What is going to move the market from here?

The secondary market witnessed a steep downward movement last month. In the period of January 14-22 BSE30 Sensex lost 4100 points incurring a loss of 16,000 billion for the investors. When Nifty futures turned into discount, it created heavy short positions. Investors were not having enough money to meet the margin calls on their future contracts, and brokers were forced to sell in large numbers. The major drain of money from the secondary market happened mainly because of the following reasons-

1. Reliance power IPO, which came with a bid for nearly Rs 11000 Crores and got oversubscribed by 73 times.
   
2. Future Group, which came with IPO to fetch around Rs 490 Crores, got oversubscribed by 133 times.
   
3. FII withdrawal from the market amounted to Rs 13035.7 Crores in the month of January.

Though FII were selling in large volume because of global cues, the major part of domestic money was stuck with the IPO of Reliance and Future Group and no buyer was available in the market.

Now in the month of February, with fed cut in interest rate huge capital inflow is expected through FII’s. Reliance Power has completed the allotment of shares and it has refunded around Rs 1 lakh crores to the bidders. Future Group also refunded the sum for unalloted bids, which is around Rs 50,000 crores. This huge inflow in market is expected to make the market bullish in the short term. But the movement will majorly be decided by the sentiments, and any negative news will turn the market bearish. The concern over the recession in the US economy is going to keep the market volatile and investors need to be cautious about their investment.

Stock Markets Unwinded

Here comes an article which will let you know the basics of a stock market. So let’s straight away start the topic which I think is of interest to everyone in the country.

First of all for those who think that stock markets are the easiest ways to become rich, think twice as it is one of the most troublesome places. It can make one earn a crore a day and loose two the next day. So with this constraint in mind let’s try and know our markets a bit better.

Let’s start with what does bulls and bears mean. Bulls mean people who purchase stocks and bear the one who sells them. All of you must have heard of about market indices as BSE Sensex or Nifty. One see’s the value of indices jumping up and down throughout the day. What does the value mean? If we take example of BSE Sensex it is the weighted average of thirty stocks which are representative of all the sectors of the economy. Thus these indices change with the change in the underlying stock prices. The next question which must be floating in your mind is what causes the change in stock prices. Well there are several factors which can cause a change in the stock price. Some of them are:

1. Recession in the economy or industry
2. Lower than expected performance of the company
3. Getting a new contract
4. News of its merger or its acquisition

Seeing the factors listed above don’t one get a feeling that these factors are transient and one most see the long term growth prospects of the company. Well my friends the stock markets are driven by something known as “Market Sentiments”. Mostly these sentiments don’t take into account long term growth prospects of a company but are driven mostly by the things happening right know in the company or industry or economy of the country or the global economy as a whole.

Further, I would also like to add that demand and supply, which are yet again governed by the market sentiments play a huge part in deciding the price of the stock and in turn the index value.
Now as we have learnt about the stock price movements and index value movements let us move into a bit more detail to understand the kind of markets prevalent in the country. Now the place where shares do get traded are known as Capital Markets. These can further be classified into primary markets and the secondary markets. The primary market is one where the Initial public offer (IPO) of a company i.e. shares for the first time are on offer while secondary market includes the place where day to day trading happens. Now a few of you must be having doubts about how does the price of an IPO is decided as the share is still not out in the market. Well it a complex process and will discuss about it in the next article. So let’s wind up this article now and will be back with more articles related to the vibrant world of stock markets very soon.

What moves Sensex or Nifty?

