US Strikes on Syria Keep a Lid on Global Financial Markets

Sat, 8 Apr RoundUp

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Most of the global financial markets traded on a volatile note during the week, and ended the week on a flattish note. Major global markets were uneasy and risk averse after the US launched a missile attack in Syria. Soft jobs data, coupled with the missile strike meant that the US markets ended the week on a flat note.

The decision by President Donald Trump to authorize the firing of U.S. missiles into Syria weighed on global stock markets in the week. Japan's Nikkei hit a four-month low after the US strike hurt broarder sentiments. The Japanese index was the highest loser during the week, shedding 1.3%.

European indices too were affected by geopolitical uncertainty. A host of positive manufacturing and jobs data coming in from the Eurozone was overshadowed by the US military actions as markets turned cautious and dumped high risk shares and assets.

European indices closed the week on a flattish note in contrast to the rally earlier in the week. The UK and French indices showed marginal gains in the week gone by, gaining 0.4% and 0.2% respectively. While the German indices closed the week down by 0.7%. Market participants are now closely following the outcome of the ongoing US-China summit.

Key World Markets During the Week

Back home, Indian share markets too pared gains over global cues. While the Sensex hit its all time high and crossed the 30,000 mark during the week over positive news from the parliament nod for the GST bills, it fell later in the week over global clues and geopolitical uncertainty. The BSE Sensex ended the week up by 0.3%.

BSE Indices During the Week

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

In a major positive development, India just got closer towards a possible July 1st rollout of the Goods and Services Tax (GST). This comes as the Parliament gave its nod to four related legislations that detail the provision of GST tax regime.

Implementation of the GST promises to transform India into a single common market and there are many sectors which stand to gain immensely from this transition.

Further, the Goods and Service Tax (GST) is likely to bring about a structural change in the Indian economy. The implementation of the same is bound to bring more companies under the new tax regime, thus providing a level playing field to organized.

This could be a positive for stock market participants, as the above transition will lead to a value migration from unorganised players to organized players. And companies with solid fundamentals and a competitive moat will capture most of this value.

In the latest development, it was reported that, banks will be allowed to invest in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), attracting more institutional investors to such assets and expanding the investment scope of banks. REITs are listed entities that primarily invest in leased office and retail assets, allowing developers to raise funds by selling completed buildings to investors.

In this regard, the Reserve Bank of India (RBI) proposed in its monetary policy to allow banks to invest in such investment trusts following a request from the markets regulator.

Currently, banks are allowed to invest in equity-linked mutual funds, venture capital funds (VCFs) and equities to the extent of 20% of their net owned funds.

The move would result in increased availability of low-cost funds for the real estate industry, which is short on cash and capital due to demonetisation and dried up funding. It's a win-win situation for both, the banking industry and the realty sector, the reports noted.

One of the biggest sectors hit by the demonetisation drive was real estate. The sector largely thrived on cash transactions. However, banks having exposure to commercial real estate also faced the music from the government's crackdown on black money.

Among banks, Yes Bank has the highest share of exposure to commercial property at 6.8%. However large private sector banks such as Axis Bank, ICICI Bank, and HDFC Bank have shares of 4.3%, 3.2% and 2.2%, respectively. State Bank of India has a miniscule 0.9% share of exposure to commercial real estate.

Moreover, it is a crucial move because including it will bring in more institutional investors into these trusts, who are looking at relatively stable assets with steady but slightly lower returns, the reports noted.

The Reserve Bank of India (RBI) announced its first bi-monthly monetary policy statement for 2017-18 in the week gone by. The RBI left repo rate unchanged at 6.25% but hiked reverse repo rate to 6% from 5.75%. While, the Cash Reserve Ratio (CRR) remains unchanged at 4%.

The repo rate at 6.25% level is quite reasonable we believe. As the chart below shows, the repo rate has fluctuated in a range over the last six years. It is back to where it was in November 2010. The last change was a cut to 6.25% last October.

The move comes as RBI continues to guard against any potential flare-up in inflation and an uncertain global economic environment.

As per RBI, gross value added (GVA) growth is projected to strengthen to 7.4% in 2017-18 from 6.7% in 2016-17. Several favourable domestic factors are expected to drive this acceleration. Further, the marginal standing facility (MSF) rate and the Bank Rate are at 6.50%.

