During the week gone by, US stocks suffered their largest weekly decline since January as investors sold companies with especially high valuations and braced themselves for a disappointing corporate earnings season. The Federal Reserve provided a small cushion for the week's declines in the form of minutes from its last policy meeting. Some investors worried that policymakers had emerged from the meeting encouraged about recent job gains and were ready to raise short-term interest rates earlier than most expected. The minutes indicated that officials remained convinced that labor markets still needed time to heal. Consequently, the US stock markets closed 2.4% down for the week.
European stocks also fell for the week. The European Central Bank has so far not introduced any fresh quantitative easing to ward off deflation, but it is increasingly expected to do so. ECB Vice President has indicated that the central bank is looking at various scenarios, which could include buying private assets.
Disappointing data from China and Japan contributed to broad investor unease. China's exports and imports both fell significantly from a year earlier. The significant declines are yet another signal that China's growth has tapered over recent years. The Chinese stock market closed 3.5% up for the week.
The Indian equity markets shielded itself from weak global cues and remained in an uptrend on hopes of a stable government at the centre that will kick start the reform process and revitalize the economy. The Indian equity markets closed 1.2% up for the week.
Majority of the sectoral indices ended in positive territory for the week with small cap (up 3.6%), Power (up 3.3%) and metal (up 2.4%) being the biggest gainers. IT (down 0.5%) and FMCG (down 0.1%) were the only losers for the week
Now let us discuss some of the economic developments of the week gone by.
Business confidence, as reflected in the Index for Industrial Production (IIP), de-grew 1.9% in February against the 0.8% growth in January, while the country's trade deficit hit a five-month high in March at US $10.5 bn. The IIP data showed de-growth in capital goods at 17.4% against the previous month's de-growth of 4.2%, while consumer durables also de-grew at 9.3% against the negative growth of 8.3% in the earlier month. Consumer non-durables contracted 1.2% against the previous month's growth of 4.4% and consumer goods fell by negative 4.5% versus the previous month's de-growth of 0.6%. The most disappointing part is decline in the growth rate of 13 out of the 22 industry groups in the manufacturing sector during February 2014.
As per a leading financial daily, the International Monetary Fund (IMF) has warned that Indian banks lack sufficient buffers to withstand unanticipated losses. The fund also fears depletion of capital for these banks if the credit quality continues to deteriorate. According to the IMF's global report, the Indian banks have not made sufficient provisions out of profits to cover bad loans in comparison to global peers. The fund also cited that fluctuations in currency could impact the earnings of Indian companies. Exchange rate and foreign currency risks would depress the earnings. Moreover, if the foreign currency liabilities are hedged through natural hedges, then the foreign exchange losses could amount to 20 to 30% of earnings in India. Overall, IMF believes that while the financial stability has strengthened in advanced economies, the emerging economies like India have witnessed deterioration.
The International Monetary Fund (IMF), in its latest World Economic Outlook, has predicted a recovery in the Indian economy. The international body expects the economy to grow by 5.4% in FY15 and accelerate to 6.4% during FY16 backed by a stronger world economy, improvement in export competitiveness and implementation of policies that encourage investments and confidence among investors. It also expects consumer price inflation (CPI) to reduce from 9.5% in FY14 to 8% in FY15 and further to 7.5% in FY16. With respect to global economy, the IMF revised the growth projection marginally downward to 3.6% in 2014 and 3.9% in 2015. However, it expects global economic activity to remain strong on back of stronger growth in advanced economies led by the US.
Now let us move on to some more developments in India Inc....
Gas Authority Of India Ltd. (GAIL) is planning to build Rs 26 bn poly butadiene rubber (PBR) plant in Dahej, Gujarat. PBR is highly elastic and stress resistant rubber used for manufacturing of tyres. GAIL's proposed plant will have a PBR capacity of 110,000 tonnes p.a and is expected to be commissioned by June 2016. Manufacturing of PBR requires raw material butadiene. GAIL is expected to source it from ONGC Petro Additions, arm of Oil and Natural Gas Corporation Ltd. (ONGC) that is expected to be commissioned this year. GAIL is in discussion for long term procurement of the raw material and is also considering to for joint venture with ONGC for the proposed plant.
National Thermal Power Corporation (NTPC) has settled dues of two subsidiaries of Coal India Ltd (CIL). This has brought an end to a tussle between the two companies over quality of coal CIL was supplying. The concerned subsidiaries are Eastern Coalfields and Bharat Coking Coal. The dues of other subsidiaries are likely to be cleared in a fortnight. NTPC owed Rs 30 bn to CIL as on March 23, 2014, out of which dues of Rs 20 bn remain to be paid. Since last one year, NTPC had started paying CIL on the basis of quality of coal the former sampled at CIL's stations. Due to this, CIL had stopped fuel supply to NTPC for a few days in April last year. However, now, coal produced from almost all mines is sampled by an independent party. This has helped settle disputes over the coal quality between supplier and procurer
Maruti Suzuki India has told its dealers to stop selling specific batches of Swift hatchbacks and Dzire compact sedans. The company has directed to stop its sales because of a loose-fitting fuel cap. According to the daily, the company is currently contemplating the recall of about 1 lakh of the second-generation models already sold to the customers. However, the company has still not confirmed the recall and stated that there is a defect in fuel cap and it was still investigating the matter. If Maruti recalls Dzire, it would be a third recall of its second largest selling car in the country. However, the cost of the replacing parts may be borne by the supplier.
The country's largest lender State Bank of India (SBI) is all set to offload its non-performing assets worth Rs 35 to Rs 40 bn of FY14 to asset reconstruction companies (ARCs). The total bad assets for the bank stood at Rs 680 bn as at the end of December quarter 2013. The non-performing assets as a percentage of total bad assets stood at 5.73% during the same period. Many of the 14 ARCs in existence have been invited to pick the bad loans. These ARCs would pay 5-10% of the total bad loans in cash and the rest in the form of security receipts. This will help the bank to offload the equivalent NPA loan off the book and make annual provisions for recovery of actual cash payments. While the asset quality pressures already looming, FY15 is expected to be no different. The outlook is expected to remain subdued and the credit growth may remain weaker as cited by the Management.
Sun Pharmaceutical Industries Ltd is planning to buy Ranbaxy Laboratories Ltd in a US$ 3.2 bn all share deal. It is important to note here that Ranbaxy is India's biggest drugmaker by sales. Japan's Daiichi Sankyo Co Ltd has around 63.4% stake in the company. Both Ranbaxy and Sun Pharma are facing quality issues in the US market. While Ranbaxy has been banned from exporting drug ingredients to the US, Sun Pharmaceutical's Karkhadi plant is also barred from shipping products by the US Food and Drug Administration (USFDA). As per the terms of the deal, Ranbaxy's shareholders will get 0.8 of a Sun Pharmaceutical's share for each Ranbaxy share they own. Daiichi Sankyo has said in a statement that it will get around 9 % stake in Sun Pharmaceutical after the deal. The deal values Ranbaxy at Rs 457 per share.
Going ahead, global markets are expected to remain volatile from the ongoing economic concerns in US and Euro zone countries. In India, the markets continued to revel in the pre-election rally. A clear mandate in the 2014 elections is expected to boost the economy and thereby attract domestic and foreign equity investors. Apart from these short term fluctuations, India's long term growth story remains intact.