Global Markets Ended on a Negative Note, However Indian Markets Outperform

Sat, 4 Feb RoundUp

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Global markets ended the week on a weak note with most of the markets ending in the negative territory. The Indian market was the biggest gainer, with gains of 1.3%. On the other hand, Japan and Brazil markets were down by 2.8% and 1.6% respectively.

US Markets have run up sharply following Trump's 8 November election win on the expectation that tax cuts, deregulation and a fiscal stimulus would accelerate economic growth. Lately, however, US stocks and the dollar have cooled off as uncertainty grows about Trump's ability to push through the market-positive aspects of his plans, and on worries about some of the more aggressively 'America First' policies, particularly on immigration.

Earlier in the week, the US Federal Reserve held interest rate unchanged in its first meeting since President Donald Trump took office, but painted a relatively upbeat picture of the US economy that suggested it was on track to tighten monetary policy this year. The Federal Open Market Committee (FOMC) - the US central bank's policy making arm - kept its benchmark overnight lending rate target at a range of 0.5% to 0.75%. In December, the Fed raised the target a quarter point, or 25 basis points, marking just the second hike in more than 10 years. The US central bank said job gains remained solid, inflation had increased and economic confidence was rising, although it gave no firm signal on the timing of its next rate move. The DJI Index was marginally down by 0.1% for the week gone by.

Meanwhile, People's Bank of China unexpectedly raised the interest rates on open market operations, adding to growing concerns about US President Donald Trump's aggressive policies. On the first day of trading after a weeklong break for the Lunar New Year, the currency also weakened after the People's Bank of China raised the interest rates on open market operations by 10 basis points. The Shanghai Composite Index was down marginally by 0.6% for the week gone by.

Eurozone witnessed a rise in inflation during the month of January. Data released during the week showed inflation accelerated to 1.8% YoY in January. This was against 1.1% in December and just below the European Central Bank's (ECB) target of 2%. It was the highest rate since February 2013 and showed prices rising in Germany, France, and Spain - three of the bloc's four biggest economies. On the other hand, core inflation was stable at 0.9% YoY. The core inflation excludes volatile prices of energy and unprocessed food. Apart from the above, gross domestic product in the Eurozone rose 0.5% QoQ in the last three months of 2016. Stock markets in Germany and France were down by 1.4% and 0.3% for the week gone by.

Back home, a smart rally on the budget day pushed the market to end the week higher, however, the cautious sentiment ahead of the Reserve Bank of India's policy meeting and visa woes on the IT sector kept the momentum slow in the last two trading sessions.  The BSE Sensex was up 1.3% for the week, while the NSE Nifty gained 1.2%. Midcap and Smallcap stocks outperformed. The BSE Mid cap index rose 2.5%, while the BSE Small cap index surged 2.4%. In the coming week, Index of Industrial Production (IIP) data on Tuesday and Reserve Bank of India's policy meeting scheduled for Wednesday will be under investors' radar.

Key World Markets During the Week

On the sectoral indices front, telecom and realty stocks led the gainers this week. On the other hand, stocks from IT and power witnessed selling pressure.

BSE Indices During the Week

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

The Finance Minister tabled the Union Budget 2017-18 on 1 February. The Union Budget focused on 10 distinct themes: Farmers, rural population, energizing youth, poor and underprivileged, infrastructure, financial sector, digital economy, public service, prudent fiscal management, and tax administration. The total budget expenditure of the budget this year is pegged at Rs 21,470 Billion. Despite the high figure the government has managed to keep the budgeted expenditure at a fiscal deficit of 3.2% as against the FRMB recommendation of 3% for the current fiscal.

The Finance Minister announced a slew of sops and tax benefits among other fiscal announcements. Presently the burden of taxation was mainly on salaried class. Post demonetisation there was a legitimate expectation of reduced burden. In accordance to this expectation, in news that will bring cheer to the majority of the tax paying population., the Income tax has been halved to 5% for those earning between Rs. 250,000 and Rs. 500,000. The Finance Minister said that this move is to reduce the burden on tax payers and bring in more people under the tax net, through lower rates.

Among other tax benefits, Foreign Portfolio Investors (FPIs) will be exempt from indirect provisions reducing tax burden. The finance minister proposed the change in the definition of 'Long Term' for long term capital gains in case of properties to 2 years from the current three years.

The stock markets have clearly given a thumbs-up to the budget. But the question is: Should you rush out and grab a slice of this relief stock rally?

Rahul Shah, co-head of research, answer this question in the recent edition of the 5 Minute WrapUp. As per him, market participants should not fall for the post-budget buying frenzy. Rather, they should look out for value and follow a long term value investing approach.

One of the major beneficiaries of the budget was the rural economy. Many measures are announced in the budget to prop-up the rural India. With an aim to double farmer's income in five years, the government made an allocation of Rs 480 billion under Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA).

Apart from the above, the government stated it would be disbursing agricultural credit to the tune of Rs 10 trillion in FY18. This, along with a 60 days' interest waiver announced earlier, will benefit farmers in a long way. Apart from this, the government will undertake Mission Antyodaya to bring one crore households out of poverty and make 50,000 gram panchayats poverty free by 2019.

