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Sensex Opens Marginally Lower; Realty & Metal Stocks Drag
Wed, 25 Apr 09:30 am

Asian share markets are lower today as Japanese and Hong Kong shares fall. The Nikkei 225 is off 0.7% while the Hang Seng is down 1%. The Shanghai Composite is trading down by 0.4%. A gauge of world stocks tumbled on Tuesday, erasing early gains as US bond yields scaled the 3% threshold for the first time in four years, while oil prices reversed course after climbing above the US$75 per barrel mark.

Back home, India share markets opened the day on a negative note. The BSE Sensex is trading down by 35 points while the NSE Nifty is trading down by 7 points. The BSE Mid Cap index and BSE Small Cap index opened the day up by 0.4% & 0.3% respectively.

Barring information technology stocks & energy stocks, all sectoral indices have opened the day in red with realty stocks and metal stocks witnessing maximum selling pressure. The rupee is trading at 66.36 to the US$.

In the news from the economy. The yield on the 10-year Treasury note, which helps set rates for auto loans, mortgages and other lending, climbed to 3% on Tuesday for the first time since 2014.

For Americans, that means borrowing costs are on the way up. For Wall Street, it's a warning that higher interest rates may eat into corporate profits and that faster inflation is coming. Both of which could eventually hurt the economy.

Market participants also worry that the Republican tax cuts for businesses and individuals will cause the economy to grow too quickly.

As per the reports, the Federal Reserve is expected to raise short-term interest rates at least twice more this year and three times in 2019, in an effort to tap the economy's brakes. That will probably lead to even higher rates on longer-term Treasuries.

In another potential warning sign in the bond market, short-term rates have also been rising. The difference in yields between short-term bonds and the 10-year note is narrowing, a phenomenon known as a flattening yield curve.

Why is this a problem? If short-term rates move higher than long-term rates, that creates something known as an inverted yield curve. And that has often happened just ahead of recessions.

But others argue that Treasury yields should be going up, because the US economy is in good shape. Rates are climbing around the world, too, as Europe's economy stabilizes and China and India post strong growth.

Moving on to the news from pharma space. As per an article in a leading financial daily, Dr Reddy's Laboratories has received an establishment inspection report (EIR) from the US health regulator after audit of its UK facility.

The USFDA issues an EIR to the establishment that is the subject of an FDA or FDA-contracted inspection when the agency decides to close the inspection.

In September last year, the US health regulator had made three observations after inspecting Dr Reddy's Laboratories' API Mirfield plant, United Kingdom.

Meanwhile, Strides Shasun will divest 100% stake in subsidiary Strides Chemicals Private Limited, to Solara Active Pharma Sciences for a cash consideration of is Rs 1.3 billion.

This forms a related party transaction as both the companies have the same promoter, the valuation, however, has been done by independent valuers.

Strides, in December 2016, had acquired Perrigo's USFDA approved API facility located in Ambernath for Rs 1 billion. This facility has API manufacturing capacity of 600 tonnes per year. This business was later renamed as Strides Chemicals. Strides Shasun, has not made any investment in this business after the acquisition.

Through this acquisition, the company had intended to vertically integrate with the generics business.

However, with the business focus now moving away from the low margin businesses, the company has now divested its last remaining API facility.

Dr. Reddy's share price opened down by 0.9% while Strides Shasun share price opened up by 0.1%.

Did you know the BSE Healthcare Index is down 20% over the past three years? During the same period, the BSE Sensex is up 21%.

The BSE Healthcare Index has underperformed the Sensex


And this was a sector they called 'evergreen'.

Have Investors boarded a plane that's about to crash? Or is it just turbulence on the way to a smooth and safe landing?

It's important to understand the core issues. Regulatory problems for pharma companies have increased over the past few years. The frequency of visits as well as quality expectations have increased a lot.

The intensity of competition has also increased. Faster approvals of drugs have led to price erosion for generic players.

While we expect the pain to continue in the short-term, the long-term picture still looks bright.

Stricter norms and pricing pressure will ensure only quality players remain. Companies with strong R&D facilities and quality compliant plants will have an edge over the others.

Those are the only pharma stocks you should be looking at.

And even among those, only three of them offer enough margin of safety today.

Get access to the safe stocks here.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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