Bombay Stock Exchange is the oldest exchange is the oldest stock exchange in Asia established in 1875. The Bombay Stock Exchange has 4700 companies listed on its exchange. The BSE index more commonly referred to as the SENSEX which stands for sensitive index. The SENSEX was first established in January 1, 1986 which was calculated using Market Capitalization-Weighted. The base year for SENSEX is 1978-1979 (BSE, 2009). It is the oldest index in India and hence is famous worldwide. This index comprises of 30 companies from 12 major industries of India. The companies included in the SENSEX are regularly reviewed by the authorities to check its composition reflects the present market scenario. Some of the companies listed in the SENSEX are Reliance Industries Limited, Infosys, State Bank of India, Wipro, Bharti Airtel, Larsen and Toubro, Hindustan Unilever, Oil and Natural Gas Corporation, Tata Steel, Tata Consultancy Services and ICICI Bank (BSE, 2009). Since 2003 the SENSEX is calculated using the free float capitalization weighted method which differs from the market capitalization method in the fact that it uses the shares of the company that is available for trading and hence its excludes stock held by the government, promoters and institutional investors. The free floating methodology is used by other world renowned indices providers such as Standard & Poor (S&P), Dow Jones and Financial Times and the London Stock Exchange (FTSE).
Factors That Affect the SENSEX
Various factors affect the shares prices of the companies which are used in the construction of the SENSEX and also which are responsible for the volatility in the prices of the shares. They are broadly classified into macro-economic and micro-economic factors,
Macroeconomic Factors
The following factors have been classified as macroeconomic factors:-
Global Market Trends
Government Stability & Economic Growth
Inflation
Interest Rates
Industry Growth
Crude Oil Prices
Exchange Rates
Global Market Trends
In this age of globalization where the economies of major countries such as the United States and the European Union and are inter-related have an effect on the Stock markets. This due to the fact that most of the foreign trade of the world economy is conducted with the United States, European Union and emerging economies such as Brazil, Russia and China. Thus if these major economies are growing at a healthy rate would have a positive effect on the Stock markets since when there is positive growth the demand for goods imported from China, India and other developing countries will increase in developed economies which have considerably higher the rate of inflation will have an adverse affect on the SENSEX since the buying power of money decreases considerably and also the increase in price of goods and services will affect the future cash flows of companies. The inflation rate in an economy is controlled by the Reserve Bank which reigns in inflation by increasing the interest rate and reducing the excessive supply of money in the economy by issuing bonds and national savings certificates. Thus inflation is controlled by the Reserve Bank by the monetary policy (C.Viney,2007).
Exchange Rates
The risk derived from the exchange rate is called foreign exchange rates. Since most of the export contracts in India are priced in US dollars (USD) if the Indian rupees (INR) starts appreciating the against the USD then the companies obligated by such export contract are adversely affected. This is due to the fact that when the exporting converts the USD into INR they could drastically reduce their profit margins and thus the future cash flows of the exporters would be adversely affected which inturn would reflect in the share prices of the company and thus adversely affect the Stock markets in a negative manner (C.Viney,2007).
Crude Oil Prices
An increase in crude oil prices have a tremendous impact on the economy as a whole since the transportation cost for industries and also increase the rate of inflation. Also the fact that the Indian government through its various companies would have to incur higher cost while importing oil and meanwhile also providing subsidies to the general public when the oil prices have increased drastically leads to losses for the government companies. Since it leads to increase the cost of production which would affect the future cash flows of companies it would have an adverse negative affect on the Stock Markets (C.Viney,2007).
Inflation
Inflation denotes the rise in price of goods. Inflation occurs when the supply of money in the economy is excessive which leads too much money chasing to few goods and services which leads to increase in prices of the goods and services. Inflation is commonly calculated using consumer price index (CPI). The consumer price index (CPI) is used to measure the change in prices of basket of selected goods and services. Thus the changes in the consumer price index (CPI) over a period of time are used to measure the rate of inflation. Thus continuous increase
the rate of inflation will have an adverse affect on the SENSEX since the buying power of money decreases considerably and also the increase in price of goods and services will affect the future cash flows of companies. The inflation rate in an economy is controlled by the Reserve Bank which reigns in inflation by increasing the interest rate and reducing the excessive supply of money in the economy by issuing bonds and national savings certificates. Thus inflation is controlled by the Reserve Bank by the monetary policy (C.Viney,2007).
