Global economy is still weak, says IMF

The head of the IMF, Mr Dominique Strauss-Kahn, said here on Monday that although the worst of the global financial storm had passed, the world economy remains "highly vulnerable."

"Today the storm has passed. The worst has been averted thanks to a bold and rapid policy response and thanks to cooperation," he told delegates at the annual conference of the Confederation of British Industry (CBI) — Britain’s biggest employers group.

"We can say that the recovery has started but everyone understands that it is very fragile and still dependent on policy support. The financial conditions have improved but are still far from normal."

Mr Strauss-Kahn, who is the managing director of the International Monetary Fund, added: "The economy ... (is) getting better, but (is) still highly vulnerable."

"During the crisis, everyone was united by a common purpose. Going forward, this might dissolve. So the road ahead will be less clear cut."

The governments have committed trillions of dollars in stimulus and guarantees and central banks have cut interest rates to record lows since the financial crisis intensified after the collapse of Lehman Brothers in September 2008.

Mr Strauss-Kahn added that nations needed to cooperate more to build on signs of worldwide economic recovery.

"The global economy has made remarkable progress over the past year, but as we stand on the cusp of recovery, new and complex challenges are already popping up," he said.

"How do we deal with these challenges? In my view, there is really only one fundamental answer — to persevere with the spirit of cooperation that has brought us to this point."

He added: "The challenges... all require cooperation. We need cooperation on exit strategies. We need cooperation on the new growth model. We need cooperation on financial sector regulation."

The CBI is meanwhile focusing its latest annual London conference on how businesses can best recover from Britain’s longest rece-ssion on record. Britain is the last major world power still mired in recession, after the eurozone, France, Germany, Japan and the United States all emerged from a steep global economic downturn.

Global economic issues & scandals affects stock index

The Sensex can start its journey on a positive note and witness a gradual decline by the end of that week. The unpredictably strong bouncebacks and reticent movements are usually the result of a host of unrelated events.

These are not mere domestic triggers that impact investor sentiment. Global developments , economic issues and even scandals have a bearing on the stock index.

Global movements

Investors cannot rule out the possibility of a storm in the domestic markets if there is turmoil in the global markets. Be it US central bank's decision to cut federal fund rates or recovery of Asian equity indices. The impact is obvious. The looming fears of recession elsewhere , in US and Europe, took a heavy toll on the Asian markets.

Since the domestic markets are not decoupled from the rest of the world, the impact will be felt here. Hence, domestic players cannot afford to overlook the performance of the Nikkei, Shanghai Composite, Hang Seng, Straits Times or Taiwan Weighted.

Monsoon effect:

The delayed monsoon has sent the prices of vegetables soaring high. To add to the woes, the price of pulses has touched the roof. The problem in the agriculture sector has come back to the consumers as food inflation.

Since the yield is low, consumers must be prepared to spend more on food. It will adversely impact the agriculture-associated industries. The government's response to the delayed monsoon needs to be closely watched.

Liquidity:

Both liquidity and risk appetite in the markets is currently high and that is good news. The Reserve Bank of India (RBI) has softened its monetary policy and reduced interest rates several times. The move was to counter the global slowdown and stimulate economic activity.

When deposits yield lesser interest rates, investors will find equity a better alternative to debt. However, government borrowing to fund its various programmes can cause a liquidity crunch in the future.

Foreign investor:

Foreign institutional investors (FIIs) are a powerful force to reckon with. FII inflows and outflows have a tremendous bearing on the equity markets. FIIs lend a hand in both making and breaking the markets. Continued FII interest in the equity markets or sustained buying will push the index up. Consequently, it triggers the interest of other major players. This could peak into a bull market condition.

On the contrary, what if FIIs decide to pull out their lot from the markets? Sustained selling can cascade into a big fall or a bear market condition.

Go by fundamentals:

Markets movements are susceptible to political developments , major political decisions, political stability, oil prices, economic factors, global forces, inflation, and even rumours. Sometimes it becomes difficult to predict why the market behaves in a particular fashion. Fundamental analysis is an unfailing method to determine the market behavior.

Analysts predict that the valuations are currently challenging. A host of factors go into fundamental analysis including current financial health of the company , projects in the pipeline, growth plans and merger/acquisitions. It is important for investors to be more alert and informed before locking their hardearned money in equity.

End of India premium story; more global now?

If the markets remain weak, the damage could extend beyond stocks to the corporate sector


In spite of faltering global markets, the Indian market had run up sharply in the last few days on hopes that the finance minister would, by some magical process, not only deliver higher spending that would lead to higher growth but would also somehow manage to keep the fiscal deficit in check. In fact, the bond markets too had been rallying on hopes that the fiscal deficit would be contained at around 6% of GDP.

What’s more, practically every analyst had said that valuations in the Indian market had gone too high, ignoring negatives such as the weak monsoon, the high fiscal deficit and persistently high food prices.

So while the 5.8% drop in the Sensex is the biggest ever on a budget day, in many ways the markets have themselves to blame for having heightened expectations. While the market expected announcements on all those issues that excite it, such as reforming subsidies, increasing foreign direct investment caps, abolishing the securities transaction tax and disinvestment, the fact of the matter is, as one equity strategist put it pithily, that the government figured it had managed to sustain growth by going in for a big fiscal push last year, so why not have more of the same.

The other factor was that there were very few Nifty short positions leading up to the Budget, as the bears had been badly hurt by the mauling they got after the elections. So when the markets fell, there was no short-covering and the fall was therefore very steep. Short positions must have been built up on Monday, though.

