World market recovering

It was consolidation time in the Indian market and the world market also seemed on its way to a recovery, writes Dr Bhaskar Dasgupta.

india Updated: Jun 07, 2003 21:29 IST

The India Babble
The market traded in a rather tight range last week of about 70 points on the BSE Sensex. The word on the market was that it was consolidation time, hence slightly optimistic by the end of the week.

From a technical analysis perspective, it looks like the market has bottomed out and over the next couple of months could reach 3400 from the current 2966 level, if it manages to break out of the resistance levels at 3000. Generally, there were good results from the bell weather stocks like Zee, HDFC and the other banks and refineries.

The market was also helped in the beginning of the week with the publication of a report from the Asian Development bank, which predicted a growth rate of 6%, but talked about the requirement for fiscal consolidation and economic reforms.

The Reserve Bank of India (RBI) came out on Tuesday with a loosening of the benchmark rate to 6%, a 30 year low and cut the cash reserve ratio to 4.5%. This did cause a bit of a sag in the bank sector midweek, but the sector soon recovered by the end of the week.

The RBI governor, Bimal Jalan, expressed reasonable satisfaction with the state of the economy and reiterated his expectation that the economy will grow at 6% this year with the normal good monsoon caveat. Inflation was also considered to remain benign over the rest of the year. The RBI turned its beady eyes on the Urban Cooperative Banks (UCB). While most of the publicity is given to the big public sector and foreign banks, these UCB’s tend to slip under the horizon.

While not comparable in the deposit base stakes, their regulation has been very weak, and the RBI has clamped down hard on them by banning loans to UCB’s directors and other interested parties, requiring concurrent audits, and these UCB’s have been given 6 months to clean up their act. The saga of IDBI and IFC keeps on dragging on and now the proposed merger is off. The "powers-that-be" have now decided that IDBI will turn itself into a retail bank, while the IFC will be split into a bank and an asset re-construction fund.

If the government sorted out the bad loans mess in the current banking system and tightened up the banking system that will have a better effect than a whole host of FDI proposals.

The Babble in the Ivory Towers
Last week, we looked at dividends and their importance to individual investors. We now move across to Canada where Marie-Claude Beaulieu,

Jean-Claude Cosset and Naceur Essaddam investigate the impact of political risk on the volatility of stock returns in Canada in a discussion paper. In particular, they explore the impact of the possibility of Quebec separating from Canada on the volatility of stock returns. This volatility, in turn, varies with the firm’s exposure to political risk in terms of its asset structure and the extent of foreign involvement. They find that the news relating to a potential independence of Quebec has a significant impact on the volatility of the stock returns.

Digging deeper, this has a much greater impact on firms which are based and operate in Quebec itself, compared tofirms based in Quebec with international operations or having strong growth potential. Finally, they find that unfavourable news has a bigger impact on stock returns rather than favourable news.

This will be familiar to readers in India, where there is a history of separatist campaigns in states like Kashmir, Mizoram, Tripura, Punjab, Tamil Nadu, etc. The implications of this paper from an Indian perspective are two-fold. Firstly, from the perspective of the government, it is clear and rather obvious that the firms in the separatist afflicted states will suffer
from severe funding issues. This is not including the issues relating to actual physical violence that these firms could face.

Given the rather patchy performance of the funding bodies (state financial institutions, public and cooperative banks, etc), a relaxation in lending norms, better long term capital terms, easier working capital funding and finally, a push to diversify into other states would be very useful indeed. Secondly, from the perspective of the individual firm, while it is difficult to put into practice, firm owners should push to diversify away from the afflicted state.

This diversification can take the form of diversifying funding sources to creating an asset base, which is not dependent on just one state.

The World Babble
Week before last, the end of the reporting season combined with the end of Gulf War II gave a gentle fillip to the markets. Well, it gathered steam this week and both the S&P 500 and the DOW ended the week more than 3% up, with the NASDAQ ending up more than 4.76%. If this recovery holds its ground, and there are some indications that it will, then there is hope that the second half of the year can be considered as a recovery.

