Can 1.2 bn people save the economy?

One thing that India always had going for itself was its large population. The consumption needs of India's billion plus were supposedly enough to help sustain the nation. But are they really? India has been hit by bad news after bad news. Slowing GDP, lower credit offtake, and dismal IIP numbers have all disappointed markets. And now, even domestic consumption seems to have taken a turn for the worse. Now that the festival season is drawing to a close, consumption trends have reversed. According to an article in Firstpost based on a survey by Emkay Global, inventory seems to be moving slower than usual. This is an indication of lower demand. Many popular goods in the fast moving consumer goods (FMCG) basket were tracked. The findings of the survey proved that manufacturing dates of most products was about 2.5 months old. Only milk and noodles seem to be moving quickly with recent manufacturing dates of 1.5-2 months. However, this survey was only conducted in Mumbai. With a large metro like Mumbai seeing slower consumption, the situation in smaller cities may be even worse. Even the jobs scenario has deteriorated with a worsening external environment. Even rural areas don't seem to be in the best shape. Agricultural credit is at a decade low. Plus, agricultural non-performing assets (NPAs) have also grown. Even FMCG companies are seeing slower growth in their rural counters. Plus minimum support crop prices and spending on NREGA (National Rural Employment Guarantee Act) are not up to the mark. Indian consumers, too, seem to be running for cover. They are not stepping out and spending as much as the economy would like them to. While this works well for their end of the month cash balances, for corporates it is another story. Companies were betting on the second half of this financial year 2011-12 (FY12) in order to counter their dismal performance in the first half. But with domestic consumption slowing, this may be a tough task for them to achieve.

The Govt finds a new way to destroy wealth!

The Indian government's finances are in a mess thanks a horde of problems such as slowing tax revenue, depreciating rupee, rising expenditure on food security and universal health, and so on. You can imagine how bad the fiscal deficit can get if things go on the way they are doing now. To help keep the deficit under check, all eyes are now set on cash-rich public sector undertakings (PSUs). Experts are suggesting various ways that would end up transferring the surpluses of PSUs to the government Budget. To give you some numbers, the big four mineral-extracting PSUs are sitting on a whopping cash pile of Rs 1.15 trillion. But would it be right to use profits that the PSUs have earned to set off against expenditures that the government is incurring?

To be able to answer that, it is important to understand the nature of the surpluses that the PSUs are sitting on. The fact that PSUs are amongst the most inefficient lot in our country is no secret. A majority of state government PSUs are either bleeding or closed. Even the central PSUs have a hard time competing with private sector players. Then how is it that some PSUs have amassed such astounding profits?

The story goes thus- Before 1991, domestic mineral prices were quite below global prices on account of price controls. As such, PSU profits were humble. But then India's economy witnessed a paradigm shift. Price controls were lifted. At the same time, the global economic boom gave a fillip to commodity prices. These factors were the key to the fat surpluses that some big PSUs flaunt on their balance sheets. It is clear that this is not regular income, but windfall gains that may not repeat in the future.

Would it be wise, then, to use such one-off gains against regular expenditures? Remember, commodities like oil and minerals are limited and will exhaust some day. Several countries in Africa and Latin America burnt their fingers by going on a reckless spending spree with their commodity windfalls. On the other hand, Norway, Chile, and Gulf countries like Kuwait and Saudi Arabia realized this and conserved part of their windfall gains for the future through sovereign wealth funds. It is up to India to leapfrog by learning from the lessons of others, or learn through the hard way of self-experience. 

Equity mkt at 28-month low, loses trillion-dollar tag

India can’t boast of a trillion- dollar equity market anymore. After on Tuesday’s sharp fall in stock prices, the market capitalisation of the Bombay Stock Exchange fell to $994.6 billion. BSE is the second market to lose the trillion dollar tag this year. South Korea, which had started the year with a market cap of $ 1.07 trillion, has lost 14 per cent this year and is trading with a value of $ 926 billion.India, caught in a double whammy of falling stock prices and a crashing rupee, has lost 39 per cent of the $1.62 trillion it started the year with. This makes it the worst performer among the 13 countries that started 2011 as trillion-dollar markets. Germany, Australia, Brazil and Switzerland, valued lower than India at the beginning of the year, are holding on to the tag, having fallen much less. The Bombay Stock Exchange benchmark Sensex and the S&P CNX Nifty fell for the fifth straight session, to close at its lowest level in 28 months, in the absence of policy initiatives to tackle growth slowdown. The BSE has lost Rs 20,00,000 crore in market capitalisation in 2011.