Government Stability & Economic Growth
Government Stability is an important factor in India which can be seen from the fact that when the United Progressive Alliance was re-elected with a clear majority in the parliamentary election held in April- May 2009, the SENSEX gained 2000 pts in around 3 minutes of trading and for the first time trading was suspended due to breaching of the circuit breaker twice in the same day. The rate of growth of an economy is also important influencing factor on the stock markets. A slow down in the economic growth rate of the economy also adversely affects the stock markets of that particular economy (C.Viney,2007).
Current Account Balance of Payments
The current account of the government is the record of financial earnings which include the exports and also the imports made by the particular government. It also has a record of income earned by investments made overseas by the government. If the current account of the government is in deficit that is if the income from exports is less than the imports than this can lead to high levels of foreign debt for the government. Thus the government would slow down the economy by the increasing the interest rates and also reducing expenditure. Therefore these initiatives will have an adverse impact on the future cash flows of the company and thus have a negative affect on the stock markets (C.Viney,2007).
Microeconomic Factors
The following microeconomic factors which affect the stock markets are as follows:-
Company information is an important factor which influences the share price of a particular company which is evident from the fact when the accounting fraud was uncovered in Satyam the share prices fell drastically (C.Viney,2007).
The business cycle also has an huge impact on the stock i.e. when economy is in boom the stock markets will rise rapidly and when the economy is in recession the stock market would affected negatively (C.Viney,2007).
Factors Affecting the Stock Price
The factors which affect the stock price of a particular company are as follows:-
Demand Supply
Profitability
Market Dynamics
Shareholders Perspective
Demand Supply
Demand and Supply is one of the most common methods used to determine the price of a particular share since even there is high demand and low supply of the shares the price of the share increases rapidly and is price of the share is low when the supply is high and demand is low (C.Viney,2007).
Profitability
The price of a share is heavily influenced by the quarterly results announced by the company every 3 months because it indicates how profitable the company is. If the company has been able to post profits which are growing each quarter the demand for the shares of the company would increase which in turn increase the price of the shares (C.Viney,2007).
Shareholders Perspectives
The markets are influenced by macroeconomic and microeconomic factors but the other factor which heavily influence the markets are the sentiments of the investors which are influenced by the information available about the companies listed on the stock exchange. Moreover investors are also influenced by the actions of arbitragers, speculators and market makers in the stock market (C.Viney,2007).
The market is often described as Bullish or Bearish which is the perspective of investors and is explained below:-
Bull Market
In a bull market the view of the investor is that the prices of the shares will further increase ad hence there is more inflow of money into the stock markets with the expectation that it would rise further (C.Viney,2007).
Bear Market
In a bear market the view of the investor is that the prices of the shares will fall and hence there is more outflow of money from the stock market since the investor would want to reduce their losses.
Present Scenario
Analysis of first week: August 31 to 4 September 2009
Date
Day
Open
High
Low
Close
Volume
Change
31-Aug-09
Monday
15,812.15
15,821.35
15,589.80
15,666.64
25,600.00
-255.70
1-Sep-09
Tuesday
15,691.27
15,923.09
15,475.28
15,551.19
26,800.00
-115.45
2-Sep-09
Wednesday
15,482.05
15,628.10
15,392.68
15,467.46
23,600.00
-83.73
3-Sep-09
Thursday
15,539.34
15,598.18
15,356.72
15,398.33
22,000.00
-69.13
4-Sep-09
Friday
15,425.86
15,740.83
15,358.94
15,689.12
30,800.00
290.79
The Sensex turned into consolidation mode and faced resistance at the important point of 16000 pts and closed more than 1 percent down when compared to last week closing due to weak global cues and also due to the Chinese market turning vulnerable. Foreign Institutional Investors (FII) pulled out Rs 904 crores in the week starting from 31 August 2009 to 3 September 2009. The Foreign Financial Investors (FII) had pumped in more than Rs 4,900 crores during August which also contributed to the net decrease of the SENSEX in the week from 31 August 2009 to 4 September 2009 (Economic Times,2009).
