10 | % change as on 01-07-10 |
| ICICI bank | 37.15 | 3.31 |
| Infosys | 61.34 | 3.79 |
| MTNL | 2.74 | (2.84) |
| Rediff | 1.92 | 2.13 |
| Sify | 1.26 | (0.79) |
 | Global Equity Markets |
US markets closed higher during the week, breaking the weakness experienced during the past two weeks. Dow's gained 4.7% this week which is the Dow's best three-day move since mid-May. Investors are getting enthusiastic about stocks again after some reassuring news from the job market. Retail sales data and employment news has been the key driver behind the market's moves during the past few weeks. Stocks also got some support from a global economic forecast from the International Monetary Fund. The IMF raised its world growth estimate for the year to 4.6% from 4.2%.
Asian markets traded higher for the week. After giving a mixed start initially, the Asian majors edged higher as the Chinese stocks helped to lift the sentiments. Shares in China outperformed their Asian peers led by property and banking stocks, with the closing of subscriptions for Agricultural Bank of China's massive IPO helping to ease a liquidity squeeze. The benchmarks also rose after taking cues from the upward rally on the Wall Street. Japan's Nikkei 225 rose on the back of the exporters which got support from a softer yen. China's improving business climate and a South Korean interest rate increase spurred confidence in a global economic recovery. Hang Seng and SSE Composite also registered weekly gains.
European markets rose higher on the back of encouraging economic data. A positive mood prevailed throughout the session, even though there weren't any major company announcements or economic releases to stimulate buyers' action. In the interest of promoting healthy, sustainable growth, the European Central Bank left its benchmark interest rate at 1.00%, as expected. The higher forecast from the IMF helped boost overseas markets and the euro. The 16-nation currency climbed to USD 1.2698, its highest level since May. German Consumer price annual inflation slowed to 0.9% in June. Forthcoming trade data and producer price inflation figures from the U.K. along with industrial production data from France will remain the crucial figure for deciding the short term movement of market.
Weekly return on major Global Indices
Data of US and European markets taken from July 01 to July 08, 2010
Data of Asian markets taken from July 02 to July 09, 2010
Weekly Change in the Composites of S&P 500
| Industry | Adj. Mkt. Cap | Adj. Mkt. Cap as on | % |
| Energy | 1,052,148 | 9,97,444 | 5.48 |
| Materials | 334,722 | 3,18,257 | 5.17 |
| Industrials | 994,560 | 9,56,514 | 3.98 |
| Cons Disc | 973,987 | 9,51,188 | 2.40 |
| Cons Staples | 1,116,845 | 10,76,930 | 3.71 |
| Health Care | 1,158,573 | 11,17,287 | 3.70 |
| Financials | 1,576,692 | 15,07,852 | 4.57 |
| Info Tech | 1,824,951 | 17,42,171 | 4.75 |
| Telecom Services | 286,297 | 2,81,103 | 1.85 |
| Utilities | 358,760 | 3,41,101 | 5.18 |
| Key Events |
Global Key Events
-
The International Monetary Fund has raised its 2010 growth estimate for the global economy reflecting stronger activity during the first half of the year. The world economy is now forecast to expand 4.6% by the lender, faster than the 4.2% increase projected in April.
-
US Jobless claim for the first time fell by more than expected in the week ended July 3rd to 454,000 from the previous week's upwardly revised figure of 475,000. While the bigger than expected drop pulled weekly jobless claims down to their lowest level in eight weeks, they remain at a relatively elevated level well above the 400,000 level.
-
Activity in the US service sector expanded for the sixth consecutive month in June though it was below expectation. Its index of activity in the service sector fell to 53.8 in June from 55.4 in May, but a reading above 50 indicates continued growth in the sector.
-
Consumer borrowing in the US dropped in May more than forecast, a sign Americans are less willing to take on debt without an improvement in the labor market. The USD 9.1 bn decrease followed a revised USD 14.9 bn slump in April.
-
The U.K. economy grew 0.7% in the second quarter of this year, more than double the growth recorded in the first quarter but slower than in the three months ending in May.
-
The European Central Bank left its benchmark interest rate unchanged at a record low of 1% for the 14th consecutive month and maintained the size of the quantitative easing at 200 billion pounds to underpin the fragile economy amid severe fiscal consolidation.
-
German industrial output grew more than expected in May, as production of intermediate and consumer goods increased compared to April. The seasonally adjusted industrial production increased 2.6% month-on-month in May, following a revised growth of 1.2% in April.
Domestic Key Events
-
India's food price inflation rose by an annual 12.63% in the week to June 26, down from 12.92% in the previous week, largely due to the high base effect, government data released on Thursday showed. The fuel price index rose to 18.02% during the period versus last week's 12.90%, while the primary articles index was up at 16.08% versus 14.75% a week before.
-
Indirect tax collection soared by a whopping 43% to Rs 56,930 crore in the first quarter of the current fiscal on the back of an upswing in industrial activity. Out of the total indirect tax collections, realisation from customs zoomed by 60% to Rs 28,135 crore and excise by 55% to Rs 19,536 crore. Service tax collection, however, declined by 3% to Rs 9,258 crore during the reporting quarter.
-
In a move to encourage self-employment initiatives among minorities, Government today approved a proposal to enhance the authorised share capital of National Minorities Development Finance Corporation (NMDFC) from the existing Rs 1000 crore to 1500 crore.
-
L&T Infrastructure Finance Company a non-banking finance arm of engineering major Larsen & Toubro has been classified by the Reserve Bank as infrastructure finance company within the overall classification of non-banking finance company (NBFC). This status will allow it mobilise funds at lower cost and get flexibility in infrastructure lending.
