The major global stock markets closed the week on a mixed note. The US indices ended the week in the red (down 1.2%) after breaching the 18k level during the last week for the first time. This was mainly due to tepid economic conditions, as construction spending unexpectedly fell 0.3 % in November, while growth in the US manufacturing sector slipped to a six-month low in December. Weak economic data also weighed on European stocks. However, the losses were mitigated on account of rising expectations that European Central Bank would take some measures to boost the euro zone. The stock markets in France and Germany witnessed a decline of 1.0% and 1.6% respectively during the week.
The expansion in British manufacturing was also lower than expected in December. The stock markets in UK declined 0.9% over the week.
The major Asian stock markets reported gains led by China (up 2.5%) during the week ended 2nd Jan 2015. This was despite the weak manufacturing data for China. The stock markets in Hong Kong were up 2.2% over the week. One of the factors driving these gains was the speculation that the government will relax monetary policy to boost growth.
The New Year seems to have started on a good note for Indian stock markets that closed higher by 2.4% over the week. The gains were mainly supported by hopes of reforms, especially in the banking sector. The HSBC Purchasing Managers' Index (PMI) rose to a two-year high of 54.5 in December led by strong order books, suggesting that the business conditions in India have improved at a faster pace. However, the survey indicated that the job market remains tight. All sectoral indices ended on a positive note with stocks in the capital goods, consumer durables and power sector leading the gains.
Now let us discuss some of the key economic and industry developments in the week gone by.
As per the latest economic statistics, the output of eight crucial industries - coal, crude oil, natural gas, refinery products, fertilizer, steel, cement and electricity has grown to a five-month high of 6.7% in November 2014, marginally higher than 6.3% in the previous month. In November last year, the output had risen 3.2%. For the first eight months of the fiscal year 2015, the core sector output was up 4.6% as compared to 4.1% in the corresponding period last year. However, one must note that there is no direct relationship between the core sector and industrial production. This is despite the fact that the core sector has almost 38% weight in the Index of Industrial Production (IIP).
The Union Cabinet has approved an ordinance to amend the contentious land acquisition act and ease restrictions including a "consent clause" which was seen as roadblock for power, highways, and housing, defence and infrastructure projects. Bringing some relief to the industry, the consent clause and social impact assessment is waived if land is acquired for these key projects. Earlier, the Act mandated 70% approval of land owners for PPP (public private partnership) and 80% for private projects. The government has tried not being 'anti-farmer' by keeping intact the increased compensation provided for under the Act, and also extending them to the acquisitions under certain exempted laws.
The Reserve Bank of India has liberalised norms on external commercial borrowings (ECBs). The new norms will increase the choice of security that companies can provide while taking forex loans. Companies can provide immovable and movable assets, financial securities and personal guarantee to overseas banks while borrowing ECBs. Reportedly, the said decision by RBI was taken with a view to liberalizing and expanding the options of securities and further consolidating various provisions related to creation of charge over securities for ECB at one place.
During the week, the telecom regulatory authority of India (TRAI) announced the base price of Rs 27.2 bn per Mhz for pan India 3G spectrum. This is about 22% lower than the previous auction price which stood at Rs 35 bn per Mhz bringing relief to the telecom operators. Further, the regulator said that the operators who win spectrum in the upcoming auction will need to roll out the network within 3 years of getting the radio waves. In the earlier auction which happened in 2010, the roll out obligation was pegged at 5 years.
In the energy segment, the government raised excise duty on petrol and diesel by Rs 2 per litre each. However, the retail pump rates will not be increased. Reportedly, this is the third excise duty hike by the government since November and will help to raise revenues of approximately Rs 60 bn during the remaining three months of the current fiscal. The government has taken the advantage of sharp fall in the global oil prices. This will help in shoring up some revenues without stoking inflation. Further, oil marketing firms have lowered prices of non-subsidised LPG cylinders and aviation turbine fuel (ATF). Each non-subsidised LPG cylinder will be cheaper by Rs 43.5 while ATF prices have been lowered by 12.5%. This is the fifth cut in the price of non-subsidised LPG cylinders since August 2014. However, the price of the subsidised LPG cylinders has been kept unchanged at Rs 417. The cut in ATF prices will help ease operating costs of airlines as this fuel accounts for more than 40% of the same.
Now let us move on to some of the key corporate developments of the week gone by.
Pharma major Lupin is on the look-out for acquisitions in markets of US, Europe (Russia, Turkey), Latin America, Japan and China to widen its overseas presence. The company is eyeing suitable acquisitions in the inhalation, complex injectables and derma space. In FY14, international operations formed 75% of the overall revenues for the company out of which the US markets alone accounted for a lion's share of 44%. The company expects the US generics business to remain a principal growth driver with 15-20 generic product launches lined up over the next 12-15 months. Lupin presently has 200 abbreviated new drug applications (ANDA) filings with US Food & Drug Administration (USFDA) out of which 100 are pending approvals and 30 are exclusive first to file. The company has also signed various agreements in the US market in FY14. The company expects its third largest business in Japan to grow by 15-20% in future.
The engineering major Bharat Heavy Electricals Ltd (BHEL) has won orders worth Rs 38.1 bn from the state of Telangana for setting up a thermal power EPC project. It is an 800 MW super critical thermal power project which is expected to be commissioned in 36 months. BHEL's scope of work here includes everything right from designing to commissioning the project.
Construction major IVRCL is on its way to sell assets worth about Rs 31 to Rs 33 bn which will help the company reduce debt by about Rs 25 bn and free up equity worth Rs 6 to 8 bn. The stake sale would include 3 road projects and a desalination plant based in Chennai. This is part of the company's strategy to focus on its EPC business. It may be noted that these plans by the company have been going on for a long time, but due to the market conditions earlier, it was no able to sell of these assets at the desired price. The company was going through a tough time given the overall slowdown combined with the high debt levels built up by the business. As such, selling of already operational assets is the route the company has taken to improve its balance sheet position.
Coal major Coal India will see senior IAS officer S. Bhattacharya assume charge as its new full time chairman and managing director by the 5th of January. It may be noted that the company has been without a fulltime head since S. Narsing Rao resigned from the post in May 2014. A better performance as far as meeting coal production targets is likely to be top on the agenda of the new management head of the company.
2015 is likely to be a crucial year for India and the markets will keep an eye on economic growth, on reforms in the Union Budget statement or outside of it, Reserve Bank of India's (RBI's) action on interest rate; and corporate earnings trend. However, global macro factors will continue to impact the Indian stock markets. While oil prices continue to decline, investors must keep in mind that low prices may be difficult to sustain in the long run. Thus, it makes more sense for investors to look out for stocks with strong fundamentals rather than short term tailwinds.