From bleak to bright – the markets suddenly turned positive ending its successive falls, thanks to strong FIIs inflows and short covering. In a swift movement, the bellwether Sensex added over 1300 points in a span of nine working days ending all the bearish sentiments which had been prevalent across the punters. The favorable factors emanating were from Greece whose parliament approved stark austerity measures; thus, paved the way for international financial aid and it would bail out the country. In India, FIIs joined in the rave party after a brief lull with a total inflow of Rs. 5,084 crore in the last week of June. Markets across the world moved up.
What the other indicators say?
While the equity moved up on favorable news emanating from European sub-region, the manufacturing has slackened across the world. In the latest Purchasing Managers’ Index (PMI) by HSBC and Markit Economics, the figures dropped across the countries. As per the latest figures, the manufacturing growth is slowing from China to Europe, thus, sending the dilemma to all central bankers whether to increase the interest rates to combat inflation despite high prices. While China’s factory index fell to its lowest level since Feb 2009, Europe’s index dropped to 18-month low. Across Europe i.e. Italy, Ireland, Spain, Greece, Germany and others reported contraction. The UK also reported a fall in PMI in June. In India too, manufacturing growth loses steam in June 2011. The PMI drops two per cent to 55.3 per cent in June, its lowest level since Sept 2010. The PMI is considered a good indicator of manufacturing activity across the world, but in India, the large contribution from the unorganized sector yields a low correlation with industrial growth.
Why PMIs are falling?
In the state of higher interest rates, central banks are tightening the interest rates, thus, hurting the economic growth. The average cost of borrowing has increased which are hurting the investment. In India, the investment growth in the latest GDP growth has grown flat. Gross fixed capital formation for Q4FY11 stood at 0.4 per cent compared to 7.8 per cent and 8.6 per cent in Q3FY11 and FY 2011 respectively.
Market punters are blaming the global economic scenario for the current headwinds. But the tailwinds still exist. We expect that the domestic companies’ performances in the first quarter of FY 12 would also decide the movement of markets as the internal consumption growth story remains intact. The natural historical corrections are also certain and the future looks promising. So, let us be hopeful.
Happy Investing!
- Amar Ranu
