Hexagon Wealth

April 22, 2013
Markets Last Week



The Sensex finished the week above 19,000 for the first time in two weeks as falling commodity prices raised hopes of monetary easing.

During the week, the Sensex rose by 4% and closed at 19,016 on Thursday.

Most of the sector indices rose, with the exception of the S&P BSE IT index. The Bankex was the biggest gainer as rate sensitive stocks advanced.

Bonds also rallied during the week, as the yield of the benchmark 10-year bond fell to 7.78% on Thursday – the lowest since July 2010. The Rupee approached a seven-week high and closed at Rs 53.96/97 per dollar on Friday.

Is gold losing its shine?

Gold has long been favored by investors across the globe (especially in India). However, after 12 years of gains, the yellow metal suddenly plunged into bear market territory last week as prices fell by a staggering 9% on 15th April. This was the biggest decline since 1980 and raised questions about gold’s status as a “safe haven asset”. 

The decline was partly caused by speculation that Cyprus was planning to sell its gold reserves to fund its bailout. This raised concerns that other troubled Eurozone economies may also follow suit. Investors were also spooked by suggestions that the Federal Reserve was planning to scale down its quantitative easing program. Additionally, the strengthening dollar and positive economic indicators in the U.S. have reduced the demand for gold. Furthermore, gold is losing its value as an inflation hedge, as inflation rates are modest in most developed countries (despite the widespread quantitative easing programs). 

What will this mean for India? Falling gold prices are effectively a double-edged sword. Firstly, lower gold prices may reduce the cost of imports. On the other hand, with the approaching wedding season, people may jump at the chance to accumulate gold at lower prices. As falling prices and higher demand may offset each other, the current outlook for gold imports is uncertain.

Some relief for India’s troubled current account

Although India’s trade deficit rose to a record high of $190.9 billion in FY’13, the outlook is positive as exports have risen over the last three months. Additionally, on Thursday, the government announced incentives worth Rs 3,000 crores to revive exports and hence, push up India’s economic growth. Higher exports and the recent correction in oil prices may lead to an improvement in India’s balance of trade, and hence, reduce the massive current account deficit (CAD).

Falling crude prices will also benefit oil marketing companies (OMCs) such as HPCL, BPCL and IOC, as this will lead to lower under recoveries, lower the subsidy burden, and improve the fiscal position. A sustained fall in oil prices will help India reduce its import bill and may also reduce inflation. Consequently, the RBI may have more scope for monetary easing. Our recommended medium-long term bond funds are likely to generate high returns if interest rates fall.

Govt Incentives
Brent Crude

A “three speed” global economy


The International Monetary Fund (IMF) downgraded the global growth forecast to 3.3%, from its January projection of 3.5%, in its World Economic Outlook. India’s economy is projected to expand by only 5.7% in 2013 – lower than the earlier estimate of 5.9%.

Nevertheless, the IMF was positive about India’s recent policy reforms, and said that strong domestic consumption and a better monsoon season may support domestic growth. On a relative basis, India’s 5.7% growth still looks attractive as most developed economies have lackluster growth rates. The IMF describes this phenomenon as a “three speed recovery”. Emerging and developing economies have the fastest projected growth rates.

The U.S. is second; as the world’s largest economy is expected to expand modestly this year. The Eurozone will probably come last, as it is projected to be in recession in 2013. At a news conference on Thursday, Christine Lagarde – the managing director of the IMF emphasized the importance of a “full-speed” recovery rather than a three-speed recovery.

Land acquisition bill to be tabled in Parliament

On Thursday, major political parties managed to reach a consensus on the Land Acquisition Bill, after six years of unsuccessful negotiations. The Bill will be tabled in Parliament on Monday, 22nd April. The new Bill includes several incentives for farmers, but may not successfully revive the investment cycle.

The Bill may effectively increase the cost of land acquisition for corporates. Industry groups were unhappy with the Bill. A. Didar Singh - the secretary general of the Federation of Indian Chambers of Commerce and Industry – said that the process of getting consents from the affected landowners would “act as a deterrent for the industry”.
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