A Mixed Week for Global Markets

Sat, 9 Jul RoundUp

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Stock markets in Brazil inched higher over the week as markets gave a thumbs up to the government's ambitious policy of curtailing primary deficit for 2017. The Brazilian Real also rallied as the prudent investors saw this initiative by the government as an encouraging sign.

After a huge rebound in the UK markets last week, the markets remained flat this week, the British pound continued to remain under pressure. The pound was trading under the $1.30 mark, recording its worst three weeks since the currency's 1992 crisis, when Britain fell out of the pre-euro Exchange Rate Mechanism. The stock markets in France and Germany ended the week on a lower note amidst an uncertain environment.

Chinese markets rallied higher as commodity prices rose and on hopes that the government will roll out more stimulus measures in future boosting industrial stocks. Singapore markets traded flat. The biggest loser for the week was the Japanese market. The markets declined by 3.7% over the week. Japan's wage growth was weaker than expected with the data for May showing a negative wage growth. Further the country also reported disappointing trade data, its current account surplus narrowed to $18billion, lower than street expectations.

Back home in India, the BSE Sensex ended the week slightly lower. The markets were trading listlessly through the week. The shares of real estate companies inched higher as inventory levels were reportedly declined by 7% in the first half of the current year. This report compiled by Knight Frank India also suggested a revival in the buying appetite for the houses.

Key World Markets During the Week

IT followed by FMCG were the biggest losers, major sectoral indices ended the week flat or in green with stocks from realty, Pharma and Metals sector witnessing the maximum buying interest.

BSE Indices During the Week

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

Reform is on the governments mind. Important legislations are getting cleared in the parliament. Recently, bills such as Insolvency and Bankruptcy Code, Aadhaar Bill, Civil Aviation Policy and SBI Merger got approval from the parliament. This indicates that the parliament is finally functioning. Government is also confident of clearing the goods and service tax (GST) bill in the upcoming monsoon session of the parliament. The clearance of this bill would be a cherry on the cake. However, will these reforms boost economic activity?

The deemed answer to that would be a YES. However, certain structural changes need to be implemented desperately for the reforms to be productive. One is a change in the labour laws. Other is improvement in infrastructure. Both the factors hold utmost importance for India to grow at a rapid pace and the reforms to be productive.

Talking about labour laws, it is often argued that Indian entrepreneurs do not expand beyond a certain point because it is very difficult to fire workers once they have been taken on.

The Chapter V B of the Industrial Disputes Act, 1947, makes it very difficult for companies with 100 employees or more, to fire an employee without the permission from the government. This prevents entrepreneurs from expanding. This is a binding constraint on the manufacturing expansion.

Rise in investments in the infrastructure space is one of the first signs of a pickup in economic activity. But if CMIE's data is to be believed, the current situation is anything but positive. New projects registered a sharp decline of 60% in the quarter ended June 2016 as compared to preceding quarter. The quantum of new project announcements was pegged at Rs 1.2 trillion in the June quarter. The quantum of stalled projects as a percentage of those under implementation remained at around 12.01%. Quantum of stalled projects has marginally improved as compared to the March quarter wherein the figure stood at 12.13%.

Such projects have been stalled on account of various issues such as problems over land acquisition, lack of clearances, lack of funds and raw material supply problems. Majority of stalled projects are in the manufacturing and power space. Both the sectors account for almost two-third of the stalled projects.

Considering the weak investments from the private sector space, the government will have to ramp up its spending on infrastructure activities. Nevertheless, with utilisation levels still far from being comfortable, it does seem that the expectations from the government and its impact on India's capex revival may be a little too stretched.

As per an article in The Economic Times, India has the potential of achieving 1.65 billion units of electricity next year. Power Minister Piyush Goyal said that owing to the infrastructure and generating capacity of India, the country can achieve as high as 50% growth in electricity production.

Currently, 1.1 trillion units of electricity are produced annually. As per the reports, there is a mismatch between availability of power and capacity of states to purchase and distribute to last mile connectivity.

In a bid to make electricity available to all, Goyal said government is planning to launch a scheme where consumers can pay for the new connection in monthly installments. This will help users to avail the service on demand. Moreover, government will focus on technological upgradation of power infrastructure through various schemes for rural and urban India. Further, government also aims to focus on solar rooftop for which a target to reach 40,000 MW by 2022 has been fixed.

Movers and Shakers During the Week

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

Lupin has received an Establishment Inspection Report (EIR) from the US drug regulator.

