The past week was a mixed one for the Asian markets. While markets such as China and Japan ended the week in the red, the other markets ended higher as compared to last week. Other global markets continued their positive run on the back of the positive US economic reports that released last week. Japan saw some pressure this week on the back of yen appreciating against the dollar, making investors concerned about earnings of export dependent companies. With gains of about 1.4%, India’s benchmark index, the BSE-Sensex was amongst the top gainers this week.
As for global markets, Hong Kong was the top gainer this week. Its benchmark index ended higher by about 3%. Singapore, UK and US followed suit, clocking gains in the range of 0.5% to 1%. France, Brazil and Germany were amongst the lowest gainers this week. China and Japan ended lower by 0.4% and 0.7% respectively.
Source: Yahoo Finance
Moving on to the sectoral indices in India - IT stocks continued to witness pressure this week as well. This was on the back of the Indian Rupee strengthening against the US Dollar. The BSE-IT Index ended the week lower by about 0.5%. The rest of the sectoral indices ended the week on a positive note. Stocks from the BSE-Realty indices were the top gainers, ending higher by about 6%. The BSE-Consumer Durables and BSE-Power indices were the other key gainers this week ending higher by 4.5% and 3.2% respectively. Stocks from the smallcap and midcap spaces outperformed their larger peers as the BSE-Smallcap and BSE-Midcap indices ended higher by about 4% and 3% respectively.
Moving on to key corporate developments during the week - The past week was an interesting one for the Indian telecom industry. The much-awaited auction for 3G spectrum began this week. It is set to add Rs 350 to Rs 500 bn to the government cash registers. However, the first day of the auction (yesterday) apparently started on a cautious note. It is believed that the highest offer for a pan-India license was Rs 39.2 bn, which is only about 12% higher than the base price of Rs 35 bn. However, the belief is that this figure is likely to rise sharply as higher bids come in the next two weeks.
While the 3G service is expected to be a game-changer for the telecom sector, we worry about the level of penetration that this service can see in the coming years. If one were to go by global experience, the usage of 3G has been much lower than expected. Only a few countries like Japan, Korea, Germany and Italy have seen decent growth in 3G over the years. In our view, with India being a market where 'affordability' is a primary concern for users, a huge success of 3G (as compared to 2G) is doubtful. We certainly hope that Indian telecom players don't go overboard with their bids and end up losing money for themselves and their investors.
During the week, the government approved the disinvestment in SAIL to mop up around Rs 160 bn. The company will raise an additional 10% equity. In addition, the government will offload a 10% stake to the public. This will happen in two rounds with each round consisting of a 5% follow-on public offer and a 5% sale of the government stake. As a result, the government's shareholding in SAIL will come down to 69%, from 85.6% currently. Public shareholding will rise to 31%, from 14.2%. In our view, the additional equity would help SAIL fund its capital expenditure plan. It will spend close to Rs 700 bn to raise its installed production capacity from 13.8 m tonnes per annum (mtpa) to 23.5 mtpa. The divestment of government stake is in line with its plan to raise Rs 400 bn in FY11. Disinvestment in other public-sector undertakings like Coal India, MMTC and Engineers India is also on the cards.
As per the Society of Indian Automobile Manufacturers (SIAM), the sales volumes of the auto industry are likely to gain by about 10% to 14% this year. Sales volumes during the last fiscal year were higher by 26% YoY. This high base effect is precisely the reason for the slow volumes growth in the current year. However, a lot will depend on the prevailing interest rate and the input costs as time progresses. During the week, India's largest auto company Maruti Suzuki mentioned that it expects the car market to more than double in a matter of just five years.
The company expects the market, which currently stands at about 2 m cars a year, to reach sales of about 4.6 m cars by 2015. It may be noted that the domestic car industry has grown by 13% annually over the last five years, and will have to clock in an average annual growth of 18% till 2015 to attain the 4.6 m cars per year level. The key rationale for this expectation is India's advantageous demographics and rising household income levels.
India's food price inflation increased to 17.7% for the week ended March 27. This is higher than the 16.4% rate recorded for the week ended March 20. This further strengthens the argument for the RBI to further raise interest rates in its April 20 monetary policy meeting. While that may be the immediate reaction of the RBI, over the longer term too policy making will be determined by how inflation shapes up. Hence, if inflation refuses to come down from such high levels in the coming months, one can expect further monetary tightening.
Inflation has been high in India for some time now. But the RBI had been wary of tinkering with its monetary policy as it did not want to thwart the GDP growth which has just started limping back to normalcy after the credit crisis. But the question of raising interest rates was always a matter of time. And it seems that that time may have arrived now.
Moving on to international news - during the week a leading business daily reported that China's economy is likely to grow by more than 10% in 2010. Factors such as a recovery in exports coupled with stronger consumption levels are likely to help the country achieve this growth figure. Moreover, if China is able to achieve this growth then it will surpass Japan to become the world's second largest economy.
However, it may not be all that rosy for the country as there are concerns looming over the Chinese bubble. Chinese banks have resorted to indiscriminate lending and a lot of this money has found its way into real estate. This has then led to inflated asset prices. While the reserve requirements have been raised, a lot may still have to be done to ensure that the Chinese growth remains intact. Moreover, if the recession in the developed world persists, it will be interesting to see how China will be able to sustain its growth in exports and thereby its GDP.