We have seen in the previous post the constituents of Sensex/Nifty and their weights in the index. Lets see what is the effect of price change of a stock on the index. We will take the example of S&P CNX Nifty. As discussed before Nifty is an index based on full market capitalization i.e. the index is proportional to the sum of the market capitalization of all its constituent stocks. The weights of the stocks in the index will vary. Lets take the data of 31 December 2007 for understanding the concept. Nifty closed at 6138.6 on December 31, 2007. The top four weighted stocks in Nifty were:

Stock Name	Market Capitalisation	Weightage
	(Rs. Crores)	%
Reliance	4,19,043	11.89%
ONGC	2,64,568	7.51%
NTPC	2,06,879	5.87%
Bharti Airtel	1,89,100	5.37%
Total	35,22,527	100%

Suppose Reliance's stock price changes by 10%, how will Nifty change?
This is a very simple question. Since market capitalization is directly proportional to stock price, Reliance's market capitalization will increase by 10%. Assuming other constituents of Nifty unchanged this will lead to an increase in Nifty value by:

Change in Total Market Capitalization of all constituents of Nifty = Change in Market Capitalization of Reliance = 10% of 419043 = 41,904.3

New Total Market Cap = 35,22,527 + 41,904.3 = 35,64,431.3

New Nifty Value / New Total Market Cap = Old Nifty Value / Old Total Market Cap

So, New Nifty Value = 6138.6 * 35,64,431.3 / 35,22,527 = 6211.625

Change in Nifty value = 73.025
% change in Nifty = 1.1896%

We got that a 10% change in Reliance's stock price will change Nifty by 1.1896%. This is same as the weight of Reliance in Nifty. So, all this calculation was meaningless and we can find the change directly from the weight of that stock in Nifty :).

Nifty falls below 6000 mark first time in 2008 led by Mutual funds sell off

Indian stock market has seen heavy sell off in the past two days. The benchmark indices Nifty and Sensex have touched a low level of about 4-5% from the closing value two days back. We will try to analyse the reasons for this abrupt selling, but first we shall look into the trends of the Indian stock market for past one year. The following graphs are self-explanatory:

Variation of Nifty-50 over one year. Returns in excess of 50% in one year.

Past one month variation in Nifty index. Highly volatile. Nifty fell sharply in mid December 2007, and also rise sharply the next week. Touched new highs of 6300 in January 2008 before falling back sharply below the 6000 level in mid January. Will Nifty rise back sharply as seen in December last year, perhaps no one can say so for sure.

The last two days heavy sell off can be seen in this chart. On January 15, and 16 Nifty has fallen sharply and only in last hour of trading on January 16, bulls have tried to come back.

Reasons for sharp fall:

If we look at two big group of players in the Indian markets, the FIIs and the mutual funds, the perception of both are not same. While mutual funds have been one of major reason as they have sold off heavily in equities in the last two trading session, FIIs have been buying steadily though their activity has slowed down.
One of the apparent reason is the Reliance Power IPO, India's biggest IPO so far, which opened for subscription on January 15, 2008. The size of the IPO is about 3 billion dollars and it got fully subscribed within minutes of its opening. The excitement about the IPO has lead to it getting more than 10 times offer for subscription on the first day itself. This is remarkable considering the size of the issue. About 27 billion dollars have shifted to Reliance Power and it appears that a substantial part of it has been coming from the stock markets. There is a craze for IPOs and this has led to spectacular performance of the IPOs in the last year. Moreover, at levels above 6300 for Nifty many investors don't see any significant upside and have taken their money from stock market to the IPO which has higher chances of giving them 40-50% returns on listing.

How did various Indian stock market indices performed in 2007

Returns of the four major indices of National Stock Exchange(NSE) of India in the year 2007 are are:

CNX 100	CNX 500	Midcap	Nifty
56%	61%	78%	53%

While late rally in midcap stocks lead to its overall better performance, CNX500 also outsmarted Nifty50. This suggests that the appreciation of stock prices in the year 2007 was across the market and not limited to the stocks in benchmark indices like Nifty and Sensex.

The graph showing the variation within the year of the above indices:
Relative performance of the four indices is shown in the graph below:

Correlation of Sensex and Nifty

How much correlated are Sensex and Nifty? Lets look at the graphs of the two indices for last five years:Analyzing the data for last five years using regression shows a high correlation between them. Lets look at the picture for last one year.

