Cash gusher

There has been a resurgence in global liquidity

Asset prices are rising practically across the board. And it's not just the equity markets that are seeing a bull run.

The bond market, too, has been rallying, and the 10-year bond yield is now hovering near the 6.8 per cent mark, well below the 7.3 per cent it reached after the RBI increased the reverse repo rate in its credit policy. The rupee, too, rallied against the dollar on Wednesday.

The rise in stocks and the rupee could be put down directly to the renewed inflow of foreign institutional investor money into the country. Stories abound in the market about funds being moved from China to India, on the theory that the Indian economy today is where China was a decade ago "" poised for explosive growth.

As everybody knows, real estate prices, too, have established new peaks, the outrageous prices paid for mill land in a recent deal being a case in point.

Nor is it only asset prices in India that are moving up. The MSCI India index may have moved up 5.5 per cent in the month to June 21, but the MSCI Emerging Markets Index too has moved up 3.5 per cent over the period.

The MSCI Indonesia index and several of the East European markets have done better than India. As Emerging Portfolio Research points out, flows to emerging market funds have picked up.

That goes for emerging market bond funds as well, which have seen inflows in 30 of the past 33 weeks. Bond prices have rallied across the world, with the yield on the US 10-year Treasury note back to 4 per cent.

Commodities, too, have started moving up. Crude oil hit a second all-time high in the last two days, while gold is backing down from 3-month highs.

And although metals present a mixed picture, copper has hit record highs and aluminium is at a 7-month high. The simultaneous rise in asset prices indicates just one thing "" a resurgence of global liquidity.

Locally, too, liquidity is abundant, seen from the fact that M3 this fiscal is up 3.4 per cent, compared with 2.6 per cent in the same period last year.

Gujarat NRE Coke

Gujarat NRE Coke has decided to buy up to a 30 per cent stake in Australian exploration company, Zinico Resources NL. While this would help Gujarat NRE get a foothold in the booming iron ore industry, analysts point out that it looks increasingly likely that the company would utilise the synergies from the overseas company for forward integration in the steel industry, in the medium term.

Zinico has secured a significant portfolio of prospective iron ore and base metals projects in Tasmania.

Diversifying the company's product portfolio appears logical given the weakness observed in the prices of met coke. Prices of met coke have fallen about 26 per cent on a y-o-y basis to about $275 a tonne currently and that's being attributed to reduced demand from China.

At the same, prices of key inputs like coking coal have almost doubled to about $180 a tonne over the last 6-8 months. The tougher operating environment had resulted in the March quarter's profit before tax dipping 44.81 per cent to Rs 18.56 crore, despite other income jumping almost eight fold to Rs 3.26 crore.

The stock was up about 2.7 per cent on Wednesday after the announcement. However, over the past three months the stock has under-performed the Sensex by a huge margin because of the drop in operating performance "" it has lost 17 per cent compared with a 10.5 per cent gain in the broader market.

Going forward, analysts expect synergies to accrue from the coking coal mine the company had earlier acquired in Australia, which should help minimise the impact of lower met coke prices.

Also, the company's efforts to broaden its export markets should gradually show signs of paying off.

Reliance & the Sensex

The Reliance group of stocks have undoubtedly played the largest role in helping the Sensex cross the 7000 levels on Tuesday. Between June 6 and June 21, the free float market capitalisation of Reliance Industries rose by Rs 6,970 crore and that of Reliance Energy grew by Rs 1,011 crore.

Cumulatively, the two accounted for over 40 per cent of the total increase of Rs 19,840 crore in the free float market cap of the Sensex. The Sensex moved from 6750 to 7077 during the period, a gain of over 300 points.

The comparison is done with data for June 6 because there were some changes in the composition of the Sensex effective that date.

Prior to that, the Sensex had made a gain of over 600 points since it hit a low of 6135 on April 19. It was this rally which set the pace for the index, and the Reliance group accounted for less than 10 per cent of the Rs 36,440 crore gain in free float market cap during that period.

The fact that the Reliance group is driving the rally now clearly suggests that they are catching up.

The key question therefore is how much more the Reliance scrip can rise, and whether it can fuel the Sensex further. Based on consensus FY06 EPS estimates, Reliance now trades at about 10.6 times, slightly lower than its forward valuation of about 11.4 times before the ownership dispute became public.

Even if valuation were to rise to those levels, the gain in the stock would be about 8 per cent. The gain in free float market cap would be close to Rs 4,000 crore, which in turn would lead to a rise of just 1 per cent in the free float market cap of the Sensex.

Based on that, it seems that there isn't much left in the rally. Of course, strong fund flows could disprove that. Besides, for all you know, Reliance could get further re-rated based on the details of the settlement.

With contributions from Mobis Philipose and Amriteshwar Mathur