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Global Stock Markets Chart Modest Gains
Sat, 24 Feb RoundUp | Prasheel Vartak, TM Team

Global financial markets ended the holiday shortened week with modest gains. The rally put behind days of decline as concerns regarding swift interest rates hikes were put to ease.

Earlier in the week the Dow and S&P continued to decline steadily as minutes from the US Federal Reserve's January meeting showed the central bank's rate-setting committee grew more confident in the need to keep raising rates.

However, the benchmark US indices recovered by the end of the week as concerns about a faster pace of rate hikes from the central bank were eased by comments from St. Louis Fed President James Bullard that expressed concerns a "bunch of hikes" could turn Fed policy restrictive. Market participants are still largely expecting the Fed to raise rates three times this year. The Dow Jones Index ended the week up by a modest 0.4%

European stocks ended the week mixed, with most major indices charting a recovery in a variety of sectors as concerns about rising interest rates and inflation apparently eased. Among country benchmarks, the UK's FTSE was down 0.7% and Germany's DAX added 0.3%, while France's CAC 40 was up 0.7%.

Asian shares rebounded on Friday as comments from a Federal Reserve official eased worries that the central bank might raise rates more aggressively this year. Chinese stocks advanced in a holiday-shortened week, paring some of their big declines from the previous week's global sell-off, as the country celebrated the Lunar New Year holiday. China's Shanghai Composite was up 2.8% over the week.

Back home, benchmark indices in India too logged modest gains of 0.4% as BSE Sensex closed at 34,142. While the Nirav Modi fraud saga still continued with public sector banks witnessing selling pressure, a spurt in metal stocks and pharma stocks meant that the benchmark indices ended the week on a positive note.

Key World Markets During the Week

On the sectoral indices front, stocks from Consumer Durables and Banking witnessed selling pressure.

BSE Indices During the Week

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

In news about the economy. Fitch Ratings in its latest report has stated that the Reserve Bank of India's (RBI) new norms for overhauling the mechanism to deal with the bad debt, is likely to push up banks' credit costs and weaken earnings in the near term.

However, it believed that stronger regulatory efforts to deal with the problem of mounting bad loans in Indian banking system along with planned recapitalisation of state banks, could help support a recovery in the sector over the medium term.

It also noted that the new framework gives banks less discretion over the reporting and resolution of bad assets and attempts to address the complexities involved in resolving the stressed loans of large borrowers. Under the new framework for NPL resolution, it observed that banks will need to report defaults by large borrowers weekly, indicating a more invasive approach to tracking bad assets.

It added that more accounts are also likely to be pushed toward insolvency courts and into liquidation, particularly since the new guidelines require all of a borrower's lenders to agree on a resolution plan to keep it away from the courts.

In news from the IT sector. In a move that could potentially hurt India's IT industry, the Trump administration has announced a new policy that makes very tough the procedure of issuing H-1B visas to those to be employed at one or more third-party worksites.

Under the new policy, the company would have to go an extra length to prove that its H-1B employee at a third-party worksite has specific and non-qualifying speculative assignments in speciality occupation.

Indian IT companies, which are among the major beneficiaries of H-1B visas, have a significant number of its employees deployed at third-party worksites.

The new move announced empowers the US Citizenship and Immigration Services (USCIS) to issue H-1B visas to an employee only for the period for which they have worked at a third-party worksite.

In the news from the economy. Ahead of the release of Gross Domestic Product (GDP) data by Central Statistics Office, the State Bank of India (SBI) Research in its latest report said that Indian economy is likely to grow in the range of 6.5-7% during the third quarter of the current fiscal year 2017-18.

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As per the report, the country's economy in fourth quarter of FY18 may grow by 7%. Besides, the country's GDP grew by 6.3% in Q2 FY18, up from 5.7% in the Q1 FY18.

The report also expects that manufacturing Gross Value Added (GVA) would be in the range of 8-10% for the Q3 FY18, if the current trend persists for remaining companies also. It added that a synchronised global growth coupled with an uptick in commodity cycle will also help sectors like metals, textiles and sugar.

However, the report warned that the recent developments in the financial markets may restrict the further growth of the Indian economy.

Market participants are closely watching the minutes of The Reserve Bank of India's (RBI) bi-monthly monetary policy meet.