Predictions for Next Week
The Finance Minster Pranab Mukherjee told that he did not expect the economy to grow at a rate of 6.1 percent which was the case in the Q1 of FY09 due to the agricultural growth which would considerably be less even thought industry growth is slowly picking up (Economic Times,2009).
The total tax collected from all over the country during the period from April to September has been able to equal the previous years growth in collections of taxes thus proving that concerns of a lower collection due reduced corporate profitability is unfounded. Thus it is a clear indication that economy is recovering form the slowdown. The all India figure for direct tax collection till September 5 totalled Rs 90,039.7 crore, while the figure for the previous period last year was Rs 88,588.9 crore (Economic Times,2009).
India's exports have fallen for the 11th month in a row, but the government is hopeful that this trend will reverse as figures for August 2009 indicate a comparatively lower decline compared to the fall in the current fiscal year so far. Exports in August 2009 declined by 19.7% to $14.3 billion compared to exports worth $17.8 billion in the equivalent month last year. "In the month of August, few sectors which had witnessed a decline in exports in the previous four months have registered a positive growth thus there is a glimmer of hope for export to turn around" commerce secretary Rahul Khullar has said (Economic Times,2009).
My Prediction for the week is that the Sensex should make considerable gains due to the fact that tax collections have gone up and also the government is hopeful that exports sector will soon
pick up which is evident from the information provided by the commerce secretary of India. The Sensex should be in the range of 15700 - 16000 pts by the next weekend.
The benchmark Sensex hit a 15-month high during the week following continuous inflows of capital in outlook of improvement in business confidence and renewal of monsoon coupled with firm global cues. Foreign Institutional Investors (FIIs) were the main movers who invested Rs 3,275.67 in the week. A survey conducted by Federation of Indian Chambers of Commerce (FICCI), for the month of September 2009, indicated that the confidence level of Indian companies is on the rise. .Strong response to the initial public offer of Oil India also gave an added boost to the market sentiment. The Sensex ended the week higher at 16,264.30 as against the last weekend's level of 15,689.12, a net rise of 575.18 points.
Predictions for Next Week
According to Chetan Ahya who is an India & South East Asia economist at Morgan Stanley told those worldwide recovery would be more than square root shaped than V- shaped. In Asia ex-Japan, industrial production accelerated to 6.2 percent in June from a year earlier, a sharp rebound from the trough of minus 7.5 percent in January 2009. Although, the worst is over, the 'new normal' will be different from 2004-2007, when global GDP grew at an unprecedented pace of close to 5%.
In August the excise tax collection were 22.5 percent over the previous month, though still a bit lower than the figure for August 2008. However Central excise duty collections in August were Rs 8,979 crore, about 8.8% below the Rs 9,846 crore collected in the same month last year. The excise duties reflect what's happening to all kinds of manufactured goods, this is arguably a more broad-based indicator of industry recovering than the index of industrial production (IIP).
C Rangarajan, chairman of the Prime Minister's Economic Advisory Council, told that economy is recovering and the interest rates are set to rise. The RBI governor D Subba Rao had said the Reserve Bank of India will look at a many factors such as the wholesale price index-based inflation, consumer price index-based inflation, components within inflation, while withdrawing the soft monetary policy and also guard against inflation which might lead to increase in interest rate by the end of the fiscal year.
My prediction for the Sensex next week is that it should have an upward movements due to the fact that excise collection have matched the collection of the same month last year but however the statement that interest rates could go up would damp the sentiments of the market since the
low of money into equity markets would reduce and also increase the cost of doing business. But it should also be noted that if interest rates are increased at the end of the fiscal year then it indicates that the Indian economy has overcome the effects of slowdown and it is a positive factor for the Sensex. The Sensex should be in the range of 16000 - 16300 pts by the next weekend.
Sensex in this week is started at 16,185 and closed at 16,741. Therefore there is an increase in the Sensex by 477 points i.e 2.93% increase. The Sensex gained on the back of higher advance payment of taxes. The auto sector was the top gainer such as Maruthi Suzuki increased up to 11.84%, the gain of Mahindra & Mahindra is 7.95 percent and where Tata Motors is 8.71 percent (Economic Times,2009).
