Global Markets End the Week on a Lower Note

Sat, 17 Sep RoundUp

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Global indices ended the week on a lower note. France (down 3.5%) and Hong Kong (down 3.2%) were among the leading losers. The French index witnessed heavy selling pressure in its Oil & Gas, Utilities and Financials sectors. Global markets remained under pressure over the week amid concerns regarding central banks, particularly the Fed, becoming less accommodative in the future and the prospect of Fed increasing the interest rates sooner than expected.

While there has been a lot of talk around the slow recovery of the world economy, the world still continues to look up to major central banks with heightened expectations that they will continue with their helicopter money policy, the central banks themselves seem to have plenty of fire power left to continue their policy of asset repurchase programs. This means that the liquidity driven rally in the financial markets might continue for a long time.

The European central bank has been fighting ultra-low inflation, it has introduced a huge stimulus in recent years. Primary among them is their program of buying 80 billion euros of bonds a month, to pump money into the economy. Last week, the ECB said it was examining options to keep its asset purchases going, which markets took as a signal that even more easing may be coming. Inflation however, continues to remain just under 2%, with this level of money in the system without any desired impact, there is an increasing risk that businesses and households will lose confidence in the ECB's policies. With two major central bank, the Bank of Japan and the US Fed scheduled for their monetary policy review next week, their comments will be closely watched by all the market participants alike.

Back home, the Indian indices closed lower over the week. The BSE Sensex was down by 0.7% for the week. The finance minister, Arun Jaitely expects the Reserve Bank of India to cut repo rates in the monetary policy review scheduled next month. The finance minister was also hopeful that banks will transmit these rate cuts to its customers.

Key World Markets During the Week

On the sectoral indices front, IT stocks led the gainers this week. On the other hand, stocks from Power, Realty and Metal witnessed selling pressures.

BSE Indices During the Week

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

State Electricity Boards (SEBs) continue to struggle and now find themselves in a soup since they are yet to formulate a policy about increasing tariffs. This is a worrying sign for the electricity producers. Much of the electricity producer's fortunes will depend on the off-takes from the SEBs. And even after implementation of the UDAY scheme, the situation at SEBs will only improve if they take tariff hikes. While some states have taken tariff hikes recently, many states have yet not taken the same on account of political pressures. Increase in tariff hike does not bode down well with the political parties as it takes a toll on their vote bank. Further, these SEBs had aggregate technical and commercial losses of 24.6% in 2013-14. And this ratio hasn't improved significantly since then. This means that a major portion of the power that is used is not paid for. Unless these issues are addressed, the situation at the SEBs is not going to change drastically even after implementation of UDAY.

The Union Finance Ministry notified the provisions of the Constitution Amendment Act that allows for setting up the Goods and Services Tax (GST) Council. As per the provisions of the Constitution Amendment Act, the GST Council will have to be set up within 60 days of its notification. This council is a very important part of the implementation process. It will be the job of the council, which will be two-thirds represented by the states, to decide on the GST rate. Then three GST Bills (Central GST, Integrated GST, and State GST) stating the actual rates will be sent to Parliament and state assemblies for approval.

The above development marks as another step forward in the implementation process of the Goods and Services Tax. Last week, President Pranab Mukherjee gave his assent to the Constitution Amendment Bill on Goods and Services Tax (GST). This, along with the bill ratified by more than 50% of the state assemblies, has made GST a law. To know how the GST impacts you, Here is Vivek Kaul's report - GST & You: What the Media DID NOT TELL YOU About the GST.

The tide might have just turned on the rural consumption story. After eleven months of continuous contraction, consumer non-durables turned positive in the month of June. If experts are to be believed, the growth was mainly on the back of a revival in the rural consumption. So is the rural consumption finally recovering? For farmers, a better monsoon will improve the yield and increase production which in turn will benefit the farmers, increased food production will help keep inflation in check thus enabling savings which will help improve discretionary spending of the consumers

Consumption will also benefit from the implementation of the seventh pay commission and the passage of the goods and services tax legislation. The transformation of the rural spending patterns over the years is an interesting phenomenon. The rural demand has now moved beyond basic food products and while the consumption of aspirational products is comparatively lower than in cities, it is a growing market. There is an increasing demand for such products in smaller packs which is an encouraging sign for the FMCG companies.

