Global Markets Ended on a Positive Note

Sat, 7 Jan RoundUp

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Global markets started 2017 on a positive note. The DJI came tantalisingly close to exceeding the 20,000 milestone. This was on the back of December jobs report, which showed that the economy added 156,000 jobs in December and average hourly earnings grew 2.9% over the past year, the fastest annual increase since 2009. While the Federal Reserve will watch for other signs of improvement as well, this report supports the committee's view that the economy can handle two to three short-term interest rate increases in 2017 as inflationary pressures rise headed into the new year. The DJI Index was up by 1% for the week gone by.

The data on the UK's services industries also attracted much market attention when released on Thursday. The readings showed that Britain's economy finished 2016 strongly, growing at the fastest rate since mid-2015, even though companies faced some of the fastest-rising costs of the past five years as sterling weakened after Britain voted to leave the European Union, an industry survey showed. The stock market in the UK was up by 0.9% for the week gone by.

The German Purchasing Managers' Index (PMI) for manufacturing rose to 55.6 from 54.3 in November. This was seen as its highest level in 35 months. The uptrend here was driven by rising demand from Asia and the US Data showed that manufacturers in Germany raised their output at a quicker pace. The output expansion was seen on the back of improvement in domestic demand and new business overseas. Another set of data for Germany showed that inflationary pressures increased in December. Input costs rose at the fastest pace due to weaker euro. German Inflation jumped closed to ECB's target of 2%, hitting the highest level in more than three years. The ECB has been pouring money into the euro zone economy in an attempt to boost inflation from a near-deflationary level. However, the strong inflation data will lead ECB to reserve the stimulus. The stock market in Germany was up by 1% for the week gone by.

China's foreign exchange reserves fell for a sixth straight month in December to the lowest since early 2011. China's reserves fell nearly US$320 billion in 2016, after a record drop of US$513 billion in 2015. The yuan depreciated 6.6% against the surging dollar in 2016, its biggest one-year loss since 1994, and it is expected to weaken further this year despite authorities' aggressive attempts to slow its descent this week. The stock market in China was up by 1.6% for the week gone by.

Back home, the market managed to finish the first week of the calendar year 2017 marginally higher. The BSE-Sensex ended on a positive note and was up marginally by 0.5%. This was on the back of continuous buying by domestic institutional investors (DIIs) even as an inconclusive Goods and Services Tax (GST) meet, hawkish minutes of meeting from the US Federal Reserve, fall in manufacturing activity in December and H1B visa woes kept the momentum shaky through the week.

The earnings season for the 3QFY17 will start from next week. Similarly, investors will react to the Central Statistics Office's projection of Gross domestic product (GDP) growth data released yesterday, which pegged economic growth at 7.1% in FY17, lower than 7.6% in the previous financial year. Investors will also await industrial production, manufacturing output and inflation data scheduled to be released on Thursday next week.

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Key World Markets During the Week

On the sectoral indices front, Realty, Metal and Oil & Gas stocks led the gainers this week. On the other hand, stocks from IT witnessed selling pressure.

BSE Indices During the Week

Now let us discuss some key economic and industry developments during the week gone by.

According to the Nikkei Purchasing Managers' Index (PMI) survey by Markit, India's manufacturing sector growth contracted, for the first time this year in December, as demonetisation curbed new orders as well as output of companies. The manufacturing PMI touched 49.6 in December, compared to 52.3 in the previous month. Any reading above 50 indicates expansion, while the one below that suggests contraction. Four of the five sub-components of the index - new orders, output, employment, suppliers' delivery time and stock of items purchased - contracted in December. Input costs accelerated at a faster pace than charges for output. This suggests companies couldn't entirely pass on the rise in input costs (driven by an increase in global commodity prices), as the cash crunch dented consumer demand.

This is the first time since the beginning of 2016 that the manufacturing PMI has come below 50, the point that separates growth from contraction. This also marked the biggest month-on- month decline in the index in over eight years or since November 2008 when the global economy had slipped into a severe downturn post Lehman collapse. Survey participants widely blamed the withdrawal of high-value rupee notes for the downturn as cash shortage in the economy reportedly resulted in fewer levels of new orders.

