Global Markets End the Week Higher Tracking US Jobs Data

Sat, 3 Jun RoundUp

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Global financial markets ended the week on a positive note with a boost from Asian share markets. Asian share markets rose to their best levels in more than two years as positive data on US manufacturing and employment and buoyant European factory growth boosted investor optimism. The Japanese Nikkei 225 ended the week up by 2.5% while Hong Kong's Hang Seng was up by 1.1%. Except German indices, European share markets ended the week on a flattish note. The German Dax ended the week up by 1.8% and closed at an all-time high on the back of strong German manufacturing data. France's CAC 40 ended the week up 0.1% and London's FTSE 100 was flat.

US markets ended the week marginally higher by 0.6% despite sluggish job growth data. The data showed U.S. economy created fewer jobs than expected last month market. The unemployment rate fell from 4.4% to 4.3% during the month however, it is viewed as a negative since the number of people participating in the workforce also declined.

Despite the disappointing data, market participants still largely anticipate the Federal Reserve to raise rates at its June 13-14 meeting, with traders expecting a 90.7% chance of a quarter-point hike, according to Thomson Reuters data.

But you know our view. We doubt the Fed's ability to raise interest and reach the long-term 'normal' of 3%.

Key World Markets During the Week

Back home, Indian stock markets continued their positive momentum and closed at record highs at the end of the week. Expectations of a good monsoon and the impending GST implementation kept the indices buoyant. FMCG stocks rallied during the week as they expect to benefit the most from GST implementation. Pharma stocks too staged a recovery after they took a beating last week. The BSE Healthcare index closed the week up by 2.1%. The Indian stock market ended the week higher by 0.8%.

BSE Indices During the Week

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

In news from economic sector, as per a leading financial daily, with an aim to achieve India's overall growth rate to 8%, Niti Aayog Member V K Saraswat has said that manufacturing sector in country needs to grow at almost 12-14% compound annual growth rate (CAGR). He also said that the country intended to achieve a 25% contribution by the manufacturing sector to its GDP by 2022.

Saraswat expects that the GDP to grow to almost US$2.7 trillion to US$3 trillion by 2022, so the manufacturing contribution to the GDP will be almost 25%. Therefore, he said that they are aiming at US$670 billion, almost adding around 100 million jobs in that direction. He also highlighted that the manufacturing sector's contribution to the GDP was 15% in the fiscal year 2015, almost US$270 billion in a GDP of US$1.8 trillion.

Citing the cutting-edge developments in defense sector worldwide, Niti Aayog Member has said that India could not omit the defense and aerospace sectors if it intended to inject a higher level of input from the manufacturing sector to its economy. He noted that the country's current share of GDP expenditure for research in the defense sector was insufficient.

He also said that they are still spending 0.9% of the GDP in research and development (R&D) and if compare to the top five (defense spenders in world), they are way down. Therefore, he said that the country needed to pump in more investments in research and development to compete with global giants in defense.

As per the data released by Central Statistics Office (CSO), Gross Domestic Product (GDP) in the January-March quarter grew at the slowest pace in at least four quarters at 6.1% as against a 7% growth in October-December.

The GDP growth, with revised series, was dragged down by construction, manufacturing and trade services thereby stripping the country of its status as the world's fastest-growing major economy. Annual economic growth at 6.1% was lower than China's growth of 6.9% for the first three months of 2017.

The expansion was much slower than the 6.5-7.8% forecast by analysts, and below the provisional 7% growth reported in the previous quarter.

Surely, the lower-than-anticipated fourth quarter GDP number reflects the lingering impact of demonetization, as predicted by economists. They believe that the sharp expansion in government consumption expenditure in January-March has in fact bolstered GDP growth from an even sharper slowdown.

Surely, the lower-than-anticipated fourth quarter GDP number reflects the lingering impact of demonetization, as predicted by economists. They believe that the sharp expansion in government consumption expenditure in January-March has in fact bolstered GDP growth from an even sharper slowdown.

The global credit rating agency, Moody's Investors Service in its latest report 'Global Macro Outlook' has said that Indian economy will grow by 7.5% in the current fiscal year, 7.7% in 2018-19 and will reach to around 8% in 3-4 years on the back of government's various reforms.

Whereas the World Bank in its 'India Development Report' has increased its hopes that India will grow at 7.2% in the current fiscal and further up to 7.7% by 2019-20 on strong fundamentals, reform momentum and improving investment scenario. The World Bank had in January scaled down India's growth forecast to 7% for 2016-17 and had estimated growth to rebound in 2017-18 to 7.6%.

In other news, as per an article in the Economic Times, work has started on the next base revision of the gross domestic product (GDP) series that will most likely take fiscal year 2017-18 as the base.

The new series of national accounts, with revised base year of 2011-12 from the earlier base of 2004-05, began around two years ago, in January 2015. Before that, the base year of national accounts was revised in January 2010.

In 2015, the Government came up with a new methodology to calculate GDP. This exercise did little to change things on ground level. However, it did help the Government's report card look good. The GDP growth numbers as per new calculation were higher than as reflected by earlier method. Even RBI had trouble digesting this artificially inflated performance.

Cut to 2017, something similar happened to inflation data (WPI) and industrial production data (IIP). The Government has launched an updated series for both. And the new numbers suggest better factory output growth and lower price pressure as compared to old numbers.

India is on a high. And our reference is not just to the Sensex. But is all really well? Our macro guru, Vivek Kaul, does not think so. For those investing based on macro clues, these are times to be a little skeptical.

In fact, Vivek has unearthed underlying trends that he believes could trigger of a series of crisis which could have a big impact on all of us. Click here to find out more.

In news from India's . The manufacturing sector stayed in expansion mode in May, charting a rebound notebandi induced downturn. Indian manufacturing activity expanded for a fourth consecutive month in April, however at a slower pace. Manufacturing sector growth in the country moderated to a three-month low in May amid softer rise in new orders and, according to the Nikkei Purchasing Managers' Index (PMI) survey by Markit.

The PMI is the reading of the country's manufacturing sector output and is updated monthly. A reading above 50 indicates expansion, while any score below the mark denotes contraction.

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 has charted its recovery from 49.6 in December 2016, to 52.5 in March, registering the fastest upward move since October 2016. At 52.5 in April, the PMI remained unchanged from the previous month. In May however, PMI growth slowed down to 51.7, still signifying expansion, albeit at a slower pace.

During May, there was "softer expansion" in both new orders and production. Incoming new work rose at the weakest pace since February, with slowdowns evident in the consumer and intermediate goods categories, while capital goods producers recorded a contraction in order books.

The survey added that below par manufacturing growth, and muted inflation could prompt the RBI to move towards an accommodative stance to support growth in the economy.

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

Moving on to the news from banking sector... S&P Global ratings has said that Indian banks' stressed assets are likely to increase to 15% of total loans by March 2018 even as their regulatory capital requirements will continue to rise till 2019.

The ratings agency, in its latest report stated that Indian banks' credit profiles are unlikely to improve over the next 12 months. As per the agency, banking sector's total stressed assets will increase to 13-15% of the total by the end of March 2018, with PSU banks accounting for most of that loans.

The report further said PSU banks operate with a thin capital cushion. In addition, they may be required to make large haircuts on loans to unviable stressed projects, the regulatory capital requirement will continue to rise till 2019, and profitability will remain subdued. Not very encouraging for PSU bank stocks.

To tackle the above problem, the Reserve Bank of India is pondering over initiating tough measures against willful defaulters.

While RBI's proactive measure to tighten NPAs is proactive, banks need to take their share of blame. In one of our recent editions of The 5 Minute WrapUp, we had highlighted how the banks' return ratios had deteriorated due to their profits written off on account of NPA provisions.

The RBI has done well to focus its attention on the willful defaulters. However, this seems to be a curative measure than a preventive one. For the bad loans problem to be solved, the root cause i.e. the initial lending process of banks needs to be put in order.