-
Exports of passenger cars from India declined by more then 3% in June to 36,874 units, mainly due to slowdown in demand from Europe. For the Indian car exporters, the European nations are the major destinations.
-
Rainfall deficit for the country as a whole has narrowed down to 11% for the period June 1-July 6 from a much higher 16% but distribution of the rains, both spatially and temporally, could continue to keep the Centre on an edge for a while despite the monsoons having covered virtually the entire country over the weekend.
-
Steady demand from automobile and consumer durables sectors saw steel consumption rising 12.2% to 14.9 million tonne (MT) during the April-June quarter over the same period last fiscal. Consumption was at 13.30 MT in the year-ago period, according to the data released by the Steel Ministry. However, domestic production rose only by 4% to 15.08 MT in the reporting period.
 | Derivatives |
-
Nifty ended on positive note at 5,352.45 marks gaining 2.20% during the week. The Nifty July futures ended at 5,353 (LTP) with a premium of 0.55 points. If we look at the derivatives data we could see that Nifty future prices ended in the positive territory but with decline in the cost of carry along with decline in open interest, this is an indication of closure of some long position. Moreover, there was active call and put writing at most of the out-of-the money strikes option. Thus this indicates market will consolidate between 5.200 to 5.400 level. Nifty may continue to face resistance at higher levels of 5,380- 5,400 whereas on the downside support is seen at 5,225 to 5,260 levels.
-
During the week, there was significant accumulation of OI in OTM Call options .Most of the open interest builds up in the range of 5200 -5,300 put while, on the flip side, the OTM 5400-strike and 5500-strike call options saw significant short accumulation. 5,300 and 5,200 strike put added 12.84 lakh and 1.32 lakh shares respectively in OI on Friday. On the Call front 5,400 strike calls witnessed addition of 2.75 lakh shares.
-
The Put-Call ratio of open interest decreased during the week from 0.94 to 0.87 levels. The options open interest remained mixed as the week progressed. The options concentration has shifted to the 5,400-5,500 strike call option due to short accumulation at these levels.
-
The Volatility Index (VIX) decreased during the week and closed at 20.14%. Market participants should be watchful at current levels as any up move in volatility may trigger more downsides in the markets. Volatility has a strong inverse correlation with markets.
-
The CNX IT index ended the week at 6,108.40 marks jumped 4.66%. The CNX IT Futures prices surged along with increase in the open interest but with decline in cost of carry on weekly basis, this is an indication of closure of long position and fresh short position is being built at higher levels. For the coming week, immediate Support for the Index is seen in the range of 5,800-5,850 mark, whereas on the upside Resistance is seen at 6,250- 6,300 levels.
-
During the week the Bank Nifty Index ended on a positive note at 9,713.70 surging 3.81%. If we look at the derivatives desk we can see that the bank Nifty futures prices increased along with an overall addition of open interest but with decline in the cost of carry, this is an indication of closure of long position and fresh short position is being built at higher levels. For the coming week bank Nifty support is seen in the range of 9,400-9,500 levels whereas on the upside stiff resistance would be faced at 9,850-9,900 levels.
-
FIIs were net buyer in index futures to the tune of Rs 1,460 crore indicating slightly up trend in market and in the options index FII witnessed a further incline in OI along with a net buy of Rs 1,090 crore with accumulation in 5,300 put is indicating market is likely to take a short correction in near term.
-
The overall mood continues to be cautious and showing a mixed trend. 5,360 to 5,400 levels for the Nifty continue to be an immediate resistance. The upcoming corporate results and progress of the monsoon will be the main cue for the market. Overall, the index is expected to remain in a broad range and settle around 5,200-5,400 levels. The global cues will play a crucial role as most indices across the globe are witnessing significant volatility.
Most Active Contracts
Put-Call Ratio
Volatility Index
FIIs Cumulative trailing 5 day's data
| Particulars | Buy | Sell | Net |
| Index Futures | 7,661.02 | 6,200.83 | 1,460.19 |
| Index Options | 20,644.67 | 19,554.55 | 1,090.12 |
| Stock Futures | 3,705.03 | 3,814.09 | (109.06) |
| Stock Options | 404.91 | 470.23 | (65.32) |
 | Debt |
- The call money rates came down to around 5.6% after rising to 5.88% in the beginning of the week above RBI's repo rate of 5.25%. Strained liquidity scenario continued during this week with the central bank providing a daily liquidity support (under LAF) of Rs 40,000 crore to Rs 60,000 crore. Call rates remained steady in the range of 5.60%-5.90% very much inline with the expectation inflows via government spending has not risen sufficiently.
- FIIs were net buyer in the debt market with buying worth Rs 5,558.80 crore compared to 4,180.8 crore of selling in the previous week. MFs were also net buyers in the debt market as they net bought securities to the tune of Rs 4,220 crore compared to Rs 114.1 crore of buying in the previous week.
- Bond prices pared early gains to end the week on lower note as global equity market recovered sharply after some better than expected economic data. Early in the week, bond yield surged to 1-week high after the central bank raised interest rates for the third time this year. Reserve Bank of India has increased the benchmark reverse-repurchase rate to 4% from 3.75% and the repurchase rate to 5.5% from 5.25% on July 2, to curb rising wholesale price index. Further, bond yield also rose after seven states sold a planned Rs 4,890 crore of 10-year notes at a sale on Tuesday as the central government said that it will raise as much as Rs 12,000 crore selling bonds at an auction on July 9. However, a further upside to yields was capped on replacement demand for a bond which is due for redemption this month. Further, bond yield and swap rates were little changed after food inflation eased, but fuel inflation accelerated in late June. Though, sentiments were dampened after South Korea's central bank lifted interest rates on Friday.
