MACROECNOMICS AND MARKET SENTIMENT

By

TAMAL DATTA CHAUDHURI

  Principal & Professor, Finance and Economics

By market sentiment we mean stock market sentiment as reflected in the level and movement in the Sensex in India and the Dow Jones Industrial Average in the US. By macroeconomics we mean various government policies, either monetary policies or fiscal policies, aimed at either controlling public expenditure, or taming inflation, or stabilizing the exchange rate, or changing the interest rates, or affecting the supply of money, or creating employment etc. The point that I am trying to make here is that macroeconomic policies get reflected in market sentiment and the mood of an economy about the macroeconomic environment can be gauged by the movement in stock market indices. Stock market indices are just not stock market sentiment barometers; over some period of time, they reflect the macroeconomic environment of the economy. One, however, needs to keep in mind that this observation is not valid on a day to day basis.

Figure 1

 To understand this let us turn to Figure 1. The green zig zag line is the movement in Sensex from 2007 onwards and the blue zig zag line is the Dow Jones Industrial Average (DJIA) over the same period. The trend lines also follow the same colour pattern.

Observe that both the Sensex and the DJIA fell sharply in the first phase from 2008 to 2009. However, due to proactive expansionary policy measures from the government of India, the Sensex recovered faster than the DJIA from 2009 to 2011. The slope of the green line is much steeper than the blue line.

The interesting part is from 2011 onwards. Whereas the Sensex has overall flattened out, the DJIA has maintained its steady upward movement. Actually after 2011, while the government of India withdrew the stimulus package, the US government continued with its low interest rate expansionary policy. Thus the internal macroeconomic environment gets reflected in market sentiment. Short term movements in the Sensex reflect immediate short term reaction to news which could also be macroeconomic in nature, both at home and abroad. A slightly medium to long term trend strengthens the association between macroeconomics and market sentiment.

RECENT SECTORAL PERFORMANCE AND FUTURE PROSPECTS

By

                                                           Dr. Tamal Datta Chaudhuri

                                                  Principal & Professor, Finance and Economics

The BSE Sensex is a measure of stock market sentiment in India. It is an index made up of 30 companies, chosen on the basis of their market capitalization. It is represented by various companies from various sectors. Thus movement in the Sensex over time and intraday merely reflects movement in prices of shares of the underlying companies that constitute the Sensex.

It is thus, perfectly possible, that the Sensex rises but the value of your portfolio does not improve at all or to that extent. This is because the Sensex is comprised of only a few companies, and even among them share prices of all may not rise on a given day. This brings us to the sectoral composition of the Sensex.

Figure 1

The sectors represented in the Sensex are banks like SBI & ICICI Bank, auto companies like Maruti Suzuki, Mahindra & Mahindra, Tata Motors, capital goods companies like BHEL, IT companies like TCS, Infosys etc. At a given period of time, not all sectors would perform equally. It depends on the macroeconomic conditions of India and also of the rest of the world. Domestic rate of growth and its pattern along with that of the rest of the world would determine which sector would grow and in turn would get reflected in the stock prices of companies from that sector.

Figure 1 shows contrasting performance of three sectors in India in the last one year, i.e. October 2012 to October 2013. Whereas the capital goods index (in brown) has continuously fallen, the IT index (in green) has increased significantly since May 2013. The auto sector has overall moved horizontally, at times picking up and at times falling.

It is interesting that sectoral performance reflects the inherent characteristics of the sector. Whereas the auto sector index reflects seasonal pattern of demand for this sector, the IT index is a reflection of the economic performance of the rest of the world. The capital goods index is a reflection of manufacturing sector slowdown of the Indian economy.

UNDERSTANDING RECENT MOVEMENTS IN RUPEE PRICES OF GOLD, US DOLLAR AND CRUDE OIL IN INDIA

By

                                                                 Dr. Tamal Datta Chaudhuri

                                                        Principal & Professor, Finance and Economics

There is considerable interest both in the press and in political debates in India, about the sharp increase in the rupee price of the US dollar (R/$), the increase in the price of gold and also the increasing deficit in the Current Account Deficit (CAD). As India’s import of crude oil is the largest component of its total import bill, an increase in its price causes the gap in the CAD to widen and raise the demand for dollars. If there is no commensurate increase in the supply of dollars, this causes R/$ to rise. While the source of demand for dollars is imports of goods and services, the source of supply of dollars is both export of goods and services in the current account and also inflow of dollars through the capital account by way of FII net inflows and also Indian companies borrowing from abroad.

Gold on the other hand is a financial asset. In India there is considerable demand for it in the form of jewelry – but the underlying principle is financial security for the girl child. The other major players in the gold market are the central banks of various countries. Whenever there is some economic or political uncertainty in the world market, there is a tendency of gold prices to rise as it is considered to be the safest asset.

In India, in the recent past, crude oil prices have increased due to the Syria war threat. News of easing of bond buy back in the US has seen dollar outflow from India. Domestic political uncertainty coupled with increasing rate of inflation and relatively low rate of economic growth has led to acquisition of gold as a financial asset leading to an increase in its price. An increase in import of gold has contributed to the widening of the CAD.

The movement in prices of gold (red line), price of crude oil (brown line) and the exchange rate (blue line) in India is shown in Figure 1. In time zone A, starting from May 2013, the price of crude oil has increased significantly and so has the R/$. This has led the price of gold also to rise. Relatively speaking, in time zone B, all three have come down. This indicates the co-movement in the three variables.