Global Markets End on a Mixed Note

Sat, 6 Aug RoundUp

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Global indices closed on a mixed note for the week. Hong Kong (up 1.2%) and the UK (up 1%) were among the biggest gainers. Japan (down 1.9%) and Singapore (down 1.4%) were the top losers in the pack.

During the week gone by, the Bank of England (BoE) cut its benchmark interest rate to 0.25% from 0.5%. This is the first cut since 2009. Along with the above move, the Bank's Monetary Policy Committee (MPC) announced additional measures to stimulate the UK economy.

The Reserve Bank of Australia (RBA) also cut its interest rates to a record low during the week. It reduced the cash rate by 25 basis points to 1.5%. This, the bank stated, was to spark historically weak inflation. This was the RBA's first cut since May and second such move in the year. The move was in response to a slowing jobs market in Australia. It was reported that the country created roughly 7,000 jobs a month on average this year, compared with more than 30,000 a month in the second half of 2015.

US stocks ended marginally up for the week. The US payrolls report, released yesterday, stated that US employment rose more than expected for the second month in a row. Wages have too picked up, raising the probability of a rate hike by the Fed later this year.

Central banks across the world are seeking to push their economies to grow by cutting interest rates and introducing stimulus measures. Last week brought two major announcements from the central banks of Japan and the US.

A recent entry in Vivek Kaul's Diary explains how central bankers make us poorer. And Asad Dossani, editor of Daily Profit Hunter, explained how to successfully trade these kinds of political events.

Back home, the Indian indices closed little changed. The BSE Sensex was up 0.1% for the week. The Rajya Sabha passed the constitution amendment bill for the goods and service tax (GST). Half of India's 29 states will still need to approve the bill, but the dream of 'one nation, one tax' finally seems to be coming true.

Global indices have closed on a mixed note for the week gone by. Hong Kong (up 1.2%) and UK (up 1%) were among the leading gainers. While Japan (down 1.9%) and Singapore (down 1.4%) were the top losers in the pack.

Last week, the Bank of England (BoE) cut its benchmark interest rates to 0.25% from 0.5% during the week. This is the lowest in the nation's 322-year old history and the first cut since 2009. Along with the above move, the bank's Monetary Policy Committee (MPC) announced additional measures to stimulate the UK economy.

On the other hand, the Reserve Bank of Australia (RBA) reduced its interest rates to a record low during the week. It reduced the cash rate by 25 basis points to 1.5%. This, the bank stated, was in order to spark historically weak inflation. This was recorded as the first cut since May and second such move in the year. Also, the above move was in a response to a slowing jobs market in Australia. It was reported that the country created roughly 7,000 jobs a month on an average this year, compared with more than 30,000 a month in the second half of 2015.

The US stocks ended marginally up for the week. As per the US payrolls report, U.S. employment rose more than expected for the second month in a row in July. The wages too have picked up. Thus, has raised the probability of an interest rate hike by the Federal Reserve.

In the recent past, central banks across the world are seeking to push their economies to growth. And are therefore cutting interest rates and introducing stimulus measures. Last week, there were two major announcements from the central banks of Japan and the US.

With regard to the topic of central banks, a recent entry in Vivek Kaul's Diary explains how central bankers make us poorer. Also, Asad Dossani, editor of Daily Profit Hunter, has written on constitution amendment bill for the goods and service tax (GST) during the week. The dream for one nation one tax is finally coming true.

Key World Markets During the Week

On the sectoral indices front, Metal and Auto stocks led the gainers this week. On the other hand, stocks from Consumer Durables and Capital goods witnessed selling pressures.

BSE Indices During the Week

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

There are concerns being raised pertaining to goods and service tax (GST) leading to higher inflation. However, many economists are of the opinion that GST would not lead to higher inflation provided the GST rate is fixed at around 18%. Historically, countries which had opted for GST were faced with a scenario of high inflation. Whether that history will be repeated in India depends on a host of factors, the most important being the standard rate of GST finally agreed upon. So going by the above issues, one can say that the inflation in India is here to stay. The real question comes as what can be the best bet to protect your wealth from these inflationary pressures? For the common man, the inflation problem in India does not necessarily mean going back to gold. We will continue to weigh the potential returns from the Sensex versus the yellow metal. As far as stocks are concerned, one of our editions of The 5 Minute WrapUp explains how buying solid stocks can help in beating inflation.

The government of India has extended the minimum import price (MIP) norms to 66 steel items for two more months. However, this has meant pruning the existing list of 173 products. As per the order notified by the Directorate General of Foreign Trade (DGFT), the items under MIP now include flat-rolled non-alloy steel and plastic, zinc or lead-coated steel among others. Products on which safeguard or anti-dumping duties were imposed have been removed from the list. However, the range of prices, which is between US$341 to US$752 per tonne, has not changed. Early this week, India's leading steelmakers had sought an extension of the minimum import price (MIP) imposed on steel by six months to a year. One must note that 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. MIP is the minimum price per tonne that firms have to pay while importing products.