- Bond prices are likely to be influence by the inflation and industrial production data for June which is due next week. Further, if global equities and commodities continue their rally then yield could gradually moderate. However, the upcoming monetary policy could add some sluggishness in the bond markets as another interest rate hike is expected from RBI.
- During the week, RBI sucked Rs 505 crore from the system under Liquidity Adjustment Facility (LAF) window while Repo transaction stood Rs 2,31,615 crore. On July 06, 2010, RBI auctioned 10-year State Development Loans, 2020 for Seven State Governments worth Rs 4,500 crore. On July 07, 2010 RBI auctioned 91-day Treasury Bills worth Rs 2,000 crore and 182-day Treasury Bills worth Rs 1,500 crore. On July 09, 2010 RBI has auctioned 7.17% Government Stock, 2015 worth Rs 4,000 crore, 7.8% Government Stock, 2020 worth Rs 5,000 crore and 8.32% Government Stock, 2032 worth Rs 3,000 crore.
| Date | Rate (%) |
| 02-Jul | 4.70 |
| 05-Jul | 5.88 |
| 06-Jul | 5.76 |
| 07-Jul | 5.60 |
| 08-Jul | 5.61 |
FIIs & MFs investment in Debt Market
Period | FIIs Net Investment (Rs. Crore) | MFs Net Investment (Rs. Crore) |
| 02-Jul | 978.30 | 976.80 |
| 05-Jul | 268.40 | 921.10 |
| 06-Jul | 3,009.20 | 1396.10 |
| 07-Jul | 1,629.90 | 926.00 |
| 08-Jul | - | - |
| Total | 5,885.80 | 4,220.00 |
Bond Yield (7.80% CG 2020)
| Date | LTP (Rs.) | YTM (%) |
| 02-Jul | 101.75 | 7.5333 |
| 05-Jul | 101.21 | 7.6223 |
| 06-Jul | 101.23 | 7.6097 |
| 07-Jul | 101.41 | 7.5967 |
| 08-Jul | 101.35 | 7.5944 |
Spread
Liquidity Adjustment Facility
| Date | Reverse Repo (Rs. Crore) | Repo (Rs. Crore) |
| 02-Jul | 115 | 56,815 |
| 05-Jul | 85 | 47,830 |
| 06-Jul | 100 | 49,640 |
| 07-Jul | 205 | 49,735 |
| 08-Jul | - | 27,595 |
| This week | 505 | 2,31,615 |
 | Commodity |
| Crude oil prices started the week on a lower note. Trading was thin due to the Independence Day holiday in the US. The weakness in the crude oil prices continued due to the concerns that a slowing economic recovery could hurt the future energy demand. Moreover, prices also fell in line with the subdued global equities markets. Crude oil prices took a sharp turn towards the end of the week and began to rise. Crude registered gains after the Energy Information Administration (EIA) revised up its global oil demand forecast. A weaker dollar also supported the higher prices. The upward rally in the crude prices continued after the release of the positive US economic data and also on the back of the improved outlook for the global economic growth for 2010 by International Monetary Fund (IMF). Further, a reported fall of 4.9 mn barrels in the crude inventory for the week ended 2 July helped the crude prices to get stronger. Finally, the crude pricesended 2.57% higher in the international markets and 4.26% higher in the domestic market on w-o-w basis. Investors' sentiments are expected to stay bullish for the crude oil and therefore crude prices may rise further in the coming week. A positive economic outlook by the IMF and a heavy drop in the crude stockpiles along with encouraging economic data are likely to keep the crude prices higher. |
|
|
Weekly change in Crude prices per Barrel
| 08-July | 01-July | Change (%) | |
| Intl Crude Oil Prices (USD) | 74.71 | 72.84 | 2.57 |
| Domestic Price (Rs) | 3,494.81 | 3,352.06 | 4.26 |
Inventories (weekly change)
| Week ended | Change | Total Inventory |
| 02-July-10 | (4.9) mn barrels | 358.20 mn barrels |
Weekly change in Gold prices in Rs/10gms
| 08-July | 01-July | Change (%) | |
| London pm fix (USD/troy oz) | 1,193.50 | 1,234.00 | (3.28) |
| Mumbai (Rs/10gms) | 18,365.00 | 18,850.00 | (2.57) |
 | Forex |
Indian Rupee depreciated marginally by 0.15% against the dollar during the week. Rupee belled the week on a subdued note as positive sentiment following the RBI's rate increase was offset by a choppy domestic share market. Thereafter, Indian rupee fell to its lowest in almost a month after the euro's fall from a seven-week peak triggered dollar demand from importers and a weakness in global stock markets underpinned sentiment. However, later in the week pared some losses as buoyant global stock markets raised expectations of more capital inflows and the euro's gains overseas triggered dollar sales by exporters. Rupee should be able to maintain a relatively firm tone against the dollar in the near term as the IMF raised India's growth forecast for 2010 to 9.5%, stating that favorable financing conditions and robust corporate profits will attract foreign inflow.
