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Five indicators to track this diwali
Markets trade today in anticipation of a better tomorrow. That's why economic data is very important to investors. Usually, these include data about inflation, growth and industrial production. But that's not all.
There are other - relatively less conventional - indicators that can be tracked to understand the outlook for the economy and markets.
Before you gear up for this year's Mahurat trading session on Thursday, read about these five indicators:
Companies usually operate on credit; they borrow from lenders and banks and pay back once they receive the sales money. During times of trouble, companies may not be able to pay back easily. This is why a credit score is important. It helps investors choose financially healthy companies. Analyst and rating firms regularly check corporate credit quality, and upgrade or downgrade credit ratings. This acts as an indicator of the economy. The greater the quantity of upgrades, the better is the credit quality of Indian companies.
Recent reports by ratings firms CRISIL and Care show that companies' credit scores are improving. There has been an increase in the number of upgrades in comparison with the number of downgrades. There were 741 upgrades and 451 downgrades in April-September 2014, according to CRISIL. This is the highest in three years, during which period the Indian economy slowed down to a decade-low.
When a company defaults on loans and is not financially healthy enough to pay back in the near future, it can approach its lenders and get its debt restructured. During this mechanism, the lender would relook at the loan stipulations to give the company more time or flexibility. An increase in debt restructuring implies poor financial health. It, thus, reflects that economic conditions are still not viable for companies to operate profitably. Loans worth Rs 37,000 crore have been approved for debt restructuring in the April-September 2014 period, according to data by the Corporate Debt Restructuring (CDR) cell. While this is still a big amount, it is down from the Rs 58,000 crore seen between October 2013 and March 2014. This is another indication that operating environment is improving.
Mutual fund investment:
Mutual funds are a big player in the equity market. Many retail investors prefer to invest in equities through mutual funds rather than direct trading. As a result, mutual fund investment data can indicate demand and confidence of retail investors in the stock market. The greater the demand for equities, the higher shares prices rise.
Investment in the equity markets by mutual funds hit the highest in a decade and half in the September quarter, market data showed. Mutual funds invested Rs 16,192.7 crore in the July-September period. This is a complete change from the scenario in the last few years, when mutual funds barely invested in equities, especially after the 2008-09 financial crisis. The recent data suggests retail investors are growing confident about equities once again and are returning to the market. This could drive markets further up. The benchmark indices Sensex and Nifty have already jumped 25% so far this year.
Global commodity prices are important for Indian investors, especially that of gold and oil. The most important reason is it affects India's import bill. This in turn affects the rupee's valuation and growth in inflation. Usually, Indian markets cheer a fall in oil and gold prices, and fall if oil prices rise drastically. Tracking the global commodity prices thus can help you foresee the trend in Indian markets. However, the downside is, the dollar usually moves in the opposite direction. This means, as oil prices fall, dollar strengthens. This is not necessarily good news for Indian investors because the rupee depreciates.
The Indian banking system is the backbone of the economy. It is hit directly if something goes wrong in the economy. The biggest indication is that loans turn bad and non-performing assets (NPAs) rise. This affects the profitability of banks. NPAs rise not just because companies turn into loss-making units. It could also be caused by reasons like a sudden government regulation or court decision.
Currently, about 14% of the total loans are under stress, according to media reports. This amounts to Rs 8.5 lakh crore. The Supreme Court's decision to cancel coal blocks allocated between 1993 and 2010 could add nearly Rs 1 lakh crore in bad loans. This is why stocks of banks usually react to any adverse news announcements.
Rs 19,200 crore
Retail investors have invested Rs 19,200 crore in the stock markets through mutual funds so far this fiscal year as of September 2014. In contrast, mutual funds remained net sellers in the previous fiscal, taking out Rs 21,200 crore from the market. Total value of equity investment by mutual funds stands at Rs 2.5 lakh crore, as of September 2014.