Indian Market Report: 2007 Has Brought On The Fear

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Includes: GLD, IBN, INFY, PTI-OLD, RDY, SAY, TTM, WIT
by: Dinesh Pandya

The first weekend of the year is surely not a pleasant one for the bulls. A strong jobs report in the US crushed hopes of an early rate cut and led to a broad sell off in markets there. This, combined with rate increase fears in India in the weeks to come, is going to serve as a double dose of worry for the Indian bovine crowd when the weekend is done.

These are very similar to conditions that caused the nasty sell off in May 2006, the painful memories of which are still branded on bull backsides. Another fear factor to keep a watch on is the dramatic sell off in the commodity space. The last time this happened was in May 2006, especially in gold, and it neatly fit into our little market event on this side of the globe. This may not be an accurate indicator this time around, as the correlation has not been that high in the last couple of months, but this chart is still worth looking at.

BSE Sensex/StreetTracks Gold Trust ETF (NYSEARCA:GLD) Comparison chart
BSESN GLD

On a positive note,the money markets have seen a return to saner levels with rates quoting at 6- 7 % from 19-20 % last week. Senior bank officials attribute last week's levels as an abnormality of usual tight year end conditions in money markets, but are still amazed at the 19 year highs in rates touched last week. They expect tight liquidity again as the second round of the Reserve Bank's (RBI) CRR hike come into effect this week. Governor Reddy made light of the the liquidity crunch and termed it as "non-disruptive " and mentioned that "liquidity conditions were not volatile". If a 1200 basis point swing in call money rates in two weeks is non-disruptive or not volatile, I wonder what could be? Only in India, folks, only in India.

The continuing friendly tensions between the pro-growth Finance Ministry and the inflation hawks at the RBI cooled dramatically last week, with Governor Reddy climbing down from his usual hawkish stance on the inflation rate, expressing his comfort with inflation being contained within the desired range of the RBI. Keep watching this space for more interesting developments as the days go by.

I am going to be watching the real estate/construction space a bit more closely as it looks like a rising tide has lifted all boats. Broadly speaking, this sector can be split into 2 classes- the haves and the have nots. This pertains to the landbanks owned by real estate companies and when they were bought. If the companies in question have possession of legacy holdings of prime real estate, bought a couple of decades ago or bought land at throw-away prices before the Great Indian Real Estate Rush began, then they deserve the accolades and sky high market caps being attributed to them. But what about the Johnny-come-latelys all rushing onto the bandwagon, even changing their names to reflect their new found skills in realty and construction? Doesn't it reek of the good old days of the NASDAQ at its prime, when anyone who put a ".com" behind their names was a must have interview candidate on the financial shows? The most common line I hear on the channel droning in the background - "Can you tell us about the value of the land bank your company holds?"

And then there is the all important question: what happens when you develop and sell all the land you bought at cheap prices? You got to buy more at current prices which sure aren't cheap, which leads to margins as thin as the paper the title deeds are printed on. The hot real estate play suddenly turns into an average building construction play,which surely doesn't deserve these kind of rich valuations. Don't be surprised if this sector gets rocked in the days to come on the back of the rising interest rate scenario. In May 2006, when the market cracked, some companies in this space fell more than 40 - 60 % in a matter of days.

But all these negative factors may not add to much, as the market awaits the earnings season and may see a short term surge on surprise numbers being posted by key index stocks, such as Infosys (NASDAQ:INFY), Satyam (SAY) and Wipro (NYSE:WIT). All these stocks have moved decently this week with Satyam up 3.6% for the week. Patni (NYSE:PTI-OLD), down 3.5 % for the week, mentioned in last week's column as a positive play got socked with an Income Tax order asking it to pay US $ 14.5 million, as it was found not to have entitlement to a tax exemption. Amongst picks mentioned last week, Polaris moved up another 11.3 % this week and other mid cap IT stocks showing promise are Mastek and HCL Infosys. Bank stocks have stayed depressed, while ICICI Bank (NYSE:IBN) was up 2.2 % being the only worthwhile mover in the group.Auto stocks were a mixed lot, with Tata Motors (NYSE:TTM) posting a 3.6 % gain, while Mahindra gave up most of its advance after being up as much by 6.8% during the week. Look for more gains in this front, as great sales numbers for the month get translated into solid results for the latest period. Another reason for future gains in this sector is that the limited number of stocks available in the 4 wheeler space and which tend to go up whenever individuals/institutions decide to add to their auto holdings in the Indian markets.

The big tumble came from ITC, down 6 % for the week,which was one of my short ideas in my previous column, but my other short picks in the same FMCG (consumer goods) sector stayed positive and refused to go down. Dr. Reddy (NYSE:RDY) was up by 3.3 % before encountering selling at higher levels which bought it back to where it started the week. Ranbaxy and Jet Airways, mentioned in last week's column, were some of the best gainers in the Sensex with gains of 5.6 % and 3.4 % respectively.

Have a good week!

Disclosure: Author hold positions in the above mentioned stocks on behalf of his clients in their investment portfolios.