| INR/ | 09-Jul | 02-Jul | %Change |
| USD | 46.75 | 46.68 | (0.15) |
| EURO | 59.36 | 58.29 | (1.84) |
| YEN | 52.81 | 53.03 | 0.41 |
 | Economy |
| Indicators | Latest | Previous | Change |
| Investment Deposit Ratio (%) | 31.28 (Jun 18) | 31.61 (Jun 04) |  |
| Credit Deposit Ratio (%) | 73.28 (Jun 18) | 72.40 (Jun 04) |  |
| Money Supply (%) | 14.50 (Jun 18) | 14.60 (Jun 04) | |
| Bank Credit (%) | 19.60 (Jun 18) | 19.10 (Jun 04) | |
| Aggregate Deposits (%) | 13.90 (Jun 18) | 14.30 (Jun 04) | |
| Forex Reserves USD bn | 278.27 (Jul 02) | 276.98 (Jun 25) | |
Upcoming Results
| Companies | Date | Companies | Date |
| Sintex Inds | 12-July | Castrol India | 15-July |
| Exide Inds | 13-July | LIC Housing Fin | 15-July |
| Infosys | 13-July | TCS | 15-July |
| HDFC | 14-July | Chambal Fertilizers | 16-July |
| Axis bank | 15-July |
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Results Declared
| Companies | Total Income (Rs. Crore) | Net Profit (Rs. Crore) | ||
| Qtr ending Jun'10 | Y-o-Y %Change | Qtr ending Jun'10 | Y-o-Y %Change | |
| Gujrat NRE Coke | 453.73 | 35.58 | 20.04 | 450.55 |
| Indusind Bank | 932.5 | 16.33 | 118.55 | 37.05 |
Market Snapshot
Weekly Open Interest Gainers
Weekly Open Interest Losers
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On daily chart Nifty has formed inverted head and shoulder pattern with resistance at 5,360. On the upside, any sustained move above 5,360 may take it to 5,400- 5,450 levels and on downside if trades below 5360 we may see some correction in nifty. 5,260 and 5,225 will act as strong supports in short term. Technical momentum indicators are currently suggesting continuation of uptrend as most of them are currently hovering in positive territory. Derivative Outlook Nifty ended on positive note at 5,352.45 marks gaining 2.30% during the week. The Nifty July futures ended at 5,353 (LTP) with a premium of 0.55 points. If we look at the derivatives data we could see that Nifty future prices ended in the positive territory but with decline in the cost of carry along with decline in open interest, this is an indication of closure of some long position. Moreover, there was active call and put writing at most of the out-of-the money strikes option. Thus this indicates market will consolidate between 5,200 to 5,400 levels. Nifty may continue to face resistance at higher levels of 5,380- 5,400 whereas on the downside support is seen at 5,225 to 5,260 levels Sector-wise Outlook This week, buying is expected in FMCG and Pharma sectors from lower supports of 5,300 levels. Short positions can be accumulated in Banking, Metals, Realty and IT stocks if the Nifty fails to sustain above 5,350 levels |
| Derivative Strategies for the week:
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Idea Cellular turned red hot on Friday following the earnings upgrade by investment bank Credit Suisse. The bank upgraded the stock's rating to outperform from underperform and raised its target price. The stock advanced 13.3 per cent on Friday alone and was supported by extra-ordinary volume. It finished the week with 15 per cent gains.
In late May 2010, the stock found support in the band between Rs 48 and Rs 50 (it had taken support at the same level in November 2009). Since then, the stock has been on a short-term uptrend. It is now facing immediate key resistance at Rs 68, inability to surpass which may result in a near-term corrective decline to its immediate support level of Rs 63. Short-term traders can take part profits off the table if the stock faces difficulty in crossing Rs 69.
Investors with medium-term perspective can consider holding the stock with stop at Rs 55. Strong weekly close above Rs 69 will take the stock ahead to Rs 75 and then Rs 82.
Shopper's Stop (Rs 619.8)
The stock revved up on Wednesday and climbed 17 per cent to record an intra-day high of Rs 658. Though it surged 21 per cent to an intra-week high of Rs 666, it shed some gains in the last two trading sessions to end the week with a 13 per cent gain. The stock has been on a long-term uptrend from its March 2009 low of Rs 70. The uptrend got accelerated in late May this year. The stock is now testing significant resistance at Rs 650. The daily relative strength index is displaying negative divergence and weekly RSI is hovering in the over bought territory. This signals caution. Failure to exceed Rs 650 will pull the stock lower to Rs 550 or Rs 500.
Short-term investors can take profits of the table at this juncture. Medium-term investors can hold the stock with stop Rs 450. Targets above the resistance level at Rs 650 are Rs 750 and Rs 777, its all-time high
Easy monitoring
Subscribe to MF units through broker, using Stock Exchange platform
Convert existing MF holdings by filling a form
Mutual fund investors can now choose to have their holdings in dematerialised form, with National Security Depository Ltd (NSDL) announcing that it will enable the same for its demat holders.
For MF investors, this is a good news as it will enable them centralise all their investment holdings.
"A demat account will allow the investors to view their investments as a single snapshot. This is any day an advantage over calculating their holdings from going through several statements," said Mr Rajnish Rastogi, Senior Vice-President and Co-Head of Equities, Motilal Oswal.
"Customers will now get one simple statement for all their holdings with all the AMCs. Earlier, if a customer held 15 schemes in 10 different fund houses, he would get that many number of statements. Now with MFs being available in demat format, investors can manage their portfolios better. They can monitor all the schemes in one go," said Mr C. J. George, Managing Director at Geojit BNP Paribas Financial Services.
However, this demat holding would entail a charge, much like shareholders paying for their demat accounts. Fund house officials believe that the best fee structure would be a flat one based on a time period, rather than a fee structure linked to Assets Under Management.
The fee must be reasonable enough to attract mutual fund investors, fund managers said. Officials at some mutual fund houses said this demat offer could attract more investors. Others felt there is still an aversion and mistrust among investors towards dematerialised holdings. This could eventually see an increase in mutual fund trading, since trading of dematerialised units would be faster and simpler.