As per an article in The Economic Times, coal price soared to its highest level at almost 20% in 17 months in the aftermath of China's decision to raise imports. Reportedly, low coal prices urged China to switch from being a producer to importer. In addition to China, other producing countries like Australia, Indonesia, and Colombia have begun lowering their coal outputs. Notably, coal prices began climbing after the Chinese government laid off some 800,000 workers in the coal and steel industries. This reform by the world's largest coal producer has since strongly affected the commodity's price movements. In June, China raised its imports by 21.8 million tonnes. On the other hand, its production was cut down by 400 million tonnes. Moreover, Indonesia too reduced production by some 50 million tonnes due to weakening of demand last year.

Now let us move on to some of the key result announcements during the week.

HCL Technologies Ltd reported its result for the quarter ended June 2016. The company's net profits grew by 14.8% YoY to Rs 20.5 billion. While, the revenues grew by 15.9% YoY to Rs 113.3 billion. In dollar terms, the net profit and revenues grew by 9.5% YoY and 10% YoY respectively. The revenues grew on the back of broad based growth across service offerings. Further, the deal with Vovlo's IT service division in February added over US$ 40 million to the revenues in the June quarter. The company has given a guidance to grow at 12-14% in terms of revenues in the ongoing fiscal. The management stated that the company signed 13 "transformational" deals during the quarter across service lines and industry verticals. Reportedly, the broad-based business wins were driven by next-generation integrated offerings-Next-Gen ITO, BEYONDigital and IoT WoRKS-reflecting investments in Internet of Things, digital technologies, cloud, automation and artificial intelligence. As the company is losing its pricing power it enjoyed before, margins and topline growth will be the key things to watch out for going forward.

ACC has announced its financial results for the second quarter of the calendar year 2016. During the quarter ended June 2016, while the company's standalone sales decreased by 3% YoY, net profit shot up by 81% YoY respectively. Cement sales volume declined by 1% YoY. Overall cement realisations were also lower. Despite lower volumes and realisations, operating profit jumped up 46.4% YoY on account of significant decline in two major cost heads - power & fuel, and freight. EBITDA margin expanded from 9.4% in 2QCY15 to 14.3% in 2QCY16. Higher operating profit and lower depreciation costs resulted in 81.0% YoY rise net profit during the quarter.

And here are some of the key corporate developments in the week gone by.

Siemens Ltd. announced that it has received an order worth approximately Rs. 2.2 billion for Power Grid Company of Bangladesh Limited (PGCB) project from Siemens AG, Germany. The plan is a part of India Bangladesh pact for Power Exchange as per South Asia Sub Regional Economic Co-operation (SASEC) by Asian Development Bank (ADB). Reportedly, the deal is for supply of Switch Yard Equipment, Fire Fighting Systems, Air-conditioning Systems, AC Control and Protections, Engineering for Civil and Plant for 500 MW High Voltage Direct Current (HVDC) Station. Siemens is basically aiming at providing transmission and distribution technologies to Bangladesh to boost the power capacity of the country, the company stated.

As per a leading financial daily, State Bank of India (SBI), which started the process of merging all its subsidiaries with itself, is all set to become a single entity by April next year. The bank has stated that it will submit the proposal to the government in September and expects to start migrating these banks by October. Regarding this merger, the management of SBI believes it will bring three sources of benefits for the bank. First, the consolidated bank is expected to manage costs better. It is estimated that the cost-to-income ratio of the consolidated bank could reduce by as much as 100 basis points (bps). Secondly, the management believes that a combined treasury could perform better. And third, the lower cost of deposit could boost margins of the consolidated bank. There is a flipside as well. With the merger, SBI will have to bear one-time pension liability costs. This is because its employees are covered by both pension and provident fund. The management of the bank had forecast this amount to be close to Rs 30 billion. In all, the merger of SBI with its associates has its pros and cons and the actual practicalities of the merger will be clear in the time to come. The prime question, however, is does it really make sense to merge public sector banks? Vivek Kaul, editor of Vivek Kaul's Diary, has answered this question in one of his articles.

National Aluminium Company (Nalco) is aiming to initiate work on extension of its alumina refinery at Damanjodi by February 2017. NALCO is awaiting environment clearance for expansion by December this year. Reportedly, NALCO is adding a fifth stream of one million tonne incremental capacity to the refinery. Its present nameplate capacity is 2.3 million tonnes a year. Further, the company will be sourcing bauxite from the mines in Koraput district to feed the refinery. In this regard, the government has also extended the validity of the mining lease till 2020 as per the Mines and Minerals Development & Regulation (MMDR) Act.

Lupin Ltd has agreed to buy a portfolio of 21 generic brands from Japan based Shionogi & Co Ltd. Reportedly, the deal is valued at Rs 10 billion. The acquisition will give Lupin access to Shinogi's portfolio, which comprises drugs in therapeutic areas such as central nervous system, oncology, cardiovascular and anti-infectives. These 21 products it is acquiring had sales of US$ 90 million collectively in the year ended March. The company already has a presence in Japan through its subsidiary Kyowa Pharmaceutical Industry. With this acquisition, the company will rank sixth among generic companies in Japan. An ageing population in Japan will provide a significant opportunity for the company to increase its presence there. Further, Japanese government too has set a target of reaching 80% generic penetration by the end of this decade. This will bode well for the company.

Going forward, macro and domestic factors will continue to influence the indices. This may keep the Indian markets volatile. However, long-term investors need not be swayed by these events. Moreover, if the markets correct, investors can look out to buy some fundamentally strong companies at attractive valuations.

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

Indian Indices Skid Downward

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