Giving a boost to clean energy programme, Finance Minister Arun Jaitley proposed massive cuts in excise and customs duties on materials used in solar and wind plants and also announced the second phase of solar park development for 20 GW capacity.

In a bid to incentivize domestic value addition under Make in India initiative of the Government, the Finance Minister has proposed to reduce Customs and Excise duties on several items related to the Renewable Energy Sector. This includes all items of machinery required for fuel based power generating system to be set up in the country for demonstration purposes; systems operating on biogas/ biomethane/ byproduct Hydrogen; LED lights or fixtures etc. The Budgetary allocation to the Ministry of New and Renewable Energy was hiked by 8.7% to Rs 50.4 billion to Rs 54.7 billion.

One must note that, India has set an ambitious target of adding 175 GW of renewable energy by 2022 which includes 100 GW of solar, 60 GW of wind, 10 GW from biomass and 5 GW from small hydroelectric projects (upto 25 MW each).

Speaking of renewable energy space in India, Rahul Shah, Co-head of Research has recently shared his views on how the rise of the renewables is changing the dynamics of the power industry (Subscription Required). He has also compared the costs of setting up various types of power plants in these times and how the Indian central government has been pushing hard for more renewable energy capacity. Here's a snippet of what he wrote:

"The renewable energy sector, and especially solar, have seen their fortunes change at a rapid pace. Leaps in technology have made renewables increasingly cheaper to produce relative to traditional thermal power.

...while thermal is still the cheapest to set up, the gap has quickly narrowed in the past few years and is now down to a whisker."

Moving on to news from stocks in the oil and gas sector. The government plans to merge state oil companies to create an integrated oil major that could top US$ 100 billion in market value and compete with global oil biggies.

The proposal of merging 13 government oil companies, which had stemmed out of the Cabinet Secretariat last year but did not find takers in the ministry of petroleum, is now back on the agenda.

The Finance Minister, in his budget speech said that the government sees opportunities in strengthening public sector undertakings through consolidations, mergers and acquisitions. The FM also highlighted that opportunities of restructuring and consolidation are clearly visible in the oil and gas sector.

The government envisions the creation of an integrated public sector 'oil major' which will be able to match the performance of international and domestic private sector oil and gas companies.

The resulting entity from the consolidation of India's major oil & gas PSUs will create an oil major which could top over US$ 100 billion in market revenue.

In another news, the Manufacturing Purchasing Managers' Index (PMI) is an indicator of manufacturing activity. A reading above 50 indicates expansion, while any score below the mark denotes contraction.

The indicator suggests an upturn in the manufacturing activity in January, as compared to December. Manufacturing activity in December was hit due to demonetisation induced liquidity crunch, lower orders and muted outputs. The main factors contributing to the above-50.0 PMI reading were growth of both new orders and output. Rates of expansion were only slight, but reversed the contractions noted in December. Manufacturers attempted to replenish their input stocks by purchasing greater quantities of raw materials and semi-finished items in January. That said, the overall rate of growth was only slight and well below its long-run average.

In another development, as per an article in a leading financial daily, gold demand in India witnessed a significant decline of 21% in 2016 at 675.5 tonne. The gold demand for 2015 stood at 857.2 tonne, while it was 675.5 tonne in 2016, as per the World Gold Council's (WGC) data.

Backed by challenges like jewellers strike, PAN card requirement and demonetisation move, India's gold demand for 2016 fell sharply. Jewellery demand in India also witnessed a sharp decline of 22.4% in 2016. Indian demand averaged at 845 tonnes over the last 10 years. According to WGC, there are some interesting short-run dynamics too. Gold demand is spurred by inflation, rises with a good monsoon, and is dampened by higher import taxes and other restrictive measures. By 2020, the Indian gold demand is expected to average 850-950 tonnes.

Movers and Shakers During the Week

Company	28-Jan-17	04-Feb-17	Change	52-wk High/Low
Top Gainers During the Week (BSE Group A)
JAIPRAKASH POWER	3.99	6.13	53.6%	7/3.6
IDEA CELLULAR	77.8	109.2	40.4%	128/66
SUN TV	536.8	683.85	27.4%	699/312
JAIPRAKASH ASSO.	10.51	13.05	24.2%	14/4.9
JAYPEE INFRATECH	8.16	9.79	20.0%	12/4.9
Top Losers During the Week (BSE Group A)
JET AIRWAYS	418.85	380.85	-9.1%	670/332
NALCO	78.45	71.75	-8.5%	79/30
SUZLON ENERGY	17.8	15.95	-8.2%	19/11.99
TCS	2,358.05	2,233.75	-5.3%	2,740/2,055
IDFC LIMITED	57.35	54.85	-4.4%	71/35

Source: Equitymaster

Some of the key corporate developments in the week gone by

As per an article in a leading financial daily, Tata Power has entered into a binding understanding with group firm Nelco's defence business of Unattended Ground Sensors (UGS) and completed the formalities for the purchase. The UGS business involves supply, installation and servicing of sensors for the Ministry of Defence.