OUT OF THE ELITE CLUB
	Market cap in ($billion)
	31-Dec	19-Dec	Change	% change
India*	1,628.87	994.60	-634.27	-38.94
France	1,758.72	1,342.60	-416.12	-23.66
Australia	1,484.03	1,157.95	-326.09	-21.97
Germany	1,502.18	1,201.08	-301.10	-20.04
Brazil	1,445.11	1,167.70	-277.41	-19.20
Hong Kong	2,485.18	2,074.01	-411.17	-16.54
China	3,759.13	3,186.08	-573.04	-15.24
Japan	3,996.76	3,393.94	-602.82	-15.08
Canada	2,102.25	1,789.12	-313.13	-14.90
South Korea	1,077.87	926.20	-151.67	-14.07
Switzerland	1,201.28	1,045.16	-156.11	-13.00
Britain	3,336.05	2,924.74	-411.30	-12.33
United States	15,430.85	14,409.62	-1,021.23	-6.62
*Mcap as on December 20 Source: Bloomberg                                               Compiled by BS Research Bureau

The Nifty fell 68 points or 1.49 per cent on Tuesday to close at 4,544, a level not seen since August 2009. The Sensex was down 204 points or 1.33 per cent at 15,175. At on Tuesday’s close, the total market capitalisation of BSE stood at Rs 52,60,441 crore. Larsen and Toubro, top engineering and construction company, which has seen a slowdown in new orders this year, was among on Tuesday’s big losers. The stock fell 5.14 per cent today to close at Rs 979.

“Further downside is not ruled out as buying support is dwindling,” said Amar Ambani, head of research at Mumbai-based brokerage, India Infoline. “Things could improve a bit over the medium to long term, provided the government signals or implements a few important steps to lift the pall of gloom,” Ambani further said.

“The whole India story was built around just one word — growth,” said Jagannadham Thunuguntla, research head at SMC Global Securities. “Now that growth is not there, nobody is interested in this market.”

The main 30-share BSE index shed 1.33 per cent, or 204.26 points, to 15,175.08, its lowest close since August, 2009. All but five of its components ended in the red. Industrial output in India fell for the first time in two years in October, shrinking 5.1 per cent.

The central bank held interest rates unchanged last week after 13 rounds of increases, since early 2010. Pushed to a corner by a series of corruption scandals, the ruling coalition has been unable to reach a consensus on the policy decisions needed to lift investment and growth.

Foreign funds have pulled out a net $300 million from Indian shares this year till last Friday, after ploughing in a record $29 billion in 2010.

The Sensex has lost 5.2 per cent over five sessions, taking the fall to 26 per cent since the start of January and making it the worst performing major stock market in the world. Energy major Reliance Industries, which has about 10 per cent weight on the main index, fell three per cent and Bharti Airtel, the country's largest mobile operator, shed 3.9 per cent. Production cuts announced by European steelmakers this month because of gloomy outlook for demand, weighed on metal makers.

Tata Steel, the world's seventh biggest steelmaker, dropped 5.7 per cent, while Jindal Steel and Power fell 3.8 per cent. Media firm Network18 bucked the trend and rose 6.9 per cent, after a newspaper reported that Mukesh Ambani, India's richest man and head of oil and gas major Reliance Industries, is seeking to buy a stake in the company. A Reliance spokesman, however, said the company was not interested in buying stake in Network18.

The 50-share National Stock Exchange index fell 1.5 per cent to 4,544.20. There were 2.8 losers for every gainer in the broader market. About 573 million shares changed hands.At 1030 GMT, the FTSEurofirst 300 index of top European shares was up 0.4 per cent. World stocks, as measured by the MSCI world equity index, rose 0.3 per cent.

What! Here are 3 sectors that lost twice as much as Sensex

The benchmark Sensex lost a steep 25 percent in 2011. But seven sector indices lost more heavily than that in the same period.

Overall, 12 out of 13 sector indices posted double-digit falls, of which three sectors lost twice as much as the Sensex.  Only the fast-moving consumer goods index emerged unscathed from the investor battering, gaining 7 percent for the year, according to Ace Equity database.

The most damned sector of 2011 was real estate. Realty stocks suffered the most as high debt levels led to high interest costs amid declining demand for most companies. HDIL was the biggest loser among real estate stocks — its shares lost a jaw-dropping 71 percent — as lack of government approvals delayed launch projects (which, incidentally, is a sector problem). The only stock from the realty index to gain was Godrej Properties, which gained 5.5 percent in 2011.

The next worst-performing sector is metals: the BSE metals index dropped 46 percent. The biggest loser was SAIL, whose shares tanked by 60 percent.

