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Global markets at all time highs
Sat, 7 Jun RoundUp

Barring Asia, global markets scaled new peaks in the week gone by. While Indian markets led the way in terms of gains, optimism was clearly visible across the US and Europe. The benchmark S&P 500 index in the US closed the week at an all time high, just shy of the 2,000 points mark. The US markets shrugged off the negative 1% GDP number for the Jan-March quarter as a one-off event caused by adverse weather conditions. The US markets also cheered the latest jobs report which showed that the economy had finally recovered all the jobs lost in the great recession of 2008-2009. However, it must be noted that it has taken a record 77 months for the US economy to recoup all the lost jobs.

In Europe, markets were enthused by the steps taken by the European Central Bank (ECB). In an unprecedented move, the ECB said this week that it would adopt a negative interest rate policy for bank deposits held by it. This means that the ECB will effectively charge banks an interest rate of 0.1% for parking their reserves with it. This has been done with a view to force European banks to lend and boost credit in the European economy which is currently struggling with deflation.

Key world markets during the week
Source: Yahoo Finance

Majority of the sectoral indices in the Indian markets ended the week in positive territory. Barring IT (down 0.6%), all other indices posted gains. Realty (up 12.3%), metal (up 11.5%) and oil and gas (up 10.4%) were the major gainers on the bourses this week.

BSE indices during the week

Now let us discuss some of the economic developments of the week gone by.

In its second bi-monthly policy review, the Reserve Bank of India (RBI) has kept the benchmark repo rate unchanged. This was along expected lines. However, the central bank has cut the Statutory Liquidity Ratio (SLR) by 0.5%. The SLR has been cut from 23% to 22.5%. Thus the repo, reverse repo and the CRR continue to remain on hold at 8%, 7% and 4% respectively. The marginal standing facility (MSF) and the bank rate have also been maintained at 9% each. The RBI governor also reiterated his tough stand on inflation by stating that the easing of monetary policy would be possible only if inflation was to fall faster than currently expected after adjusting for the base effect.

As reported by a leading business daily, the Reserve Bank of India has raised the overseas investment ceiling for individuals to US$ 125,000 from US$ 75,000 in its second bi-monthly monetary policy review today. This has been done on the back of stability in the foreign exchange market. Earlier the ceiling was reduced on account of the worsening current account deficit and a volatile rupee. India's current account deficit has narrowed to 1.7% of GDP in FY14 from a record 4.8% of GDP in FY13. RBI cited that the robust portfolio investment inflows aided by foreign direct investments and external commercial borrowings have led to comfortable external financing conditions. Also, they have helped to boost reserves. Furthermore, the RBI has also given permission to all residents and non-residents to carry up to Rs 25,000 in Indian currency notes while leaving the country. The current limit for carrying domestic currency notes for Indians travelling overseas is Rs 10,000.

India's services sector has seen an expansion in business activity for the first time in nearly one year. The HSBC Services Purchasing Managers Index (Services PMI) has registered an expansion in the month of May 2014 at 50.2. This is up from 48.5 last month. A number above 50 indicates expansion. This has been largely driven by new business activity indicating optimism among corporates that the economy will rebound since the new government has taken charge. However it would be too early to say at this time if there will be a genuine turnaround in the service sector.

According to a leading daily, the finance ministry has planned a new entity to deal with the bad loan problem. The Finance Minister is considering a six-point agenda to resolve the non-performing loans (NPAs) menace. The banking system today holds approximately Rs 2 lakh crore of NPAs. The government is planning to set up a National Asset Management Company that will take over the bad debts of the banking consortiums, and re-energizing fourteen asset reconstruction companies in the country. The new entity quite likely may have a 51:49 partnership between the government and the banks. The amount of capital to be pulled in from banks will be decided soon. The company is expected to take over the NPAs on the balance sheet of banks and also help revival of the sick units. Besides, the government is also occupied with issues such as creating a special resolution mechanism for the infrastructure sector, re-looking at corporate debt restructuring mechanism, improving the effectiveness of the insolvency regime, and liberalizing norms to increase capitalization of asset reconstruction companies. Combating the asset quality issues that have put the banks in trouble for quite some time now is now the top most priority for the Ministry.