Reportedly, the acquisition is made on a slump sale basis for about US$1.3 million. The UGS business will be housed in Tata Power's strategic engineering division (SED) once the deal is completed. SED is a supplier of defence equipment and solutions. Further, acquisition of the UGS business will provide synergies to the existing business of Tata Power SED and has scope for growth and expansion, the company stated. However, going ahead, whether the takeover of Nelco's UGS business segment further enhance tata power's presence in the defence segment and provide synergy and alignment in servicing the customers will remain to be seen.

Asia's oldest stock exchange BSE Limited's Initial Public Offering (IPO) opened up for trading in the secondary market today. BSE Limited share price listed at Rs 1085 per share, a 35% premium over the issue price of Rs 806, on its rival National Stock Exchange (NSE).

BSE share price continued its upward move and went on to hit a high of Rs 1200 per share, up 49% over its issue price within a matter of minutes of listing. Around 12 million shares changed hands on the counter on the NSE so far. The country's first IPO of equity from a stock exchange has generated big demand across categories of investors. BSE Ltd's Rs 12.4 billion issue saw 51 times more demand than the shares on offer. The institutional investor portion was subscribed 49 times, the high net worth individual portion nearly 159 times and the retail investor portion by 6.5 times, the exchange data shows.

During the offer for sale, we had alerted subscribers about our view regarding the BSE Limited IPO in one of the premium editions of the 5 Minute WrapUp. You can read about our view of the BSE IPO here (Subscription Required).

According to a leading financial daily, Coal India has reported provisional production of 55.99 million tones (MT) in January 2017, as against a target of 61.04 MT. The company's total off-take for the month of January stood at 51.35 MT, as against a target of 55.73 MT. The company also has produced 433.7 MT of coal in the April-January period of the ongoing fiscal against the target of 478.5 MT. The government is aiming at one billion tonne coal production by Coal India and another 500 million tonne by the private sector players by 2022.

Coal India is falling back on increasing allotments under the auction route as its sales and price realizations to Fuel Supply Agreement consumers is feeling the heat, owing to the low demand of the fossil fuel in the domestic market. While e-auction volumes for the company increased to touch 39.52 MT in the April-October period of the current financial year, the average price per tonne declined by 27%, at Rs 1,463 a tonne. It accounts for over 80% of the domestic coal output and has a production target of 598 million tonnes for the current fiscal.

According to an article in The Economic Times, Rural Electrification Corp (REC) has signed a loan agreement with Tamil Nadu's power generation and transmission utilities for financial assistance of Rs 68.9 billion. Reportedly, the pact has been signed with Tangedco and Tantransco in Chennai for implementation of 800 Megawatt supercritical thermal power plant, renovation and modernisation of existing thermal power plants and establishment of new 765 KiloVolt, 400 KV substations in and around Chennai.

Further, it will also support in other renewable energy, energy conservation, smart grid and automation power projects in Tamil Nadu. In the meanwhile, REC has also inked three pacts to extend financial assistance of around Rs 600 billion to Andhra Pradesh recently. The financial assistance comprises Rs 400 billion to Andhra Pradesh Power Generation Corp, Rs 100 billion to Transmission Corporation of Andhra Pradesh and Rs 100 billion to AP DISCOMSs.

Apart from financial assistance, power utilities have agreed for availing Consultancy and Management Services from wholly owned subsidiaries of REC for their various projects for next 5 years, the reports noted. To know more about the company's financial performance, subscribers can access to REC's latest result analysis (subscription required) and REC stock analysis on our website.

Meanwhile, a legislation has been introduced in the US House of Representatives which doubles the minimum salary of H-1B visa holders to US$ 130,000. Following the tabling of the Bill, the BSE IT index fell by 4%. The shares of HCL Technologies fell 3.7%. TCS saw its stock price tumble 4.6%. And Wipro went down by 4.1% on the bourses. Reportedly, Indian IT professionals largely use these visas to go to the US. The Bill introduced seeks to double the salaries for IT firms to US$130,000 per annum, which is more than double of the current H-1B minimum wage of US$60,000, which has remained so since 1989. The bill, if passed, would require employers in the US to first offer a vacant position to an equally or better qualified American worker before seeking an H-1B or L-1 visa holder.

This move could affect technology companies that depend on the programme to hire tens of thousands of employees each year, the reports noted.

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

The Nifty 50 Index was up 100 points for the week. It started the week on a negative note, failing to test the 8,550-8,600 levels, which were previously a resistance level but are now a support. On Wednesday, the index shot up 155 points on the back of the positive budget announcements. Toward the end of the week, the index traded on a positive note and closed its weekly session with 1.15% gains. The Nifty is clearly trading in an uptrend channel with support at 8,550, a level to watch in the coming sessions. You can read the detailed market update here...

Nifty 50 Index Closes the Week 100 Points Up

 

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