Are Bulls Back?

Outcome of general elections have changed the face of Indian Equity Markets. People who are staying away from the market are suddenly all excited about the easy money from stock markets.

 Is it really the revival of great Indian bull market which is ignoring all bad news and simply concentrating on the development agenda of the newly form UPA government without the fear of LEFT parties  or its just yet another short lived  trend. I personally feel that there are less chances of it being a sustainable upside trend for long, reason being: -

 

1.      1.  The earnings figure of the companies are still on the declining trend, nearly 33% of the top 1000 listed Indian companies by market capitalization have shown losses in the last Quarter. Majority of the companies are seeing a decline in the EPS growth.

 

2.       2. GDP increase of 5.8% might look very comforting but if look at the breakup of the GDP growth rates only the infrastructure sector has shown good growth with rest of the sectors still far from the last year’s level.

 

 

3.       3. Global recession seems far from over with heavy weights like General Motors filling for Bankruptcies and US markets still struggling for confidence.

 

4.       4. We are facing the challenge of large fiscal deficit and there is a high expectation for the populist budget this year which might stretch it even further. High Fiscal deficit combined with soaring current account deficit can even make a case of downgrade of India’s sovereign ratings which will increase the cost of funding for both the government and the companies of India.

 

5.       5. Low credit off take from banking sector clearly reflects the declining trend in the capital expenditures of the companies.  It can reduce the extent of growth rates and job opportunities both in manufacturing and services sector.

 

6.       6. Delayed Monsoon can negatively affect the agriculture and the rural economy making it tough for recession neutral industries like Food and FMCG.

 

7.       7. Declining exports and increasing crude prices can even the increase the current account deficit of India and with less capital account inflows due to grim external conditions the balance of payment condition of India can denigrate although we are sitting in huge Forex reserves.

 

I can clearly see a classic case of retail investor’s excitement about entering the market when it’s too hot to handle. It’s very tough to predict the direction of the markets but the macro economic factors doesn’t really reflect any signs of sustainability of this rally for long time and I think it will be in interest of the small time investors to go a bit slow on their buying frenzy in a quest to become a millionaire in a month.  

Credit Rating Agencies ..

The origin of credit ratings agencies can be traced back to 1840 when agencies started rating merchant’s ability to repay their financial obligations. It was the gift of 1837 financial crisis which saw increased credit defaults and it led to the birth of credit rating agencies which can predict the interest and debt repaying abilities of the lenders. The functioning of these credit ratings have remained questionable ever since and this topic revisits itself after every financial crisis, sub-prime crisis is no exception.

The whole purpose of structural finance and financial engineering for sub prime loans was to improve the credit ratings of various financial instruments by credit enhancement and converting them into marketable securities. The underlying risk of the financial innovation and the difference between Prime AAA+ securities and sub-prime AAA+ was never contested before the whole system failed. 

The biggest issue with these agencies is their financial model where they actually get there revenues from the company they rate and not from the users of credit ratings, it causes two problems,

1. The credit rating company cannot be conservative in its approach as there is high competition in the ratings business and the company may lose out on lucrative deals if it starts giving conservative ratings. 

2. Most of the companies which undergoes rating process wants better credit ratings to reduce the cost of financing and no company wants to increase their cost of capital even after paying rating agencies.

If we actually compare the number of above investment grade to below investment grade ratings issued by different agencies, we will find that most of the ratings given are above investment grade. There is a need to change this financial model to make the whole structure more fundamentally strong.

The second crucial issue with rating agencies is their operating model, which relies totally on the auditor and the companies for all financial and non financial statements. It increases the risk of distorted ratings in case the auditor and the company are running a joint partnership firm which happened in case of Enron. 

I feel that the world has seen enough recessions and depressions, there is an urgent need of a single world regulator who can improve the functioning of various financial markets and limit the grey areas of finance.