Driven to depth

More FIIs, changing styles lend stability to the Indian market

Its been a great year for the Indian stock market and on the eve of Samvat 2061, the Sensex is once again nudging 6000. The strong trend, with the occasional blip as in May, has had two drivers "" strong fundamental performance of the corporate sector and stronger foreign institutional investor (FII) inflows.

FII inflows in CY04 have just crossed the $6 bn mark and should easily overtake CY03's inflows of $6.6bn. Interest in the Indian markets has possibly never been so keen.

In the past year, not only have the big, reputed global equity players bought into Indian companies, there have been a large number of not so well-known funds that have debuted on the Indian bourses.

For instance, compared with 60-70 FIIs that bid in IPOs earlier, around 270 FIIs participated in the TCS IPO. The NTPC public issue saw some more new qualified institutional buyers (QIBs) subscribing to the issue.

The different styles and sizes of these funds has helped the market. Today, smaller QIBs are taking an exposure to stocks which have market capitalisation of just $50 million-$100 million.

Moreover, their investment objectives and time horizons are different. Some are looking for deep value, some for value and some for growth. This diverse perspective has helped the markets remain more stable just as the participation of hedge funds has brought liquidity.

Interestingly, one of the larger QIBs and an early entrant to India has actually been paring its exposure. Two years ago, that would have created near panic. But thanks to more QIBs in action and hence diverging views, the market is actually going up.

Shipping rates

If shipping rates and steel prices are any indication, the much-touted slowdown in Chinese demand hasn't happened, despite the clampdown in credit and the rise in interest rates.

In fact shipping freight rates have increased after the hike was announced, indicating no let up in the almost insatiable Chinese demand for oil and steel products from Indian and global exporters.

And with HRC prices in the Middle Kingdom still ruling at $ 600 - $ 610 a tonne, it is understood that even in the home markets, large steel manufacturers are evaluating another price hike shortly.

Said a steel analyst at a domestic brokerage house, " Global financial markets had over estimated the impact from the recent Chinese rate hike and we need to instead focus on the fundamental factors that is leading to robust HRC prices."

The buoyant Chinese demand has been reflected in freight rates "" in the case of Baltic Dry Index, it has moved up approximately 0.31 per cent since interest rates were hiked in China and is presently ruling at around 4937. And with winter already setting in most Western countries, resulting in strong demand for heating oil coupled with Chinese demand for petro products, spot tanker segment rates too have improved ""- in the case of VLCC they have risen almost $ 200 to reach $ 123, 860 a day.

The markets however, have not taken cognisance of the improved shipping freight rates, with both the G E Shipping and SCI stock remaining more or less at the same level over the last ten days.

Slowing capital expenditure?

The Index of Industrial Production data for September show manufacturing growth of 8 per cent, which is pretty good considering that the IIP had moved up quite a bit in September last year. Which means that, unlike, the growth in August, the September growth figures don't benefit from a base effect.

Sure, September's IIP growth of 7.69 per cent is lower than August's 8.02 per cent, but consider that while the IIP was 196.7 in August, it moved up to 198.9 in September. Ditto for the manufacturing index which moved up from 206.2 in August to 208.6 in September.

However, because of the inadequacies in the method of data collection, it may not make much sense to analyse the numbers to the decimal points""it's more important to consider the broad trends.

The September data does show up one such disquieting trend""there's been a slow but steady deceleration in the rate of growth of the category, "Machinery and Equipment other than Transport Equipment" which could be taken as an index for the growth of capital expenditure.

This index rose at a sizzling rate of 30.2 per cent in July, slowed to 26.3 per cent in August and decelerated further to 19.8 per cent in September. In June, this index rose by 29.2 per cent. Sure, 19.8 per cent is still a very high rate of growth, but if the deceleration persists it could because for concern.

Also, while the category of "capital goods" as a whole showed higher growth, that includes transport equipment.

With contributions by Mobis Philipose and Shobhana Subramanian