The decision of the committee is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

The review comes in the backdrop of the likelihood of 'El Nino' disrupting monsoon rainfall and exerting upward pressure on food prices, and rising global oil and commodity prices, the reports noted. The RBI has however hiked its outlook for GDP growth to 7.4% in this fiscal from 6.7% last year. Inflation is expected to average around 4.5% in the first half and 5% in the second half.

India's IT sector was under pressure during the last week after the Donald Trump government announced measures to step up scrutiny of H1B visa holders in the US.

The $115-billion software services sector in the country will possibly have to deal with fresh restrictions as the US government announced its intention to prevent the abuse of the H1B work visa system and said the system should help US companies in hiring highly skilled foreign workers when there is a shortage of skilled employees in the country.

There are plans to prohibit visas to entry-level engineers too. H1B work visas are most sought after by Indian firms and professionals, mostly in the Information Technology sector.

The US Citizenship and Immigration Services Agency (USCIS) on Monday said it would scrutinise petitions on three parameters - validation of employer's basic business information, higher H1B employee ratio and employers petitioning for H1B workers who work offsite at another company or organisation's location. There will be more scrutiny of fresh engineers who apply for these visas.

The US opened the window to invite applications for 85,000 H1B visas it plans to issue for 2018.

The latest announcement comes at a time when there is already an air of protectionism in the global markets. Singapore and the UK are both cutting down on visas to Indians in the IT sector, while also increasingly protecting high-paying computer engineering jobs for locals.

For many Indian companies, Singapore acts as a base for Southeast Asia, while the UK is a regional base in Europe.

An overall protectionism trend is expected to hit the Indian IT firms' bottom line. Especially in the US which accounts for more than 50% of revenues of India's IT majors.

Indian IT companies such as Infosys, Wipro, and TCS may have to bear a hit on their revenues for the short term.

However, we believe that it is unlikely that the companies will substantially bring down their focus on the US. Instead companies may look out for other means to reduce costs or protect margins.

That said, Indian IT companies will also need to rise to Trump's challenges. But fortunately, most were already gearing up for this. Trump may have only accelerated their defence.

So as long as you aren't worried about the revenue guidance in the coming quarters, you need to do just one thing: Stay vigil on valuations.

And you never know, the Trump crash may be an opportunity to act on not just IT but lots of other safe stocks as well.

The Yogi Adityanath-led BJP government in Uttar Pradesh yesterday announced writing off crop loans of up to Rs 1 lakh for about 21.5 million small and marginal farmers.

The total waiver on the back of this development stands at Rs 363 billion. This is one of the highest waiver promised by a state.

Of the above amount, Rs 56 billion represents non-performing assets of 7,00,000 farmers and will be waived off immediately.

The development will enable farmers to seek new loans from the bank. It will also clean up the account books of the banks involved for the above loans.

That said, the development will also mean loss of revenue for the banks. Banks will only be paid back the principal amount by the state, and thus will forego the interest income. Also, as the waiver will be returned to banks after a few months, the banks will sacrifice the interest revenue they would have earned during this period.

Apart from the monetary impact, there is also the question of moral hazard in loan waivers.

Our big picture expert Vivek Kaul explains it succinctly in his Diary.

In our view, India's agriculture sector needs the government's support but loan waivers cannot be the solution as they are only focused on the short-term. Moreover, expenditure on loan waivers will leave the government with less fiscal space for productive infrastructure spending.

According to a leading financial daily, Finance Minister Arun Jaitley has expressed his confidence that India's GDP will grow at 7.2% in 2017 and at the rate of 7.7% in 2018. He also pointed out that global growth is moving upwards but emerging market economies (EMEs) face newer challenges from growing protectionism of some economies, global financial condition, policies of the United States and increased geopolitical tension.

The Minister has stated that India has sought US$ 2 billion loans for various projects from the New Development Bank (NDB), whose core mandate is sustainable infrastructure development and which is set up by the emerging countries such as India, China, Brazil, Russia, and South Africa.

He also pointed out that in next five years, the country would require Rs 43 trillion or US$ 646 billion for modernizing its infrastructure from highways to urban infrastructure. He added that funding needs for building infrastructure in India and other emerging nations offers enormous opportunity to an institution like NDB.

