Massive sell off in global markets

Sat, 5 Sep RoundUp

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Major stock markets globally continued to witness selling pressures for the week gone by. China posted weak manufacturing data. The index was at 49.7. A number below 50 indicates contraction in manufacturing activities. Further, speculation around US interest rates left the world in a jittery mood. 

The European markets, on the other hand, recovered a little from the previous week. The European Central Bank (ECB) surprised the markets when President Mario Draghi downgraded inflation forecast and pledged more quantitative easing (QE). This cheered the stock markets in Europe. Among the major Asian stock markets, stocks in Japan and China were down by 6.4% & 2.2% respectively.

The US labour department data showed that unemployment fell to 5.1%, lowest since April 2008. This may raise the possibility of an increase in interest rates by Federal Bank.

Key world markets during the week

Source: Yahoo Finance

The India indices closed the week down by 4.51% owing to the global cues. The net outflow from foreign institutional investors (FII) during the week was Rs 30.4 billion. However, during the same period, the net inflow from domestic institutional investors (DII) was Rs 28.8 billion. In a way, the data is positive in that 'hot money' from FII is leaving the country, which should lead to less volatility in the stock markets. 

BSE indices during the week

Source: BSE

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

1. The National Democratic Alliance (NDA) will spare the Foreign Portfolio Investors (FPI) from Minimum Alternative Tax (MAT) prior to 1st April, 2015. The move is in line with the recommendation of the A.P.Shah committee. The tax department will issue a circular to hold all existing demands as well as new demands. Acceptance of the report will be viewed positively by the foreign investor community. This will boost the sentiment and FII (foreign institutional investor) investments in the stock market.


2. The Union government will auction sixty-nine oil & gas fields under the revenue sharing model. The fields have 89mmt (million metric tonnes) of reserves. They can be exploited over a period of 20 years. Earlier the contracts were based on profit sharing model (PSM). Under PSM the government had to scrutinize the cost details of private participants; leading to delays and disputes. The shift to the revenue sharing model enables the government to secure minimum revenues even in case the hydrocarbons are sold at a cheaper price. Further it enables the successful bidder to sell the gas at the prevailing market price rather than the administered price.


3. The Australian Bureau of Meteorology stated that the 2015 El Nino is now the strongest since 1997-98. The strengthening El Niño was one of the primary factors for the forecast of a deficient monsoon by the Indian Metrological Department (IMD). The June-September monsoon season is crucial in India whereby more than 50% of agricultural land is rain-fed. As of Tuesday, 40% of the country was rain deficient. The monsoon is expected to start withdrawing from northwest India this week. A weak monsoon may add to the inflationary pressure and may delay the central government decision to cut interest rates.

Movers and shakers during the week

Company	28-Aug-15	4-Sep-15	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Essar Oil	163	191	17.4%	211/92
Sun Tv	341	387	13.5%	460/256
Nalco	29	33	11.9%	69/28
Reliance Communication	54	59	7.6%	118/46
Reliance Capital	304	322	5.9%	560/251
Top losers during the week (BSE-A Group)
Finance Tech	120	100	-16.7%	266/109
Glenmark Pharma	1,193	1,028	-13.8%	1262/678
Union Bank	181	157	-13.3%	254/130
Adani Enterprise	80	69	-12.8%	804/67
Century Textiles	570	504	-11.6%	793/458

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

1. As per an article in Business Standard Oil and Natural Gas Corporation along with its partner will invest roughly $ 24bn in producing natural gas from a giant field off Mozambique. The natural gas will be converted into liquid fuel (LNG) and would be exported to India. The gas will be converted into 'LNG' at an onshore liquefication plant and exported in cryogenic ships to consumption centers in India. The company is planning to commence production from Q1 of 2020. The project will have an ultimate capacity to produce 20 million tonnes of LNG annually and will be the world's largest LNG export site. The company has obtained the required permissions to build the project.


2. Larsen & Toubro (L&T) has bagged an order worth Rs 10.7bn to build tracks for the Riyadh metro project in Saudi Arabia. The order is from a consortium which includes Bechtel, Almabani, CCC and Siemens. The company has stated that the order is in sync with L&T's strategy for expanding their railway business in to the Middle-East. The project includes the construction of about 63 kilometers of double ballastless tracks in tunnels, viaducts and three depots. The said is projected is to be completed in 40 months.


3. Sun Pharmaceutical completed the acquisition of GlaxoSmithKline's (GSK's) opiates business in Australia. Opiates constitute of narcotics raw materials and are used to manufacture pain killers.  The financial details of the deal are not disclosed. The company's Australian opiates business brought in revenue of $69.6m in 2013. Under the deal, GSK's two manufacturing plant in Australia along with the entire inventory will be transferred to Sun Pharma.


4. The iconic English football club Manchester United entered into a digital partnership with HCL Technologies. They will work together to unveil a number of digital initiatives. HCL will create a 'United Xperience Lab'. The lab will be housed at the Old Trafford stadium of Manchester United. HCL and Manchester United will explore ways to create a unified fan experience for supporters.


5. Cipla has acquired the exclusive rights to market the skin care products of the country's leading dermatology player Percos India. The deal is estimated to be worth Rs 900m. The deal will help to shore up Cipla's dermatology portfolio. Percos' product mainly focusses at skin rejuvenation and treating disorders relating to aging and pigmentation. As per an agreement, Percos will continue to manufacture the products for five years. After the completion of this term the rights to manufacture will be transferred to Cipla.

Chinas official Purchasing Manager's Index (PMI) fell to 49.7 in August from the previous months reading of 50.  The index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The index fell to the lowest reading in three years. The People's Bank of China last week lowered the benchmark interest rates for the fifth time since November. They also devalued the yuan on 11th August. The monetary easing policy has failed to revive the growth drivers in China due to excess capacity and sliding prices.

Further the speculation surrounding the US Federal Banks decision in relation to the interest rates will bring more volatility to the stock market. The US central bank has left its key interest rates unchanged at near zero levels since the 2008 financial crisis. An increase in the interest rate would possibly result in an outflow of money from Foreign Institutional Investors (FII). The interest rates have a direct correlation with the bond yield rates. This will lead to increase in the bond yield rates, subsequently resulting in FIIs to shift their money to the US treasury bonds.  

The economic & earnings growth numbers in China and US Federal Bank's decision on interest rates will play a key role in the movements of the market going forward.However we recommend investors to pick stocks with sound fundamentals when they are on sale at reasonable prices. Then hold on to them for the long term or until something bad happens to the business. Sticking to this simple formula will relieve you from the stress of market volatility.