US fiscal woes drag global markets

Sat, 28 Sep RoundUp

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Barring Japan (up 0.1%) , the major global stock markets ended the week in the red on account of fiscal issues in the US economy. The global markets are reflecting the lack of progress in negotiations over the US budget and debt ceiling. The investors are further worried about a possibility of Washington technically defaulting on its debts. The positive data flow on US job, consumer and housing statistics has been offset by chances of a partial government shutdown next week and concerns on debt ceiling. The US stock markets lost 1.2% over the week. The US dollar also touched seven month low.

The stock markets in Europe also reflected the concerns in US economy that overshadowed encouraging euro zone business confidence data and ended the week with losses. The stock markets in Germany, France and UK lost 0.2%, 0.4% and 1.3% over the week. Besides, the markets remained on the back foot on concerns over a political crisis in Rome highlighted by Italian debt auction.

Barring Japan (up 0.1%), the major Asian stock markets ended the week in red. Japan is expecting an announcement about the government's economic growth and tax strategy next week. The stock markets in China lost 1.4% over the week ahead of the launch of a pilot free trade zone in Shanghai. Further, a weeklong holiday in China that starts on Tuesday kept investors at bay.

The Indian stock markets led the losses with the BSE-Sensex losing 2.6% over the week. The markets were down on fear of further rate hikes as Mr. Raghuram Rajan highlighted the inflation concerns in Indian economy. It is to be noted that the Reserve Bank of India (RBI) in its last monetary policy review had unexpectedly hiked repo rate by 25 basis point to 7.50 % to counter mounting inflationary pressure. Further, the investors were cautious on account of a weak trend in the global stock markets and ahead of current account deficit numbers due next week.

Source: Yahoo Finance

Source: BSE

Now let us discuss some of the economic developments of the week gone by.

In a move to empower country's tax authority to restrict tax avoidance, the government has notified much-diluted General Anti Avoidance Rule (GAAR) provisions to be implemented from April 2016. The GAAR provisions would apply to business arrangements with a tax benefit exceeding Rs 3 crore. These rules will be applicable to foreign institutional investors (FIIs) that have not taken the benefit of an agreement under Section 90 or Section 90A of the Income tax Act or Double Taxation Avoidance Agreement (DTAA). As per Central Board of Direct taxes (CBDT), before invoking the GAAR provisions, tax officials would have to issue a notice in writing to the assessee seeking objections if any, to its applicability. Meanwhile, in order to ease the concerns of anxious investors, CBDT has said that benefit of grandfathering would be given to investments made before August 1, 2010, however, only up to March 31, 2015. It is important to note here that the government had introduced GAAR provisions in FY13 Budget. Earlier, these were scheduled to come into effect from April 1, 2014. However, the implementation was delayed due to protest from global and domestic business leaders and investors.

In order to ease tight liquidity situation ahead of the festival season, the Reserve Bank of India (RBI) plans to take measures such as bond purchases to support the flow of credit to productive sectors of the economy. The RBI said that present liquidity tightening condition in the market is mainly due to the prospective effects of banks' half-yearly account closure, seasonal pick-up in credit demand, festival-related demand for currency and sluggish deposit growth. Liquidity has also tightened due to uncertainties about the government's borrowing programme for the second half of 2013-14. The government has said that it would borrow Rs 2.35 lakh crore from the market in the second half of the current fiscal. The total amount projected in the Budget stands at Rs 5.79 lakh crore. The government borrowing stood at Rs 3.44 lakh crore in the first half of FY14.

Now let us move on to some news from the corporate world.

The Government has decided to allow private energy firms such as Reliance Industries, Cairn India Ltd, BPL Ltd and BG to explore shale oil and gas from their existing fields. The Cabinet has already approved shale gas exploration policy for oil companies such as Oil India Ltd and Oil and Natural Gas Corporation Ltd. (ONGC). This paved way for these companies to explore non-conventional resources in blocks awarded to them without auction. The Ministry would also launch the tenth bidding round of oil and gas blocks after certain policy issues are resolved. The Government has also decided to resolve differences over interpretation of contractual provisions post concerns raised by Reliance industries. The Ministry has also clarified that that gas price hike proposed by the Rangarajan Committee would be uniformly applicable for all.

Telecom Regulatory Authority of India (TRAI) has mandated mobile service providers to implement full mobile number portability (MNP) within six months. This shall help millions of subscribers as MNP will allow them to retain their numbers if they move from one service provider to another. At present, MNP is restricted within a service/circle area (intrastate) and is not applicable if the subscribers move from one state to another. Full MNP is likely to present an opportunity to companies like Idea Cellular, Bharti Airtel Ltd and Vodafone which have benefitted from circle level MNP in the past. Implementation of full MNP is likely to increase users' available choices, improve competition and may also improve network quality. As per industry experts, companies that have a strong brand proposition, superior network quality, differentiated products and services will have an edge in this case.

The leading steel firm Tata Steel's management has said that India's steel consumption is expected to grow by 5% YoY in the current year. The slow growth would be largely due to lesser demand from the construction/ real estate (consumes 60% of the volumes) as well from the automobile sector. During FY11, FY12 and FY13, the growth rates stood at 9.9%, 5.5% and 3.3% respectively. However, in the 5mFY14 period, steel consumption has been flat. On account of the prolonged monsoon season, construction activity has been poor. Besides, the Indian auto manufacturers are also facing a slowdown. The management expects steel prices to remain stable. The management has further suggested possibility of overcapacity situation in the sector because of which Indian steel manufacturers will have to focus on exports in the short run.

The engineering and construction major Larsen & Toubro (L&T) has bagged new orders worth Rs 27 bn during September 2013 across various segments both in the domestic and overseas markets. The firm has bagged orders worth Rs 13.3 bn in the water and renewable energy sector. Three of the major turn-key orders received are from the Public Health Engineering Department of Rajasthan for water supply projects. Another Rs 12 bn new project has been secured by the company for its buildings and factories business. These strong orders are definitely expected to be a booster to the engineering behemoth.

Power Finance Corporation Ltd (PFC), the nodal agency for ultra mega power projects (UMPPs), will invite fresh bids for two UMPPs. One is Bhedabahal in Orissa and the second project is Cheyyur in Tamil Nadu. Earlier this month, PFC had scrapped initial bids received from 20 power companies for setting up the 4,000 MW UMPP in Orissa way back in 2011. The project has been delayed due to absence of environmental clearance as well as scrapping of old Standard Bidding Documents (SBDs).The new SBDs have been finalized now and PFC will go ahead with inviting fresh bids. For the Orissa UMPP, all major clearances such as land acquisition, water linkage and coal blocks are in place now. Civil aviation clearance has also been obtained from the Airports Authority of India. For the UMPP in Tamil Nadu; which will be based on imported coal, all major clearances are available.

Last week saw the subdued performance of global stock markets on US fiscal woes. The Indian stock markets performed the worst on added concerns of inflation. Going ahead, the Indian stock markets will be influenced by global trends and current account deficit numbers due next week. Investors should note that short term developments should not form the only basis for investment decisions. Indeed, the focus should be on stocks of companies that have good fundamentals and a sound management. And if these near term gyrations result in such good quality stocks being available at attractive valuations, then investors must certainly take advantage of the same.