Global Markets Remain Anxious about Central Banks' Next Moves

Sat, 23 Jul RoundUp

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Most major Asian markets ended the week on a positive note. Stock markets in Brazil and Hong Kong were the top gainers and ended the week higher by 2.6% and 1.4% respectively.

Gains in stocks from sectors like basic materials, utilities and industrials led higher the markets higher in Brazil. With the Olympics on the anvil, the event in Rio is being expected to provide a fillip to the local economy.

Stock markets in Europe too ended the week on a positive note. Stock markets in UK and Germany ended the week higher by 0.9% and 0.8% respectively. Stock markets in US ended the week higher by 0.3%. this was the fourth consecutive week of gains for the major US indices.

The Chinese market was the only prominent loser this week, ending 1.4% lower. Continued economic uncertainty in important sectors such as housing along with fears on the currency front affected sentiment.

Indian indices were almost flat, ending down by just 0.1% The ongoing earnings season will be a key short-term trigger for the markets going forward.

Most market participants across the globe remain anxious about what central banks from the US to Japan will do next. The policymakers on their part are still trying to assimilate Brexit, and the effects it will have on the status quo. Though liberal on rhetoric, they for the large part avoided any big policy moves since UK's referendum in June.

Many anticipate the US Fed's next move as a rate hike. Even so, elections in the US are now close and will likely subdue major policy action.

Key World Markets During the Week

Energy stocks led the gainers this week in the Indian markets. Banking and consumer durables stocks were the top losers.

BSE Indices During the Week

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

During the week, an article in the Economic Times stated that campus recruitment of graduates may fall across engineering colleges for the first time since 2009. This is said as companies are resorting to automation of entry-level coding jobs and looking at optimising their bench strength.

Going by the data, India gets around 16 lakh graduate engineers every year. Of this, nearly 2 lakh are absorbed by the IT industry. However, there is a declining trend seen in this space. The industry had around 2 lakh net additions in 2015-16, lower than 2.2 lakh additions in 2014-15.

Reportedly, Infosys recently announced that it will focus on a zero-bench strategy to increase utilisation levels. TCS, which announced its first quarter results recently, reported a fall in 1QFY17 attrition rate with the company taking steps to control loss of employees. The company also reported a dip in net additions on a sequential basis.

A report by NASSCOM, the organisation that sets the tone for public policy for the Indian software industry, said that with rapidly changing technologies and demand for skilled workforce, around 5-10% of existing jobs could be automated in the next 10 years. The report further stated that nearly 60-70% of the current workforce will be need to be re-skilled in technology, social and design thinking.

While the above trend bodes well for the IT industry that has been trying to protect profit margins, it raises concerns for engineering jobs in a sector that employs over three million people.

We have been writing about the rising penetration of automation and how it can pose a threat to the rising demand for jobs in India. As one of our recent editions of The 5 Minute WrapUp states: 'Part of the jobs slowdown can be attributed to inflexible labour laws and the rise of automation. Since it is not easy to fire employees in India, companies increasingly prefer to hire less and ramp up automation instead. The automation trend is accelerating not just in manufacturing but in services sectors such as IT too.'

In a news update from the steel sector, Indian has decided to back a recent G20 move to curb excess steel capacity and subsidies given by countries to their steelmakers. Although, at the same time, the Indian government is concerned that this decision will keep the local industry from availing itself of state support in the form of a minimum import price (MIP).

Members at the G20 trade ministers' meeting held last week said structural problems including excess capacity in some industries had caused a negative impact on trade and workers. They also stated that excess capacity in steel and other industries is a global issue which requires collective response. G20, addressing these issues, said that the subsidies and other types of support from governments can cause market distortions and contribute to global excess capacity and therefore require attention.

Interestingly, India had opposed a similar proposal ten years ago which sought to control the steelmaking capacity of developing countries.

The government of India on February 5, 2016 had imposed the MIP on 173 steel products. This was done to promote domestic growth of steel manufacturing industry. Also, government has made efforts to impose anti-dumping duty, safeguard duty on imported steel products. This is likely to further restrict and reduce dependence on externally manufactured steel products.

MIP is the minimum price per tonne that firms have to pay while importing products. To know more about MIP and its impact on steel industry, do read this edition of The 5 Minute WrapUp Premium (subscription required).

The National Green Tribunal (NGT) has ordered the Road Transport Office (RTO) of Delhi to de-register all diesel vehicles over 10 years old.