A demat account for MFs would work much like that for shares. One can subscribe to mutual fund units through one's stock broker using the stock exchange platform. Upon subscription, the Asset Management Company (AMC)/Registrar and Transfer Agent (RTA) will credit the mutual fund units to one's demat account.
For existing mutual fund holdings, the investor has to obtain a conversion request form from his Depository Participant. After verification, the AMC/RTA will credit the mutual fund units into the investor's demat account.
We take a decision based on whether growth is available at a reasonable price. Buying pure value stocks sometimes carries the risk that no one is able to see the 'value' except us.
ANOOP BHASKAR, HEAD, EQUITY, UTI-AMC
Investors have focused on companies' ability to generate cash-flows since the market meltdown of 2008 and that is why value strategies and defensive sectors have done so well, says Mr Anoop Bhaskar, Head-Equity of UTI Asset Management Company. Explaining how he approaches a 'value strategy', Mr Bhaskar says that value stocks or sectors need to be able to attract liquidity too.
Excerpts from the interview:
UTI's Master Value and Midcap Fund have been among top performing diversified equity funds in the past year. What strategies contributed to this?
There were a couple of broad themes that helped. One, we were overweight on defensives like pharmaceuticals, relative to our benchmarks. We also got our calls right on automobiles, with a strong overweight position. Both made positive contributions to our returns.
Two, we have also been underweight on banking, and yet bank stocks we chose such as IndusInd, Bank of Baroda (both of which trebled) performed well. Stock selection has helped us. We consciously differentiate the two funds. The mid-cap stocks with high growth prospects may go into the Mid-cap fund, the ones with a value dimension usually go into the Master Value Fund.
Value investing has worked well in this period, hasn't it?
Yes, and you have to see it in the market context over the past year. We came off a period when stocks had fallen off very sharply and valuations were very low. We thus found several good quality stocks available at a high dividend yield. These stocks have bounced back very well.
From now on, the market is fairly priced and the orientation of the market is towards high Beta. For Master Value to do well, we need to have liquidity flowing into value stocks and we need to have sufficient opportunities with good fundamentals.
In 2007-08, for instance, pharma or automobiles didn't do too well. If flows begin to shift towards, say, infrastructure stocks, then 'value' stocks may not outperform.
The market orientation still seems to be towards 'defensive' stocks. FMCG and pharma stocks have outperformed…
One of the outcomes of the market fall and rise of 2008-09 has been that investors don't want to chase a certain theme, irrespective of valuations. They want to make sure that the underlying business is strong enough to be able to generate free cash-flows. In 2007-08, if you remember, short-term investors were riding on companies and sectors that could frequently raise capital.
The entire gravy train depended on companies being able to raise capital from the markets rather than being able to generate cash-flows from the business. The focus was also only on the profit and loss and not on the balance sheet. However, all that has changed in the past year. That is helping value investing perform.
Are you able to find high quality dividend yield or low PE stocks in the market today?
We don't run a pure value fund that focuses on valuations alone. We look at relative valuations to find stocks. A couple of months ago Maruti Suzuki had dropped to a very low PE multiple and we added it to our portfolio; that is not a conventional 'value' stock. We take a decision based on whether growth is available at a reasonable price. Buying pure value stocks sometimes carries the risk that no one is able to see that 'value' except us.
Is liquidity in mid-cap and small-cap stocks back to late 2007 levels?
Not for all the stocks. Liquidity actually depends on the stock getting discovered and you have to take a call on whether the sector and stock will manage to get liquidity in future. Some stocks, like SRF for instance, do manage to add liquidity even as their price rises. Two or three years ago, no one would look at the fertiliser sector; today there is interest in the sector. If you hold Coromandel International, liquidity has improved tremendously. The call is on whether the sector can attract investors.
While FMCG and pharma stocks have outperformed, traditional high beta sectors like capital goods and infrastructure have languished. Do you see a reversal happening?
Not immediately. In the case of capital goods stocks, the companies raised a lot of funds, which were invested in projects. In many cases, the projects have not been completed yet.
If and when they do get completed and investors see that the returns from these assets are much higher than anticipated, that is when interest will return to these stocks. However, you are right in that the 'defensive' sectors such as FMCG and pharma are today trading well above market valuations and carry high betas. Therefore, it would be naïve to assume that they would provide protection if the market falls.
What you have seen over the last six months is other consumer sectors getting re-rated. Two-wheeler companies and paint companies today enjoy PEs 22-23 times their earnings. Two-wheeler companies, for instance, are high on cash and ROCE and have low working capital requirements.
Their capacity investments of, say, Rs 500 crore can generate cash-flows around Rs 1500 crore of sales. Those kinds of businesses have got re-rated based on the cash-flows they generate.
If exposure to defensives and mid-cap stocks helped performance so far, is there reason to alter that now?
We may need to balance that out with a higher weight to 'growth' sectors, maybe cement or construction. We have been underweight on financials and may need to increase that based on the index weight. However, financials are not as big an exposure in the mid-cap basket as in the Nifty and so we can manage the portfolio while being underweight on the sector.
Our exposure to commodity stocks is low. I would be cautious on commodities as they would be susceptible to a slowdown in the global growth. Better to be invested in the converters of commodities than manufacturers.
What are the risks to the outlook from here on?
The key risk I see is valuations. For instance, some of the mildly impressive mid-sized companies in the pharma space are trading at 15-16 times forward earnings and at 2 -2.5 times their book values. Their capital return ratios need to improve greatly to justify their price. Market preference for certain sectors has pushed up valuations.