It is still fragile territory, but the broad swathe of good quarterly results from the US companies give hints to a growing recovery.

The big news this week was the settlement between the investment banks in the US and the US securities regulators about the conflicts of interest issue. A $1.4 billion fine looks like it was cheap at the price, and the market shrugged it off as this fine was widely known before. The concern now is two-fold.

The first is that the investment banks have denied any wrong-doing and with all the documents now in public view, the market expects a spate of private investor class action lawsuits to follow.

Going by the current amounts of damages that the US juries have been handing out, expect some major fireworks in or out of the courtrooms with significant settlement amounts bandied about.

The second market concern is the feeling that the target was misjudged; only a few analysts were targeted, while the whole investment banking area, which was the driver of the conflicts of interests, has been left untouched. This can leave some open holes for the class action suits.

While in Europe, the insurance sector shrugged off its long gloom and companies like Munich Re and Allianz did well. The banking sector was also reasonably well driven by good German bank performance, but ABN AMRO droppedon lack of guidance on its quarterly results.

Overall, the Footsie Eurotop 300 was compressed into a rather tight range of 40 points and ended a rather disjointed week only 0.3% up. Japanese banks were boosted with news that they will be able to offload problem loans to a government body and political news that the government is thinking about other ways to help the banks and the stock market.

On the Fixed Income side, the looming deficit financing for the US is putting a downward price pressure on the US treasuries. The economic figures coming out of the USA, (the jobless figures) were not as bad as expected but still the current unemployment rate is 6%. As I mentioned above, the news is still bad, but not as bad and hoping against hope and touching rabbit’s feet
is getting quite common! European markets were disappointing with the weak purchasing manager’s index numbers pulling the yield up.

Interest rate cuts on both sides of the pond doesn’t seem likely anytime soon, with both the European Central Bank and the Fed preferring to have a waiting watch for this month. Summer time being a naturally slow time in the markets, the central banks may decide to pre-emptively give a boost to the markets in June.

The dollar further weakened against the Euro, there have been murmurs, coming from the Euro Zone exporters, about the slow progressive damage caused by the increase in the Euro. This is making their exports rather expensive vis-à-vis the dollar and given the lack of demand internally, this has started to hurt. The ECB may well take action on this account.

Gold broke through the $340/ounce barrier and ended the week with a high of $344/ounce. The main driver was again the persistent weakness of the dollar against the Euro. The Financial Times reported a rather sharp drop in the price of platinum, mainly coming from China as the SARS impact looms ever more in that area. Correspondingly, in India, with the marriage season arriving in May, the demand for gold is set to pick up.

On the oil markets side, the markets were trading in a thin holding pattern amidst a bit of confusion around OPEC’s last week’s bungled attempt to shore up prices. It is expected that a further round of cuts may be required by the OPEC, as there will be continuing downward pressure on the prices with the Iraqi oil coming back on stream and the summer months approaching.

On the International Institution front, India has again topped the league of countries who initiate anti-dumping complaints for the second half of 2002. There were a total of 149 anti dumping actions and India accounted for 54 of them. Maximum number of the investigations aimed at the chemical sector followed by the base metals sector.

China with 27 investigations, on the other hand, is the top nation, at which the anti-dumping investigations are aimed at. While I would not be concerned about the level of investigations initiated by India, if only a fraction of all this energy is targeted towards actually improving basic industrial infrastructure, I would be happy.

I predicted last week that the markets may trend down with the SARS virus exploding. Well, so much for predictions. It now looks like the trend is coming off its bottom and moving up slightly. The recovery is still fragile and please pray to your respective god(s) to keep this momentum going. The bright spot is, the market does not expect any significant bad news on the horizon, so it can get back to normality (or whatever that is).

(Dr Bhaskar Dasgupta works in the City of London in various capacities in the banking sector. He also lectures at several British Universities. He holds a Doctorate in finance and artificial intelligence from Manchester Business School and is currently working on another doctorate at Kings College in international relations and terrorism.
He will be writing a weekly Monday round-up on markets and indicators.)

First Published: Jun 07, 2003 21:28 IST