As reported by a leading business daily, India's steel consumption increased by 0.5% YoY during the first two months of the current financial year. As reported by Economic Times, the same stood at 12.6 m tonnes during this period. It is believed that due to the elections this year, the government spending was less, a major driver for steel consumption and thus seems like the numbers are subdued. In FY14, steel consumption figures stood at 73.9 m tonnes, which was higher by 0.6% on a year on year basis. With nearly 60% of the steel consumed by the construction sector, an overall improvement in investment will be a major growth driver for the steel sector. The automobile segment contributes to nearly 15% of the demand. As the management of Tata Steel had indicated recently, India's steel consumption is expected to touch 75 m tonnes in FY15.

Movers and shakers during the week
Company 30-May-14 6-Jun-14 Change 52-wk High/Low
Top gainers during the week (BSE-A Group)
Suzlon Energy223140.5%30 / 6
Max (I) Ltd.24331429.5%346 / 151
Reliance Capital52465524.9%650 / 290
ONGC37546423.8%428 / 234
SAIL 8810923.6%107 / 38
Top losers during the week (BSE-A Group)
J&K Bank1,840.301,601.50-13.0%1,995 / 995
HCL Tech1,403.301,324.00-5.7%1,589 / 721
Bosch Ltd12,363.0511,900.00-3.7%13,330 / 8,000
TCS2,159.102,084.05-3.5%2,384 / 1,382
Emami Ltd466.55451.85-3.2%539 / 393
Source: Equitymaster

Now let us move on to some more developments in India Inc.

As per a leading financial daily, Tata Power will be commissioning two wind power projects by FY17. The projects have a combined capacity of 229 MW and are being commissioned in South Africa through an equal joint-venture with Exxaro Resources. For both the projects, power purchase agreements have been signed with Eskom Holdings SOC Ltd for a period of 20 years from the start of commercial operations. Besides, Tata Power is also developing a 126 MW Dagachhu hydel project with the Bhutan government and has also started work on the first phase of 185 MW Shuakhevi hydro power project in Georgia. The company has an installed generation capacity of 8,560 MW and has been scouting for growth opportunities in South East Asia as well as SAARC, African and Middle East regions.

India's largest and the world's fourth largest telecom operator Bharti Airtel is poised to sell its African tower business during this month. The deal would enable the company to raise about US$ 3 bn and help it reduce its huge debt burden. In fact, as of March 2014 the company's debt stood at US$ 10.4 bn. Further, as the company has won spectrum in the recently concluded auction its debt would increase once it makes full payment. Out of the deal proceeds, US$ 2 bn is expected to be used to retire debt while the balance will be utilized for capital expenditure. This move will also enable the company to focus on its core business of providing telecom service. Bharti Airtel has been looking to sell its African tower business since past year.

As per a leading business daily, Coal India has reported its provisional coal production for the month of May 2014. The company has produced 36.27 m tonnes coal in May, which is 6% lower than the target of 38.56 m tonnes. The company's combined production for two months of April and May this year witnessed a shortfall of 3% at the provisional number of 73.79 m tonnes as compared to the target of 76.17 m tonnes. It may be noted that India's largest coal producer has been missing its production targets in recent times. With respect to coal offtake agreement for May, it stood lower by 7% than targeted, while for the April-May period, off take stood 81.25 m tonnes against target of 88.94 m tonnes, which was lower by 9%. These shortfalls are quite higher than the company's 3QFY14 shortfall of offtake by 4.7% and production by 3.9% to its target.

As per a leading financial daily, US Food and Drug Administration (USFDA) have found as many as 12 procedural lapses in Wockhardt Ltd's US facility in Illinois. The US regulator has identified deficiencies in quality, hygiene and personnel training standards at the company's Morton Grove manufacturing unit at Illinois in the US. Similar concerns have been raised by USFDA at the company's Indian facilities in the past. It is important to note here that the Mount Grove unit is Wockhardt's sole manufacturing site in the US and production from here accounts for around 50% of the company's revenues. For FY14, sales in the US market contributed to 45% of the company's overall turnover.

The Indian markets are trading at all time highs. For further cues the markets will look for announcements of key economic policies by the new government before the budget. The parliament session has also begun and if important pending economic bills are taken up it would be a positive for the markets. The commentary by the US Fed regarding the future of its QE program will also be important. However, it is important that investors do not get carried away with short term events and remain focused on the long term fundamentals of individual companies when investing in the markets.

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