Jaitley further added that growth in emerging and developing countries is picking up and news from economies of BRICS countries is encouraging. He hopes that NDB will help in funding of emerging economies. He added that India was looking to have a mutually beneficial partnership with the bank.

In news from India's manufacturing sector. The manufacturing sector continued its rebound from notebandi. The sector expanded well in March as a rebound in export demand along with a sharp rise in production, contributed to a stronger expansion of total new orders, according to the Nikkei Purchasing Managers' Index (PMI) survey by Markit.

Having deteriorated in December for the first time in one year, the health of India's manufacturing economy showed signs of improvement in January 2017. The manufacturing PMI recovered from 49.6 in December 2016, to 50.4 in January 2017 and continued moving upwards marginally to 50.7 in February.

The sector continued its upward move, as PMI rose to 52.5 in March, registering the fastest upward move since October 2016.

The robust PMI data comes after dismal infrastructure and industrial data in January and February.

Earlier, government data showed India's infrastructure sector grew at its slowest pace in five months in February mainly due to lower cement output. India's industrial output grew just 2.7% in January as cash ban dampened consumer demand.

On the prices front, although both input costs and output charges rose further, inflation rates softened from February. During March, the rate of inflation slowed to the weakest in four months and was below the long-run survey average.

The main factors contributing to the PMI increase in March were a strong export demand and a rise in output and orderbooks. Moreover, firms hired additional employees to cope with greater workloads.

Looking ahead, production volumes are likely to rise further as businesses will seek to replenish their stocks, as remonetisation nears completion.

Movers and Shakers During the Week

Company	31-Mar-17	07-Apr-17	Change	52-wk High/Low
Top Gainers During the Week (BSE Group A)
Reliance Industries	1,269.35	1,404.95	10.7%	1,449 / 926
L&T	1,557.65	1,681.10	7.9%	1,702 / 1,177
BHEL	164.8	174.65	6.0%	179 / 113
Maruti Suzuki	164.8	174.65	6.0%	6,356 / 3,419
NTPC	163.35	167.85	2.8%	178 / 125
Top Losers During the Week (BSE Group A)
Infosys Ltd	1,024.50	982.00	-4.1%	1,278 / 900
ITC Ltd	282.60	272.00	-3.8%	292 / 204
Sun Pharma	687.15	668	-2.8%	855 / 572
HDFC	1520.9	1480.7	-2.6%	1,536 / 1,060
Lupin Ltd	1448	1410.95	-2.6%	1,750 / 1,384

Source : Equitymaster

Some of the key corporate developments in the week gone by

As per an article in a leading financial daily, Hindustan Unilever (HUL) plans to shed jobs as part of the Dutch parent's global mandate to reduce costs across markets. While the extent of job cuts will be known by the end of April, it could be between 10% and 15%, including layoffs and reduction in new hiring. HUL currently employs 18,000 people in India including more than 1,500 managers, as per the data of its 2015-16 annual report.

Further, the company said it would increase its margin targets and review the dual structure of the Anglo-Dutch company which exists as two separate entities in the UK and the Netherlands.

One must note that, Unilever announced a restructuring after the Anglo-Dutch consumer goods giant faced an aborted takeover bid from Kraft Heinz Inc. The company said it will cut costs, sell its spreads business, buy back shares worth 5-billion euros and target a 20% operating margin by 2020, up from 16.4% last year.

Further, Unilever announced that it will combine its foods and refreshment business to unlock future growth and faster margin progression.

However, with GST implementation, there will be reduction in warehouses and supporting infrastructure, resulting in some job losses. But India is still one of the better-performing markets for Unilever and the restructuring will not be as severe as in other markets, the reports noted.

In news from stocks in the pharma sector. Cipla received approval from the US food and Drug Administration (USFDA) for its generic Abacavir and Lamivudine tablets used for treatment of human immunodeficiency virus (HIV) infection.

The product is a generic version of ViiV Healthcare Company's Epzicom tablets in the strengths of USP 600 mg/300 mg. According to IMS Health, Epzicom tablets had US sales of approximately US$346.3 million for the 12-month period ending February 2017.

One must note that, Aurobindo last week got an approval for generic Epzicom tablets. Cipla, Aurobindo and Mylan are the largest producers of antiretroviral medications globally.

