Global Markets Jittery Over Outcome of US Election

Sat, 5 Nov RoundUp

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Barring China, major global markets ended the week on a negative note. The uncertainty over the outcome of US elections has kept the global markets on its toes. Dow Jones Industrial Average (DSIJ)- the benchmark index of US was down by 1.5% during the week. Further, the US central bank in its meeting on 2 November kept the interest rates unchanged. Experts believe that there is a high likelihood of interest rates being hiked in the month of December.

Asian markets too ended on a weak note with benchmark indices in Japan and Hong Kong were down by 3.1% and 1.4% during the week.

However, stock markets in China were up by 0.7% during the week mainly on the back of good numbers pertaining to their Purchasing Managers Index (PMI) data. An official gauge of the nation's factory activity rose to the highest level in more than two years in October. China's official manufacturing PMI increased to 51.2 from September's 50.4 indicating a third straight month of expansion.

Back home, Indian markets too fared badly. BSE Sensex was down by 2.4% during the week. Worse affected was the BSE Small Cap index, which went down by 4.3% during the week.

Key World Markets During the Week

Sectoral indices ended the week on a negative note with stocks from pharma and realty space witnessed maximum selling pressure. Sun Pharma was the worst hit among the pharma players with the stock down by 12.2% during the week.

BSE Indices During the Week

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

After a series of discussions it seems like the center and the state have struck a consensus on the tax rate beneath ec (GST). This essentially means that India has moved closer towards implementation of GST. The government aims to implement GST from 1 April 2017.

The GST council has decided upon a multi-tiered tax rate system. 50% of the items present in the consumer price index (CPI) basket, including food grains such as rice and wheat will attract zero tax rate. By including 50% of the CPI items under zero tax rate, inflation will remain in check.

The next slab will be 5%, wherein items of mass consumption like spices, tea and mustard oil will be taxed. Next will be two standard rates of 12% and 18% wherein a majority of items used by the common man will be taxed.

After that, there would be a higher slab of 28% where items currently attracting a tax of 27-31% will be taxed. Items like white goods and cars will be included in this tax bracket.

Now, the so called demerit and sin goods such as aerated drinks, luxury cars, tobacco and pan masala will also be taxed at 28%. However, on such goods a cess will be levied by the center over and above the 28% slab. Reportedly, the cess will be levied in such a manner that the final tax incidence on such demerit items and sin goods is not less than the existing tax rates. The cess in-turn will be used by the central government to compensate the states for the loss arising out of the transition to GST. The estimated loss to the states is pegged at Rs 500 billion in the first year.

The multi-tiered tax rate structure could possibly complicate GST as it will lead to classification issues. Interpretation issues could arise pertaining to classification, in turn leading to more litigation.

Having said that, GST could be a potential game changer for the economy if implemented in the correct manner. All things considered, it could add another 1-2% to GDP growth every year on a sustainable basis.

The Nikkei India Composite Purchasing Managers Index (PMI) - a gauge of private sector activity in the country has reached its highest level since January 2013 in the month of October.

The index, which reflects the activities both in manufacturing and service sector, came in at 55.4 for October 2016. This could essentially mean that a recovery is around the corner led by good monsoon and an increase in consumption.

However, what was also surprising in October month's PMI number is that there are signs of a gradual improvement in investment demand. There was a strong inflow of new work during the month. This in-turn would bode down well with the employment scenario as well. A sustainable improvement in this index will be the key things to watch out for going forward.

Movers and Shakers During the Week

Company	28-Oct-16	04-Nov-16	Change	52-wk High/Low
Top Gainers During the Week (BSE Group A)
Century Textiles	909	978.65	7.7%	1,037 / 404
Future Enterprises	15.90	16.90	6.3%	173 / 16
HINDALCO	149.60	158.20	5.7%	166 / 59
VEDANTA LTD	202.05	212.80	5.3%	226 / 58
MRF LTD	47903.95	50319.90	5.0%	54,601 / 30,464
Top Losers During the Week (BSE Group A)
Sun Pharma	743.75	652.75	-12.2%	896 / 649
Housing Dev. Infra	83.3	73.4	-11.9%	109 / 56
Oriental Bank	128.25	113.45	-11.5%	158 / 75
Gitanjali Gems Ltd	78.50	69.90	-11.0%	94 / 30
Jaiprakash Asso.	11.13	9.93	-10.8%	14 / 5

Source: Equitymaster

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

A Mint, analysis of quarterly earnings of 53 members of the BSE-100 index shows that 28 of them have exceeded consensus earnings estimate by Bloomberg.

However, the sustainability of these earnings will much depend on the volume growth going ahead. Why do we say this? Since the preceding year, the commodity prices have stayed benign. Even when the topline growth has remained muted, the bottomline has remained strong on account of lower costs mainly on the back of lower commodity prices.

However, the commodity prices have slowly started moving northwards and hence it will be difficult to sustain the operating margins at the level as seen at present. This in-turn could dent the earnings.