Source:Ace Equity

The capital goods sector tumbled 45 percent for the year over sluggish order book positions and a rise in cheap imports from China. Leading companies like BHEL, Crompton and L&T lost 48 percent, 62 percent and 45.6 percent, respectively.

Power stocks also lagged, surrendering nearly 40 percent. Policy logjams and high borrowing costs were the main culprits for dragging shares lower.

Next in line was the public sector undertaking index, which declined by 32 percent as disinvestment blues hit most of the stocks in the index. Investors stayed away from these scrips due to regulatory uncertainties, execution delays and lack of government steps on divesting stakes in many of these companies.

The constant hikes in key policy rates impacted the banking  index, which surrendered 30 percent this year. Following the Reserve Bank of India’s moves, rate-sensitive stocks like SBI, IDBI and ICICI plunged 40-50 percent. Higher rates cut down demand for credit, even as an economic slowdown heightened fears of rising bad loans. Kotak Mahindra Bank was the only stock that remained in positive territory with a 2.8 percent gain.

The oil and gas index tanked by 28 percent, led by a steep 65 percent fall in the market value of Essar Oil. State-run HPCL, BPCL and IOC recorded double-digit losses due to subsidy-sharing concerns. Petronet LNG was the only stock that rose by almost 28 percent.

Overall, Indian stock markets struggled to rise above the burdens of high inflation, high interest rates and slowing corporate earnings. A snowballing eurozone crisis has also put off foreign investors, who have been major sellers of stocks after pouring in $29 billion last year.

Rs 9,00,000 cr: That’s bank money stuck in risky sectors

The bad news for Indian banks just got worse. As the economy slows, the finance ministry – which has to foot the bill for capitalising public sector banks if they end up with bad loans – has asked them to provide details of their exposure to stressed sectors, says a report in The Economic Times.

The ministry has sought details regarding banks’ exposure to aviation, telecom, commercial real estate and power. The exposure to these four sectors specifically comes to around Rs 5,00,000 crore till September 2011, says the newspaper. Slowing investments, low credit growth and high interest rates have all increased the risk of bad assets for banks.

That such fear is not unfounded is evident from the fact that the bad loans of listed banks in the country soared by 33 percent to over Rs 1,00,000 crore during the second quarter of this fiscal. Firstpost looked closely at Reserve Bank of India (RBI) data to check for bank exposures to risky assets in underperforming sectors like textiles, power, metals, and real estate, and discovered that the amount involved could be as high as Rs 9,00,000 crore.

Going by a CLSA report, the banking sector’s total loan book as at ended of 2011 will be around Rs 37,00,000 crore. The brokerage firm, after assessing risks, says that 20 percent of this loan book is vulnerable to major risks. This gives us a sum of almost Rs 7,50,000 crore that is at risk. The total loan portfolio, when divided sector wise shows that 12.3 percent has gone to agriculture, 7.2 percent to power, 5.6 percent to metals, 3.9 percent to textiles, 1.1 percent to gems and jewelery, 3 percent to commercial real estate and 8 percent to retail loans.

The vulnerable part of the portfolio amounts to 21 percent of the total loan portfolio of banks. Among banks, Canara Bank seems to be in the worst position with almost 35 percent of its loan book comprising real estate, infrastructure, metals and textiles. It is closely followed by Indian Overseas Bank, Punjab National Bank and Corporation Bank, all of whom have more than 30 percent of their loan book exposed to these sectors.

As far as restructured loans are concerned, which give a fair idea of stressed loans in a bank’s portfolio, PNB tops the list with 8 percent of its loan book restructured at the end of September 2011. Agricultural loans are also turning out to be a major concern for banks, with bad loans rising by 150 percent in the last two years despite good monsoons.

Agri-loans have contributed 44 percent to the incremental non-performing loans last year, says out a Macquarie report. Private banks have handled their agriculture portfolios much better than public sector ones. The banks who have the largest share of agri loans in the portfolio and, therefore, more vulnerable are State Bank of India (15 percent), Canara Bank, PNB, Union Bank and Bank of Baroda (14 percent each), and Bank of India (13 percent).

The power sector, which looks to be one of the most risky sectors now with both generation and distribution companies finding it difficult to run operations, is one of the most vulnerable sectors. Canara Bank has a 13 percent exposure to this sector while Oriental Bank of Commerce and Corporation bank have exposures of 11 percent to this sector.

The huge increase in potential bad loans has two implications: public sector banks will need more capital, which means the budget provisions for this sector will have to be raised significantly next year, making fiscal consolidation even more difficult. Secondly, banks will be reluctant to lend more to many sectors, thus worsening the slowdown.