Based on the past data, one can easily conclude that Sensex and Nifty are highly correlated indices.

What is BSE Sensex? What constitutes Sensex?

SENSEX (Sensitive Index) is the India's most popular stock market index developed by Bombay Stock Exchange (BSE) in 1986. SENSEX has 30 constituent stocks representing a sample of large, liquid and representative companies. The base year of SENSEX is 1978-79 and the base value is 100.

The Index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, 2003. The level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period.

The selection of constituents in SENSEX is based on several factors including the listed history, trading frequency, rank based on market capitalization and liquidity, industry representation, etc.

The index is reviewed every quarter and in the case of a revision in the Index constituents, the announcement of the change is made at least six weeks in advance of the actual change.

The present constituents of SENSEX are:

Name	Industry
ACC Ltd.	Cement
Ambuja Cements Ltd.	Cement
Bajaj Auto Ltd.	Automobile - 2/3 wheeler
Bharat Heavy Electricals Ltd.	Electrical Equipment
Bharti Airtel Ltd.	Telecommunication
Cipla Ltd.	Pharmaceuticals
DLF Ltd.	Construction
Grasim Industries Ltd.	Cement
HDFC	Finance - Housing
HDFC Bank Ltd.	Banking
Hindalco Industries Ltd.	Aluminium
Hindustan Unilever Ltd.	Diversified
ICICI Bank Ltd.	Banking
Infosys Technologies Ltd.	Softwares
ITC Ltd.	Diversified
Larsen & Toubro Limited	Engineering
Mahindra & Mahindra Ltd.	Automobiles - 4 wheelers
Maruti Suzuki India Ltd.	Automobiles - 4 wheelers
NTPC Ltd.	Power
ONGC Ltd.	Oil Exploration/Production
Ranbaxy Laboratories Ltd.	Pharmaceuticals
Reliance Communications Limited	Telecommunication
Reliance Energy Ltd.	Power
Reliance Industries Ltd.	Diversified
Satyam Computer Services Ltd.	Softwares
State Bank of India	Banking
Tata Consultancy Services Limited	Softwares
Tata Motors Ltd.	Automobiles - 4 wheelers
Tata Steel Ltd.	Steel
Wipro Ltd.	Softwares

The weightage and market capitalization of the constituents of Nifty as on 11 January 2008 are shown below:

Name	Free-Float Market Capitalization (Rs. Crores)	Weight in Sensex (%)
ACC Ltd.	10,105.36	0.72
Ambuja Cements Ltd.	12,685.74	0.9
Bajaj Auto Ltd.	16,555.77	1.17
Bharat Heavy Electricals Ltd.	64,149.25	4.55
Bharti Airtel Ltd.	41,721.91	2.96
Cipla Ltd.	10,316.99	0.73
DLF Ltd.	30,585.98	2.17
Grasim Industries Ltd.	23,225.91	1.65
HDFC	72,575.42	5.15
HDFC Bank Ltd.	49,869.91	3.54
Hindalco Industries Ltd.	17,386.76	1.23
Hindustan Unilever Ltd.	24,753.83	1.75
ICICI Bank Ltd.	157,659.91	11.18
Infosys Technologies Ltd.	76,723.99	5.44
ITC Ltd.	58,650.90	4.16
Larsen & Toubro Limited	109,360.09	7.75
Mahindra & Mahindra Ltd.	15,231.08	1.08
Maruti Suzuki India Ltd.	12,982.17	0.92
NTPC Ltd.	33,678.60	2.39
ONGC Ltd.	55,905.85	3.96
Ranbaxy Laboratories Ltd.	10,326.60	0.73
Reliance Communications Limited	57,241.77	4.06
Reliance Energy Ltd.	37,925.18	2.69
Reliance Industries Ltd.	227,361.54	16.12
Satyam Computer Services Ltd.	26,113.26	1.85
State Bank of India	57,722.49	4.09
Tata Consultancy Services Limited	24,197.37	1.72
Tata Motors Ltd.	17,635.05	1.25
Tata Steel Ltd.	43,674.83	3.1
Wipro Ltd.	14,190.08	1.01
TOTAL	1,410,513.59	100%

