Equity Rainbow.. 22 May 2008.

Equity Rainbow.. 22 May 2008.

An arch of spectral colors appearing in the sky -An illusion hope . Rainbow which catches everybody's attention to look at those colors just for some time . We can compare the current trends in equity market exactly with Rainbow without a shadow of doubt . Rainbow adorn with seven colors which gives ostentatious feeling but illusive. The beautiful seven colors for Equity Market Rainbow are keep on changes every movement from Day and night.The seven economic indicators of Equity Rainbow are 1.Inflation , 2.Crude Oil Prices , 3.Dollar exchange rates 4. I.I.P numbers 5.GDP Growth , 6.US Economy , and 7.Market Valuations. These exuberant colors are keep on changes the outlook of the Equity Market always. I would like to analyse the impact of these indicators on the Equity Market in the current contest of Indian economy is concern..
Inflation : First of all Thank God , we don't have any storms of inflation from Zimbabwe where 1,00,000 percent of inflation rate prevailing now , which makes the currency virtually worthless. Whole sale price Index (WPI) , which is indicator of prices for 435 articles represents the inflationary situation in India. To figure out inflation one need not have to wait for WPI numbers released on every Friday 12 noon , If your a frequent visitor to the vegetable market or grocery store or if your constructing your dream home one can know more effectively how inflation is eating your valet. Inflation raised significantly in the recent past from level of 3 percent to 7.83 , which is 44 months high. last time inflation hit such a high was in September 2004 , when it touched 7.86 %. which over and above the tolerance level of RBI and govt of India. For a corporate rising inflation puts growth at risk as liquidity contracts, which ,in turn could put pressure on earnings growth of companies . That will bring stock prices under pressure. Iam sure inflation is nightmarish situation to the chieftains , last month Mr Chidambaram conveyed his press conference at 11.50 pm to announce the excise rate cuts on edible oil and impose ban on export of food grains . But one should aware CRR and excise rate cut measure are not like sari don or disprin to control a headache . These are the monetary policy measures to control the liquidity and to control the prices over a period of time .Inflationary environment is chronic and last for 3 months to more than year , it is inevitable to control inflation every week before Friday. This time Inflation story is in different trajectory , we are not only following the Global market cues everyday morning , but also the Inflation . India is not a exception in the world to escape from the inflation because of the burning global commodity prices. Commodities prices are cyclical in nature once the supply over flows , the prices will automatically ease. I don't think given the kind of sophisticated financial instruments like ECB etc ., are concern for corporates raising money for M& A activities and for capex plans funds flow is not big problem now.
Crude Oil.& Dollar exchange Rate :Oil is on burn again due to soaring crude prices ,70 % of India's foreign exchange reserves are spent for imports on oil , From October 2007 to Feb 2008 even though oil prices were on raising front , but it was not a hot topic because of appreciating rupee. NYMEX crude was trading at 127 Dollars per barrel, crude prices are up by more than 300 % from their 2003 levels it was at 28 $ per barrel . For the market Oil & Gas sector represents 15.8 % on Sensex and 21.80% on NIFTY . Stocks which commands the bourses are mainly RIL and ONGC. For RIL rising oil prices leads to its stock prices to soar to new highs , its ability to process highly sour crude (High Sulphur content) and sell the refined petro chemical products in the international markets prices will enable RIL to earn high refining margins and for ONGC given the subsidy burden it will be neutral on the earnings front. But for oil marketing companies like IOC,HPCL and BPCL it will be tough time.The impact of raising oil prices will certainly bring some companies into lime light in the oil exploration activities .On a negative side raising crude oil prices increases the pressure on current account deficit and on positive note the OPEC nations which are minting money will invest their surpluses in the emerging markets through sovereign funds.Dollar rate is concern last 6 months Rupee was appreciating and Dollar got depreciated , now from last one month there is complete reversal is reflecting rupee depreciated nearly 5%.Dollar is not only a reserved currency but also a investment currency to the central banks around the world , so after reaching certain equilibrium point , RBI supports Dollar. For the Sensex is concern crude price & Dollar exchange rate will have neutral effect,surge in crude oil prices lead to demand for dollar and rupee weakness which benefits IT industry having 15% weight age on the Sensex..
IIP & GDP. : Index of Industrial production which is monthly data released by govt of India on a monthly basis reflects Industrial production of companies in India is key indicator economic activities of the companies which slipped from 11.6% to 8% disappointed everybody .But if we analyse the IPP numbers this drop appears to be because of base effect .Industrial growth in March 2007 , the base for calculating growth in 2008, was unusually high, there is certainly a base effect .If we look at the numbers month -on -month March over February , you will find a 23 points increase in general index , which will translates to growth of nearly 8.5%.we are really seeing the base effect and there is really no slowing down if we look at it over the trend on M-O-M basis this is according to the Crisil report. A slowdown in growth to about 7.5 to 8 percent is still a very good growth rate .The investment rate in Indian economy is still going strong in the mid 30s, which should be the major driver of the economy. Don't forget India is second fastest growing economy in the world.
U.S.Economy & Market Valuations :Investors and analyst in India are more worried about the US economy than Indian economy , this is the time to differentiate the global equity market from emerging equity markets , from U.S equity to non US equity .where as 80 % Indian economy is complete domestic story which I explained in my earlier articles.The sensex 's current price -earings multiple is down from 28.5 in early Jan to 18, on its earning forecast (Rs1050), sensex PE multiple works out to about 15, which experts reckon is good value to the long term investors.
These are the right times to savvy investors, off late investing in equities has become a fashion talk and dealing rooms have become like casino tables which lead to the bubble situations in the market. We are not buying SENSEX or NIFTY ( Indices) , and we are not doing a basket trading . one should develop a habit of stocks specific investment approach and strategy. .
Investing in equities is a process not a transaction , one needs to experience the EQUITY RAINBOW to reap the harvest confidently.