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Old 02-21-2010, 07:04 PM
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Default Budget 2010: Mkt pundits present their wishlist

The benchmark Sen*** closed the week 136 points lower on the back of a sell-off, triggered by the US Federal Reserve's surprise move on Thursday. The central bank increased discount rates by 25 bps to 75 bps post closing of US markets. The markets however recovered some of losses in the last one hour of trade, especially post recovery in the European markets, as experts say the Fed's move is not a tightening measure.

Where do experts see the markets in the run up to the Budget and what are their expectations from Finance Minister Pranab Mukherjee? In a special series kicked off by Mint, eminent market experts, Shankar Sharma, MD, First Global; Rashesh Shah, Chairman and CEO, Edelweiss Capital; Narayan Ramachandran, MD & Country Head, Morgan Stanley; S Nagnath, President and CIO, DSP BlackRock, UR Bhat, MD, Dalton Capital Advisors (India), and Pramit Jhaveri, Head of Global Banking India and Vice Chairman Asia, Investment Banking, CII presented their wishlist for Budget 2010, and the road ahead for the markets.
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Old 02-21-2010, 07:04 PM
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Q: What do they expect from the budget and government and what should the government do?

Bhat: The RBI has set the agenda and an indication by the government that nowadays the ball is in your court and you have to do something about the fiscal deficit. The fiscal deficit would be higher than 6.8% in my view because of the simple fact that the 3G auction is not happening and the divestment also would be much less than what was initially thought that the government has to do something to cut down on fiscal deficit.

In addition I think we are probably doing divestment for the balance of budget. I think the divestment proceeds have to be used for something better than that.

Nagnath: Currently, emerging markets are the flavor amongst FII and within that Asia is being seen as a bright spot in terms of economic growth. So in general, policies in the Budget and beyond that continue to propel growth to be put in the 7% plus range, would certainly be very appealing to FIIs because they are looking at India and China as engines of growth at a time when the developed world is struggling with rather low rates of growth.

Q: What do you expect? What kind of balancing act do you see?
Jhaveri: We should be really thinking more about the supply side of the equation which is how do you create more on the supply side whether it is on food or infrastructure to absorbed these inflows.
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Old 02-21-2010, 07:05 PM
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Q: What do you think?

Ramachandran: I think this budget is going to be about consolidation the 13th finance commission is going to bang on the fact that consolidation is required because beyond a point India is capital starved and for capital to come from outside you will have to have proper management

I think when you say debt to GDP that goes beyond the 80% plus that we are at and it begins to ring alarm bells around the world with possible downgrades and so on. So, both from the finance commission report as well as in flavor this Budget is going to have consolidation as its theme.

India consumes a lot and paradoxically China is dealing with the opposite where fixed asset to GDP is well north of 60% and they are figuring out how to stimulate consumption and we need the opposite kind of discussion which is how to stop consumption from happening atleast relative to investment.

In terms of the markets, I have to rechristen this word it is not tightening. Itís the end of easing. We are normalizing it and if you take any monetary condition index any where in the world, a combination of the currency and broadly speaking monetary policy we are not tightening anywhere.

So we have to be very careful that this is normalizing and normalizing does create a period of choppiness. But the very fact that normalization continues means there is some growth in the system. So there is obviously the chance for the markets to fall on news of tightening.

But I do think eventually markets can go up atleast as much as nominal earnings go up in India and I would say that number is in the low teens if not high teens.
Q: What kind of balancing act you want to government to do?

Shah: I am also slightly optimistic because I donít think the government really thinks that there is any pressure to roll back or try and reduce the 6.8% because anyways if it is coming down if we look at expectations of GDP growths of FY11 even if you do anywhere around 7.7-7.8% kind of GDP growth number, the increase in the tax receipts and all will offset part of this and all the share sale that is going on hopefully the 3G auctions etc.
About Rs 100,000 crore will come out of the offloading of the shares as well as the 3G auctions. So if Rs 100,000 crore is going to come out of that you will not see the pressure on the government to do something but there is no need to do anything significant.

Q: The fiscal consolidation is one side but the other side is you may have a great economy, you may have everything but still market is not going anywhere because there is no liquidity? How do you see the funds flow, capital flow in this current fiscal?

Sharma: I think that is a difficult call to take. The fact that the dollar will relatively be a stronger currency and that determines where liquidity goes on a global basis by and large. Given my outlook in the short-term that the dollar will strengthen, I doubt if lot of money will come to India or for that matter emerging markets. Again money is always going to chase the momentum in an asset class. It is not that money creates momentum, I am a firm believer that momentum creates money flows.

Shah: I think overseas flows will be around USD 8-10 billion to about USD 14-15 billion. Indian flows via LIC, insurance companies, as well as from the mutual funds should be about Rs 100,000 crore. From Indian investors, we see another Rs 40,000-50,000 crore. But what will happen is that there is a lot of equity issuances under way and they will act as a cap on the market as a whole. The Indian liquidity which is through insurance companies and LIC will act as some sort of flows, so we will end up seeing a year where equity issuances and liquidity will somehow cushion the market and keep it rangebound.

Ramchandaran: If we assume that the fundamentals, particularly economic and earnings, are decent Ė letís say 8% growth as Shah was saying on the economy and 15% earnings growth -- then average flows are going to be in the mid-teens of billions, but it predicts absolutely nothing.

Bhatt: I donít think there is any reason for us to suspect that FIIs will fight shy of India suddenly. I would expect that something like a billion dollars a month can be expected. The other big event is the ban of proprietary trading in the US. If you are a bit more creative, we can invite all that capital here and let that happen in India. So, that is one quantum jump that is possible if we can do that.