The Monetary Policy Committee of the RBI, which kept the policy repo rate unchanged in its February 7 policy review expressed concern about continued inflationary risks, citing factors including high food and global crude oil prices and the government's decision to increase spending for the year starting in April to support a struggling agricultural sector.

The MPC voted 5-1 at the meeting to keep the policy rate on hold at 6 per cent and to retain its neutral monetary policy stance. RBI Executive Director Michael Patra was the sole member to vote for a 25 basis point hike.

The minutes released on showed widespread concerns among the six MPC members about inflation, which accelerated to a 17-month high of 5.2% per cent in December from a year earlier, driven higher by food and energy.

The RBI's monetary statement in December had projected quarterly average inflation in the range of 2-3.5% in the first half of fiscal 2018, and 3.5-4.5% in the second half. Now it expects inflation to be about 4% by the year end.

Rate cut or not, we do not attempt to predict how and when macroeconomic developments will unfold. Instead, we focus on the fundamentals and the underlying business strength of companies. The ValuePro team is always on the lookout for all-weather stocks whose fortunes are not tied to economic cycles.

In news from the economy, foreign direct investment (FDI) in India grew marginally by 0.27% to US$35.94 billion during the first nine months of the current fiscal year 2017-18.

According to data released by the Department of Industrial Policy and Promotion (DIPP), the country has received US$35.84 billion FDI during April-December 2016-17. However, in rupee terms, FDI inflows dropped by 4% to Rs 231,457 crore during the first nine months of FY18, as compared to Rs 240,385 crore in the same period of FY17.

During the first nine months of the current financial year, the sectors which attracted maximum inflows were services, telecommunications, computer software & hardware and construction activities. Services contributed around 17% to total inflows with an investment of US$4.62 billion, followed by telecommunications and computer software & hardware which contribute 8% each with investment of US$6.13 billion and US$5.15 billion, respectively and finally construction activities contributing around 3% (US$2.5 billion).

Movers and shakers during the week
Top Gainers During the Week (BSE Group A)
Company16-Feb-1723-Feb-18Change52-wk High/Low
IDBI BANK61.877.124.9%83/50
BHUSHAN STEEL44.950.011.4%103/39
JAIPRAKASH ASSO.17.319.211.0%30/9
APOLLO HOSPITALS1,138.21,232.18.2%1,357/959
IPCA LABS625.3671.97.5%688/400
Top Losers During the Week (BSE A Group)
GITANJALI GEMS LTD37.624.8-34.0%105/25
UNION BANK118.3108.8-8.1%205/105
Source: Equitymaster

Some of the key corporate developments in the week gone by.

Moving on to news from telecom sector. Another major consolidation is on the cards in the telecom space.

According to a leading financial daily, Bharti Infratel Ltd and Indus Towers Ltd-two of India's largest telecom tower firms-are planning to merge their businesses.

Vodafone India Ltd and publicly traded Bharti Infratel Ltd hold 42% each in Indus Towers. Idea Cellular Ltd owns 11.15% and US-based private equity fund Providence owns 4.85%. Bharti Infratel was earlier planning to acquire a controlling stake in Indus Towers and make the latter a subsidiary.

According to that plan, Bharti Infratel was to acquire the stake it didn't own in Indus Towers in an all-cash transaction and later sell the combined business to external investors.

However, both Vodafone and Idea have decided to stay invested in the tower business and the original deal stands scrapped. Notably, Vodafone India and Idea Cellular are set to merge this year to create India's largest telecom operator, surpassing Bharti Airtel Ltd.

The whole telecom business has been an underwhelming story so far. While the telecom subscriber base has increased from 300 million in 2008 to 1.2 billion in 2017, investors have little to cheer. The BSE Sensex has gone up 3.25 times in nine years, but the BSE Telecom Index has not moved an inch from its levels of 2008.

With the entry of Reliance Jio, the competition has intensified further, with a lot of the current players opting for consolidation in order to remain competitive. Reliance Jio's low cost offerings and strategy of capturing market share will further dent the sector. The sector has been a classic 'value trap'. While it always looks cheap compared to other sectors, it has failed to provide any reasonable returns. We also believe the situation is unlikely to change in the near future. For an investor, it's important to differentiate between 'value' and 'value traps'.

Moving on to the news from automobiles sector. As per an article in a leading financial daily, Tata group is planning to sell its automotive parts manufacturing company Tata AutoComp Systems Ltd (TACO).

