Budget, inflation fear grips markets
Closing

The benchmark Indian indices had a rather volatile outing today with every attempt to move closer to the dotted line proving futile. While banking and power stocks evinced investor interest, those from the telecom and commodity sectors bore the brunt of profit booking. Starting off close to the dotted line, the indices moved deeper into the negative territory as the session progressed. Worries over stimulus rollback in the forthcoming budget and rise in food inflation to 18% this week seem to be keeping investors on the sidelines. The mid and smallcap stocks also shed gains and their respective indices ended the session lower by 0.6% and 0.4% respectively.

While the BSE Sensex closed lower by around 101 points (down 0.6%), the NSE Nifty lost around 26 points (down 0.5%). As regards global markets, most Asian indices closed lower today while European indices have opened on a mixed note. The rupee was trading at Rs 46.26 to the dollar at the time of writing.

Auto stocks were amongst the key losers in today's trade as investors accounted the fact that the auto makers who enjoyed a record-breaking sales run in recent quarters are now bracing themselves for upheaval. Led primarily by changing government policies and rising inflationary pressures most auto companies are set to witness a decline in volumes as well as realisations. Companies like M&M, Tata Motors, Maruti Suzuki and Ashok Leyland are already contemplating price hikes in the region of 1% to 3% on the back of increased commodity prices. However, they may have to take another round of hikes due to the partial rollback of excise duty post budget and rollout of Bharat-IV compliant engines from April. The companies will therefore need to sacrifice on volumes as well as margins.

Keen to bolster banks' capital base but hamstrung by fiscal strain, the government is mulling selling some parts of its stakes in few PSU banks to state-owned insurance companies like Life Insurance Corporation (LIC) and General Insurance Corporation (GIC). Even after the stake sales, the government will continue to be in total control of these banks, either on its own or through cross-holdings. The rationale behind the move is that it would enable the Centre to infuse fresh equity into the PSU banks from resources raised from the banks themselves and still retain full control. In some cases, the government would have a majority stake (51% or above) in these banks on its own, and in others, it will have a majority stake along with institutions owned by it like LIC. The move certainly seems benign for banks in which the government holding already stands at 51% and currently offers no scope for dilution or capital infusion. Stocks from the PSU banking sector like SBI, PNB and Union Bank witnessed some profit booking today.

The International Monetary Fund (IMF) has announced that it will shortly begin selling 191.3 tonnes of gold in the open market under a program approved last year to boost its resources for lending. It may be recalled that the IMF had earlier cited its plans to sell a total of 403.3 tonnes of gold, about one-eighth of its total stock. This is primarily to diversify its sources of income and increase low-cost lending to poor countries. So far, India, Mauritius and Sri Lanka have purchased a total of 212 tonnes of gold from the IMF. The RBI was the biggest purchaser of gold snapping up 200 tonnes of the yellow metal over two weeks in October 2009, boosting its gold holdings to the 10th largest among central banks.

We think it would be a good move by the RBI to participate in future gold purchases from the IMF. The same would be a good option to protect wealth as opposed to the US Treasuries, whose safety is being questioned on the back of US' massive debt and the declining value of the dollar.

Pharma, banking stocks buck the trend
01:30 pm

Persistent selling activity led the Indian markets to continue to trade in the red during the previous two hours of trade. At the time of writing, the market sentiments remained pessimistic as the overall decline to advance ratio was poised at 1.3 to 1 on the BSE. However, there was mixed action seen on the bourses, as stocks from the healthcare, banking and IT spaces were amongst the gainers. Stocks from the energy, metals, realty and power spaces were amongst the top losers.

The BSE-Sensex and the NSE-Nifty are currently trading lower by around 90 points (down 0.6%) and 25 points (down 0.5%) respectively. The BSE-Midap Index is trading lower by about 0.3%, while the BSE-Smallcap Index is trading flat. The rupee is trading at 46.31 to the US dollar.

Trading higher by about 5%, the stock of Havells India is in favour today on the back of the company's plans of manufacturing ceramic metal halide (CMH) lamps, which are considered to have the highest efficiency light sources in the industry. These lamps are designed for indoor and outdoor lighting applications. As per the company's management, Havells would be able to produce about 1 m units per annum. In fact, it goes on to add that this plant will be the world's first to manufacture CMH lamps. The company plans to export nearly 90% of the production and is targeting revenue of about Rs 1 bn from this product range alone. However, considering that the company reported net sales of about Rs 17.8 bn (standalone) during 9mFY10, the contribution from this segment will be marginal. During FY09, the consolidated net sales stood at about Rs 55 bn.

IT stocks are currently trading firm led by CMC, Infosys, Satyam and Tech Mahindra. Software major, Wipro has further forayed into the defence space by tying up with CAE Inc, a company which provides training systems integration and simulation technologies. Both the companies recently announced an agreement to jointly address the growing simulation-based training, operations, maintenance and training support services opportunities for India's defence forces. As part of the deal, both the companies will be providing joint investments, sales support and local production support based on the respective expertise of each company. As per Wipro, it along with CAE will be collaborating to provide training systems integration and simulation-based solutions for areas like war gaming, C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance) and a range of defence platforms expected to be acquired by India's defence forces.

While the company has not given any figures of the business that it expects to generate from this venture, it must be noted that Wipro earns nearly 22% of its IT revenues from India, of which defence is a small but critical segment.

Realty, auto weigh heavy on markets
11:30 am

The Indian markets continued to trade on a weak note during the previous two hours of trade. Currently, selling activity being witnessed in the metal, oil & gas, realty, and auto sectors is weighing heavily on the indices. Nevertheless, the stocks from consumer durables, healthcare, IT, banking and telecom sectors are managing to garner investors' interest.

