Best week for global markets in a year

Sat, 10 Jul RoundUp

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The past week turned out to be a brilliant one for stock markets across the globe; this was after a terrible performance in the previous week. Most Asian markets gained on a weekly basis, with Japan leading the gainers, China being a close second. Sentiments were positive after US retail sales grew at the fastest pace in four years (4% growth year to date) and the IMF raised its forecast for global economic growth. Good retail sales showed a revival of spending in the US, the biggest consumer for Asian exporters. China’s benchmark index posted strong gains of around 4% among world indices; it also stated that it will stick to a fairly loose monetary policy. The Japanese markets gained by about 4.1% this week on the back of positive US numbers, boosting shares of top Japanese exporters. These companies derive most of their sales outside Japan. The currency depreciated this week, improving the profit outlook for exporters. European markets were the best performers this week. They also reported their biggest weekly gains in a year (over 6%). They gained on the back of global fears allaying and bank stocks rallying. This rally was based on investors speculation that the bank’s stress tests would assume a lower than expected loss. US markets closed over 5% up on the back of positive economic data. This was its biggest weekly gain in a year.

The Indian markets ended on a positive note this week with an over 2% gain. It started off the week flat with the Bharat bandh being enacted and the RBI rate hike but closed positive towards the end of the week. The key reasons for the same were the IMF upping global GDP growth as well as raising its growth forecast for India. The monsoon was also 2% above normal levels last week, allaying concerns on food inflation. Positive global economic data also reduced fears that the US and Europe would face a double-dip recession. Interest rate increases in South Korea, Malaysia, and Taiwan and along with India in recent weeks signaled that Europe’s debt crisis will not derail economic growth.

Source: Yahoo Finance

Moving on to the sectoral indices in India - Stocks from the Oil & Gas, power, and FMCG saw some pressure this week. The BSE-Oil & Gas Index closed almost 1% down, after being amongst the top gainers last week. BSE-Power and BSE-FMCG indices were pretty much flat with a 0.3% loss. Stocks from the consumer durables, IT and realty spaces were amongst the top gainers this week. The BSE-Consumer Durables Index was the best performer with gains of over 5%. The BSE-IT Index and the BSE-Realty Index reported good gains of over 4% each.

Source: BSE

Moving on to key corporate developments during the week. As per a leading business daily, Lupin has become one of the top five generic drug companies operating in the US market in terms of number of prescriptions. Lupin now trails behind Teva, Mylan, Sandoz and Watson. Lupin had an average of a little over 8.4 m prescriptions a month in the year between May 2009 and April 2010 according to the global market research agency IMS. Lupin has made rapid strides in the US on account of its branded generics strategy. In fact, in FY10, formulation sales from the US registered a robust 39% YoY growth. The branded generics business there grew by a dazzling 72% YoY and this business now accounts for 37% of the overall sales in the US. What is more, with the acquisition of 'AllerNaze' (an intra-nasal steroid) and 'Antara' (an anti-cholesterol drug), Lupin has further strengthened its US product portfolio.

In other news, Reliance Industries' daily crude oil imports fell about 23% in May from April. It was due to a planned shutdown of 100,000 barrels per day (bpd) vacuum gas oil hydrotreater at its older refinery to change a catalyst. The unit is still off-line. The company's two complex refineries at Jamnagar can together process 1.24 m bpd of crude. Compared to April, the company cut the intake of African crude in May by about 40%, while imports of cheaper Middle East grades declined by 16%. Its purchases from Latin America fell 9%. It may be noted that in 2009, it significantly raised imports of light sweet crudes from Africa to benefit from a narrowing price differential between light-sweet and heavy-sour crude grades.

Moving on to the banking sector, banking stocks closed higher this week. As per a leading business daily, ICICI Bank is planning to raise between US$ 500 m and US$ 700 m (approximately Rs 23 bn to Rs 33 bn) in the international market through a five and a half year bonds issue. The exact amount and maturity of the issuance is yet to be decided. The bank will keep an option of redemption of the notes any time. The dollar denominated bonds will be issued by the bank through its Hong Kong branch. The bonds are expected to be priced around 3.2% higher than 5-year US treasuries. They will be listed on the Singapore Stock Exchange. Their proceeds will be used by ICICI Bank for general corporate purpose. The paper has been rated by Moody's at the same level as India's foreign currency debt.