Meanwhile, Cipla's arm Medpro South Africa (Pty) Limited signed an agreement to acquire 100% stake in Anmarate (Pty) Limited, South Africa, for Rs 26 million. Anmarate is engaged in manufacturing and distribution of pharmaceutical products.

Reportedly, the acquisition would help strengthen the market position of the company. The transaction is expected to be completed before 14 April 2017.

Sun Pharma was among the top losers on the BSE Sensex last week, after the US Food and Drug Administration (USFDA) began a surprise inspection of its facility.

The USFDA began inspections on the company's Dadra plant, which is its Second largest USFDA-approved plant after Halol and the estimated revenue generated from the formulations plant stands around US$ 250 million.

Dadra has been Sun Pharma's only formulation plant which had no USFDA concerns.

USFDA conducted a surprise inspection at the plant and found alleged storage and logistics lapses.

Sun Pharma is the fifth largest specialty generic pharma company in US market and US revenues contribute nearly 48% to its total revenue. With a drop in the US Dollar and inspection at Dadra plant, earnings of Sun Pharma in Q1FY18 may get affected.

In news from the steel sector, Tata Steel reported a 17% increase in Q4FY17 sales to 3.17 million tonne (MT) compared to 2.71 MT in Q4 FY16. On a sequential basis, the company saw sales jump 6.11% in the third quarter this year over Q3FY17.

Meanwhile, the company has reported a 24% growth in saleable steel production at 3.1 million tonnes (MT) for the fourth quarter of FY 2016-17. Its crude steel production during the January-March quarter of 2016-17 also grew to 3.2 MT from 2.5 MT a year-ago. Furthermore, the company's hot metal production was up at 3.5 MT, as compared to 2.7 MT in the same quarter of the 2015-16 fiscal.

The government's proposal to give domestic steel makers a preference in government projects should protect them from cheaper imports. But in the meanwhile, the steel makers are chasing imports out by ramping up production. In February, domestic steel output rose by 12.9% YoY, as large private steel producers such as Tata Steel and JSW Steel ramped up output. Imports during the first eleven months of FY17 dropped by 39% YoY.

However, the consumption data over the past few months clearly show that there are no takers for domestic steel. So steel makers have been forced to export more, with overseas shipments up by 78% YoY in the fiscal till February.

In news from stocks in the IT sector. Infosys co-founder and IT industry icon NR Narayana Murthy criticized the huge pay hike given to the company's Chief Operating Officer (COO) UB Pravin Rao.

The IT major is in the news for the wrong reasons yet again as a fresh row erupted between the founders and the company board over pay hike to its COO.

In a letter addressed to reporters, NR Narayana Murthy said the quantum of increase would erode the trust of the rank-and-file employees.

"Giving nearly 60% to 70% increase in compensation for a top-level person (even including performance-based variable pay) when the compensation for most of the employees in the company was increased by just 6% to 8% is, in my opinion, not proper," Murthy said.

In October, Infosys said it was raising Rao's salary to include a fixed compensation of Rs 46.2 million and variable compensation of Rs 38.8 million per annum.

This was put to vote on February 23, and voting ended on Friday last week. However, a majority of the promoters did not vote for a resolution seeking a salary increase for the COO. Only 24% of promoter votes were cast in favour of the resolution seeking a 35% rise in Rao's compensation.

This mirrored the promoters voting 12 months ago, on a resolution seeking a two-year extension and a revised compensation of US$ 11 million for chief executive Vishal Sikka.

The latest developments cast a doubt about the levels of corporate governance at Infosys. It remains to be seen how the company plans to move away from such issues and focus on increasing value for its minority shareholders.

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

The Nifty 50 Index traded on a volatile note during the week. On Monday, it opened the session 47 points gap up to hit a life-high and traded a bit volatile until mid-week awaiting the RBI's monetary policy. On Thursday, the index slipped 45 points but recovered strongly taking cues from the RBI's policy. After the US attack on Syria, the index opened gap down on Friday and slipped sharply towards the end of the session. It ended the weekly session with marginal gains of 0.26%. The 8,950-9,000 level remains a strong support zone for the index. You can read the detailed market update here...

Nifty 50 Index Ends in the Green

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