Of course, the Budget did disappoint in areas such as the plan for disinvestment and that of pricing of petroleum products. The target of Rs1,100 crore for disinvestment is woefully low considering the gravity of the fiscal situation. But as far as pricing of petroleum products go, the government already took the step of raising prices before the Budget and has now announced that a new viable and sustainable system of these products is being looked into.

The increase in the minimum alternate tax (MAT) rate is obviously a negative for companies such as Reliance Infrastructure Ltd and Reliance Industries Ltd. Thankfully, the proportion of companies that pay MAT is relatively less. Besides, tax paid under MAT can be used as a credit for ten years when these companies come out of the MAT regime and hence may not necessarily be a negative for all companies; by that logic, MAT is a kind of advance tax. But for some companies, the book profit (on which MAT is calculated) has been higher than the taxable profit for years on end and they haven’t availed of MAT credit. For such firms, the hike in the MAT rate is a definite negative. Analysts say much of the fall in the later half of the session was on a reading of the fine print of the MAT changes.

Interestingly, the BSE Capital Goods index was among the worst hit, falling by 7%, though there are ample outlays for both rural and urban infrastructure spending. But as Sandeep Sabharwal of Prabhudas Leeladhar Pvt. Ltd points out, valuations of large-cap capital goods companies had risen sharply in the run-up to the Budget and a correction was due. The BSE Bankex fell by at least 8%, as higher bond yields will lead to losses on treasury holdings. Bank stocks, too, had outperformed the broad market.

On the other end of the spectrum, FMCG (fast moving consumer goods) stocks gained by 1%, as the markets were enthused about the increased rural spend and the increase in incomes through the cut in personal tax surcharge and the removal of fringe benefit tax.

ITC Ltd gained at least 3% on relief that taxes on cigarettes were not raised in the Budget. Auto stocks fell by around 3% on an average, lower than the rate at which the broad market fell, for the same reasons. Besides, the stimulus package announced for the sector has been maintained, which is also a positive. IT stocks, too, were relatively better off thanks to the extension of the sunset clause on tax incentives for units that operate in software technology parks by one year. The removal of FBT (fringe benefit tax on perquisites) is also a large positive for the sector. Many companies in this sector, however, pay MAT and the increase in the MAT rate will result in higher tax outflow. But since MAT credits are available for 10 years, this is only a timing issue and there would be equivalent savings on taxes in future years, when these companies come out of MAT.

If the markets remain weak, the damage could extend beyond stocks to the corporate sector. Companies had started raising funds through QIPs (qualified institutional placements, or sales to certain categories of buyers, largey financial institutions) to repair their balance sheets and provide a cushion against the downturn. That option would no longer be open to them.

What of the future? The special India story triggered by the election results and sustained on hopes of a dream budget is now over for the time being. The hope was that India would continue to enjoy its premium over other markets in the region based on a reform agenda. That hope has now been dashed. The Indian market can now be expected to move more in sync with global markets.

Amul ranks 21st in the global dairy business listing

Dairy product major Amul has been ranked 21st largest dairy business group in the world by the International Farm Caparison Network.

Amul has made it to the league of top 21 by IFCN which analyses global dairy trends, a statement said. The other dairy companies included in IFCN's list are Fonterra, Campina & Friesland, Dairy Farmers of America, Arla Foods, Dean Foods etc.IFCN's survey is based on the milk intake of 2007.

India with a production of 114.4 million MT of milk is the largest producer of the world.

FT Global 500 - Indian Companies

Rank	Company
75	RIL
120	ONGC
138	NTPC
188	Bharti
330	Infosys
345	BHEL
362	ITC
372	SBI
483	TCS
495	HUL

Equity investors should track market developments

The stock markets have been volatile over the last few days. They are in a sideways movement and trying to find the bottom after a fall of 20 percent a week ago. The market sentiments are not very positive at the moment and the recent developments are expected to dampen them further. Globally, governments and central banks are trying to cut rates and announce packages to improve business sentiments.

These are some of the major developments in the markets last few month:

A) Global

On the global front, another large US bank went into a financial crisis. The US government took quick measures to avoid the spread negative sentiments in the markets. The US government announced a bail-out package and agreed to shoulder the losses on the bank's risky assets.

China announced a large cut in interest rates and reserve ratio to boost the investor sentiments in the markets. Recently, the World Bank announced China's growth rate next year will come down to 7.5 percent. The European Union is also considering a large package to bring cheer to the business environment and investor sentiments.

The scenario worldwide is still looking quite gloomy as more bad news is coming in from large financial and industry houses. People looking at investing in the stock markets should remain extremely cautious and closely track the market developments. Investors with a low risk appetite, and inadequate exposure and understanding of the market dynamics should stay away from direct exposure to stocks at this moment.

B) Crude oil price drops

Crude oil prices are quoting in the range of USD 48 to 55 in the last few days due to lower demand in the global markets. The import crude basket of domestic oil marketing companies also has come down drastically. The oil ministry and government are considering a rate cut on petroleum products (mainly petrol and diesel).

The rate cut will result in a lowering of prices of commodities, and will reduce the inflation rate further. Analysts are expecting inflation to go below five percent by March 2009 due to the slowdown in the global markets, a sharp decline in crude oil prices, and the inflation base effect.

C) Currency

The rupee again depreciated vis-a-vis the US dollar. It was at its lowest level in the year, trading at around Rs 50 per USD. The rupee depreciation is not good from the perspective of the economy, as it results in imports getting expensive and increases the current account deficit.