The company has received a notification that the inspection carried out by the US Food and Drug Administration (FDA) in July 2015 at its Goa facility is now closed.

The USFDA had made nine Form 483 observations related to inadequacies and adherence to standard operating procedures. The nine observations are now resolved, the report said. This is a big positive for the company, considering it contributes to around 50% of US sales.

Note that the companies receiving Form 483 observations must respond to the FDA in writing with a corrective action. Reportedly, Lupin responded to observations and provided it with regular updates on corrective action.

As per an article in The Economic Times, the tyre industry is set to import more rubber owing to the decline in rubber production in the country. Availability of rubber stocks has been a key concern for the Automotive Tyre Manufacturers Association (ATMA). The industry has conveyed its intention to go for more imports if the situation does not improve.

Moreover, since January, natural rubber prices in the country are up 35% with rates rising to Rs 143 per kg from Rs 130 over the last week. However, import of natural rubber went down 6% in April-May from a year ago.

It was reported that rubber price in the international market is more than Rs 50 cheaper than in India. Consequently, imports might go up in the coming months to meet the demand. In one of our premium edition of The 5 Minute Wrap Up, we have offered the bits on the rising concern on the prices of natural rubber.

The country's natural rubber production dropped by 13% to 0.6 million tonnes in 2015-16, while imports surged up to 0.5 million tonnes, from 0.4 billion tonnes in 2014-2015. As against 1.2 million tonnes of annual consumption, India's natural rubber production stands at 575,000 tonnes. Thus, India has no option but to import natural rubber, the report stated.

According to a leading financial daily, Bank of Baroda (BoB) is set to offer rating-based lending to retail mortgage loan seekers. This involves lending based on credit scores unlike a uniform rate regardless of the credit quality.

BoB stated that this will help them identify the right kind of borrower with the least probability of default. Reportedly, this change is expected to improve the quality of bank's retail portfolio. It will also provide an opportunity to the customer to maintain a steady credit behavior and improve his credit score to get the benefit of lower rates.

Further, the scoring based pricing will be based on the CIBIL's (Credit Information Bureau of India Limited) score. The rating is done on a scale of 300-900 points. Low rating is assigned to the least trustworthy and high rating is assigned to blue chip customers.

Indian banks charge corporate customers based on their credit rating, but haven't extended this policy to retail borrowers.

In FY 2015-16, BoB's home loans contributed to nearly 9% of its total advances at Rs 249.7 billion. Other retail loans contributed 7.6% to the total book at Rs 214.6 billion. Click Here (Subscription Required) to read our fourth quarter result analysis on Bank of Baroda.

Developers like Suzlon Energy and Inox Wind are concerned with the changing incentive structure in the wind energy sector and investors' retort to it. Reportedly, Suzlon and Inox Wind offer turnkey wind energy solutions. In this, companies acquire land, set up a windmill and sell it to investors. They in turn deduct accelerated depreciation on the project from their taxable income or profits. The union budget halved the accelerated depreciation such investments can need from next fiscal.

Part of the reason for lower investor interest is also included government's thrust on solar capacity addition. The wind energy sector is more than five-fold in size (27 gigawatt) compared to solar power. But with rapidly declining tariff witnessed in the latter over the last year, it is fast becoming the favorable investment destination. Thus adversely impacting the wind power sector. While solar tariff touched a low of Rs 4.35 per unit, wind power continues to cost over Rs 5 per unit.

Another issue is ambiguity on the extension of generation based incentive (GBI). As per the current policy, the wind developers are entitled to receive an incentive of Rs 0.50 per unit for a unit of electricity generated.

As per the reports, the bulk of the reason for low investor interest is the lack of proper policy direction with respect to the continuation of GBI beyond 2016-17 fiscal.

Moreover, the Centre has set an ambitious target of achieving 175 GW capacity from renewable energy resources by 2022 and of this, 60 GW is seen to come from wind power.

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

Indian stock markets traded on a flattish note in a short trading week. The BSE Sensex ended the week with gains of 0.21% while the NSE Nifty ended with a negligible loss of 0.03%.

The BSE Healthcare, Realty, and Metals indices ended with the week with gains of 2.47%, 1.52%, and 0.91% respectively. While BSE Teck, IT, and FMCG were the biggest losers with losses of 1.6%, 1.4%, and 0.76% respectively.

Indian Indices Trade Flat

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