Predictions for Next Week
The U.S senate is going to extend the unemployment benefits by an additional 13 weeks to people who live in states with unemployment rates of at least 8.5 percent and who are scheduled to run out of benefits by the end of September (Economic Times,2009).
Officials of the Federal Reserve Bank of USA are signalling that the US economy would grow at 2.9 percent in this quarter ending which was up from the analyst estimate of 1 percent in July (Economic Times,2009).
The Asian Development Bank (ADB) has raised its growth forecast for India to 6% in the current fiscal year from its earlier projection of 5 percent, due to increased government expenditure and improved business confidence, but warned against the increasing fiscal deficit of the government (Economic Times,2009).
My Prediction for the Sensex next week is that due to the fact that unemployment benefits are being extended in the US shows that even though the US economy is expected to grow at 2.9 percent at the end of this quarter, it is a jobless recovery and hence will take some time for the US economy to generate more jobs and hence the Sensex should close in the negative region. The Sensex should be in the range of 16300 - 16500 pts by the next weekend.
The Sensex underwent a downward correction after it fresh 16-month highs amid signs of caution about over valuations and fears of liquidity shortage. In the week to September 26, the Sensex ended at 16,693.00, a net loss of 48.30 points or 0.29% from its last weekend's close. The bellwether Sensex had virtually touched 17000 pts mark on September 22 on continuous capital inflows. The pharma stocks were the top gainers in the concluding day of the week. This was due to a report prepared by the Federation of Indian Chambers of Commerce and Industry that the Indian pharmaceutical market will treble to USD 20 billion in next six to seven years (Economic Times,2009).
Predictions for Next Week
The IMF will raise its forecast for 2010 global growth to about 3 percent from 2.5 percent, said Murilo Portugal, the fund's deputy managing director (Economic Times,2009).
European shares rose early on Wednesday, powered by gains in energy and mining stocks, as commodity prices firmed on the final day of the quarter, offsetting weakness in banks. The benchmark index is up 21 per cent this year, and has surged 55.9 percent from a record low in early March (Economic Times,2009).
US employers cut a deeper-than-expected 263,000 jobs in September, lifting the unemployment rate to 9.8 per cent, according to a government report on Friday that fueled fears the weak labor market could undermine economic recovery (Economic Times,2009).
The Sensex jumped over the psychological 17,000 mark in a brief three-session week which was cut short due to holidays on 28 September and 2 October , riding on strong liquidity situation but over-valuations concerns still persisted. The Sensex gained an impressive 441.55 points or 2.65 percent in the week. Bank and IT stocks attracted hectic buying and India's largest private sector bank ICICI bank gained 10.24 percent and the country's largest public sector bank State Bank of India gained 3.31% on a likely growth of 30-35% in net profits for Q2 (Economic Times,2009).
Predictions for Next Week
Annual inflation based on wholesale prices could speed to 8 per cent by end-March 2010 backed by rising input costs and strengthening economic activity, Nomura said in a recent note. Nomura, whose inflation estimate is higher than the central bank's projection of
around 5 per cent by end-March, expects the Reserve Bank of India (RBI) to revise its target in its next policy review on Oct. 27 (Economic Times,2009).
Economic recovery and job creation in India are more important than trying to tame inflation, as prices should ease because a drought is not as severe as first thought, a top policy adviser said on Monday. Montek Ahulwalia, Deputy Chairman of Planning Commission told it was important to create more jobs than to try to lower prices since the drought is not as severe as first thought to be (Economic Times,2009).
India's annual industrial output growth probably accelerated in August to 9 percent on robust consumer demand and government spending, with further strength expected as the country recovers from the effects of the global downturn (Economic Times,2009).
My prediction for the next week is that the SENSEX should make considerable gains due to the fact that India's Industrial output has grown by 9 percent should be a positive factor also coupled with the fact that The statement made by Montek Singh Ahulwalia that job creation is more important than keep prices lower will provide a boost to the markets since it indicates interest rates would not be changed. The Sensex should be in the range of 15700 - 16000 pts by the next weekend.
