Interest rate worries hold back markets

Sat, 27 Mar RoundUp

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The week gone by was a rather mixed one as far as the global stockmarkets are concerned. European markets closed in the green on the back of approval of the bailout package for Greece. However, barring India and Japan, the Asian markets closed in the red on worries of inflation and rising interest rates.

Germany was the top performer among world markets this week with a 2.3% gain. Among the remaining European countries, France and UK closed the week with gains of 1.6% and 0.9% respectively. Coming to Asian countries, Japan was the top performer with gains of 1.6% while India closed the week with gains of 0.4%. The remaining Asian countries closed the week in the red with China, Hong Kong and Singapore losing 1.6%, 1.5% and 0.3% respectively. In the Americas, US markets closed with gains of 1% during the week while Brazil closed the week with a marginal loss of 0.2%.

Source: Yahoo Finance

Moving on to the sectoral indices in India - it was a mixed week for Indian stocks. Stocks in realty fell the most, continuing their losing trend seen since the past three weeks. The BSE-Pharma index was the top gainer for the week with an increase of 2.6%. The BSE-Banking and BSE-FMCG indices followed with gains of 2% and 1.2% respectively. While the BSE-Realty index was the only loser of the week with a fall of 4%, BSE-PSU and BSE-Smallcap indices also closed in the red with a loss of 2% and 0.8% respectively during the week.

Source: BSE

Moving on to the key corporate developments of the week, the shifting of the Nano factory from Singur to Sanand is expected to cost Tata Motors an additional Rs 2 bn or US$ 44 m. This is a result of compensation to be given by the company to its vendors who had to relocate from Singur to Sanand. This sum is likely to compensate between 75% to 80% of the losses incurred by the vendors. However, the compensation is not expected to be given out in cash nor in fact at a single go. It is believed that Tata Motors would give out the compensation in a phased manner and in the form of either loans or higher prices for components. It may be noted that Tata Nano is expected to start commercial production next month.

In another news in the auto sector, Hero Honda announced two important news during the week. One is its plans of building a fourth plant in order to augment capacity. The other is that the company is considering exporting motorcycles to Africa. We believe both these factors are positive for the company in the long run. Greater capacity would help the company grow its revenues as well as profitability in the domestic market whereas exports, if at all they materialize, would give another boost to the company’s growth.

In news from the cement sector, the projected buildup in cement capacity over the next few years is expected to create an over capacity situation. This would result in a decline in realization as utilization falls. During February 2010, the average capacity utilization stood at 83% compared to 92% in the same period last year. However, with the government earmarking Rs 480 bn for rural infrastructure programme under the Bharat Nirman, cement manufacturers are focusing on the rural markets for their incremental growth. Large companies like UltraTech, Heidelberg Cement, ACC, Ambuja as well as small companies like Shree Cement are investing in the expansion of their retail and distribution network to take advantage of this infrastructure drive.

In news from the FMCG sector, P&G has announced that it intends to double the production of Tide. This would push up the production of Tide detergent to 200,000 tonnes per annum while the company sells about 40,000 tonnes of the detergent as of now. This means that the company will have a buffer capacity of two and a half times its current sales. This is an indication of how aggressive the company’s growth plans are. This also explains the company’s aggressive marketing and advertisement war waged against its rival HUL recently. It may be noted that the detergent market is estimated at Rs 100 bn. HUL has taken price cuts recently in its detergent segment and we can expect more intense competition between the two rivals in the coming days.

In international news, European Union (EU) and International Monetary Fund (IMF) have approved a bailout plan for Greece. While the size of the loan package is not available, it would involve EU nations contributing to the package based on their GDP and population with IMF also contributing to the package. This would help Greece, the country with the largest fiscal deficit among the EU members, tide over its economic crisis. The Greece crisis has been threatening to destabilize the economies of the euro zone members.

Movers and shakers during the week

Company	19-Mar-10	26-Mar-10	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Areva T&D	277	312	12.5%	386 / 178
Gujarat NRE Coke	80	88	9.1%	98 / 20
Sintex Ind.	270	290	7.3%	297 / 94
HDFC Bank	1,818	1,948	7.1%	1,953 / 944
Punj Lloyd	174	185	6.5%	299 / 80
Top losers during the week (BSE-A Group)
NMDC Ltd.	359	298	-16.9%	572 / 153
Renuka Sugars	78	72	-7.9%	124 / 42
RCF	85	78	-7.3%	118 / 34
Neyveli Lignite	159	149	-6.4%	178 / 77
Guj. Mineral Dev.	149	140	-5.8%	188 / 38

Source: Equitymaster
Coming to economic news in the United States, four small banks were seized by regulators on Friday evening to bring the bank failure tally for the year to 41. The continued bank failures comes as Federal Deposit Insurance Corp pulls back the loss-share agreements designed to attract bidders into taking on the assets of troubled banks. Further, out of the 27 US states that reported unemployment rates for February, 7 states showed a decline, while the remaining states showed an unchanged unemployment rate. It may be noted that for January, 30 US states showed increasing unemployment rates. Some more cheer from the US came as the consumer sentiment rate improved from the earlier month. Additionally, US GDP grew by 5.6% for the fourth quarter.

To sum up, in the week gone by, we witnessed the effect of concerns over higher inflation and rising interest rates on the stockmarkets. Going forward, central banks worldwide will have to walk on a tightrope between controlling inflation and managing economic recovery.