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| Due to the robust domestic economic growth, strong policy response and strong corporate earnings, the Indian markets have clearly been more resilient compared to the broader Global benchmark. While the Sensex has posted positive return of close to 1.5% YTD, compared to negative return of over 6% for MSCI EM, the Sensex outperformed by close to... | |||
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| FMCG: Currently, the BSE FMCG Index is trading at a PE of 30.7x, a 46% premium over the Sensex PE of 21.0x. Going forward, we expect the premium to expand on the back of rising volumes, supported by the boost in consumption, owing to the favourable changes in tax slabs… | Media-Broadcasting : Although the sector has performed (almost) in tandem with the Sensex over the last one year, in periods before that it used to command a very high premium (over the Sensex). Currently, the sector is trading at a PE of… | ||
| Oil & Gas : Historically (over the past 4 years), the BSE Oil and Gas Index has traded at a average PE of 16.7x, at 14.6% discount to the average PE of the Sensex, 20.6x. However, the recent deregulation of petrol prices and partial increase in diesel prices have improved the growth and profitability prospects of the sector for both oil marketing companies and private oil players… | Metals : We foresee the Metal sector underperforming the broader markets due to a difficult pricing environment in the coming months. This will be largely due to the faltering demand and steep over-capacity in the market. In addition, the sharp rise in raw material prices is likely to hurt margins further…. | ||
With exchanges competing for a share of the currency derivative pie, investors may gain as services improve and transaction costs drop.
The exchange-traded currency derivative segment is set to experience greater action as India's latest stock exchange, the United Stock Exchange (USE) throws its hat into the currency derivative ring in the near future. The USE is slated to join the two behemoths, National Stock Exchange and the MCX Stock Exchange this month in vying for a share of the currency derivative turnover pie.
It comes as no surprise that this segment is attracting great attention as it is the fastest growing section among domestic stock exchanges over the last year. The combined turnover of NSE and MCX-SX in these products has increased from less than Rs 1,000 crore in October 2008 to Rs 35,000 crore by June this year.
While only the dollar-rupee futures were traded initially, the exchanges now trade euro-rupee, pound-rupee and yen-rupee futures as well. Trading in options of these currency pairs is also going to be launched soon. This move could give a further boost to turnover since many traders prefer using options in their trading strategies.
Greater liquidity for the USE
Three exchanges offered a trading platform for currency derivatives in 2008. But the Bombay Stock Exchange saw its turnover declining steadily until the exchange decided to hive off the currency derivative trading to the new exchange, USE, in which it holds 15 per cent stake.
The USE is expected to be more successful than the BSE in trading these instruments because 21 public sector banks and seven private banks are stakeholders in this exchange. The argument is that these banks could shift part of their over-the-counter (OTC) foreign exchange business to the USE, thus contributing to the liquidity.
Most of the members of the BSE are also expected to become a part of the USE since trading membership is free and the exchange intends to charge no transaction fee in the initial stages, adding to the liquidity.
Although the plan appears sound on paper, the ground reality may be far from that. Exchange-traded currency derivatives are settled in cash and there is no exchange of actual currency on expiry. This would ward off many importers and exporters, who can only hedge their exposure through these exchange-traded instruments. They would eventually have to resort to the OTC market for settling their forex obligations.
Hedging forex exposure
Again, though the member banks could make their smaller clients hedge their forex exposure through this product, it might not be easy to do so with the larger clients. The standardised contract sizes (1000 USD, 1000 euro, and so on) and fixed transaction costs will not appeal to large importers and exporters, who may prefer the greater flexibility of the OTC market. They can also negotiate lower transaction charges in the tailor-made contracts offered in the over-the-counter market.
It is observed that the majority of players in the currency derivative segment of the NSE and MCX-SX currently are not companies with foreign exchange exposure but traders who bet on the currency movement. Both the NSE and MCX-SX have an edge over the USE in attracting the trading fraternity.
The NSE has a strong equity derivatives segment which transacts over Rs 60,000 crore of business everyday. The participants in this segment are only too glad to trade yet another instrument with the same exchange.
MCX-SX was also able to establish a flourishing currency derivative segment over the last two years through the client-base existing with MCX. Smaller commodity traders who are exposed to foreign currency risk prefer to hedge this exposure through currency derivatives traded on MCX-SX.
The USE will, therefore, find it difficult to wean away the trading fraternity who are already well entrenched in trading forex derivatives on NSE and MCX-SX. It can be argued that the broking members of the Bombay Stock Exchange who have registered with USE can impart the required liquidity to this exchange. But given the way currency derivatives failed to take off on BSE and had to be halted in less than 12 months, it is hard to envisage how BSE members can make a difference this time around. As exchanges battle it out to grab a share of the currency derivative turnover, investors are likely to walk away as the ultimate winners as services improve and transaction costs drop with greater competition.
The unique concept of having both active and passive features may help investors to earn higher returns for the same risk.
Exchange Traded Funds (ETF) in India have not taken off in a big way as many actively managed funds continue to give superior returns when compared with key indices.
ETFs as an investment class have only mopped 0.19 per cent of the latest assets under management despite being in existence for almost a decade now.
Given this back drop, Motilal Oswal Asset Management Company has launched MOSt Shares M50 ETF, an open-ended equity ETF which tracks its in-house MOSt 50 basket.
Objective: MOSt 50 basket was introduced with the idea of earning higher returns for risk equivalent to the Nifty basket. It is a fundamentally weighted index with constituents of Nifty index getting weights based on the fundamentals rather than weights based on the market capitalisation (followed by the Nifty basket).
