A new forward Indicator to predict Nifty

A new indicator was developed by Nomura team called Nomura Economic Surprise Index for India (NESII) to predict the market direction using economic variables like GDP,IIP,PMI,WPI(inflation). Everyone knows that announcement of GDP , Index of Industrial Production , Purchasing managers index and Inflation will swing the market in either direction. Quants from nomura developed this "tactical tool" which can be used to predict the direction of market. 

NESII is a weekly index and has shown a strong correlation with India's financial markets and can be used to confirm the price movement.

It shows NESII and NESII 3-month moving average. If NESII goes over zero, then it could be taken as a sign of turning point and turning point which could lead the market to new highs.

How effective is this tool, only time will tell as this is no more part of Asymmetric information to market participants.

In the above pdf they have said that the index is available on Bloomberg with the ticker . I could not find any as of today, do let me know if any of you find

Paralyzed 2011 Market, Will it get worse in 2012?

What is in everyone's mind on the stock market in 2012?. There are many interesting things coming in 2012 like assembly elections in few states that includes Gateway to Delhi, growth rates decreasing in emerging countries, the Euro issue, FCCB on indian companies, NPA's of Banks. Before we go ahead into 2012 lets look at how markets performed in 2011. The below chart compares Nifty with CNX Infra and CNX Realty Index. These two were the worst performing sectors of last year with infra down by 37% and Realty down by 50%.

In the Infra sector: GMR infra was down by 52%, Suzlon was down by 65%, Voltas was down by 65%, Lanco Infra was down 85%, SCI was down by 63%, RelInfra was down by 58%, Rpower was down by 54%, Punjlloyd was down by 63%.

In the Realty Sector: we have couple of stocks which got embroiled in 2G scam that got hit badly, like the  DB Realt,a new entrant down by 74% and Unitech was down by 70%. Apart from these HDIL was down by 72% and DLF down by 36%.

In the below chart Nifty is compared with BANK Nifty that went 31% down and the PSU Bank went 40% down

Clearly,the only winner of 2011 was the FMCG sector,which was up by nearly 10%

Major contributors were HUL that went up by 33%, ITC up by 15%, Marico up by 20%, Jubliant Foods up by 20% and on the other side McDowell was down by 68%  due to the effect of Kingfisher Airlines that almost went bankrupt.

And the possible reasons for markets tanking down in 2011 are:

• Government Paralysis
• Loss of confidence among the FIIs that led to currency depreciation
• Interest Rate hikes by RBI to contain Inflation
• Euro Crisis and near recession scenario
• Rise of NPA among Banks
• Fiscal Deficit

It will be very challenging for few companies in 2012 to rise money to fund ongoing projects. One issue which will haunt many a companies is the FCCB redemption. Some companies have FCCB maturity in first half of the year and their Stock Prices are currently trading at 80-90 % down the conversion price. Such bond investors will not convert there bonds to stock and therefore companies would have to repay the debt in foreign currency.As Rupee is depreciated by about 15%, this makes the redemption payment for companies even more tough.

Examples : SUBEX,SUZLON,RCOM etc..

Also, the recent announcement by Govt. about borrowing plan to overshoot by another 40,000 Cr will make matters worse in coming days. I am guessing it will touch new lows in 2012 but will end up in positive by the year end. Lets see how markets open in the first day of new year tomorrow...

Inflation Rate Projection by RBI

Here is the inflation chart taken from RBI website and RBI is Projecting a baseline WPI for 2012 at 7%

Am not sure how they are going to bring this to medium term objective of 3% consistent with india's integration into the global economy.

At least from the past two years RBI has failed in containing the inflation and there inflation targeting is a failure as they didn't contain it.

Lets see if at least they can manage atleast 7% for this year coming from a very high base rate of last year


Comments :

Revisiting this post in october 2012 and inflation crosses the upper band as projected by RBI. It looks like RBI utterly failed at controlling the inflation in 2012 also. Shame on them

Notes from RBI Post Policy Press Conference Call

Here are some notes taken  from RBI Post Policy  Press Conference Call

• RBI  monetary policy is determined independently of the government borrowing requirement to certain extent
• As Fiscal deficit is a variable in inflation, RBI takes into account of Government borrowing requirement   while estimating  inflation numbers, in projecting inflation outlook and in calibrating RBI policy.
• RBI will not use exchange rate as an instrument for inflation management with recent depreciation of the Rupee has added to inflation pressures but this depreciation is not due to any change in our economic situation, it is due to factors outside of India 
•  Because it is factors outside of India, it might reverse in course of time when the external situation will have adjusted back.
• There is  the issue of the prepayment which banks are charging, which they should not do. RBI has asked  banks to look into it waiting for a response from banks
• This was the main point in the 10 point formula recommended by Damodaran Committee 
• RBI feels the level of fiscal deficit is going to be one of the risk factors in the inflation outlook
• So if the government conforms to 4.6% that is, one level of risk, but if borrowings go beyond that and the fiscal deficit exceeds that, that will increase the risk for inflation because fiscal expansion is inflationary. 

Here are the Risks to inflation

• One is  fiscal deficit,
•  Demand pressures and how they might respond to the monetary policy action that RBI took 
• Issue of commodity prices, especially in oil price how that might settle because it’s not moderated as much as it should have, given the global situation. In these last few weeks inching back up, so the gain or comfort from the oil prices has not been very much. 
• Then there is this structural food component. There is also suppressed inflation.
• The electricity prices have not been adjusted because coal prices have not been adjusted.
• Petroleum sector prices have not been adjusted, and they do not reflect the current international price. Those are all the variables on the inflation outlook.

Is it the right time to buy stocks?

"Is this right time to enter the market?" is the question which keeps on coming to my mind. Should I wait for some more time? or Should I enter with some percentage of my allocation at this time?. With global data like phile Fed index, crisis in euro region, bond yields in US, inflation in India etc., shows very gloomy days ahead. Should I still go ahead and buy few bargain stocks. I know it's better to buy into stocks at 5000 levels than at 5700 levels trading in May-June. But how do I determine which stock I need to buy?

If you consider US economy slowing down and EURO crisis coming back which sector should be looked into? IT sector got badly hit by news of US slow down, Banking sector got hit due to worries within the sector. Real Estate as we know is rate sensitive and recent RBI hikes and the anticipated hikes in the future will only make the sector more vulnerable. Automobile sector also got badly hit by the hikes and low sales in June-July (btw do you see a lot of Ads related to automobiles offering discounts on TV)

I think, the best option right now is to pick out individual stocks rather than going for a particular index.

Few stocks which impressed me after seeing  stock ticker on a news channel are Suzlon(huge debt), Educomp(recent IT raids), TCS, Lanco Infra...Lets see if I can make some progress over the weekend :)