NSE launches MINIFTY for retail investors

India's biggest stock exchange National Stock Exchange (NSE) on December 27, 2007, has introduced a new contract, MINIFTY, in with S&P CNX Nifty Index as underlying. The new contract is a small derivatives contract and has a lot size of 20 for fures and options. The main contract NIFTY has lot size of 50. With the value of underlying at about 6250 points the total contract size of MINIFTY can be estimated about 125,000 INR. With the introduction of this contracts NSE, India's biggest derivatives exchange, expects the retail investors' participation to increase significantly. Currently NIFTY futures and options are the highest traded index derivatives in India with an average daily turnover of about INR 20000 crores (200 billion INR). With the introduction of MINIFTY there are arbitrage possibilities between Nifty and mini Nifty derivative contracts.

Nifty 50 is the benchmark index of NSE which captures the Indian stock market movement and is based on 50 highest market capitalization securities.

Thus, the cost of taking a derivative position on the index has reduced from around Rs 3 lakh to a little over Rs 1 lakh.

Bombay Stock Exchange (BSE) has also introduced a mini contract named MSX in the futures segment. The contract is based on BSE's benchmark index SENSEX and has a lot size of 5. The SENSEX is currently at about 20800, making the total contract amount to be just above Rs. 100,000. BSE's main product in the futures segment has a lot size of 25.

Securities and Exchange Board of India (SEBI) has approved the introduction of seven new derivative products for the Indian market. SEBI has put a minimum contract size limit of Rs. 100,000 on the contracts at the time of introduction in the market.

Nifty touches 6300 mark for the first time

India's stock market index S&P CNX Nifty, which includes top 50 listed companies, has scaled new highs by crossing the 6300 mark for the first time on 4th January. The index has risen by more than 50% since last year and is one of the best performing global index of the year 2007 . Most of this rise has been fueled by the FIIs which have been pumping exorbitant amount of money into the Indian stocks. The country has been growing exceptionally well with last years growth in GDP of about9% per annum

Biggest bull run of FII in India in 2007

Foreign Institutional Investors (FII) are very bullish on India. The amount of FII money inflow in the first half of FY07-08 itself broke earlier records. According to an estimate available on Reserve Bank of India's (RBI) website the net FII inflow during April 2007 to September 2007 was a whopping $15.5 billion. This itself was enough to break previous records but the inflow trend is still continuing. The stock markets have witnessed a bumper rally because of this extra money from outside coming into the markets and the BSE-30 index, Sensex, has given returns in excess of 50% in last one year.

Santa brings cheers for Indian investors

The Indian stock exchange rocked on 24 December with the benchmark index BSE-30 (Sensex) rising by 3.6%. This came as a pleasant surprise for many traders who were hoping a dull market following the trend of past few days. In the previous week the Indian stock market had shown loosing faith and in the last couple of trading session there was a tussle between bulls and bears with even results. With the festive spirit the markets have bounced back but are still to see the 20,000 mark for the Sensex which was crossed earlier this month.

There were couple of reasons for this spectacular performance. Gujarat elections, increased buying in IT stocks were the main reasons supporting the overall global market performance. Almost all the sector had contributed to this rise including the IT, banking, power, metals, etc. The stock markets world over are celebrating the festive season and Indian markets are no way behind them.

Market Capitalization of India and China

India’s stock market index, Sensex, has doubled in two years; China's stock market's index Shanghai Stock Exchange (SSE) has nearly tripled in last 10 months (since the beginning of this year).

P/E ratio of Indian stocks averages 25 while that of China is about 50.

China’s market capitalization $3.5 trillion is more than double of India’s $ 1.6 trillion.