The BSE-Sensex and the NSE-Nifty are currently trading lower by around 60 points and 20 points respectively. Stocks from the midcap and small cap spaces have managed to buck the trend and are currently trading in the green, with the BSE-Midcap and the BSE-Smallcap indices trading marginally up by 0.04% and 0.23% respectively. The rupee is trading at 46.21 to the US dollar.

According to a leading business daily, India's second largest commercial vehicle manufacturer (by sales) Ashok Leyland is planning to enter into construction equipment business in a joint venture with John Deere (JD). The company will have to compete with the dominant players like Tata Motor's Telcon, L&T, Esscorts, Caterpillar and Komatsu in this segment. Nevertheless, the joint venture is expected to kick off from December 2010. It is setting up a facility in Tamil Nadu with an initial investment of around Rs 3 bn. The testing of products in the market has already started.

It may be noted that the company appears quite confident about the venture and aims to rapidly gain a 15% market share. It has worked on its business model in order to correct few inherent disadvantages faced by existing players. It expects the venture to fetch Rs 3 bn to 4 bn in full year operations in 2011. We believe that given Ashok Leyland's manufacturing and distribution strength coupled with JD's technological expertise, its confidence in the venture is well founded.

As per a leading business daily, HCL Technologies, India's fourth largest IT service provider is betting big on the Middle East IT market. As an attempt to expand its regional presence there, the company has opened its Middle East headquarter at Dubai, UAE. It may be noted that the company already services over 25 large organizations in Middle East which is a major part of company's Asia Pacific (APAC) business. The company derives around 13% of its revenues from APAC business which is growing at a brisk pace. The revenues from this region grew by around 10% in 2QFY10, much better than the developed western markets. We believe the strategy to diversify from the western markets like the US and Europe will go a long way for Indian IT as a major part of the incremental IT investments are expected to come from geographies like Middle East, China and India.

India reflects weak Asia
09:30 am

The Indian markets have started today's session on a volatile note. The benchmark indices opened above the breakeven mark but soon fell into the negative territory. However, they are showing signs of an upward move currently. Other key Asian markets are trading in the red with Singapore (down 0.4%) leading the pack of losers. However, Japan was up 0.2%. The US markets closed higher by 0.4% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with metal and telecom stocks bearing the brunt of selling activity. The BSE-Sensex is trading lower by around 24 points, while the NSE-Nifty is down by about 10 points. However, buying interest is being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.3% and 0.4% respectively. The rupee is trading at 46.19 to the US dollar.

Energy stocks have opened the day on a mixed note. Gainers here include HPCL and BPCL. However, Reliance Industries is in the red. As per a leading business daily, the Indian government has sought an additional US$ 2.7 m from Reliance Industries towards royalty. Oil and gas producers pay royalty and profit petroleum, a share in the production, to governments which hold the mineral rights. In this case, the government feels the company did not take into account the marketing margin it charges its customers while calculating the dues to the government from April to September last year on gas produced from the KG basin fields. It may be noted that Reliance Industries charges US$ 0.135 per m British thermal units as marketing cost. In our view, while the present demand for US$ 2.7 m on Reliance Industries may seem trivial given the size of the company, it would result in a meaningful amount over the entire life of the field.

Engineering stocks have opened the day on a mixed note. Gainers here include Siemens and Thermax. However, BHEL is in the red. As per a leading business daily, BHEL has singed a memorandum of understanding to form a 50:50 joint venture (JV) company with Toshiba, Japan. The JV will manufacture equipment for power transmission and distribution in India and abroad. It would include products such as transformers, reactors and switchgears. A new plant is likely to be constructed for the purpose. The technology will be supplied by Toshiba. The formalities for the JV are likely to be completed by June this year. In our view, this is a positive development for the company as it will enhance its ability to further tap into the huge opportunity in the sector in India over the next few years.

Look who's buying gold now!
Pre-Open

While stockmarkets try to find their ground (now) amidst the fear of failing countries, loud voices can be heard of investors seeking shelter in the safety of gold. While some like Marc Faber are asking everyone to buy more gold, there are others like George Soros who are up on the act.

Yes, you read that right! George Soros, the man who 'broke the Bank of England' by betting against the Pound in 1992, has in fact more than doubled his holding in the world's biggest gold exchange-traded fund (ETF) - SPDR Gold Trust. His fund now is the fourth-largest investor in this ETF. And these holdings were at around US$ 660 m at the end of 2009.

Ironically, while these latest figures are as on December 31 2009, Soros had proclaimed publicly last month that the yellow metal is in an 'ultimate asset bubble' ! His act of adding gold to his fund's portfolio thus leaves some bells ringing. However, this makes it amply clear that even he treats gold as a hedge against the future crisis that central banks are setting up for us.

Anyways, rather than buying gold just because someone else is buying, you would do well to simply keep a certain percentage of your portfolio in the yellow metal. Then the idea should be to rebalance this portfolio each year to conform to your original allocation.

This is simply to say that after a year in which gold soars, you would sell a portion of your stake. And after a year in which gold loses value, you would add to your holdings to get back to that original allocation. Same as you must be doing for your stocks' portfolio.

Now, you can argue about what that percentage allocation to gold should be. We suggest that it should be relatively small – around 5 to 10% of your total investments. That should be enough to provide some hedge during periods of extreme upheaval or when inflation fears spike. And this should still allow more traditional assets (like stocks) to boost your portfolio's value during the majority of time when the markets aren't in crisis. So, continue to invest in gold. Just don't go overboard!