Though December saw a mild decline in manufacturing output, the average reading for October-December remained in the "growth terrain", suggesting a positive contribution from the sector to overall GDP in the third quarter of 2016-17, the survey said.

According to a leading financial daily, Foreign Direct Investment (FDI) in India increased by 27% at US$27.82 billion during the April-October period of the current fiscal as against US$21.87 billion in the same period last fiscal. The FDI numbers indicates that the government has been able to create a suitable climate in which the foreign investors feel confident that interest is protected. According to Department of Industrial Policy and Promotion (DIPP), manufacturing constituted around 41.5% of the equity inflows, while non-manufacturing were around 58.5% during April 2014 to Sept 2016. Total FDI in the country in the last financial year was US$55.6 billion, up by 23% over previous year. DIPP also stated that trademarks filing has increased by 10% and its examination grew by 250% so far this fiscal till November and added that trademark pendency has come down to 3 months and is expected to be 1 month by March 2017.

The main sectors including services, telecom, trading, computer hardware and software and automobile were the major areas which attracted FDI inflows. The country receives maximum FDI from Singapore, Mauritius, the Netherlands and Japan. FDI is considered crucial for country, which needs around US$1 trillion for overhauling its infrastructure sector such as ports, airports and highways to boost growth. Growth in foreign investments will also help improving the country's balance of payments situation and strengthen the rupee value against other global currencies, especially the US$.

The 8th meeting of the Goods and Sales tax (GST) council held over a two-day period remained inconclusive, effectively ruling out the implementation of GST from 1 April. The centre on Wednesday said that it will wait for consensus to emerge on GST laws and will not push for a decision by vote despite the threat of a delay in rolling out the new tax regime from April. However, both the centre and the states made headway on the integrated GST bill at the two-day meeting, though the contentious issue of sharing of administrative powers was not taken up. Two major issues -the proposed levy of tax on sale in the high-seas and dual control over entities with annual turnover of less than Rs 15 million-have held up the finalisation of the draft laws. The laws need to be cleared by the state legislatures and Parliament before GST can be rolled out.

Agreement on the crucial issue of 'dual control', which envisages a division of control over tax assessees between the states and the centre under the proposed GST and is at the heart of the wrangling between the two sides. Some states have now raised a new issue of the rate split under GST. And are advocating a split in the rates between the states and the centre should be in the ratio of 60:40 rather than the previously proposed equal split. With the deadlock between the centre and the states continuing over multiple issues, it is unlikely the GST will be rolled out on its initial deadline of 1 April. The GST council is set to meet again on 16 January. GST, when implemented will bring in a host of regulations to enable transparency in the tax regime. This will no doubt lead to added costs for implementation of regulations. Unorganized players may bear the brunt of added costs of compliance and may find it difficult to comply with the GST norms and compete with the well-established organised players.

According to a leading financial daily, the purchasing sentiment of Indians during December fell steeply by 0.42 points with the Buying Propensity Index (BPI) standing at 0.26 points, a nine-month low. The BPI in November 2016 had stood at 0.68 points.The BPI, measured on a scale between -1 to +1 is a quarterly index that measures the buying keenness among consumers. With a higher number signifying higher propensity to buy, and a lower number signifying the opposite. The steep decline in the BPI can be attributed to a single major event that occurred in November - demonetisation. Majority of consumers facing a cash crunch were expectedly not keen to splurge on any purchases other than essentials.

The December fall was when the pain of demonetization began to be felt more severely after the first salary cycle post-demonetisation announcement in December, and the impact of the enduring business and personal hardships as felt by citizens. The Index, based on research across 3,000 consumers- influencers across the eight tier I cities, found that Delhi was most severely impacted with a month-on-month fall of 122 per cent in citizen keenness to buy, registering a negative sentiment in December at -0.14, followed by Kolkata with a BPI fall of 90 per cent.