The ETF seeks to earn superior returns by giving preference to companies with reasonable valuations and consistently good fundamentals within the Nifty basket.
The illustration of the index shows 13 percentage points higher returns on an annualised basis for a little over a three-year period for MOSt 50 basket.
However, Most 50 index basket has tracked the Nifty basket from April 2007 to the lows of March 2009. It is only from March 2009 that MOSt 50 index gained multiple times that of Nifty.
Strategy: The Motilal Oswal AMC has designed this proprietary basket, which attributes weights to companies depending on pre-defined metrics such as return on equity, net worth, retained earnings and price.
The financial measures are taken on a historic basis. Then an algorithm classifies stocks into one of the three categories: over-weight, under-weight or equal weight, depending on their financial performance and valuations.
This weight would be different from that of the Nifty basket. For instance, while the Nifty 50 index has 15.8 per cent weight on the oil sector, MOSt 50 has given only a 2.4 per cent weight to this segment. While the ETF is passively managed to the extent that tracks the stocks in the index, it will be dynamically re-balanced periodically, based on changing fundamentals and whenever the constituents of Nifty index are changed.
Review: The unique concept of having both active and passive features may help investors to earn returns higher (called alpha returns) than what is commensurate with the risk of the basket. In addition ETFs have a low-cost structure and don't entail any exit load, as they are traded like any other stock on the bourses.
Risks: As the fund considers historic data for evaluating fundamentals, any new development may not be factored into the rebalancing right away and, often, the market's response by way of , re-rating/de-rating happens very quickly.
For instance, oil price de-regulation would not tend to reflect in the performance of MOSt basket, as against the Nifty 50 basket, given the low weights in the former.
The active strategy to a set basket of stocks also poses certain other risks. At times, higher weight to stocks that are under-valued for long (on expectations of re-rating), may affect the performance of the ETF, when compared with the Nifty index.
Weights based on pre-defined rules, lack of human intervention inability to diversify outside of the Nifty universe to boost performance may also heighten risks.
Besides, the MOSt 50 index still has to hold all the Nifty stocks, irrespective of their valuations. The NFO closes on July 19.
The risk perception
Factoring in risks goes a long way in determining your investment outcome.
Ever had your friend exclaim at your investment choices with phrases such as "That sounds like a very risky bet'' or "That's a very risky stock''? How about asking the friend to rank your investment risk on a scale of 1 to 10. The friend stares back blankly, implying either you have lost your marbles or they're lost in translation. So what do you perceive as the risk in your investments?
Fundamental risks
Risk in its varying degrees of perception is the magnitude of fear at the thought of losing something. It could be the fear of losing your home, friend, mobile phone, or money. When it comes to investing, the idea of the risks intrinsic in the business, its operations and environment are also known as 'fundamental risks'.
To borrow the idea of investor Warren Buffett's 'fundamental' risk of investing in a business, there are five primary factors in appraising this risk: The first would be on how confident you are in your judgment of the long-term economics of the business you want to invest in. Take, for example, the much-maligned telecom sector, which has been in the news for deteriorating economics and expensive expansion.
Investing in this sector would entail having a perspective on how consumer behaviour is likely to evolve over the next five years and whether consumers are likely to spend more on value-added services or more time on the phone. Add to this, the large number of players in several circles, which means little pricing power.
These are just a couple of factors in the economics of the business on which one needs an informed perspective. A rapidly changing business is often a risky one for an investor who is not watching it closely.
Human element
The second and third factors deal with the ability of people to run their businesses effectively and their propensity to reward the shareholder and themselves in a proportionate and acceptable manner. Retail investors have traditionally had little say or sources on management. However, gauging how effectively the company communicates to its shareholders through interviews, press releases and annual reports can give you a cursive idea of the management behind a stock. A crooked manager or misinformed, yet ambitious, CEO is a major risk to an investor, considering how he can derail an otherwise good business. An instance of such behaviour includes the Satyam episode that saw the slipshod Maytas merger attempt as a prologue to the expose of Ramalinga Raju's number fudging.
The fourth factor is the effect of external factors such as inflation and taxes on a business. Companies in sectors such as alcohol or tobacco have the constant risk of taxes being hiked at various levels, considering how the products they produce are viewed as 'vices'.
Inflation ravages business with little pricing power or scope for passing on costs. Cyclical industries such as automobiles and consumer durables have often been squeezed by rising costs during periods of low consumer demand, as prices cannot be hiked.
Businesses which are easy scapegoats for government taxation or companies that can be squeezed by the economic cycle are inherent fundamental risks. Sugar companies are a classic example of a sector which gets pushed to extreme highs or lows depending on season, crop yield and a host of other factors. Scale is a saviour in such a scenario as small mills become unviable and often go broke during the cyclical lows.
Price
The fifth factor is possibly the simplest — the price you pay. Paying a sensible price can help the investor avoid a great deal of pain associated with moody equity markets. Several retail and professional investors got suckered into buying newly-fangled, esoterically-named, mutual fund schemes or over-priced IPO's during the market peak of late 2008 only to lose their shirts over the next year.
Overpaying is possibly the most common risk the investor overlooks. As Buffett says, the above factors are difficult to 'precisely quantify' but ''investors in an inexact but useful way 'see' the risks inherent in certain investments without reference to complex equations or price histories.''
The perception of various factors which are deemed 'risky' does not always lend itself to a convenient number. But acknowledging that they exist and attempting to base the price you pay after roughly factoring in those risks goes a long way in determining your investment outcome.
