An interesting point was made on the sidelines of the G-8 summit in Hokkaido, Japan, regarding the role of any nation’s central bank in controlling inflation in today’s globalised and open world. As global trade/ GDP ratios rise sharply, the price of tradable goods is increasingly determined by international, rather than domestic, demand and supply. Most of the inflation in tradable goods over the past year, in India and abroad, has been in oil, other non-agri commodities and food — marked by global demand-supply imbalances.
Prices of most other tradable goods are still relatively stable on account of the efficiency effects of globalisation. While the world economy taken together can be seen as closed, the role of nation-based monetary policy is becoming increasingly marginal in impacting domestic consumer price inflation. However, the central banks of developing economies do have a role in correcting the internal imbalances.
International oil price rises should be passed on to the consumer as soon as possible and in as graduated a manner as feasible so as to avoid shocks. If everybody expects oil prices to reign high in the foreseeable future, it is best for the consumer to feel the pinch and curb consumption. Then over time, all economic agents will veer round to a less energy-intensive regime.
The markets during the last week displayed an upward bias initially but were unable to sustain the rise following a combination of both macro and political factors. On the political front, the Left finally withdrew its support to the UPA government, which was on anticipated lines and actually impacted market sentiment positively.
However, two other negative factors which continued to keep the market edgy were the sustained rise in crude prices, which touched a record high of $147.25a barrel after correcting earlier to $136 a barrel just a couple of days back on rising political tensions between Iran and Israel, and a weakness in dollar.
Crude price rose sharply on concerns that Israel may be preparing to attack Iran, while a strike in Brazil and renewed militant activity in Nigeria have continued to threaten supplies. The second negative factor was the continuous rise being witnessed in bond yields on government 10-year paper during the last two to three weeks which has now averaged a new high of 9.5%, clearly indicating that some stringent steps from RBI are expected soon to tone down inflation pressures in the near term.
Also, on the macro front, IIP numbers released for May 2008 during the week turned out to be extremely disappointing and alarming. In May ’08, IIP growth has come down to 3.8% as compared to 10.6% in May last year, and also the April IIP numbers were revised downwards to 6.2% from 7% earlier.
In line with global slowdown in industrial production, India’s industrial growth will moderate in 1H2008 and hence, will impact the GDP growth negatively. Also, the infrastructure growth during May ’08 is down to 3.5% as compared to 7.8% in May last year. The only soothing factor is that food production in the country is all set to touch a record high of 231 mn tones which will hopefully bring down inflation, which is now close to 12%.
We would soon be in the midst of the earnings season and corporate earnings — in the light of higher interest costs, increased cost push and a slowdown in demand — are bound to get impacted adversely. While the full impact of increased interest costs has not yet been reflected on corporates till date, the going ahead is expected to be choppy as battling higher input costs coupled with slowdown in demand will pose a big challenge.
Sectors such as IT, telecom and pharma will continue to show improved earnings numbers during this quarter but capital-intensive sectors such as cement, metals, real estate, construction, banking and auto are likely to show significant margin pressures.
Interestingly, FIIs during the last week, which earlier had hedged positions in F&O, which was largely responsible for the high July series Nifty discount, have now unwound their hedged positions and turned sellers in the cash segment. This is a dangerous trend and could be read as an indication of some more outflow on account of the FIIs.
The outlook for this week continues to remain edgy and negative. Although the markets are now clearly in the process of a bottom formation, a fall to the recent low of 3,800 levels for Nifty is not ruled out considering the impending RBI action which will be very stringent looking at the macro numbers and the earnings trend seen in corporate results which will now set the tone ahead for the markets.
However, a value investor may be advised to favour domestic to external consumption story and also look for value in those sectors that have been beaten up the most.
(CEO, Reliance Money)
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment