Likely QE withdrawal hurts indices

Sat, 22 Jun RoundUp

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All the major global stock markets ended the week in the red with Brazil (down 4.4%) and Hong Kong (down 2.8%) leading the pack of losers. The US stock market registered losses (down 1.2%) over the wee, after the US Federal Reserve Chairman Ben Bernanke hinted at a likely pull back of QE program. This means, if the US Fed perceives recovery in the economy and unemployment levels, it would gradually reduce the monetary support. This was one of the primary reasons for the weakness in the global stock markets during the week gone by.

The European stock markets too witnessed a sharp fall. The stock markets in Germany, France and UK were down by 4.2%, 3.9% and 3% respectively over the week. Concerns regarding the QE program being tapered off hit these markets as well. The weakness was further fueled by political instability in Greece. Majority of the European stocks hit year's low during the week on back of the US Fed and Greece woes.

The major Asian stock markets also mirrored the trends in the US as well as the European markets. However, Japan notched gains of 4.3% on back of a weakened Yen. Worries about China's slowing economic growth further impacted the markets. The stock market in China was down by 4.1%. The fall was further fueled by fears related to decline in manufacturing data.

Source: Yahoo Finance

The Indian equity markets also closed the week in the red with the shares in the realty and banking space leading the downfall. The BSE-Sensex was down by 2.1%. The Indian markets too reacted negatively to the Fed's announcement. News regarding the pull back of QE program also impacted the rupee. Rupee witnessed a sharp fall against the US dollar and hit a low of Rs 59.94.

All the sectoral indices witnessed downfall during the week. The maximum selling activity was witnessed in the realty sector and Banking sector. However stocks from pharma segment and BSE Small Cap were least impacted.

Source: BSE

Now let us discuss some of the economic developments of the week gone by.

In the beginning of the week, the Reserve Bank of India (RBI) kept key interest rates unchanged in the light of high food inflation, weakening rupee and uncertainty over foreign fund flows. As per RBI's mid-quarter policy review, the recent decision by US Fed to phase out monetary easing and uncertainty over policies of central banks can result in fund outflows from emerging economies. This can pose further risk for the rupee that is already reeling under severe pressure. Rupee has come under pressure as the current account deficit to GDP ratio reached a huge 6.7% in the December 2012 quarter. Further in its guidance, the RBI has said that only the taming of inflation will allow monetary policy tools to tackle the economic slowdown.

Now let us move to some news from the corporate world.

As per a leading source, some stocks from the energy sectors such as Oil and Natural Gas Corporation (ONGC), and Gas Authority Of India Ltd. (GAIL) may be paying higher subsidy share of approximately 45% in FY14. During FY13, oil exporters together had a subsidy burden of Rs 600 bn. However as these companies are making losses on sale of petroleum products, this is becoming a bigger worry for upstream companies than the oil marketers. Reportedly, Mr Sudhir Vasudeva, the Chairman and Managing director of ONGC, mentioned that the change in the subsidy share formula is impacting the company adversely. Currently, the government and the upstream companies each are paying approximately 37.5% of the total under recoveries to oil firms like Hindustan Petroleum Corporation Ltd, and Bharat Petroleum Corporation Ltd. Further, it should be noted that two years back, upstream firms paid 33% to oil firms toward their share and from FY12 onwards their share had gone up to 37.5%.

Movers and shakers during the week

Company	14-Jun-13	21-Jun-13	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Reliance Communications	107	120	11.9%	130/47
Guj. Minerals Dev	123	133	8.5%	222/119
The Indian Hotels	48	52	8.4%	72/46
Zee Entertainment	221	235	6.4%	255/134
Berger Paints	230	244	6.1%	255/125
Top losers during the week (BSE-A Group)
Future Retail	130	99	-24.2%	276/84
MMTC Ltd	171	133	-22.5%	890/133
Core Education	38	30	-21.6%	345/30
Jindal Steel	242	204	-15.7%	480/196
JSW Energy	51	44	-14.3%	75/43

Source: Equitymaster

According to a leading news medium, IDFC Limited, infrastructure financing company, has its board approved for obtaining a banking license from the Reserve Bank of India (RBI). Guidelines for licenses of new banks in the private sector were issued on February 22nd and thereafter associated clarifications issued on June 3rd this calendar year would form the basis for decision. In this backdrop, RBI recently mentioned that the entities getting licenses to open new banks will be given 18 months to open branches against 12 months prescribed earlier. Also, the promoters would have to transfer their holdings to the non-operative financial holding company (NOFHC) in a stipulated period. IDFC, in particular, stands as one of the best poised institutions in the financial sector, with highest capital adequacy and high operating efficiency. Moreover, the management has indicated its willingness on compliance with regulatory requirements to form a banking entity. Overall it is best placed in the entire gamut of financial services and hence proves as a strong contender for a banking license.

In some news from the pharma sector, the European Union antitrust regulators have imposed fines amounting to 146 m Euros (approximately Rs 11.5 bn) on nine global drug manufacturers. The reason for the penalty is that these nine companies have been held guilty of blocking the supply of cheaper versions of Danish company Lundbeck's antidepressant drug Citalopram. Indian pharma company Ranbaxy Laboratories is among the companies who have been fined. The company is required to pay a penalty of 10.3 m Euros (approximately Rs 800 m). As per the daily, the company is expected to appeal against the decision.

As per the European Commission, Lundbeck had inked agreements with the other eight global drug makers to delay the entry of cheaper generic versions of its blockbuster Citalopram. This had resulted in consumers paying 20% more for the medicines.

As per a leading news medium, the engineering major Larsen & Toubro (L&T), India's largest engineering and construction company, is looking to build its order book of Rs 2,000 bn over the next two years. Recently, L&T has announced that it is competing for defence contracts worth up to Rs 80 bn, which are scheduled to be awarded in the next few months. Among others, the company has placed bids for four contracts from the Indian coast guard worth about Rs 40 bn for supplying training ships and support vehicles, the orders for which are likely to be finalized in the next six months. L&T has a presence in defence equipment space for three decades and has been working closely with DRDO for building defence equipment. L&T is a US$ 13.5 bn technology, engineering, construction, manufacturing and financial services conglomerate, with global operations.

The telecom players finally have some cause to cheer. As per the data released by Cellular Operators Association of India (COAI), the subscriber base for the GSM operators has increased by 0.5% in the month of May 2013. The total GSM subscriber base has increased to 667.6 m in the month. However, telecom incumbent Bharti Airtel had no reason to celebrate as it lost subscribers to other competitors. In terms of net subscriber additions, Bharti lost subscribers again to its rivals Vodafone and Idea Cellular. This makes it the second consecutive month that the incumbent has lost subscriber share to its peers. But despite the loss, the company still enjoys the largest market share in terms of subscribers. Though the subscriber base has grown, the pace of addition has slowed down as the net adds during the month were below the net adds seen in the month of April 2013. As per COAI, this was due to the slower network expansion in some circles triggered by the non availability of some network equipment.

The massive quantitative easing program of the US Fed has been one of the reasons for the recent rally seen in the global stock markets. Thus, it was hardly surprising that a likely pull back of the QE program spooked markets including India. Investors investing in the Indian stock markets though, should look upon this as an opportunity to buy some good quality stocks at attractive prices with the potential to deliver healthy returns in the longer term.