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The Indian stock market is having a dream run and it had made people believe that all is fine with the India economy. But I have a different view. I believe that this stock market rally is not sustainable and fundamentals donot support such a rally.
Lets check the fundamentals.
Oil & Gas - Crude oil prices have doubled over a period of one year and no respite is expected in near future. Indian PSU oil companies are taking a hit. Navratnas are going red and this is not sustainable. I agree with Swaminomics that’s spiraling crude price is not as bad as what it was a decade due to increased importance of services and relatively less impact on inflation. But still the inflation is under control because government has not passed the price rise to consumer. But sooner or later they will have to do that and then...inflation will rise.
Foreign currency position is in bad shape if you ignore the hot & unreliable FII money coming to Stock exchanges. Trade balance position is of concern due to heavy dependence on crude imports.
Power – Power reform is dead. Delhi privatization was always a problem, as it did not lead to competition but guarantee of 16% return to a private company rather than PSU. Most of the proposed power plants plan to use gas as feedstock. Now with oil prices spiraling gas prices has to follow them and this will make gas/naphtha-based power plants unviable. (Mr. Anil Ambani I told you earlier through my blog that focus should be on power distribution and transmission rather than generation). Dhabol settlement is another recipe for disaster (read BW cover story for details)
Telecom – FDI and ADC issue is still unresolved. As I told earlier, next big jump in telecom when ADC policy is changed to percentage of revenue rather than per minute basis. Nothing has changed yet. Added to that spectrum issue is unresolved which is holding back capital investments
Roads & port– Its happening but not at the speed it was happening during BJP’s rule. Congress has focus on port, but something concrete is yet to happen.
Airlines – Yes this is a revolution in making. But this too can get badly affected by oil price rise. Fate of the Mumbai & Delhi Airport modernization would be a good indicator or this sector. Lets wait and watch.
Steel, cement, coal & other commodities - Prices are at all time high making new capital investment very costly
The point I am trying to make is that there is nothing that justifies the kind of rally that we are experiencing now except the ‘hot & unreliable’ money coming from abroad. The problem is this money will go off as soon it came. The burst will create its own negative spiral that will pull down economy when it doesn’t really deserve
Stock market Burst ------- fall in confidence -----fall in capital investments ---fall in prices----fall in income---fall in demand----fall in capital investments
Lets check the fundamentals.
Oil & Gas - Crude oil prices have doubled over a period of one year and no respite is expected in near future. Indian PSU oil companies are taking a hit. Navratnas are going red and this is not sustainable. I agree with Swaminomics that’s spiraling crude price is not as bad as what it was a decade due to increased importance of services and relatively less impact on inflation. But still the inflation is under control because government has not passed the price rise to consumer. But sooner or later they will have to do that and then...inflation will rise.
Foreign currency position is in bad shape if you ignore the hot & unreliable FII money coming to Stock exchanges. Trade balance position is of concern due to heavy dependence on crude imports.
Power – Power reform is dead. Delhi privatization was always a problem, as it did not lead to competition but guarantee of 16% return to a private company rather than PSU. Most of the proposed power plants plan to use gas as feedstock. Now with oil prices spiraling gas prices has to follow them and this will make gas/naphtha-based power plants unviable. (Mr. Anil Ambani I told you earlier through my blog that focus should be on power distribution and transmission rather than generation). Dhabol settlement is another recipe for disaster (read BW cover story for details)
Telecom – FDI and ADC issue is still unresolved. As I told earlier, next big jump in telecom when ADC policy is changed to percentage of revenue rather than per minute basis. Nothing has changed yet. Added to that spectrum issue is unresolved which is holding back capital investments
Roads & port– Its happening but not at the speed it was happening during BJP’s rule. Congress has focus on port, but something concrete is yet to happen.
Airlines – Yes this is a revolution in making. But this too can get badly affected by oil price rise. Fate of the Mumbai & Delhi Airport modernization would be a good indicator or this sector. Lets wait and watch.
Steel, cement, coal & other commodities - Prices are at all time high making new capital investment very costly
The point I am trying to make is that there is nothing that justifies the kind of rally that we are experiencing now except the ‘hot & unreliable’ money coming from abroad. The problem is this money will go off as soon it came. The burst will create its own negative spiral that will pull down economy when it doesn’t really deserve
Stock market Burst ------- fall in confidence -----fall in capital investments ---fall in prices----fall in income---fall in demand----fall in capital investments
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