IT’s the only thing that looks exciting

It’s a little frightening when casual investors start knowledgeable discourses on the impact of the Yen interest rate hike. It is also a measure of how globalised the Indian equity markets have become. The land of the Rising Yen had top billing across the Indian electronic media last week.

As every housewife who’s ever subscribed to an IPO now appears to know, the Bank of Japan decided to impose an interest rate last week for the first time in six years. That’s right. For six years, traders have been borrowing zero-interest Yen funds, converting into other currencies and seeking any sort of positive return.

The rate hike will make these “carry-traders” a little more selective about Yen borrowings and that could slow down inflows to high-risk markets such as India. Mind you, the Yen (at an overnight call rate of 0.25% and effective lending rate of about 0.4%) is still way cheaper than the Euro (2.75% minimum) and the US dollar (upwards of 5.5%).

Combined with the US rate hike of late June, the Yen hike does make it imperative for the RBI to take a few decisions.
The Indian central bank has two options. If it does nothing, the currency will depreciate more quickly than the 7% it’s lost in the past year. And if it raises rates to maintain rupee strength, it might cut down on domestic credit demand.

I think it will raise rates slightly because that seems the conservative course of action, but this is just a guess. Again, whatever the RBI does, I think the rupee will continue to fall. It’s the rate of change, which is critical. If the RBI manages to stay in control of the rate of change and that stays predictable, everything’s fine. Given a combination of a forex war chest of $162 billion and the protection of a semi-convertible currency, there’s no reason why the RBI would lose control.

The two other international variables that occupied investor mindspace were crude prices and gold prices. The Israeli assault on Lebanon caused a spike in crude prices to new record levels, and it sparked renewed interest in the yellow metal as an inflation hedge.

When we speak about such macro indicators, it’s difficult to take a call on the exact effect all these trends will have. But, the combination of these trends does seem to make the global investing environment less benign. Both money and energy became more expensive last week.

I think the Nifty is going to range-trade between about 3,075 and 3,200 for the next week. But, if it closes outside that range, a new trend will be established.

Institutional investors were net sellers throughout last week. FIIs, however, have started building up fairly large open positions in the derivatives segment. That could mean they are hedging their short bets.

Fed, Yen, crude and gold - all fine things for the desi investor to concentrate on. We can buy gold and we can short PSU refiners such as BPCL and HPCL. Unfortunately, there’s not much point in buying ONGC, the PSU will not be allowed to leverage high crude prices to maximise profits. As to the implications for the finance industry, Indian banks may take a beating if lending slows down due to higher rates. But this has also been on the cards for a while and discounted into current prices.

Most Indians are determined to be international in their outlook despite the restraints on actually investing abroad. So, why not concentrate on the Indian companies that are really foreigners? I’m referring to the usual suspects in the IT-BPO industry.

These industries are pretty much interest-rate indifferent; they’re beneficiaries of a weak rupee and as a group, these shares have underperformed the broad market for the past year or more.

Infosys’ Q1 results and upwards-revised advisories show that growth has exceeded previous estimates. I suspect that other IT majors will come through with similar happy surprises in Q1. These are the only set of stocks which are looking technically exciting at the moment. An IT technology sector fund may make sense for a long-term investor. So could a long position on the CNXIT index if you want to play the futures game for short-term returns.

In conclusion, it was quite incredible that the market simply stayed open and ran uninterrupted through the chaos of last week’s terrorist attacks. Salaam Bombay!