Pessimism Abounds

I hate beginning my address to readers with something negative. But do I have much of an option? Given the macro-economic environment that we are currently in, nothing seems to be going in the right direction. It is probably for the third time in a row (excepting the preceding issue, which was a DSIJ Banking Special) that I have written about the rupee’s condition. That single factor has just gone from being bad to worse, and is currently at its worst.

We are almost at the end of the first quarter of the financial year. At the beginning of this financial year, the rupee was trading at 54 to a dollar. Today, it stands at around 64 to a dollar – a depreciation of around 18 percent. Everything that could have been done to arrest the decline of the rupee has already been addressed. From imposing restrictions on gold imports to placing imports of non-essential items on the banned list, the government has tried every sane and even some seemingly strange measures to brake the rupee fall.

However, even all the measures put together have yielded very little success. In fact, certain measures that the government has initiated have gone against their very intent. A cut in the limit for overseas direct investments under the automatic route for all new transactions to 100 per cent of the net worth from the hitherto 400 per cent and the bringing down of the limit for remittances made by resident individuals under the liberalised remittance scheme from USD 200000 to just USD 75000 are being perceived as a return to the capital control period of the early 90s. Obviously the market has reacted in the way any rational market participant would have expected it to.

On one hand, where the market has been bleeding under the impact of a worsening macro scenario on the domestic front, on the other, it has been facing the wrath of a not-so-congenial global scenario. Talks of the Fed tapering off its bond buying in the US have once again surfaced to send shivers down the spine of almost all major global markets, and this has only made matters worse for the Indian markets.

Jittery investors would be curious to know where the markets are headed, and our choice of the cover story for this issue comes from our responsibility toward our readers to address that curiosity in the right perspective. The message that we send to our readers is plain and clear – the pain is not over yet. You would have to endure some more of it before the macro situation stabilises, and with it the markets too.

Another significant development over the past fortnight has been the recent NSEL debacle. The ambitious dreams of a fiery promoter are looking shattered after one of the group companies defaulted on payments and settlements. From allegations of a massive fraud to calls of takeover and attachment of properties, the situation has been utterly chaotic. At stake is a humongous amount of Rs 5500 crore pitted against the bruised credibility of a promoter, who was until a fortnight ago looked upon as being among the most successful first generation entrepreneurs of modern India. Of course, we at DSIJ have always desisted from getting into any kind of speculative juggernaut, sticking strictly to factual analysis. Our Special Report on the NSEL fiasco brings to you a blow by blow account of what has emerged so far in the NSEL drama. One thing that surely emerges from it is that the tarnished reputation of Financial Technologies and its promoter Jignesh Shah is far beyond repair.

The other important story for this fortnight is on the June quarter performance of India Inc. This is the third quarter in a row that India Inc. has faltered on its way up. There is, of course, a silver lining to the dark clouds. Certain sectors such as IT, Telecom and FMCG have done well. However, many of the sectors are still reeling under various pressures. In fact, the shockwaves and aftershocks are not quite over, and we could see a subdued September quarter ahead in the face of the macro factors that currently surround India Inc.

All this, of course, does not prevent us from bringing to you some good long-term investible ideas. Akzo Nobel India, an industrial chemical and paints manufacturer, is our Choice Scrip recommendation for this fortnight and the Low Priced Scrip call is Firstsource Solutions, a BPO which is carving a niche for itself in a fairly commoditised business. Both companies have some very compelling factors supporting investment in them.

I am sure that this issue of the magazine will give you an all-round perspective of where the markets are headed and what you could expect going forward. As always, it would certainly be nice to hear from you about how you liked the issue. Please send in your feedback to comment@dsij.in. Remember, your feedback is our strongest motivation for improvement.