China has five companies in the world’s top 10 companies by market capitalization while Indian companies are yet to enter the list. India’s biggest company by market capitalization, Reliance Industries Limited has recently crossed the $100b mark.

Industrial and Commercial Bank of China (ICBC) has replaced Citigroup from the top position in the banking sector. Three of the world’s top six banks are from China. These are ICBC, China Construction Bank and Bank of China. Chinese companies are now the world’s leader by market capitalizations in banking (ICBC), insurance (China Life Insurance), telecoms (China Mobile) and airlines (Air China).

Similar kind of trend was seen in 20^th century when US companies replaced European companies in the list of world’s top companies by market capitalization.

Sensex crosses 20k and Ambani crosses Gates

Mukesh Ambani, of Reliance Industries Ltd, became the world's richest man on 29 October, overtaking Microsoft's Bill Gates and Mexican Carlos Slim Helu. The feat was achieved because of the strong rally which the stocks of Ambani's Reliance Industries has been witnessing since last month. The Reliance Industries Ltd stock has risen more than 60% in past few months and has helped Bombay Stock Exchange's 50-stock index Sensex to cross 20,000 points and take Mukesh Ambani's net worth to $63.2billion just piping Helu and Gates who are a little behind at around $62.29bn each. Ambani holds more than 50% shares of Reliance Industries.

Estimates of the wealth of the top five richest person of the world are:

Mukesh Ambani - $63.2 billion
Carlos Slim Helu - $62.3 billion
Bill Gates - $62.3 billion
Warren Buffett - $55.9 billion
Lakshmi Mittal - $50.9 billion

Stocks to watch

As long as our money doesn't make money for us, we are dependent on someone for our sustenance. As long as our budget depends upon the month-end salary, we can’t have everything in life. Investment, if done intelligently, can be one of the easiest way to get rich fast. This section of the blog will keep you updated with the crisp news about the companies and help you to take better decision about investing.

This week was quite significant with the clearance from SEBI about the P-notes and the FII bringing dollars back to exchange. BSE's 30-stock index, Sensex, witnessed an all time high till now and closed at 19,243. In the absence of any bad news in coming days the trend is expected to continue. The inflation maintained its 5 years low position at 3.07% in the week ended 26'th October, and that dilutes the prediction of any hike in CRR by RBI in the near future. This helped the banking sector accumulate significant gains and in the outlook in near future is strong.

There are many large cap stocks which are moving the market quite often and always in news, but in this section we will bring to you those stocks which are not heard much, but all set to be future star. The list starts with -

RMTL is a Gujarat based company manufacturing welded and seamless stainless steel(SS) pipes & tubes, carbon steel(CS) LSAW, HSAW and ERW pipes. It is the only company in the industry having presence in both CS and SS pipes. The company has embarked on a growth trajectory with its Greenfield expansion in Kutch, backward integration into Hot SS extruded-mother pipes, addition of spiral SAW and wind power capacity. Sales of the company has grown by hopping 630% in last 5 years. Share price has gone up by 260% in from Nov ’06 to Oct' 07 At the CMP of Rs 1257 (as on 26th October) the stock is trading at 11.75x FY08E and 9.11x FY09E.

At present the outlook of this company remains very strong from the major markets namely Refinery, Petrochemicals, LNG, Capital Goods Industry and Power Plants. With a robust order book position of around Rs.5 bn which will be executed within next 6-8 months, RMTL will continue to get healthy order book in FY08E and FY09E as well mainly because of big capex plans announced by oil and gas industry players. Undoubtfully, the RMTL stock has been performing very well on the bourses and is has more than doubled in a year. Seeing the valuations and current trend it can easily cross Rs 1800, a 54% upside from current level. More information at Rediff Money.

Disclaimer: FINMANAC has taken due care and caution in compilation of data for its blog. The views and investment tips expressed above are the personal view and should not be taken as only base for any investment decision. FINMANAC advises users to check with certified experts before taking any investment decision.