Now, moving on to news from the auto space. Bajaj Auto, India's 2nd largest two-wheeler maker after Hero Honda continued the buoyant trend in the auto space. The company recorded its highest ever monthly sales of two-wheelers in June. It sold over 282,808 units in the domestic as well as export markets. It zoomed ahead with a 68% growth over June last year. Units sold previously were 167,945. Sales of three-wheelers, including exports, grew by 32% to 32,614 units for June 2010, versus 24,731 units sold in June last year. Total sales of both two-wheelers and three-wheelers (including exports) grew by 63% YoY. Riding on strong sales of its new 'Discover' model, the company’s market share has increased from 25% to 34% for the quarter ended June 2010.

However on the negative side, the company is also facing production problems along with other auto manufacturers in the industry. Sales for June would have been even higher if not for production constraints which limited sales. The company lost around 20,000 units of production in June due to this constraint. Cost pressures due to increasing raw material prices also forced the company to raise prices of its Discover and Pulsar range by Rs 500-1,000 in mid June.

As per reports Tata Steel announced flat domestic sales in 1QFY11. Sales in the quarter were hurt by weak market sentiment in the flat products segment and excessive imports of hot rolled coil from China. Sales of long products, mainly used in construction, rose 8%. Tata Steel did not divulge growth for flat products. However, within this segment, demand from the auto sector rose 20%. The company's crude steel production in India rose 8.3% to 1.63 m tonnes for the quarter. It must be noted that in 4QFY10, steel consumption grew 28% QoQ. Demand came in from major steel consuming sectors such as automobiles, machinery and equipment production industries. In fact, in FY10, global steel consumption recovered in the second half of the year after a steep decline in the first half.

The company is also looking to raise the prices of steel in order to pass on the hike in input costs to consumers. If the producer does not pass on this hike, margins will be affected. However, the company has not revealed the quantum of the price hike. Internationally, iron ore prices have witnessed an upward movement. Automobile and construction sectors that are the primary consumers of steel may face the pinch of an expected price hike.

Movers and shakers during the week

Company	2-Jul-10	9-Jul-10	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Indiabulls Fin. Ser.	138	161	16.8%	220/95
Bharti Airtel	265	308	16.3%	467/257
Idea Cellular	58	67	15.0%	85/48
Bharat Forge	294	330	12.2%	336/130
Ashok Leyland	62	69	11.2%	70/30
Top losers during the week (BSE-A Group)
Rel Natural Resource	64	45	-29.5%	93/44
MMTC LTD	30,101	28,649	-4.8%	40,000/26,490
United Phosphorus	182	175	-4.0%	200/135
Tulip Telecom	179	173	-3.1%	250/162
ACC Limited	860	836	-2.7%	1,017/700

Source: Equitymaster
Things are not looking hunky dory for the textile sector in India. It is well known that the Indian textile sector has been facing challenging times due to the global financial crisis and volatility in foreign exchange. As reported in a leading business daily, a FICCI study stated that the Indian textile industry is facing tough competition in the US. This is because exporters from smaller countries like Bangladesh are cornering the lucrative market at a faster pace. In the US, India's share increased by 0.17% in 2009 over the previous year but the share of Bangladesh, Indonesia, Vietnam and China increased by 0.5%, 0.4%, 0.67% and 4.3% respectively. Not just that China accounts for about 37% of the US' textiles and apparel imports, while India's share is less than 6%. Indeed, India's textile sector will have to really pull up its socks if it wants to remain a competitive force in the US and bolster revenues in the longer term.

On the positive side, the total value of merger and acquisition (M&A) deals in India jumped nine-fold to US$ 24.8 bn in the second quarter of 2010. With this, the total value of M&A deals so far this year has surged to US$ 48 bn. In stark contrast, the value of deals in 2QCY09 stood at US$ 2.8 bn. There was a marked increase in the number of deals that took place as well. For instance, the deal count rose to 182 in 2QCY10 as compared to 98 in the corresponding period the previous year. Given that the Indian economy has been growing at a strong pace, investor confidence and consequently liquidity has returned to the market. However, rise in valuations is an important factor that companies will have to watch out for in the future.

The International Monetary Fund (IMF) is the latest to forecast slower economic recovery in developed markets. In its updated World Economic Outlook, the economic review body predicts world GDP growth to decline to 4.3% in 2011. This is in contrast to 2010, wherein the IMF has raised its forecast to 4.6% from 4.2% earlier. A cutback in government stimulus spending next year, slower growth in manufacturing, fiscal consolidation in Europe and falling consumer confidence in the US and Europe are the key reasons. IMF however believes the higher growth rates in emerging economies like India...and China may sustain concerns over these economies overheating. The agency recently raised India's growth forecast for 2010 to 9.5%. Around 3 months back, its estimate was 8.8%. The IMF upped its forecast based on positive corporate results and financial conditions. The sun definitely seems to be shining brightly in the East.