Exchange-traded currency options coming soon
| Reserve Bank to spell out norms in a week. |
Corporates and individuals will soon have one more tool for hedging their currency risks. The Reserve Bank of India (RBI) will next week come out with the contours of the exchange-traded currency options, a top official of the central bank, said.
"Very soon (a week or so) you will hear from us as far as allowing exchange traded currency options in SEBI-approved platforms (exchanges)," Mr G. Jaganmohan Rao, Chief General Manger, Foreign Exchange Department, RBI, told a seminar on currency risk management, organised by the PHD Chamber of Commerce and Industry (PHDCCI) here on Saturday.
He said the RBI had been in discussions with banks and industry participants over the last one year on the issue of exchange-traded currency options. "There had been 43 rounds of discussions in last one year," Mr Rao said. Currently, currency options are allowed only as over the counter (OTC) products.
The RBI Governor, Dr D. Subbarao, in the annual monetary policy statement released in April this year, had announced that the central bank had decided to permit recognised stock exchanges introduce plain vanilla currency options on spot dollar/rupee exchange rate for residents.
In India, the level of hedging as part of currency risk management is quite low. Only 3 per cent of those with forex currency exposure have gone in for hedging their risk, it was pointed out.
Convertibility
Meanwhile, Mr Jaganmohan Rao advised small and medium enterprises (SMEs) to limit themselves to simple products (forwards, options and swaps). "Never go for structured products," he said.
On full convertibility of the rupee, Mr Rao said that full convertibility was required, but noted that the country was not yet ready for that.
"We are still to meet certain conditions of the Tarapore Committee report (on full convertibility). But RBI Governor is the best person to answer when India will have full convertibility," he said in response to a question on full convertibility.
On how much the Indian industry had lost on account of the global financial crisis through the currency channel, Mr Rao said the RBI only had 'rough estimates' on how much the industry had lost.
"We know about the banks and not about industry. We only have some rough estimates on how much industry lost. As and when industry had to make huge payments, we get to see the tussle between industry and bankers and thereby get some more information," he said. Already, exchange traded currency futures are permitted in two recognised stock exchanges in respect of four currency pairs.
Investing in stocks is the best bet to beat inflation
| 20-year analysis shows returns outstrip gold, bank deposits and commodity futures. |
With prices rising at double-digit rates, where does it pay to invest? An analysis of stock returns over alternative avenues of investment such as gold, bank deposits and commodity futures shows that equities have been most successful in giving inflation-beating returns.
Over a 20-year period, according to the analysis, equities have managed a higher return compared to other asset classes during years of high inflation (Consumer Price Index in excess of 7 per cent).
The Consumer Price Index has been above 7 per cent annually in all the years since 1990. Equities have managed to out-perform other asset classes for six years during the period.
In 1991, when the Consumer Price Index rose above 14 per cent, equity investors made an 80 per cent return (measured by Sensex) on their investment. In 1997, when the CPI rose over 7 per cent, the equity market delivered a close to 20 per cent return. In 2009, when inflation was at a 10-year high of 11 per cent, investors could have raked it from the market had they only been venturesome enough.
Equities outperform
In the years when the inflation was over 7 per cent, returns from equities oscillated between 17 and 80 per cent. Adjusting for inflation, the real return has been at least eight percentage points higher. The reward for investing in equity has also widened in recent years.
An investor who bet on equities, rather than gold in the last five years, generated a 12-percentage-point higher return compared to the eight-percentage-point excess return in the mid-1990s. Needless to say, the equity returns are much higher than the returns on investments in bank fixed deposits too. Interest rates on fixed deposits have fallen sharply since the mid-to-late 1990s.
Gold was the second best choice for hedging against inflation in the last two decades. In 2008 and 2009, for instance, when inflation was over 10 per cent, gold yielded a 15 per cent return.
Gold as choice
Gold has caught investor fancy only in the last seven years. Perceived as a safe-haven in times of crisis, the investment demand for gold has been going up.
The data of the past 20 years, however, do not throw up any precise trend of gold being an out-performer in inflationary times.
Indeed if it outshone stocks, it was only when there were external shocks such as the one that happened in 1997, and more recently in 2008, when there was a crisis of confidence with the equity market across the globe. The conservative investors who preferred the fixed deposit route to investment saw negative real returns in most of the years of high inflation.
In 2009, the interest rate for deposits of one-to-three years was 7.25 per cent, with negative real return (factoring in the inflation rate) of 4 per cent.
This year, too, as inflation continues to remain at 12-13 per cent, bank FDs offer interest rates of 6-6.5 per cent.
Commodities too have not fared well to beat inflation. The Reuters Commodity index, a benchmark for measuring commodity price movements, has been in the red on most occasions of high inflation — in 2008, 1998 and 1997, for instance.
Monthly Market Update on http://www.indiabulls.com/securities/mailermis/monthly-market-report/monthly-market-report-july-10-2010.htm
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| *LTP stands for Last Traded Price as on Friday, July 09, 2010 4:04:21 PM | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#1R1 stands for Resistance level 1 @1S1 stands for Support level 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| #2R2 stands for Resistance level 2 @2S2 stands for Support level 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#3R3 stands for Resistance level 3 @3S3 stands for Support level 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The levels given above are with respect to previous closing price on the NSE / BSE. |
| Buy / Sell (Jul 09, 2010) | |||||||
| Buy | Sell | Net | |||||
| FII | 3457.40 | 2353.32 | + 1104.08 | ||||
| DII | 1458.80 | 1420.08 | + 38.72 | ||||
Arvind Parekh
+ 91 98432 32381