Moving on to news about the economy. According to an article in a leading financial daily, Foreign Portfolio Investors (FPIs) have proposed to the government that the threshold limit for triggering indirect taxation provisions be raised from 5% to 26%. The Central Board of Direct Taxes (CBDT) on December 21 clarified that even FPIs, private equity and venture capital funds would fall under the ambit of indirect transfer provisions, the law which became contentious between telecom major Vodafone and government.

To put it simply, the law as it stands states that all FPIs having more than 50% of assets under custody in India and owning over 5% stake in any listed entity would incur tax under indirect transfer provisions. This is in addition to the securities transaction tax and short term capital gains tax. As per this, overseas investors putting money into large offshore funds would have to forego a slice of their gains while selling or redeeming the units they hold. Most FPIs invest through special purpose vehicles that are India focused with more than 50 per cent assets invested here. FPIs propose that the threshold limit of 5% to be raised to at least 26%, as it would keep most of the FPI transactions beyond the gambit of the law. The FPIs further proposed that there should be no Tax deducted at source (TDS) obligations levied on them, and that corporate restructuring should not trigger indirect transfer provisions.

Moving on to news from the commodities sector. According to an article in a leading financial daily, gold imports have fallen to their lowest levels since 2003. This can be seen as an impact of the government pushing digital transactions and discouraging purchases of assets using cash. The demonetisation move had an impact on gold demand, which went up sharply after the withdrawal of Rs 500 and Rs 1000 notes on 8 November, with people scurrying to offload their cash into gold. However, the gold demand fell sharply in December owing to the cash crunch and the stipulation of furnishing Permanent Account Number (PAN) details when purchasing jewelry or bullion worth more than Rs 200,000.

The import of gold in 2016 in tonnage terms has been the lowest since 2003, according to the GFMS TR. The organization has estimated the official gold import in 2016 at 492 tons, a large part of that being for export. All efforts to discourage gold import will be incomplete if jewelers don't get local supplies, which is possible only if idle gold lying with Indian households is mobilized and for this the gold monetization scheme (GMS) is an ideal vehicle. The government is pushing banks towards this end.

Moving on to news from stocks in power sector. According to an article in The Business Standard, the Central Electricity Authority (CEA) has estimated an investment of Rs 2.6 trillion till 2022 indicating significant growth in the power transmission sector. The investment figure includes an estimate of Rs 300 billion in transmission systems below 220 kv. About Rs 1.6 trillion would come from states and the other Rs 1 trillion from Power Grid Corporation of India. The government is planning to increase the size of projects and scope of work in transmission. Inter-state lines with capacity of around 56,000 Mw are being planned by the end of the 13th plan. CEA stated that renewable energy generation would be 20.3% and 24.2% of the total energy requirement in 2021-22 and 2026-27, respectively. The estimate is that India would need 100,000 circuit km (ckm) of transmission lines and 200,000 MVA transformer capacity of substations at 220 kv and above voltage was expected to be added in the 13th plan. It has suggested that investment be invited through competitive bids.

Movers and Shakers During the Week

Company	30-Dec-16	06-Jan-17	Change	52-wk High/Low
Top Gainers During the Week (BSE Group A)
Jaiprakash asso.	8.07	10.39	28.7%	13/5
MMTC Ltd	52.75	62.25	18.0%	65/30
Unitech	4.03	4.64	15.1%	9/3
DLF Ltd	111.35	126.6	13.7%	170/73
Jaypee Infratech	7.4	8.22	11.1%	13/5
Top Losers During the Week (BSE Group A)
Mphasis Ltd	565.55	528.05	-6.6%	622/404
LIC Housing	559.45	524.06	-6.2%	624/389
Divis Laboratories	783.1	737.45	-5.08%	1,380/736
Infosys Ltd	1,010.70	971.45	-3.9%	1278/900
Tech Mahindra	488.7	469.75	-3.9%	564/405

Source: Equitymaster

Some of the key corporate developments in the week gone by.