Pune-based Tata AutoComp, a subsidiary of Tata Motors Ltd, has more than 33 manufacturing facilities across India and China, and five joint ventures in partnership with leading global auto parts makers.

One shall note that, N. Chandrasekaran is planning to divest companies that are not making money and allocate capital to businesses where the group's prospects are brighter.

The plan involves reducing costs and increasing efficiency of the company, which has struggled to make money or increase its market share in the country.

In June, Tata Motors and two other group entities had announced the sale of a 43% stake in engineering unit Tata Technologies Ltd to private equity firm Warburg Pincus in a deal worth US$360 million. However, the deal was called off this month following a delay in securing regulatory approvals.

Under Chandrasekaran, the Tata group is making partial and complete exits from various non-core businesses.

Moving on to news from pharma sectorBiocon share price is in focus today after the drug major said that the United States Food & Drug Administration (USFDA) made six observations after inspecting its Malaysia plant.

Biocon said that the USFDA completed a pre-approval inspection of the facility and issued a Form 483 with six observations.

As per USFDA, observations are made in Form 483 when investigators feel that conditions or practices in the facility are such that products may become adulterated or render injuries to health.

In another development, as per an article in The Economic Times, Aurobindo Pharma has expressed early stage interest in the European business of the US$1.7-billion privately held Canadian drugmaker Apotex.

Known for its high profile litigations in the US against MNC pharma players, Apotex has put on the block its European operations as part of a wider consolidation effort.

The deal may be valued at around US$100 million and fits in with Aurobindo's strategic road map of upping its presence in eastern Europe through bolt-on acquisitions.

Moving on to the news from banking sector. As per an article in a leading financial daily, the regulator National Housing Bank (NHB) has approved the merger of Capital First along with Capital Home Finance and Capital First Securities Limited with IDFC Bank.

The US based PE firm Warburg Pincus backed non-banking financial company and IDFC Bank with this merger in an all-stock deal, are set to create a Rs 880-billion combined entity.

The share swap ratio for the merger is fixed at 139:10, meaning IDFC Bank will issue 139 shares for every 10 shares of Capital First.

The merger is likely to be completed in the next two- three quarters.

Capital First has a customer base of 3 million and a distribution network in 228 locations across the country.

Further, it's gross and net NPA stood at 1.6% and 1%, respectively as on September 2017.

Post-merger, the combined entity will have an AUM of Rs 880 billion.

Reportedly, the new entity will have a distribution network comprising 194 branches, 353 dedicated banking correspondent outlets, over 9,100 micro ATM points, and will be serving more than 5 million customers.

Currently, private equity firm Warburg Pincus holds 35.97% in Capital First. Notably, IDFC which entered the banking space in 2015, has been on the lookout to grow its retail portfolio.

Gitanjali Gems was in focus over the week, amid reports that State-run MMTC has decided to terminate its loss-making retail experiment with Gitanjali Gems as unease over the nine-year-old venture mounts, following accusations of Mehul Choksi's involvement in the over Rs 113-billion fraud that has rocked PNB.

However, most investors in stock markets suffer from short-term memory. The past debacles are quickly forgotten with investors making a beeline for dud stocks, only to burn their fingers repeatedly.

Back in July 2013, after the stock of Gitanjali Gems had slumped on charges of market manipulation by its promoters, it was being lapped up by institutional investors hoping to cash-in the long run.

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

Today, the Indian stock markets ended its February futures and options (F&O) expiry. Let's have a look at how the Nifty 50 Index performed during the expiry.

It was the worst expiry for the Indian indices in the last one year. Except for the first day of the expiry where the Nifty 50 Index achieved an all-time high of 11,171, the bulls did not stand a chance. The index started its free fall from day 2 and, subsequently, tumbled down 6.2% from the previous expiry.

Last expiry, we mentioned that the RSI indicator was trading in its extreme overbought territory. This indicated that a correction was expected. As a results, the index corrected 6% from the previous expiry.

Recently, the index bounced from the rising trendline (blue line) and today it up nearly 110 points. The RSI indicator has also cooled-off and has now reversed up from its support level. So does this indicate a resumption of the uptrend?

The derivative and rollover data can give us some clue about this. Read our detailed analysis on the derivatives data in yesterday's  Profit Hunter Pro newsletter (subscription required). To subscribe, click here.... You can read the detailed market update here...

Nifty 50 Index Ends February Expiry 6% Down
 Nifty 50 Index Ends February Expiry 6% Down

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