All fall down

May 14, 2012, 06:41 IST | Alex K Mathews

The markets began on a positive note last week, but later dipped into the red breaching the 200 DMA and closed well below it. In the anticipation of further downside, investors are cutting short their long positions. Foreign Institutional Investors (FIIs) too are keeping away from the markets.

There is a fear that the Government may pull up old cases and tax them with the new GAAR as it was done in the case of Vodafone. The Indian rupee continued its downward spiral and hit a new record low last week. We saw RBI coming up with many measures to stop the fall in rupee against dollar, but they seemed to have little effect. Europe has remained a concern for the global markets for some time now. In Asia too, the economic data wasn’t good and more over disappointing.

Markets can bounce back but higher-level sustainability is still doubtful. The front line stocks like Tisco, BHEL, Maruti, M&M, Infosys, DLF and Bharti Airtel, etcetera are weak and these stocks will drag the NIFTY towards the south. The present situation of mid cap and small cap stocks are also under threat and high beta stocks in both these sectors should be avoided. The Finance Minister (FM) deferred the implementation of the proposed GAAR by one year and also made some amendments to the provision of GAAR. The FM halved the capital gains tax for private equity investors to 10 per cent and relaxed the norms for arrest of persons involved in violation of Customs Act. Due to pressure from the jewellery industry, the FM said that the government has decided to withdraw the levy of 1 per cent of excise duty on all precious metal jewellery, branded or unbranded, with effect from March 17, 2012.

The government also raised the threshold limit for Tax Collection at Source (TCS) on cash purchase of jewellery to Rs 5 lakh from the present Rs 2 lakh, while retaining the threshold limit for cash purchase on bullion at Rs 2 lakh. The amendments also include shifting of onus of proof to the revenue department from the tax payers, appointment of independent member in the GAAR panel and permitting investors, domestic and overseas, to seek ruling from the Authority for Advance Ruling (AAR) and rolling back the proposal of levying tax deducted at source on the sale of immovable property (other than agricultural land). The proposal was to get TDS at the rate of 1 per cent.

Later we had the March IIP numbers, which contracted unexpectedly to 3.5 per cent against 4.1 per cent growth previously. It was below the analyst growth expectation of 1.5 per cent. Manufacturing, which constitutes about 76 per cent of industrial production, shrank an annual 4.4 per cent from a year earlier, while mining fell 1.3 per cent and electricity grew at 2.7 per cent. Core sector growth slipped to 2 per cent in March against 6.9 per cent in February, while capital goods production fell sharply by 21.3 per cent along with consumer non-durable goods, which fell 1.1 per cent.

RBI expects the inflation to ease as industrial activity has slowed along with expectation of better monsoons this time. Rupee had fallen to 54 levels last week. In order to arrest the rupee fall, the RBI asked all foreign-exchange earners, including exporters, to convert 50 per cent of their total foreign exchange earnings kept in banks into rupees. This must be done within two weeks. Economic data across the globe was weak. IIP numbers across major economies fell. Spanish IIP fell to -7.5 per cent against -5.3 per cent, Danish IIP fell to -2 per cent against 0.1 per cent, Malaysian IIP fell to 0.6 per cent against 7.5 per cent, French IIP came in at -0.9 per cent against 0.9 per cent, British IIP was at -0.3 per cent against 0.4 per cent, Chinese IIP fell to 9.3 per cent against 11.9 per cent previously. Other major data included, Chinese retail sales which fell to 14.1 per cent against 15.2 per cent, Chinese PPI fell to -0.7 per cent against -0.3 per cent, Chinese inflation fell to 3.4 per cent against 3.6 per cent, US jobless claims fell to 367000 against 368000, US import price index fell to -0.5 per cent against 1.5 per cent. Australian unemployment rate fell to 4.9 per cent against 5.2 per cent and US wholesale inventories fell to 0.3 per cent against 0.9 per cent previously.

In Greece, none of the political parties got the majority to form the government. The lack of a government could cast Greece’s loan agreement with its foreign creditors into turmoil, with a $4.3 billion refinancing looming this month and a requirement from its lenders to cut $15 billion from the budget in June. Global markets fear that, the victory of parties, which are against austerity measure, will push indebted nations like Greece, Spain etc into further trouble. In order to instill confidence, Spain announced that its bank bailout fund would convert its 4.5 billion euros of preferred shares in Bankia’s parent company Banco Financiero y de Ahorros into voting shares.

Alex K Mathews is the author of Financial Services And Systems, as well as Option Trading: Bear Market Strategies published by Tata McGraw Hill. He is also the technical and derivatives research head of Geojit BNP Paribas Financial Services Ltd. The author may have a vested interest in investments he has recommended. Feel free to e-mail him at Geojit BNP Paribas has membership in, and is listed on, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

Disclaimer: No financial information whatsoever published anywhere in this newspaper should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is for educational and information purposes only and under no circumstances should be used for actual trading or making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment or trading decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at his or her risk. 

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