Movers and Shakers During the Week

Company	12-Apr-17	19-May-17	Change	52-wk High/Low
Top Gainers During the Week (BSE Group A)
MAHINDRA FINANCE	312.8	388.95	24.3%	405 / 244
BAYER CROPSCIENCE	4,295.6	5,002.5	16.5%	4,960 / 3,680
UNITED SPIRITS	2,059.1	2,343.1	13.8%	2,703 / 1,775
DIVIS LABORATORIES	546.65	618.35	13.1%	497 / 305
TATA COMM.	655.5	735.3	12.2%	784 / 427
Top Losers During the Week (BSE Group A)
VIDEOCON INDUSTRIES	47.3	36.75	-22.3%	115/37
RELIANCE COMMUNICATIONS	25.8	20.65	-20.0%	55/18
BHEL	158.4	140.3	-11.4%	183/114
POWER FIN CORP	143.7	127.8	-11.1%	169/78
CG POWER & INDUSTRIAL SOLUTIONS LTD	93.4	83.8	-10.3%	97/56

Source: Equitymaster

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

In news from the . The healthcare sector charted a steady recovery from last week, and closed the week up by 2.1%

Glenmark Pharma announced that it had received final approval form the US Food and Drug Administration (USFDA) approval for its for generic version of Bystolic tablets, used in treatment of hypertension.

The ANDA (Abbreviated New Drug Application) approval granted by the USFDA is for Nebivolol tablets, 2.5 mg, 5 mg, 10 mg and 20 mg, the generic version of Bystolic tablets, 2.5 mg, 5 mg, 10 mg and 20 mg of Forest Laboratories, LLC.

Glenmark added that it may be eligible for 180 days of generic drug exclusivity for Nebivolol Tablets, 2.5 mg, 5 mg, 10 mg, and 20 mg.

Citing IMS Health sales data for the 12-month period ended March 2017, the company Bystolic tablets achieved annual sales of approximately $1 billion.

Glenmark's current portfolio consists of 116 products authorised for distribution in the US market and approximately 68 ANDA's pending approval with the USFDA.

The up move was triggered as Cadila Healthcare announced that it had received final approval form the US Food and Drug Administration (USFDA) approval to market Levofloxacin Injection.

Levofloxacin is used in the treatment of bacterial infections and will be produced at the group's formulations manufacturing plant at Moraiya, Ahmedabad.

This is a significant development for the company as it is the first drug approval from the company's Moraiya plant since successfully completing the USFDA audit with zero observations, in February this year.

Earlier this week, the company received final approval from USFDA to market oral drug Felbamate tablets, which is used to treat epilepsy. The drugmaker has over 115 approvals and 300 ANDAs since the commencement of the filing process in FY04.

US arm began the process of recalling over 13,200 bottles of antihistamine, Children's Cetirizine Hydrochloride chewable tablets, from the American market for failed specifications.

The drug was manufactured in the company's Halol plant, which is facing regulatory issues.

The US Food and Drug Administration (USFDA) said in a report that the ongoing class III recall is nationwide in the USA and Puerto Rico. As per the US health regulator, a class III recall is initiated in a situation, "in which use of or exposure to a violative product is not likely to cause adverse health consequences".

The reason for the recall as stated in USFDA's Enforcement Report is failed tablet/capsule specifications: out of specification results for increased tablet hardness.

The country's largest telecom operator announced that it received approvals from the Securities & Exchange Board of India, BSE and the National Stock Exchange of India for its proposed merger with Telenor India.

Airtel and Telenor have also filed a joint application before the New Delhi bench of National Company Law Tribunal (NCLT) for approval of the merger. In a statement, the firm said the merger also requires approval from the Competition Commission of India (CCI).

In February this year, Airtel had entered into an agreement with Telenor South Asia Investments Pte in February to buy Telenor India's operations in Andhra Pradesh, Bihar, Maharashtra, Gujarat, UP (East), UP (West) and Assam. These seven circles contribute about 35% to Airtel's total revenue.

These circles represent a high population concentration and therefore offer a high potential for growth.

Airtel will also take on some of the Nordic telecom operator's local liabilities.

The acquisition is slated to bolster Airtel's 4G spectrum holdings and revenue market share, strengthening its hand in the battle against Reliance Jio Infocomm. Airtel will pocket 43.4 units of 4G spectrum in the 1800 MHz band once the Telenor deal is concluded.

Airtel will also take over Telenor India's outstanding spectrum payments of some Rs 16.5 billion and other operational contracts, including tower leases with Bharti Infratel and Indus Towers, besides employees and 44 million customers. This stands to add to the telecom major's already growing debt.

