After registering healthy gains during the previous week, the global stock markets have extended their winning streak. Amongst global indices, the US stock markets were up by 1.3% during the week in light of encouraging unemployment data reported by the US labor department. As per the data from the US labor department, the unemployment rate in the world's largest economy has fallen to 8.8% in March from about 8.9% in February. This boosted optimism in the US stock markets. As far as the Indian stock market indices are concerned, the Sensex registered a gain of 3.2% during the week due to rising fund flows and improved global cues. Despite higher crude prices and inflation, it was a bit surprising to see the markets rallying for the second week in a row. Now, it is interesting to see whether this relief rally has legs to cross the psychological 20,000 mark in the next week.
Amongst the other world markets, Germany was up 3.4% while Hang Seng was up 2.8%. Brazil and France were relatively flat during the week registering a gain of 2.2% and 2.1%, respectively. Even Japan was able to carry forward the gains registered in the previous week and was up by about 1.8%. China was the only market to have closed the week in the red.
Source: Yahoo Finance
Moving on to the performance of sectoral indices in India, amidst healthy gains in the Sensex, all the sectoral indices closed the week in the green. Realty stocks were the biggest gainers during the week as buying interest resurfaced post the huge correction witnessed over last month. Consumer durables posted a gain of 6.0% during the week while the auto stocks were up amidst impressive monthly sales figures reported by the auto companies. Amongst other sectoral indices, both Capital Goods and PSU were up by 2.5% during the week, followed by banking, oil & gas and pharma.
Moving on to key sector news/economic developments that concluded during the week, it may be noted that a new micro-finance bill is being proposed with an aim to cover all types of Micro-Finance Institutions (MFIs) under its purview. The last bill covered only MFIs not regulated by the RBI. As a result few NBFCs were outside the purview of the latest bill. The new bill will cover all MFIs including NBFCs, non NBFCs and trusts & societies. The new bill may also restrict MFIs from taking deposits. It may be noted that the earlier bill had a provision for deposit taking NBFCs. Finally, the bill may also cap the interest rate on individual loans or may limit the difference between the amount charged to the borrower and the cost of funds of MFIs. The final call on these issues is expected to be taken after having an opinion from the RBI.
In news from the infrastructure sector, the Transport Ministry is likely to award 100 highway projects in the next fiscal spanning 11,000 km requiring an investment of over Rs 1,000 bn. This is almost double of what the ministry awarded in the latest fiscal. The proposed new 100 projects will be part of Phase 3 and Phase 5 of the NHDP programme. The geographies for the said projects have already been identified. Now, considering the historical track record of the transport ministry the target does look ambitious.
In what may comes as an interesting data to companies looking at capitalizing on India’s consumption story, the initial reports from India’s census statistics puts India's population at 17.5% of world population in 2011. The population rose by 181 m to 1.2 bn people over the last 10 years. China currently is the most populous nation accounting for 19.4% of the global population. However, with India's population equaling the combined headcount of the US, Indonesia, Brazil, Pakistan, Bangladesh and Japan put together, there is little to take away from the consumption potential here. Another encouraging data is the rise in literacy rates. Literates constituted 74% of the total population in 2011 up from 64.83% in 2001. FMCG and consumer durable companies in particular will have a lot of takeaways from the results of the census.
The government recently promulgated new Foreign Direct Investment (FDI) rules. As per the new rules, any company that has a foreign holding of more than 50% will be treated as a foreign company for computing FDI. By this definition, banks that would fall into the foreign company category would include banks like HDFC Bank, Yes Bank, Indusind Bank,Federal Bank, Development Credit Bank and ING Vsyasya Bank. It may be noted that this status would not hamper the general operations of these banks. However, the status would mean that the investments made by the banks would be regulated by the FDI norms. As a result, if these banks were to make any investments in any particular sector or if they have to make any downstream investments, then they would need to abide by the FDI norms. The government has reinforced that this change is only to simplify the FDI process in the country. It would not hamper the banks’ operations in any way.
Moving onto some key corporate events that unfolded during the week, Tata Motors is planning to invest GBP 50 m (approx. Rs 3.6 bn) in its research and development base in the UK over the next two years. The automobile company plans to hire 100 new engineers at the Tata Motors' European Technical Centre (TMETC). This will increase the existing workforce by more than 40% at the plant. It may be noted that TMETC's engineers work alongside WMG (Warwick Manufacturing Group) researchers in low carbon technology collaborative R&D programmes. TMETC has recently developed the Pixel city car aimed at European drivers on the Warwick campus. Also, Tata's Vista electric vehicle has been developed by them. Tata Motors has made an investment of GBP 85 m (approx. Rs 6 bn) in TMETC so far. The company management considers this as another step towards Tata's long term commitment to build and develop R&D facilities in the UK.
In an interesting piece of news Reliance Industries (RIL), India's largest private sector company, has inked an equal financial services joint venture agreement with DE Shaw Group. The joint venture will be RIL's foray in the fast growing Indian financial services business. DE Shaw is a New York-based global private equity and hedge fund company. It may be noted that the Mukesh Ambani-led company and Reliance Anil Dhirubhai Ambani Group (ADAG) had scrapped the non-compete agreement in May 2010. Soon afterwards, RIL forayed into the telecom sector with a US$1 bn investment in Infotel Broadband Services, the only company to win pan-India broadband spectrum in a government auction. We believe that the RIL's move is significant in the context of RBI being ready to allow big industrial houses to set up banks. However, the regulator's draft guidelines on new bank licensing norms are awaiting the finance ministry's clearance.
Rising interest rate is one of the key risk factor to the Indian stock markets right now. And if the market consensus is to be believed, the interest rate cycle is at its peak right now and the rates may fall from here on. It is believed that the liquidity situation of the banks is likely to improve which will reduce the cost of funds. Further, even an expected fall in inflation during the second half of the current fiscal is likely to keep the interest rates under check. However, even if the inflation does not fall and the central bank raises the rates in the near future the banks would be reluctant to pass on the increase as it is expected to lead to a slump in credit demand. It may be noted that the industry has the capacity to absorb another 25-50 bps of rate hike. However, if the rates increase beyond a certain limit than the banks will have to pass on the increase to its customers.
It may be noted that the food inflation fell to 9.5% for the week ended March 19 due to fall in the prices of pulses. However, vegetable and fruit prices continue to remain expensive. The drop in the food inflation was also due to higher base in the previous corresponding period. Although the government is taking steps to curb inflation by raising rates it may be noted that as food inflation is caused due to supply side issues prevailing in the economy raising rates does not help the cause. The government will have to eradicate the losses caused due to improper storage facilities for the food items. Allowing FDI in retail can bring in some efficiency in the supply chain management and help eradicate the losses. However, as this is a politically sensitive issue the government needs to evaluate the situation before taking any decision.
The brent crude prices increased to US$ 118 on Friday as the US payroll data indicated that the job market environment is likely to improve in the world’s largest economy. An improving job market environment signals that the economy is upbeat resulting in an increase in crude oil prices (as demand increases due to improved economic prospects). However, an increase in oil prices is likely to have a negative impact on the current account position of India as it typically imports 75% of its crude oil requirements. Further, tensions in the Middle East are not helping the cause either. It may be noted that apart from earnings downgrade risk (due to increase in commodity prices) an increase in oil prices is posing to be a huge threat for the Indian markets, right now.