State Bank of India (SBI) has cut its lending rates by 90 basis points for maturities ranging from overnight to three-year tenures, after experiencing a surge in deposits. The SBI move comes after Prime Minister Narendra Modi on Saturday admonished banks to "keep the poor, the lower middle class, and the middle class at the focus of their activities," and to act with the "public interest" in mind. Among the steepest interest rate cuts in a long time, the move is aimed at boosting loan growth, which has fallen to a multi-decade low.

After the move, its so-called overnight marginal cost of funds-based lending rate (MCLR) fell to 7.75% from 8.65%, while three-year loan rates will now be 8.15% from 9.05% previously. This is the second rate cut by the SBI in two months, as the lender had reduced MCLR by 15 bps in November. Following the withdrawal of the old Rs 500 and Rs 1000 notes, banks' loan growth has slumped, with economic activity taking a hit.

Following this, Union Bank of India and Punjab National Bank also announced cuts ranging from 60 to 90 basis points.

According to an article in a leading financial daily, Bharti Airtel is in talks with Swedish telecom operator Telenor to acquire the latter's India business unit for US$350 million. Airtel could acquire half of Telenor India's liabilities, while Telenor is expected to hold the remaining half. The deal is likely to be closed by end of January. Telenor has been allegedly hoping to leave India, having been pushed into a corner on account of its restricted data spectrum holdings and its presence in limited areas. Bigger adversaries like Bharti Airtel, Vodafone India, Idea Cellular and new participant Reliance Jio Infocomm have been greatly extending their 4G administrations. Reportedly, Telenor India owes close to Rs 19 billion to the government in deferred spectrum payments and about Rs 18 billion to financial institutions as debt. One must note that, Telenor currently has operations in 6 telecom circles - AP& Telangana, Uttar Pradesh East and West, Bihar, Gujarat and Maharashtra. Telenor also holds 4G spectrum license in seven telecom circles.

According to an article in the Business Standard, Larsen & Toubro (L&T) announced that its wholly-owned subsidiary L&T Hydrocarbon Engineering (LNTHE)-led consortium has bagged two orders from Saudi Aramco. LTHE in consortium with EMAS CHIYODA Subsea, has won two awards involving Engineering, Procurement, Construction and Installation (EPCI) contracts from Saudi Arabian oil giant, Saudi Aramco. The contract is awarded to supply and install 4 wellhead decks in the Safaniya field and another award to upgrade on 17 platforms in various offshore fields in the Arabian Sea off the coast of Saudi Arabia.

One must note that, the long term agreement awarded by Saudi Aramco to the Consortium in June last year had been very successful. Moreover, the consortium is poised to remain a substantial service provider to Aramco and participate in the development of capabilities in Kingdom over the long term, the reports noted.

Separately, in a major development L&T has been identified as the implementation partner by the government to convert Pune into a smart city. In this regard, the letter of intent for the Pune smart city project was handed over by the Municipal Commissioner of Pune to L&T Construction's Smart World & Communication Business Unit, which will be executing the project. The scope of work includes enabling Wi-Fi at around 200 strategic locations across Pune, establishing Emergency Call Boxes and Public Address Systems, Environmental Sensors, Variable Messaging Displays, Network Connectivity and Video Analytics Integration. Diversification continues to help L&T (Subscription Required) negotiate and get better terms and margins for projects. Apparently, this is because it is less desperate to win orders as compared to a company which are present in only a couple of sectors. Its reputation, extensive technical prowess, and large skilled workforce have enabled L&T to command a certain premium from customers and vendors alike. Whether, further addition to these new projects provides a cushion to its profitability will be an interesting thing to watch out for going forward.

According to an article in The Economic Times, Coal India announced that in this month, it will be starting the second phase of auction of coal linkages for the non-regulated sector and is likely to put on offer 14.5 million tonnes (MT) of fuel. In this regard, Tranche II of auction of coal linkages for sponge iron sub-sector under non-regulated sector will start from January 17 onwards. Further, in the non-regulated sector, the auction of coal linkages will be for sponge iron, cement, steel and others. One must note that, the company will put on offer of around 5 MT of coal for the sponge iron sector. In the first round, the company had auctioned around 22 MT of fuel linkages for the non-regulated sector. Also, last year, the Cabinet Committee on Economic Affairs had approved allocation of coal linkages for non-regulated sector only through auction route.

