Jul 11, 2009|
India down on budget hiccup
The pre budget period saw the Indian markets run up significantly on hopes that the Union Budget 2009 will meet its expectations. Come 6th July and the markets were in for a surprise as the budget failed to live up to the hype. Falling by 9% during the week, the market participants did show that they were not so content with the budget this year. In fact, the Indian markets were the top losers amongst key global indices. Other global markets had a rough week as well with Japan (down 5%), France (down 4%), Brazil (down 3%) being the key losers. However, China and Singapore managed to buck the trend, recording gains of 0.8% and 0.4% respectively.
|Source: Yahoo Finance
Coming to the performance of sectoral indices during the week, it was the FMCG and auto sector stocks that emerged as the favourites. While the BSE-FMCG Index ended the week higher by 4%, the BSE-Auto Index managed to fall by only 1% over the previous week. On the other hand, stocks forming part of the BSE-Realty Index were in for a reality check as the index dropped by 17% over the previous week. It was followed by the BSE-Bankex and BSE-Capital goods indices which dropped by 14% and 13% respectively.
The movement in stocks this week was a reflection of how the budget will impact particular sectors and companies. Amongst stocks forming part of the BSE 'A' Group, ITC emerged as the top gainer during the week. The gains in ITC were mainly on account of the Finance Minister (FM) not tinkering with the taxes on cigarettes. That seemingly came as a relief for investors as the government in the past has been steadily increasing the excise duties, which have indirectly impacted volumes. Further, the FM also kept excise duties on paper and paperboards unchanged at 4%. This will help the company reduce its cost. In addition, the increased focus on rural India will help it increase revenues from these markets, which currently form around 20% to 25% of the company's income.
The result season for the June ending quarter began this week with IT major Infosys announcing its 1QFY10 numbers. The company reported a 5% drop in net profits on a QoQ basis while the topline has come in lower by almost 3%. Also, despite adverse currency movements and billing pressures, the company managed to expand its operating margins by 50 basis points on a QoQ basis. On a YoY basis, sales were higher by 13% YoY, while its bottomline grew by 17% YoY. The company has also revised the revenue guidance for FY10 upwards, projecting a decline of around 4% YoY as against the previous estimates of a decline of around 7% YoY to 8% YoY.
Movers and shakers during the week
Inflation numbers (as measured by the WPI) for the week ending June 27 dropped to -1.55%. It may be noted that this is the fourth consecutive week of negative trend in inflation numbers. The inflation number stood at -1.3% during the previous week. The negative trend in the last couple of weeks is mainly on the back of the high base effect as the rate of inflation was as high as 12.03% during this time last year. While the prices of fuel items remained unchanged this week, food prices did rise on a week on week basis. It is important not to be carried away by this low headline inflation as in reality, the recent hike in fuel prices and surging price of the important consumer goods are signaling high inflation if the high base effect is removed.
Coming to economic news, concerns of the high fiscal deficit (as a percentage of GDP) have been looming large over the markets in the past few days. It may be noted that the deficit zoomed to 6.2% in FY09 as the global economic slowdown impacted India's pace of growth, as a result of which stimulus measures had to be undertaken. The Finance Minister (FM) during the week indicated that the deficit will form 6.8% of GDP in FY10. Moreover, on including off-budget items such as fertiliser and oil bonds, the deficit figure will stand at about 12% of GDP. This indirectly created flutters across financial markets.
During the week, rating agency S&P also expressed its concerns over the country's outlook. Currently, the agency has given a rating of BBB- which is one step away from the 'junk' status. Any downward revision on this rating could lower India's appeal with foreign investors (which we are anyways not complaining much about!). However, S&P has added that it expects its India outlook to stabilise at the current levels provided the country manages to reduce its deficit burden in the medium term. This is also keeping in mind that a faster than expected economic recovery would help India to achieve faster fiscal consolidation through higher revenue growth.
In other international news, the International Energy Agency (IEA), which had earlier predicted a decline in this year's oil production from countries other than the Organization of the Petroleum Exporting Countries (OPEC), has reversed its estimates. As per Reuters, the energy advisor to almost 30 developed countries now believes that strong output from Russia will push the non-OPEC production up this year. It may be noted that several OPEC members have started producing more oil than their agreed-upon output quotas as oil prices have gone up from their recent bottom.
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