Falling oil prices and currency wars influence stock markets

Sat, 17 Jan RoundUp

   Previous Close   

The week gone by witnessed some interesting developments with significant consequences for the global stock markets. The oil prices plunged further, thus raising concerns of deflation in the developed world.

The US stock markets were down by 1.3% during the week on concerns regarding strength of the global economy and falling oil prices. This was despite some positive news on the economic front. As per the recently released data, factory production in the month of December increased for a fourth straight month in a row. In a separate report, a measure of consumer sentiment from the University of Michigan suggested a jump to its highest level in 11 years.

Most major markets in Europe closed with strong gains. The stock markets for Germany and France were the biggest gainers with respective indices up 5.4% and 4.8% over the week. The recent move of the Swiss National Bank to ditch its policy to cap the rise of the Swiss franc had major implications for currency markets. Following the news, the Swiss franc spiked against both the Euro and the US dollar while Switzerland's stock market sank. While Euro hit fresh 11 year lows against the dollar, gold prices ended above US$ 1276 , at highest since August last year.

The major Asian stock markets closed the week on a mixed note with China and Hong Kong gaining 2.8% and 0.8% over the week while stock markets in Japan and Singapore were down 1.9% and 1.1% respectively. The markets in Japan declined as investors sought safety of Asian government bonds, after the Swiss National Bank rattled currencies and as oil glut concerns weighed on sentiment. However, the stock markets in China remained unperturbed and were boosted by announcement of CNY50bn provision by People's Bank of China to support agriculture industry and small companies.

Key world markets during the week

Source: Yahoo Finance

The Indian stock markets ended the week in green (up 2.4%) with a major boost coming from Reserve Bank of India's decision to cut repo rate by 25 basis points. Barring oil and gas and metal, all sectoral indices ended the week on a positive note with the stocks in the realty and capital goods sector leading the gains.

BSE indices during the week

Source: BSE

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

Inflation numbers for the month of December 2014 were announced this week. The same, measured by as the wholesale price index, stood at 0.11% in the month of December as compared to 0% in the previous month. Last year, the figure stood at 6.4%. Food inflation stood at 5.2% (the highest figure since August) versus 0.63% in the month of November. However, fuel inflation came in at a negative 7.82% as compared to a negative figure of 4.91% in November 2014. As for manufactured products, inflation stood at 1.57% in December as compared to 2.04% in November. As reported by the Hindu Business Line, retail inflation for the month of December stood at 5% as compared to 4.4% in November.

The Reserve Bank of India (RBI) on Thursday has cut the reverse repo rate by 25 basis points to 7.75%. The CRR rate is kept unchanged at 4%. It is imperative to note, there has been an ongoing debate on the rate cut since some time now. However, this move was not anticipated by various experts.

The exports during the month of December declined after the rise seen during November 2014 . The decline during December was largely attributable to outbound shipments, which fell 3.8% YoY. Exports had contracted in October by about 5% but then rose 7.3% in November from a year earlier. However, even imports for the month of December fell by 4.8%. Consequently, the trade deficit has improved, and was lowest in the current financial year.

The telecom regulator TRAI has rejected the Department of Telecom's (DoT) proposal to set the base price of 3G spectrum higher by 43% compared to the 2010 auction price. The government is set to auction a limited amount of 3G spectrum in the 2,100 MHz band in the 22 Feb auctions. While the regulator has been trying to convince the government to keep the base price as low as possible to ensure fair competition, the government is more concerned about revenue maximization and is unlikely to lower the reserve price at all. It is in fact keen to hike it by 43%. The Telecom Commission will now take the final call shortly.

Movers and shakers during the week

Company	9-Jan-14	16-Jan-14	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Sun TV	354	418	18.2%	488/299
Housing Dev. Infra	68	80	18.1%	114/39
Emami Ltd	768	876	14.1%	895/421
Ultratech Cement	2,727	3,071	12.6%	3140/1652
United Spirits	2,861	3,208	12.2%	3244/2226
Top losers during the week (BSE-A Group)
Videocon Inds.	191	166	-12.9%	211/155
Hindalco	155	138	-10.7%	199/97
Core Education	13	12	-9.9%	22/9
Petronet LNG	214	198	-7.5%	222/103
Berger Paints	244	226	-7.3%	253/100

Source: Equitymaster
Now let us move on to some of the key corporate developments of the week gone by.

National Thermal Power Corporation (NTPC), India's largest power producer, has signed Rs 100 bn term loan agreement with SBI. The loan will have tenure of 15 years. NTPC has lined up huge capex plans in order to meet the power deficit situation in the country. The current agreement will ensure that it is able to avail liquidity at the right time to fund its capex if need be.

Tata Motors will be launching its Bolt compact car in 100 cities at the same time to capitalize on the popularity of new model and gain share in the highly competitive small car market. As per company, this strategy will help increase traffic in the showroom in a big way. The company had launched the Zest model in August 2014. Although the model launch helped the company to arrest sales decline but the company lost significant volumes due to long waiting periods. As per SIAM data, Tata Motors recorded sales growth for the second month in a row in December when offtake grew by 7% YOY to 13,599 units.

The Indian government is under process of selling 10% of its stake in Indian Oil Corp (IOC) this fiscal. This stake sale will help the government in raising about Rs 81.5 bn. Reportedly, the Department of Disinvestment (DoD) has circulated a draft note for the consideration of the Cabinet Committee on Economic Affairs (CCEA). Currently the government is holding approx 68.57% stake in the IOC. The finance Minister Arun Jaitley had discussed possible disinvestment candidates in oil sector, other than ONGC, with Petroleum Minister Dharmendra Pradhan recently.

As per a recent amendment, the government has proposed a ban on the sale of loose cigarettes and raising the age-limit for buying tobacco products from 18 to 21 years. Since a large proportion of cigarettes sold is in the form of loose cigarettes, 70% as per Euromonitor International, the proposed amendment is likely to impact the sale of cigarette companies. In addition, the Health Ministry has suggested that the fine amount on smoking in public places be raised from Rs 200 to Rs 1000 and the designated smoking zones in hotels and restaurants should be removed. The new bill also seeks to increase the fine from Rs 10,000 to Rs 1 lakh in case of violation of the proposed law.

Now that the result season has begun, let is take a look at the interim performance of some of the companies.

India's largest software firm, Tata Consultancy Services (TCS) has announced its third quarter results for financial year 2014-2015 (3QFY15). The company reported a 2.9% quarter-on-quarter (QoQ) growth in its consolidated sales. In the constant currency terms, sales grew by 2.5% QoQ. The operating performance was good. The operating margin improved marginally by 0.2% QoQ to 28.8% during the quarter. On an absolute basis, the operating profits grew 3.6% QoQ. Net profits were up by 1.6% QoQ. The company has declared an interim dividend of Rs 5 per share. The record date is 28th Jan 2015 and the payout date is 9th Feb 2015.

Going ahead the Indian markets will continue to look for cues from global events as well as the results season which has just begun. However, investors would be best served if they focus on the long term and invest only in fundamentally strong companies trading at attractive valuations.