2015 had been an absolutely terrible year for metals and mining companies. Almost all of them saw their stock prices plunge and how. 2016, had seen a reversal of sorts though. Barring SAIL and Coal India, all the metals and mining companies have outperformed the Sensex by a wide margin. In one of our premium editions of The 5 Minute WrapUp, we have cited the reasons Coal India's underperformance (Subscription Required). Going forward, whether the worst gets over and prices start to rise again will be the key things to watch out for.

According to an article in The Financial Express, Exide Industries Ltd announced that it will invest Rs 3 billion to expand its capacity for advanced motorcycle batteries over a period of 18 months starting April. In this regard, Exide opened a Rs 7 billion assembly facility in Haldia to make so-called punched grid batteries with technology from East Penn Manufacturing Co. of the US. Exide is the first producer of such batteries in India. With the new facility, Exide has increased its annual production capacity by 1.2 million to 15 million batteries.

Reportedly, the new range of batteries will not only be a lot more robust, being manufactured in a modern plant with advanced robotics and automation (Subscription Required), the manufacturing process will also eliminate human errors to a large extent.

Moving on to news from the energy sector. ONGC's overseas arm ONGC Videsh Ltd (OVL) has won rights to bid for oil and gas development projects in Iran.OVL is among the 29 international oil companies from more than a dozen countries that Iran has pre-qualified to bid in the upcoming tender for oil and gas projects, according to the list put out by National Iranian Oil Co (NIOC).

It is the only Indian company to have qualified to bid for projects in Iran, which holds the world's fourth-largest oil reserves and is OPEC's third-largest oil producer. OVL is already present in Iran. In 2008, it had discovered the Farzad-B gas field in the Farsi block in Persian Gulf. The discovery has an in-place gas reserve of 21.7 trillion cubic feet (tcf), of which 12.5 tcf are recoverable. OVL is reportedly in talks with the Iranian government over the development of this field.

ONGC officials said that OVL will definitely look at participating in the bid round that Iran will hold using a new, less restrictive Iran Petroleum Contract (IPC) model. The IPC model ends a buy-back system dating back more than 20 years under which Iran did not allow foreign firms to book reserves or take equity stakes in Iranian companies. The new IPC is said to be more flexible terms that take into account oil price fluctuations and investment risks.

According to an article in the Livemint, Sun Pharmaceutical Industries Ltd's drug Seciera has displayed positive results in a 12-week multicentre phase-3 clinical trial conducted on 744 patients. Seciera is indicated for the treatment of dry eye disease, developed by Ocular Technologies.

One must note that, Ocular Technologies is recently acquired by Sun Pharma (Subscripton Required). Following this acquisition, Sun Pharma owns exclusive, worldwide rights to Seciera and is developing it to commercialize for global markets including the US, Europe, and Japan, as well as several emerging markets. Moreover, Seciera would further help to strengthen the company's emerging ophthalmics pipeline, which includes the recent launch of BromSite and late stage development programmes for Xelpros and DexaSite. Going ahead, this product if approved by USFDA would give the company a share in the dry eye drug market which is expected to touch US$5 billion by 2020, the reports noted.

And here's an update from our friends at Daily Profit Hunter...

The Nifty traded on a positive note during the week. The index remained in a tight range at the start of the week. Then, on Thursday, it opened gap up and continued to show strength throughout the day. Yesterday, the index again opened on an upbeat but couldn't sustain there for long. Towards the end of the session, it witnessed some selling pressure and ended the day down 30 points. The Nifty managed to end the week with a 0.70% gain. The index is facing stiff resistance from 8,250-8,300 levels provided by its recent high and 200 EMA. A sustained close above these levels will help gain positive momentum for the index. You can read the detailed market update here...

Nifty Struggling Near Resistance zone of 8,250-8,300

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