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

As per an article in Livemint, Glenmark Pharmaceutical has got an approval from US Food and Drug Administration (USFDA) to launch a generic version of AstraZeneca Plc's Xylocaine ointment. Reportedly, the ointment is used to treat certain skin conditions associated with itching and pain. Further, this ointment had sales of US$ 370 million in the twelve months ended July.

Currently, the company has 62 abbreviated new drug applications (ANDAs) pending approval with the US health regulator.

In the last few quarters, Glenmark's performance has been severely impacted by global headwinds. But fiscal 2017, has shown some improvement, in spite of pricing pressures in the US and domestic market. The year FY17 will see launch of Zetia generics under low competition. Glenmark will be the only the player in the market for a period of 4-6 months. The branded market size of Zetia is US$1.6 bn and Glenmark already holds approval. The traction from this product coupled with new product approvals will be the key things to watch out for going forward.

Tata Motors reported a 16% rise in global sales at 86,288 units, including that of Jaguar Land Rover (JLR) vehicles, in August. The company had sold 74,639 units in August 2015. In the passenger vehicles category, global sales stood at 56,104 units last month as against 44,956 units during the same period a year ago, up 25%. Sales of luxury brand Jaguar Land Rover grew 28% to 42,260 units in August compared with 33,103 units in the same month last year. Sales of commercial vehicles remained flat at 30,184 units from 29,683 units in the year-ago month.

Industry analysts feel sales are likely to remain buoyant in the coming months (Subscription Required) on account of a slew of positive factors such as good monsoon and upcoming festival season. Meanwhile, the company along with its domestic partner TMT Motors of Vietnam, announced the launch of its first product in the country - the Tata SuperAce, a versatile mini-truck. The company has launched the vehicle in the Vietnam market, a year after foraying into Vietnam.

Tata Ace family has surpassed over 1.5 million sales globally since 2005. With the 'SuperAce', the company is perfectly positioned to fuel the potential growth, encouraging first time commercial vehicles customers to enter and successfully compete in the transportation space. Tata Motors sells the model in Indonesia, Philippines, Thailand, South Africa, Sri Lanka, Bangladesh, Ghana, and India.

The quest to raise money and unlock value via the Initial Public Offering (IPO) route continues... September 19 will see the first initial public offering in India's insurance sector. This comes as ICICI Bank plans to raise Rs 60 billion by selling a stake in its subsidiary ICICI Prudential Life Insurance Company. By doing so, the bank has valued the insurer at Rs 480 billion. Through the IPO, over 18.13 crore shares will be offered for sale. Of these shares, 10% is reserved for shareholders of ICICI Bank. Ten banks, including DSP Merrill Lynch and ICICI Securities, have been hired for the issue. ICICI Bank, which owns a 68% stake in the company, will raise Rs 60.5 billion at the top end of the price band.

The IPO is recorded as the biggest IPO in the domestic market since Coal India's stake sale in October 2010. In fact, this is what Tanushree Banerjee, Equitymaster co-head of research, recently wrote in one of the issues of the Research Digest (subscription required). Here's a snip-

• The IPO of ICICI Life Insurance not only has the lure if being a billion-dollar issue. But it will also be the first pure-play insurance company to be listed in India.
  
  Now, if you've seen the financial statements of banks and non-banking financial institutions, beware that insurance is a different animal altogether. What constitutes impressive financials and a strong balance sheet for insurance companies differs quite a bit from other financial entities.
  
  Valuing insurance businesses is going to be a novel experience indeed.

We have analyzed the company and here is our view on this mega IPO.

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

Nifty opened with a gap of 130 points on Monday on the back of negative cues from global markets. During the week It made an attempt to recover some of the losses but was thwarted in the latter half on Friday. It seems like the bears would have an edge against the bulls as index chops around in a range of 8,700 to 8,900. You can read the detailed market update here...

Nifty Witness Losses

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