What’s good for the United States is good for the world would be one way to paraphrase the famous one-liner about General Motors and America to reflect 21st century realities. The US generates about 20 per cent of global GDP (gross domestic product); the US dollar, or USD, is the global reserve currency. The American economy has been a key driver of global growth for 60 years. On the geo-political front, America’s influence has been unmatched since the dissolution of the Soviet Union in 1992.
Since twitches in the US economy and its foreign policy actions have an inordinate effect on the personal well-being of almost everyone on the planet, traders obsessively follow US presidential elections. These are too close to call — it will probably boil down to voting patterns in a couple of key counties, in a couple of key states like Ohio and Florida.
Traders would, in general, be happy if Mitt Romney took charge. He’s perceived to be business-friendly in a way Barack Obama is not. So, there may be a surge in early November if there is a change of guard in the Oval Office. There may even be an earlier surge if Romney takes a clear lead in key states.
I don’t think the result will make much, if any difference, on the ground in the short run: every president is a prisoner of his predecessor’s legacy for at least 18 months, or more. It took Dubya three years to blow the surpluses Bill Clinton left. It’s taken Obama four years to (not very effectively) contain damage caused by Dubya.
Post-election, there may be an easing in the current Iran-Israel face-off and, hence, a fall in the price of crude. The Iranians have been making conciliatory noises for the past fortnight, while the Israelis, aided by the powerful American-Jewish lobby, have used the run-up to the election to ratchet up pressure on the Shia regime. That apart, there hasn’t been much substantive overseas news. Spain continues to dither. Japan and China continue their face-off. The Syrians fight their civil war, occasionally killing Turks as well.
| Current | Value 14 days ago | Change % | |
| Nifty value | 5,684.25 | 5,746.95 | -1.09 |
| Index PE | 18.94 | 19.32 | -0.38 |
| Index dividend yield | 1.40 | 1.40 | 0.00 |
| Index Book value | 3.10 | 3.20 | -0.10 |
| USD INR (RBI ref rate) | 53.72 | 51.62 | -4.07 |
| FII net buys/ sales (Oct 1-18)# | 9683.33 | 20,769 (*) | |
| DII net buys/ sales (Oct 1-18)# | -1836.66 | -3,198.70 (*) | |
| # Rs crore, Oct 18 provisional figures; *Sep 1-30 net buys/ sales | |||
On the domestic front, the allegations about the Mango Man from Moradabad and his real estate transactions have had an interesting effect on the real estate sector. It would be wonderful if it actually led to substantive reforms in the real estate market but that is extremely unlikely. The allegations against the law minister are a storm in a teacup; they won’t impact share prices.
In policy terms, positive noises about reforms continue to be heard. There will be a bailout of huge proportions for the state power distribution companies. This will, at least temporarily, prop up the prices of lenders to the power sector and of manufacturers of power equipment. Kingfisher Airlines is finally going down the tubes — it has been a long, painful demise. Suzlon has been hit by its inability to buy time to repay overseas debt.
The telecom sector is set to swallow several bitter pills in the form of 2G auctions and the potential impact of refarming spectrum. The next financial year could be another bad one for the sector, given the sort of debt overhang most operators have on their balance sheets. Litigation gumming things up further is plausible and speculations about mergers may be one thing keeping share prices afloat.
The early trend in Q2 results have been on expected lines for Reliance, Infosys, Tata Consultancy Services and HDFC Bank. HCL Technologies has done better than expected. The cement industry has continued to deliver a strong performance.
The macro-economic numbers as well as the results trend suggest that not much has changed in terms of the economic cycle. GDP growth expectations continue to be pared down despite the marginal improvement in the Index of Industrial Production, or IIP. Exports continue to decline.
Public sector undertakings (PSUs) bank balance sheets could see further deterioration. This will be a key indicator in my opinion. If PSUs stem the rot in terms of non-performing assets (NPAs) and restructurings, it would be a turnaround signal. India Inc is also praying for a big consumption push during the festive season — if it happens, we’ll see the impact only in Q3 results.
A rate cut will certainly help. But inflation remains high enough to make it unlikely that the central bank will cut policy rates in any substantive fashion in its next policy review on October 30. Given the patterns of investment in government debt, the yield curve is likely to stay tight, though not inverted.
The stock market has marked time through the past 10 sessions with price fluctuations occurring only in specific stocks. Foreign institutional investors (FIIs) remain enthusiastic about India and continue to be substantial net buyers of Indian securities, including debt. Domestic institutional investors (DIIs) continue to sell into the rally while increasing exposures to government debt. The rupee made a big recovery to 51 against the USD followed by another reversal down to test support near the 53.75-54.00 band.
Technically speaking, the Nifty has meandered between 5,625 and 5,775 in the past 10 sessions and the trend is indeterminate. A breakout beyond 5,815 (the 52-week high), or a breakdown below 5,600, could mean a swing of 200-odd points in the direction of breakout till either 6,000 or 5,400. This is unlikely to happen in this settlement (October 25). But November could be a key month with a big swing in either direction and it could start early in the month.
I’ve previously advocated holding deep Nifty puts till the end of the December settlement at least, on the grounds that there could be fireworks in the winter session of Parliament. It may just be worth taking wide strangles of, say, a long Nifty 5,400 put and a long 5,900 call in the November series. If November sees a trend established in either direction, the returns could be phenomenal.