Investment tips: How to pick potential stocks:

After the correction, the markets have almost reached the bottom. Perhaps, this may be the ideal time to add some new stocks to your basket. Here are some popular stock-picking strategies:

Bottom up investing

Here, the investor filters stocks of companies that have inherently strong fundamentals . Companies are evaluated for strength and efficiency of the management team as well. The ability of the management team in strategic decision-making and building value is a significant contributor to a company's growth.

In a bottom up investing approach, it must be noted that the investor picks a company's stocks based on its performance and fundamentals and not on performance of the sector. Historical performance of the company and its growth prospects also help assess it.

This approach is usually considered a narrow strategy where the broader economic climate and industry performance is not factored in. Investors believe that these companies are fundamentally stronger than the others in the sector, based on their past performance and efficiency of operations. Hence, external factors are believed to have little influence in the stock picking.

Some analysts feel the broader sector trends could impact future performance of the company and not analysing them could blur the decision-making process.

Top down investing

In this method, investors analyse the broader market before narrowing down to individual stocks. GDP, health of the economy and market, interest rates, inflation , geopolitical scenario and global factors are first studied. This is unlike the bottom up method where fundamentals of individual stocks are first analysed before taking into account the expansive global economy.

Next, sectors where investments are prudent to make are identified. Finally, individual stocks from these sectors are identified based on fundamental and technical analysis. An extensive analysis of individual stocks is made by the investor.

A top down approach helps determine the overall market condition and economic climate. It helps build a diversified portfolio with exposure to numerous sectors that are performing well.

In the bottom up approach where investors narrow down on the stocks before considering the economic climate, the possibility of over-exposure to equity is high. A top down approach, on the other hand, could fail if the analysis of the overall economy goes wrong.

Picking bargain stocks at lows could be quite a challenge . Careful analysis and study can help you sail through turbulent times. 

 

source:

FINANCIAL TIMES

 

Are we headed for another Slowdown?

- By Asad Dossani, Author, The Lucrative Derivative Report  

The latest spate of economic data is worrying. GDP growth is now at its lowest level since mid-2009, at 6.9% per year. Industrial production has fallen for the first time since 2009, one of the main contributors to the falling GDP growth rate. Inflation has seen a small fall, but still remains above 9%. Finally, the rupee has suffered a fall of over 20% against the dollar since April of this year.

The poor economic performance is not limited to India; it is occurring around the world. For example, in China, GDP growth has also at its lowest level sine 2009. The Eurozone countries are likely to enter recession next year due to the ongoing negative effects of the debt crisis. Financial markets around the world are suffering from high volatility and large falls due to the ongoing crisis. 

Given that growth in India is falling, and growth around the world is falling, is there anything that we can do to reverse the trend? It will help to look at what has caused the slowdown in India's growth. Mostly we are interested in knowing if it is due to internal factors that we can change, or external factors that we have little control over.

One of the negative drags on GDP growth has been the worsening current account deficit. First, exports have been falling. This should not be a huge surprise, given that the countries we export to are experiencing economic problems. Second, imports are rising. This is due to a weaker rupee and higher commodity prices. In both instances, external factors are the primary culprit, and from a domestic policy perspective, there is little we can do.

The other negative drag on GDP growth has been falling industrial production. In the previous month, industrial production suffered a 5% annual fall. Industrial production accounts for around one-quarter of the economy's total production, so this figure is obviously very important. Industrial production has not seen a fall of this magnitude for a very long time.

If we look deeper into the falling industrial production figure, the main standout is capital goods production. Capital goods production was down 25%, and this is extremely worrying. Capital goods are investment goods, so any fall in this will directly lead to a future fall in production.

This leads to the question of what can be done to help the situation. When it comes to industrial production, this is primarily a domestic issue, so the correct policy should help the situation. First, we should probably assume that the current government can do nothing, given their weakness and recent history. This leaves policy in the hands of the RBI.

As we know, the RBI has been relentlessly raising interest rates over nearly the last two years. This has been done to combat higher inflation. This policy had some success early on, but recently has faltered. Over the last 1 year, inflation has remained steady at around 9%. At the same time, the GDP growth rate has been consistently falling.

Thus, the RBI's policy of raising interest rates has done little to help the inflation probably, and has likely contributed to falling growth. Industrial production is heavily impacted by interest rates, because large investment projects require considerable borrowing to fund them. Thus, higher interest rates have reduced investment.

The best policy for the RBI going forward would be to ease monetary policy and lower interest rates. A policy of raising interest rates over the last year has worked poorly, and now we are seeing the consequences of this. At a time when the global economy is slowing down, the RBI should do what it can to keep growth in India at high levels. Lowering rates would be a good start, as it should improve borrowing and investment.