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Moving on to news from oil & gas sector. As per an article in a leading financial daily, the government is planning to combine Hindustan Petroleum Corp Ltd (HPCL) with Oil and Natural Gas Corp (ONGC) by December this year by selling its 51.1% stake in the former to the latter for US$4.5 billion (about Rs 290 billion).

The stake sale is part of India's plan to create a state-held oil giant. ONGC will take majority control of HPCL as part of the government's plan to create an oil major capable of competing with Big Oil.

However, Is Integration of State Run Oil Companies a Good Idea? Richa Agarwal, our oil & gas sector analyst has written a few implications of a merger plan (subscription required) in one of the premium editions of The 5Minute WrapUp. She is of the opinion that until the fine print is out, one should not consider any upsides from this announcement while investing in oil and gas companies.

Although the initial plan was a merger of the two state-owned companies, the current thinking is to let ONGC take over HPCL so that the sale consideration flows to the exchequer in a year the Union budget has set a disinvestment target of Rs 725 billion.

The 51.1% stake in HPCL is worth nearly US$ 4.5 billion, the equivalent of 287.7 billion Indian rupees. This will help India to meet 40% of its targeted proceeds from asset sales by the end of the financial year to March 2018, the reports noted.

In another development, Tata Sons Chairman N. Chandrasekaran is planning to consolidate group firms to weed out duplication and increase efficiency.

Tata Group has nearly 100 companies in its fold. Tata group has diversified into multiple businesses that range from chemicals and fertilisers to auto components and therapeutics over the last 110 years.

Some of these are underperforming, some are not contributing to profits and in some cases, two or more businesses are doing similar things. These are the ones that Chandrasekaran is expected to take a hard look at.

Reportedly, the group has started a process to sell drug discovery services company Advinus Therapeutics drawing interests from private equity funds Kedaara Capital and True North as well as from strategic players, GVK Biosciences and Lambda.

Chandrasekaran is also capping capital exposure in Tata Ceramics, Tata Business Support Services, Tata Asset Management, Tata Autocomp Systems and Tata Chemicals' fertilizer unit, and is increasing investments in high-growth and industry leading businesses. While some assets like Advinus Therapeutics and fertilizer unit will be outright divested, it could be a partial sale or a merger in others like Tata AutoComp and Tata Asset Management.

Moving on to the news from stocks in engineering sector. Larsen & Tourbo's construction arm won orders worth Rs 51.46 billion various business segments.

L&T's power transmission and distribution business bagged orders worth Rs 27.8 billion in the domestic and international market. Its smart world and communication business has secured an order worth Rs 2.2 billion from Rajasthan Rajya Vidyut Prasaran Nigam.

While its water and effluent treatment business has bagged a Rs 12.9 billion order. Further, L&T said its building and factories business has won Rs 5.3 billion, and metallurgical and material handling segment has won Rs 3.2 billion order.

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 provide a cushion to its profitability will be an interesting thing to watch out for going forward. Subscribers can access L&T's latest result analysis and L&T stock analysis on our website.

Meanwhile, L&T is in talks to sell its switchgear business. The company has started the process to sell the business for approximately Rs 25 billion.

L&T is likely to carve out switchgear's assets from various subsidiaries to initiate the sale process. Revenues from manufacturing and trading of switchgear for the company, was Rs 24.34 billion in FY16.

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

The Nifty 50 Index ended another week at an all-time high.

The index opened the weekly session lower but recovered immediately and continued trading higher throughout the week to hit a new life high on almost a daily basis. On Friday, the index opened 41 points gap up and traded thinly to end the weekly session with 0.61% gains.

Since the December 2016 low, the Nifty has been trading in a smooth uptrend finding support from the 20-day exponential moving average (EMA) on every correction.

With every successive higher highs in the index, the RSI Indicator has been making lower highs, thus forming a negative divergence. But on ever minor correction, the indicator is finding support from the 50 level.

As long as the index stays above the 20 EMA and the RSI above 50, bulls are in control. But any major drop below these levels and the bulls will have to take a back seat. You can read the detailed market update here...

Nifty Index at New Life High

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