Hi
With the corrections last month on the back of news that FED will increase the interest rates, along with BOJ sucking liquidity from financial market and other central banks also raising rates, scene was set for deep corrections all over the world market.
Now anticipated increase appears to have been fully factored in and investors were increasingly of the opinion that prices are at correct valuations, the spectre of higher than the anticipated rise is raising its, head, thereby , spooking the market.
The anticipation of higher than expected rate will keep the market on tanterhooks.
Global cues have sharply turned negative during last 24 hours.
There are
serious concerns over the activities of hedge funds which have witnessed explovise growth over last few years due to cheap yen from Japan.Us court has thrown the rule requiring them to be registered with SEC on the ground that it is arbitrary and it exempts fund with less than 15 clients from registering. Now it is to be seen if SEC decides to appeal higher or come with tighter rule. In either case danger posed by hedge fund can not be wished away now. So the equation is to be clearly understood. Hedge funds have more operational flexibility. They need not adhere to many prudential practices and often works on the boundary conditions, i.e.
slight change in various operating parameter will see them flying to lucrative destinations. Margins are thin and risks are higher. Often they have destabilising effect on the stock market as thinner margins disappear and they dump stock en-masse leading to meltdown. Their money is nimble and quickfooted like hyena and sometimes need to clean up an inflated market.
Now if interest rates go up then money will be costlier and thin margins will evaporate. So hedge funds will fly off again to safer destinations such a bonds.
Secondly, if money is costlier, companies will find it difficult to get loans at cheaper rates. Cost of business will be up so profit will reduce unless they find it possible to pass it on. That may not be feasible in many cases. So results will be bad and stock prices of such companies will decrease. This will be anticipated much in advance by hedge funds and they will exit before impact is really visible to others. In such case there will be immediate decline the rise and then slow decline over a long period. Investors are well to study individualcompanies for such factors. It will be seen in scetoral shift of the outlook in general. Better companies will be able to survive. Hedge fund makes no allowance for that.
Thirdly,high inflation will cut the consumer spending as also high cost of borrowing. So many booming sectors will become busting sectors. Such companies will find themselves in doldrums and unable to steer in any direction. Their results will be bad and will be visible over two quarters at least.
So a sectoral realigment keeping in view domestic conditions will have to be done. India is set on a moderately high growth rate though less than china.To sustain that rate the investment required is more than 1600000 crores at 2001-2002 prices.Our priority areas are
infrastructure and social sectors; improve allocative efficiency of resources; enact policy reforms for creating an investor friendly environment; and improving governance and enhancing the efficiency of the delivery systems.The sectors like roads, telecom, seaports, power and airports would be special areas of focus.The two areas that would cause concern are mining and power, as they hold potential to slow India's growth.
With such a massive investment over the period of five years is certainly going to be beneficial. Further to sustain such growth rate we need to develop at 10% in Industrial sector and above 5 % in Agriculture sector.
So if capital is costly, imports are dearer , growth rate in industrial sector will suffer. If monsoon is bad, or credit delivery system to farmers are poor then agricultural growth will suffer.
These aspects need to be watched out. Technology sectors perticularly IT and services should show normal growth. However strong dollar will impact the revenue of IT companies.
Market will in the long term will react to these conditions . These thing will have to be analysed in detail by some knowledgeable members so that a firm sectoral outlook could be presented on long term basis for investment purposes. That should take into account the current scenario and potential for growth and Govt. policy imperatives.
In general , when I am optimistic , I mean the areas where policy focus is centered will grow as the country has potential for the growth and to achive those targets it will take many years before we take a breather. We have to lookaround us to see if such a change is evident, look beyond numbers also.
To give you some numbers to keep in mind before we see around us
Sectoral Structure of GDP at factor cost
SECTORS--- 2006-07--- Tenth Plan
1 Agriculture & Allied Activities
-- 20.5-- 22.2
2 Mining & Quarrying ---1.9 --2.1
3
Manufacturing --- 16.7--- 16.1
4 Elect, Gas & Water Supply--- 2.8--- 2.8
5 Construction ---6.1--- 6.1
6 Trade ---
13.6 ---13.3
7 Rail Transport ----0.8--- 0.8
8 Other Transport ---4.8--- 4.8
9 Communication ---- 2.3---- 2.1
10 Financial Services ----7.5--- 7.0
11 Public Administration ---- 6.1 ---6.4
12 Other Services ---16.8 ---16.4
Total ----100.0 ----100.0
Sectoral Growth Rates and ICORs Tenth Plan
SECTORS Growth ICOR(Rate (%))
1 Agriculture & Allied activities ----
3.97 ---1.99
2 Mining & Quarrying ---- 4.30---- 7.99
3 Manufacturing ----
9.82---- 7.77
4 Elect, Gas& Water Supply ---- 7.99 ---- 14.97
5 Construction ----
8.34 ---- 0.99
6 Trade ---- 9.44 ---- 0.91
7 Rail Transport ---- 5.40 ---- 14.66
8 Other Transport ----
7.54 ---- 5.37
9 Communication ----
15.00---- 8.33
10 Financial Services----
11.69 ---- 1.56
11 Public Administration ---- 6.43 ---- 5.45
12 Other Services ---- 9.26 ---- 3.53
Total GDPfc ---- 7.93 ---- 3.58
Projected investment requirements for Private sectors in 000crs.
Sectors--- Investment required---- Projected Private investment
1.Agriculture & Allied---
219.6--- 174.0
2. Mining & Quarrying ---89.4 ---103.0
3.Manufacturing ---
1476.9--- 1330.7
4.Electricity ,Gas & Water Supply --
-412.5--- 68.0
5.Construction ---61.0 ---38.9
6.Trade ---136.6--- 106.0
7.Rail Transport--- 81.9 ---60.6
8.Other Transport---
237.6 ---184.3
9.Communications---
296.4 ---74.1
10.Financial Services--- 151.2 ---26.5
11.Public Administration ---273.1--- 30.6
12.Other Services--- 645.3 ---499.9
Total ---4081.7--- 2476.1
If we are able to muster what is given above(figures from 10th Plan) then it should be visible around us. And if you get confident by looking around you that yes there are visible signs of growth and future actions/plans then liquidity will come to India. Market will see up for a long time to come. These temporary blips should be used fruitfully. NO we are not at all going to doomed level.
Pankaj