'Opening services beneficial'
The Sensex stumbled a bit last Monday and Tuesday on profit taking and there was some bad news on the IT front, but then it took a deep breath and powered up to close just under 100 points up over the week at 3583.
The up tick was helped by traders having to cover their short positions before the expiration of the June equity derivatives. Other good news included good financial results, news of outsourcing contracts, improving the economy and the expectations and then the confirmation of the US fed interest rate cut.
It is also a broad-based rally, with market depth and breadth quite good compared to previous sessions. Foreign institutional interest is still high, with the foreign institutions being net buyers over the entire week. On Friday, it was reported that the growth in 2002/3 will be about 4.8 per cent after a 6 per cent growth in the last quarter. Pretty reasonable, I would think, after the tribulations from the Iraq war.
Given the success of the Maruti IPO, the government is now thinking about using the same mechanism for other public sector firms, in particular the non-life insurance companies, as reported by the Economic Times. This is a good idea. Increasing the number of shareholders in the country can only be good and better. Plus an increase in the household wealth held in the form
of shares will diversify our wealth holdings.
One of the reasons attributed to why the UK will escape the pensions time bomb is the diversification of wealth holdings and a large mass of shareholders, who have slowly realised that reliance on government pensions is a mug's game and personal responsibility has to be taken for old age provision. Another piece of good news came from New Jersey, USA where the bill to prohibit state firms to outsource internationally was scotched. One of the reasons why the IT companies showed a spurt and the fact that a rather large number of American companies lobbied against the bill.
Another interesting piece of news was that ITC is planning to delist from eight regional stock exchanges for lack of trading. From one perspective, this is good as it will develop the NSE and BSE. With the rise in connectivity, the requirement to actually have an exchange floor is long gone and this will definitely help in the creation of more liquid markets.
On the other hand, if this keeps on going, then IPO's and market expertise will get concentrated and local companies will have to go to the financial centres to get listed. Not sure whether this is good or bad. It didn't seem to have a bad effect in the UK, when the local regional exchanges were wound up. Derivatives markets are moving up on the equities side and now that interest rate futures are launched, it is a good step on the way for good deep financial markets.
The Babble in the Ivory Towers
We look at a working paper by Jayesh Kumar of Indira Gandhi Institute of Development Research, India where he studies the relationship between various forms of ownership and firm performance for a sample of Indian firms.
Interestingly enough, he does not find any impact or relationship between the various forms of ownership (corporate, foreign, financial, institutional and managerial) and management performance. The author restricts his study to manufacturing firms listed on the Mumbai Stock Exchange with data from 1991 to 1999 with a final sample of 530 firms. This provides a good universe and the data looks good. The analysis throws up some very interesting conclusions. At least, it turns many a core financial theory on its head such as agency theory, corporate governance theory and the like.
If ownership patterns do not have an impact on corporate performance then the prima facie case is that capital in India is fully fungible from the perspective of capital expectations. In other words, all types of investors have the same expectations and behaviour within a firm. This is an "ideal" situation and frankly I would find this to be very surprising, because it means that the Indian markets are fully efficient and there is full information exchange (??) or else the accounting data is suspect. I would expect more investigation is needed to really check out this research.
One aspect to note is that the study relies on annual accounting data. Perhaps a more granular study of quarterly or six monthly figures, along with another variable relating to stock prices may throw up some additional information into this relationship. In a way, I find this surprising as one would expect managerial ownership to be a better driver for corporate performance. Still, points to ponder indeed.
Details of this paper and past columns are available on http://beady.blogspot.com
The World Babble
The markets had a rather volatile week and never really got above their start of week levels. The DOW ended at 8989, almost 2.3 per cent below the start of the week, NASDAQ at 1625 and the S&P at 976 (2 per cent down). The University of Michigan's June consumer sentiment index slipped down from 92.1 in May to 89.7. Personal income jumped a bit, as did personal consumption expenditure and real disposable income, which is now at the highest in the past 12 months. The market expects a slight increase in the 2nd quarter GDP figures.
The problem is, the market is running on faith, hope and a fair bit of charity from Alan Greenspan, and all this quarter, the economic news is middling, nothing to justify the optimism really and the feeling is that a big chunk of news would be very helpful. Over the second quarter, the Dow is up 7.8 per cent, the NASDAQ 21.7 percent and the S&P 11 per cent. So it is good from an overall perspective.
The interest rate cut of just a quarter of a per cent really didn't help as it fell between the stools of the bulls and bears. Next week, there is a heavy corporate and economic reporting week, and the feeling is that the numbers are not going to be good. If they aren't, then the markets are going to tank. The thing is, where does one go to invest? The interest rates being so low, its not worth-while to invest in the money markets, bonds are haywire, alternative assets are risky, emerging markets are too painful, which just leaves cash and the equity market. But with all the contradictory news, the markets are volatile! Just look at the mutual fund flows, totally unsure whether it's coming or going.
The Nikkei gyrated all over the place, went up on Monday, down on Tuesday and Wednesday, U-turned on Thursday and ended up at the same level as of Monday on Friday at 9104 coming off a good wall street performance and the weaker yen at 119 to the dollar. Good news about the Japanese industrial output and employment figures helped push up the market as well.
Europe fell back a bit as well, the FT Eurotop 300 ending down at 859. With the rise in the dollar which rose almost 1.5 against the Euro, the auto sector did a wee bit well, but was not enough to push the entire market up as such. The Footsie didn't do much better, closing at 4067, down almost 100 points from the start of the week.
The bond market is heaving, the quarter point cut confused the market, but in any case, the sell off gathered steam and the yields are soaring. The policy statement which accompanied the rate cut was very confusing and didn't give a clear direction to future policy nor to the potential steps that the Fed may take. On the other hand, the ECB has decided to wait and see. With the rise in the dollar, the pressure is slightly off the bank, not that they were showing any signs of listening anyway.
The signs of economic recovery across the Euro zone are dim, so one can only sigh and hope for the best. Gold was down as well, driven lower by the dollar's rise, ending at just about $343 per ounce. On the trade front, India has promised to open up the accounting, construction, engineering, computer services, tourism and maritime services in the WTO framework based on reciprocity. A very interesting step indeed and something which would be good for the country. After all, the country is full of highly intelligent, literate and numerate people, and moving up the value chain from manufacturing. Given that this step will involve potential free flow of professionals, it is also a better step for our qualified professionals to gain experience and value added services.
The EU farm ministers did try to get something done with the farm reform, as usual, it was a bodge, a massively complicated deal, which will not satisfy the farmers and will definitely not satisfy the EU's trade partners. You see, the actual amount of money spent on farm subsidies is not going to change. The only thing which will change, will be the link between production and
subsidies in few sectors, and that too, countries don't need to put this deal into practice if they don't want to. I am afraid this is not enough, and people will point fingers at the EU for mucking up the Doha round, this farm reform is just not good enough. Oh! Well, perhaps in 2007!
(Dr Bhaskar Dasgupta writes a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.)