Hence, a volume growth is really important at this juncture to achieve a sustainable earnings growth moving ahead.

Companies are increasingly trying to cater to the Ayurveda segment. Companies such as Colgate Palmolive (India), Dabur India, Hindustan Unilever India are launching products in the herbal segment to tackle competition from the emerging threat from Patanjali.

For example Colgate recently launched a herbal toothpaste named Cibaca Vedshakti to counter Patanjali's toothpaste Dant Kanti. Similarly Dabur India in its recent move laid down a strategy to launch more Ayurveda products such that this segment constitutes more than 75% of the sales of the company by 2020 from the present 60%.

Patanjali does not yet represent an existential threat to incumbents, although it may become one for specific categories or brands. However, companies are no longer dismissive of the threats from such brands. This is a developing story that will attract attention for some time to come.

We in fact met management of a leading hair oil player recently. He validated the view that 'Ayurveda' as a separate category is not a passing trend and is rather here to stay. But its dent in the market will be limited as Ayurveda has a 'functionality' aspect linked to it - it is mainly used as a form of treatment.

While it's too soon to jump to conclusions, this is definitely a space we'll be keeping an eye on.

Bharti Airtel has awarded a US$60 million (4.02 billion) pan-India deal to Nokia to implement voice-over-LTE (VoLTE) calling technology which may be launched for subscribers within this year.

Airtel may be in an advantageous position if it launches VoLTE services any time soon, considering that Jio hasn't been able to publicize the benefits of this technology due to the interconnection issue. Reliance Jio claimed it is facing massive call failures.

As per the reports, Airtel will use VoLTE as a complimentary service to its existing voice offering. In case VoLTE is not available in an area, Airtel users would be able to fall back within the network to lower technologies, which are 2G and 3G.

Consumer demand in smartphones that support the VoLTE feature has nearly doubled since Jio Infocomm's 4G launch early September. Reportedly, more than 14 million VoLTE-enabled smartphones are estimated to have been shipped into India in the September quarter, nearly twice the number in the previous quarter.

Vodafone India and Idea Cellular, having bolstered their 4G spectrum holdings in the recently-concluded auctions could also join the VoLTE race soon. Vodafone is already trialing VoLTE in select areas using Nokia's IMS solution, while Idea Cellular is reportedly in advanced talks with both Ericsson and Nokia, and is likely to award the deal in coming days.

And here are some of the key result updates in the week gone by.

Eicher Motors reported September quarter results for fiscal 2017. Company's flagship brand Royal Enfield, reported robust numbers for the month of October. Sales volume of Royal Enfield grew by 33% during the month of October as compared to a year ago. For the first seven months of the current fiscal year, the sales volume growth stood at a robust 34%.

The company also took a price hike in Royal Enfield in the month of August-ahead of the festive season, in-turn leading to realizations growing by 4% YoY during the September quarter. Operating margins too came in at a healthy 31.3% during the quarter.

However, their commercial vehicle segment isn't performing as expected. The competition is intense in the commercial vehicle space. Lower demand coupled with intense competition led the company to give hefty price discounts. Hence, realizations in the commercial space declined by 7% during the quarter as compared to a year ago. This in-turn dented the overall profitability of the company.

The continuation of the strong growth of Royal Enfield coupled with the performance of their commercial division will be the key things to watch out for going ahead.

Nestle reported its results for the quarter ended September 2016. The company's net profits doubled to Rs 2.6 billion from Rs 1.2 billion a year ago. Revenues too grew by 35.1% YoY to Rs 23.4 billion.

The company's flagship brand Nestle Maggi has been able to regain its lost market after the Food Safety and Standards Authority of India (FSSAI) had put a ban on the noodle brand citing excess monosodium glutamate and lead content. In last November, when the company relaunched Maggi its market share stood at 10.9%.

Further, the company is aggressively pushing to introduce new products in the market to boost growth. The company has introduced four new variants to maggi noodles named as Maggi Hotheads.

To add to this the company has introduced a variety of new products in its confectionary, milk products and beverages segment. In all, the company has introduced 25 new products. This will drive the growth in the topline going ahead.

Traction from new products coupled with the re-gain of market share from Maggi noodles will be the key things to watch out for going forward.

The outcome of US elections will play an important role in determining the trajectory of the global markets in the short run. The markets are expecting Mrs. Hillary Clinton to win the presidential elections. However, if this does not happen fickle minded Foreign Institutional Investors (FII) may flee from emerging markets to safe heavens like US Treasuries and Gold.

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

The Nifty dropped more than 2% during the week. This was the second largest weekly drop after the Nifty topped out near 9,000 levels in September. It has ended the week below the crucial support level of 8,500 at 8,435. It seems like the bears are in total control now and may not take any rest ahead of the 200 DMA level of 8,320. You can read the detailed market update here...

Nifty Slumps on the Back of Ongoing Global Volatility

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