Every autumn, I go deep into the Himalayas, to stretch my legs, my mind, and most especially the concept of time, which seems to become so urgent when you are watching markets five days a week. Last year, while I was away, our markets crashed. This year, it was as if nothing had happened in the two weeks my cell phone was off.
The Nifty, I discovered, had taken a bit of a dip. But now it was back roughly where I had left it, just above 5000. Few shares had seen substantial moves while I was away, except for the sudden slump in telecom valuations. The bonus announcement in Reliance Industries left virtually no impact on the markets.
Internationally, the Dow had just broken through 10,000 for the first time in over a year, and gold continued to set new records. Sadly, for Indian gold bugs, the 6 per cent rise in dollar gold prices didn’t translate to a huge deal, because the rupee also powered up to 46 per dollar, a good 4 per cent higher than the roughly 48 it was when I headed for the hills.
For this, one has to thank foreigners, who continue to pour money into India—in the first two weeks of October, our markets received over $1 billion of portfolio investment, following on $3.8 billion in September, $1 billion in August, and $2.3 billion in July.
Strength in the rupee usually translates directly into weakness for IT stocks, and I found that Infosys, which was at Rs 2,340 on October 1, had dropped all the way down to Rs 2,177, and was trading around Rs 2,200 just before Diwali. Quarterly results had been mildly encouraging, with turnover up 2 per cent over the previous quarter, and profits up just under 1 per cent. But the 4 per cent gain in the rupee in the first two weeks of Q3 is not great news for IT companies, especially those which have most of their billing in US dollars.
| | | | Once again, the surge in the rupee has meant that the rupee cost of oil is not hugely impacted | | | | |
|
The other price movement I found troubling was the new high in oil, at over 75 dollars a barrel. Once again, the surge in the rupee has meant that the rupee cost of oil is not hugely impacted. But, going by trends, it seems as if oil, like gold, is headed up. Looked at in another way, both seem to be moving in the opposite direction to the dollar—as the dollar heads down, gold, and oil, head up.
One measure by which the dollar is tracked is its movement against a basket of six currencies: the dollar index. This dropped substantially in the first half of October, from roughly 77 to 75. This number, which peaked at 120 in early 2002, hit an all-time low just below 72 in early 2008, when equity markets were at their peak. The somewhat simplified link between equities and the dollar is: when the risk appetite is low, investors look for safety. US Treasuries are traditionally the safest investment, so in such times, their price, and the consequent demand for dollars, rises. When the appetite for risk returns, as it seems to be doing now, demand for US Treasuries recedes, equities rise, the dollar drops.
This also means money flooding into emerging markets, and we have seen how this impacts both Indian equities and the rupee. My own take is that the dollar index is going to test its low of 72. This will mean new highs for gold. The uptick in rupees will be limited, but I do see higher levels.
Commodity prices, too, will continue to surge. Protecting the Indian customer, and corporate profits, from the impact thereof will depend on how much the rupee moves. If inflation depends on how much money foreigners want to put into Indian markets, that makes me a little uncomfortable.
I guess nothing much changed during my trek.
The author is an investment advisor and posts stock market comments daily on outlookmoney.com. He can be reached at msatyanand AT yahoo DOT com