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Devangshu Datta: Looking in the wrong direction

If an upside in the market depends on a change in sentiment, neither the Budget nor the UP elections are likely to provide that thrust

Devangshu Datta  |  New Delhi 

When funny things happen in the forex markets, traders often invoke the actions of Mrs Watanabe as explanation. This fictional character symbolises the quintessential retail speculator. She is the Japanese housewife who carry-trades, borrowing in low-interest Yen and lending in higher interest currencies, and trusting to fate that the exchange rate will not move against her.

When funny things happen in India’s primary markets, lead managers can look to Geeta-bhen, the quintessential Gujarati housewife who likes a punt. If she thinks there’s a little money to be made on a new issue, there are good chances of over-subscription. Any lead manager who ignores her, does so at his peril.

Geeta-bhen was very happy with the Multi Commodity Exchange (MCX) issue and the initial public offer (IPO) was massively over-subscribed with over Rs 36,000 crore being bid for Rs 630 crore worth of shares. The auction processes of the Oil and Natural Gas Corporation (ONGC) follow-on public offer (FPO) completely excluded her. She wouldn’t have been interested anyhow; the reserve price left nothing on the table. As a result, the FPO scrambled to find Rs 12,000 crore.

The success of MCX does indicate that there are savings on tap — more than enough to make the disinvestment targets look realistic. But that issue succeeded because the people selling it understood the mindset of their target audience; ONGC saw a low-key response because the people selling it didn’t understand investor sentiment. Unfortunately, the future direction of the stock market is likely to be set by the same mandarins who oversaw the ONGC issue.

  Current (Mar 2) Value 
14 days ago
Nifty value 5359.35 5564.3 -3.68
Index PE  18.99 19.49 -0.5
Index dividend yield  1.48 1.42 0.06
Index book value  3.04 3.12 -0.08
USD INR (RBI Ref rate)  49.3525 49.2128 -0.28
FII net buys/ sales(last 14 days)# 14180.8 25217.4  
DII net buys/ sales (last 14 days)#  -1273.4 -2386.4  
#=Rs crore;  (euro) since Feb 1, 2012                                                  Source:NSE data

There are two domestic events that investors are focused on at the moment. One is the outcome of the UP elections. The other is the Budget. Some of the optimists on the Kerb at Dalal Street connect these two events via a long and flawed chain of logic.

It goes this way. The Congress will do well enough in UP to become a key partner for the Samajwadi Party (SP), which will win the largest number of seats without attaining a majority on its own. Then, the SP will rejoin the United Progressive Alliance (UPA) at the Centre and, thus, enable the Congress to stave off blackmail from the Trinamul. In turn, the Congress will push ahead with all the plans and projects that Mamata didi has forced it to shelve. Pranab babu will whip out a very liberal Budget with lots of sops, based on these calculations and the market will zoom north.

In reality, the Budget itself is unlikely to vary in content whatever the election results, though Pranab babu may tweak his speech a little. The mandarins have long since footnoted the details of the Finance Bill and they’re not flexible enough to adapt to changing circumstances as the ONGC FPO indicates.

Also, even if the UP election results conform exactly to the optimistic scenario of a Congress-SP alliance, it’s unlikely that the UPA will suddenly show signs of reformist zeal. It’s too mired in scandal and too comfortable with inaction.

The domestic institutional investors (DII) aren’t very optimistic about change. They’ve been consistent sellers through 2012. The rally that pushed the Nifty up from 4530 in December 2011 to 5630 in Feb 2012 was driven totally by foreign institutional investor (FII) buying. The overseas players have remained net buyers through the past 10 weeks but the volume of domestic selling has accelerated in the past fortnight with operators and retail players also cutting down equity exposure. In fact, retail has become less and less optimistic.

One way to look at the Indian market is strictly in terms of supply-demand from several segments. FII, DII and retail buys and sales must match and we have delivery numbers. Axiomatically, if price rises, supply is not easily available and if price falls, supply is more than demand.

The FIIs have been net buyers of Rs 25,000 crore -plus equity in February and Rs 13,000 crore-plus in January. That has been partially matched by Rs 2,200 crore of DII sales in February and Rs 1,800 crore of DII sales in January. Retail and operators have coughed up the rest of the equity that the FIIs bought.

Reconciling numbers, that segment sold Rs 34,000 crore net to the FIIs. What is more, that segment was more comfortable supplying equity in late-February. Prices have fallen despite more demand from FIIs. That means domestic retail and DIIs are both essentially bearish.

If an upside in the market depends on a change in sentiment, neither the Budget nor the UP elections are very likely to provide that thrust. If it depends on FII attitude, we may have to look further afield for triggers.

At least part of the reason for FII rebalancing into Indian equity was the likely weakness of the euro zone. Another reason was that many FIIs were underweight after heavy sales through 2011. That rebalancing is probably over — they have bought more in the past two months than they sold in the period between March and December 2011.

India’s GDP growth is trending lower and there’s no real sign that the economy has hit the bottom of the cycle. As of now, if crude prices move higher, India starts looking more unattractive, if only because the Reserve Bank of India is unlikely to cut rates in that case. On the policy front, If the 2G mess is compounded by further vacillation or arbitrariness, that isn’t likely to make foreigners happy. In purely corporate terms, consider Kingfisher, DLF, Air India; none of these showcases India in good light.

Given a multitude of scams, entitlements, high subsidies and rising deficits, foreign investors would come to India only if they saw compelling valuations and high earnings growth. As of now, neither is visible. The Nifty is trading above its long-term PE average (roughly 17-18). Earnings projections are lower than normal.

The Nifty is holding on above its long-term 200 Day moving average. If it drops another four to five per cent, it would break that trend indicator and start looking bearish again. There is every chance that this will happen. Unless the UP elections, and the Budget both produce pleasant surprises, and the price of crude slides lower.

First Published: Mon, March 05 2012. 00:12 IST