De-registration of older vehicles would mean that these vehicle owners will now look to buy new vehicles thus triggering more demand for new cars. Reportedly, Delhi and NCR account for 6-8% of diesel cars and commercial vehicles demand in the country.

This is an encouraging news for auto makers. This comes at a time when vehicle sales are already looking up due to reducing interest costs, good monsoon and expected benefits of seventh pay commission dole outs.

Movers and Shakers During the Week

Source: Equitymaster

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

In news from the banking space, Axis Bank cut its base rate by 10 bps. Post this reduction, the base rate of the bank stands at 9.35% from 9.45% earlier. The new rates are said to come into effect from July 27.

Notably, the bank's base rate, with this cut, is the joint second lowest among Indian banks along with that of ICICI Bank. One must note that the base rates of State Bank of India (SBI), and the largest bank by market capitalisation -HDFC Bank, are currently the lowest at 9.3%.

In order to facilitate monetary transmission and ensure that changes in lending rates are sensitive to movements in the policy rates, the Reserve Bank of India (RBI) has introduced the marginal cost of funds based lending rate (MCLR) as the benchmark for lending from April 1. With this, the RBI has suggested banks review their lending rates frequently, and reflect changes in their cost of borrowing.

MCLR is computed based on banks' marginal cost of borrowing, or incremental cost of funds. This is as against the computation based on the average cost of funds that banks have used so far.

What this means is that if a bank's cost of borrowing is 8% but the incremental cost of funds becomes 7.5%, the marginal cost of borrowing for the computation purpose will be 7.5%, rather than the average of the two. With this regime in place, a fall in deposit rates will be quickly reflected in the lending rates.

The Reserve Bank of India (RBI) has cut interest rates by 1.5% so far. However, the transmission of rates by banks has been much lower. Hopefully, with the marginal cost of funds based lending rate that came into effect from April 2016, banks are now in a better position to pass on the rate-cuts. However, more than this, the revival in the broad economy will play a key role in bringing about a more sustainable recovery in credit demand.

Sun Pharma Advanced Research Company (SPARC) and its parent Sun Pharma have entered into a licensing pact for its Elepsia tablets in the US market for an upfront payment of US$10 million. Elepsia tablets is used in the treatment of epilepsy. As per the agreement, SPARC will license Elepsia XR to a wholly-owned subsidiary of Sun Pharma for the US market.

It is also eligible for certain additional milestone payments and defined royalties linked to any future sales of Elepsia XR. Elepsia XR was approved by the USFDA (Subscription Required) in March 2015. The script of SPARC and Sun Pharma finished up by 1.1% and 0.7% respectively.

In another development, Dr. Reddy's Laboratories has launched Omeprazole and Sodium bicarbonate capsules, 20mg/1100mg and 40mg/1100mg, a therapeutic equivalent generic version of ZEGERID (omeprazole/sodium bicarbonate) capsules in the United States market. The same has been approved by the U.S. Food & Drug Administration (USFDA).

As per the reports, the Zegeride brand and generic had U.S. sales of around US$306.7 million MAT for the most recent twelve months ending in May 2016.

Dabur India has acquired South Africa-based Discaria Trading, a firm engaged in manufacturing and trading of cosmetics for an undisclosed amount. The company's wholly-owned subsidiary Dabur International has acquired 100% share capital of Discaria Trading.

This marks Dabur's entry in the high-potential South Africa market. The company currently has manufacturing in Nigeria and Egypt, which caters to the North and East African markets.

Reportedly, Dabur plans to set up a greenfield manufacturing facility in South Africa following this acquisition. Dabur is likely to sell its Namaste range of hair care products , which caters to ethnic African population, and cosmetics under the Vatika hair care and DermoViva skin care brands.

In another development, Hindustan Unilever (HUL) has proposed to make an investment of about Rs 10 billion towards the setting up of a new manufacturing unit in the vicinity of its existing factory premises in Doom Dooma, Assam. This investment is subject to receipt of requisite approvals and clearances. The new unit, that is envisaged to be commissioned in early 2017, will augment the production capacity of Personal Care products for HUL.

Going forward, the Indian markets will be influenced by the earnings season as well as global macro developments like the next interest rate move by the US Fed. However, long-term investors need not be swayed by these event. Holding on fundamentally strong stocks should be the way to go we believe.

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

Nifty traded on an extremely flattish note during the week. It traded in a tight range of 110 points. It has been trading in a range of 8,595 to 8,475 over the last nine trading sessions. It seems that the range bound movement could persist for a couple of sessions. However, F&O expiry scheduled next week could bring in some high volatility towards the end of the week. You can read the detailed market update here...

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