Q: Apart form the flows, one of the key factors that has driven the Indian markets in the past one year or more is the faith in reforms. Do you have faith in reforms or do you have a feeling that reforms particularly in the capital markets have taken a backseat?

Shah: I have a strange issue with that. In the market, I am also not sure what kind of reforms we want because the capital markets in India are reasonably open. We have credit default swaps, but all this is not part of reforms. All these are products between Sebi and RBI. They brought interest rate futures etc. So, I donít know what big reforms are required in capital markets.

Ramachandran: I have to agree that in India the reform process is agonizingly slow. It is consensus based, but broadly speaking in the right direction. Of late, there is obsession with financial instrument reform. As the sole carrier of the weight of reforms, it has broadened out in all the areas that Shah has talked about. If you think about RTI (Right to Information) in India, itís a magnificent new reform. The buzzword today is inclusion, which is totally required, comes from that broadening set of economic reforms. A lot more is possible than what we are achieving.

All of us who engage in financial markets have a very narrow perspective of what reforms are all about. I think it just comes down on the day of the Budget. If the Finance Minister moots a proposal for a mid-day meal for children, then the markets will sell off 500 points. If he were to say that I will abolish dividend distribution tax, which probably benefits 300 people in South Mumbai, then the markets will rally 2000 points. I find that it is sort of a narrow-focused perspective of equity markets.

I am a capitalist, but I totally disagree with that narrow focus of what constitutes reform. I think the reforms are going just fine. I am a complete believer in RTI as well. The fact is that we have a very good law minister at the helm of affairs, talking about de-congesting of courts, and setting free two lakh undertrials. Those things matter a lot more than just a few fiddling on the budget to please the stock market.
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Old 02-21-2010, 07:06 PM
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Q: Apart from raising money which will help the government to bridge its fiscal deficit, from the markets point of view, how will this large disinvestment program work which the government is quietly planning?

Bhatt: While it is possible to say that we can raise Rs 200,000 crore or Rs 100,000 crore, I think we can only disinvest as much as the markets can take. I donít think the market has that sort of an appetite.

Q: What kind of market appetite are you seeing for this government paper?
Shah: I think the market will find the balance because there is cash coming into the market through household savings which comes through insurance companies in the market. If the government is going to raise about Rs 40,000-50,000 crore, which is what our estimate is, through the share sale, the market should be able to absorb it. I think even overseas a lot of FIIs find it easier to just buy good quality public sector stocks and just hold on to it for a few years. So, the appetite will be there.

Sharma: The government is ultimately crowding out the debt side as well the equity side for what would have naturally been available for other productive uses. I have a problem with that intellectually, but I don't have a problem with that financially because somebody is giving you the money, so take it. The fact is that there was a huge insatiable appetite for capital on the debt side which was bad enough, now it is there in equity markets. I have a little bit of an intellectual problem with that.
Jhaveri: I think everyone has talked about the same number but donít think that it is necessary and imperative on the Finance Minister to make any comment in the budget about what he plans to do in the next 12 months in terms of a number. But the trend is already set and everyone is clear that there is a game plan to raise some amount of money that is being talked about in terms of divestment. You take a call as things go by. If you look at 2009 as a case in point for the kind of flows or money that Indian companies have raised, the Rs 50,000 crore numbers that we are talking about certainly doesnít seem it.

Q: The DTC has proposed an abolition of capital gains tax. Is this a good or a bad thing for the market?

Sharma: Retail investors largely don't matter much in determining the course of Indian markets in any case because they are vastly outnumbered by institutional investors now. They might be very active on the F&O side, but thatís a different animal altogether. But on the pure investment side, the numbers don't make me believe that doing anything very drastic to their taxation will necessarily alter where India's stock markets are headed.

Jhaveri: It is more a question of how the market will react at the time such an announcement is made -- that is within 5-10 minutes. When you look at it from a slightly short- or medium- or even long-term perspective, philosophically its part of life and it goes on.

Bhatt: Its very equitable that everyone should pay tax when they make money. To that extent, I think that is fair, except that whatever the experiment we had with no long-term capital gains after one-year has become a scam and that is the way people would convert money into different colours. That is something that needs to be put an end to and they are talking of indexation anyway. If you hold it long enough you may not pay too much tax but that is very fair.
Shah: The reason for bringing STT and giving the long-term capital gains was it is easier to collect but I think the code affects the FII fairly significantly. All FIIs who are investing through Mauritius will go away and the sentiment effect will be a lot more significant than retail investors.

Sharma: The economics of investing in a particular instrument don't necessarily drive capital back. Just to give you an example, which is very recent in mutual funds, you can come in for free but there is actually capital outflow on the insurance side, a high cost way of accessing the equity markets. But that is where the big capital flows are happening. It is a little bit of a paradoxical situation. Frankly, incentives or cost don't actually determine where money actually goes. We have a live example of that dichotomy right here between mutual funds and insurance.

Q: Where do you see Indian markets going forward on parameters of market valuations and corporate earnings?

Bhatt: Valuation is not a great argument to buy today and so are interest rates, but earnings growth is what can surprise us.

Ramachandran: You are going to get blow out earnings, so we will see the upside on 30% earnings rather than 20. I think interest rates and commodity prices are a problem if global growth hangs in there. So, if those two headwinds happen, then it is likely to have a stock sale. I pick the high side on the market probably 15-20% from here.

Sharma: Buying into the growth sector in India is way too expensive. Everything in the infra pack or FMCG pack, save for the autos, are north of 20-25 times earnings which I don't think are certain by any chance. On the other hand, most companies have diluted their return on capital substantially in the last nine months by raising a lot of capital at very low stock prices, thus capping returns. I would hold out for a first half move down by about 25%, after which we see a recovery in the second-half in stock markets. We may end up probably 10% down for the year.
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