Sensex Opens Marginally Lower; IT Stocks Under Pressure

Thu, 20 Jun 09:30 am

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Asian share markets edged near this year's peak while benchmark US treasury yields, and the dollar dropped after the Federal Reserve signaled possible interest rate cuts later this year.

Back home, India share markets have opened the day on a negative note. The BSE Sensex is trading down by 92 points while the NSE Nifty is trading down by 26 points. The BSE Mid Cap index has opened the day down by 0.3%, while the BSE Small Cap index is trading lower by 0.8%.

Barring energy sector, all sectoral indices have opened the day on a negative note with IT stocks and FMCG stocks witnessing maximum selling pressure.

The rupee is trading at Rs 69.65 against the US$.

In the news from the economy, the US Federal Reserve held interest rates steady on Wednesday but signaled possible rate cuts of as much as half a percentage point over the remainder of this year, as it responded to increased economic uncertainty and a drop in expected inflation.

The US central bank said it "will act as appropriate to sustain" the economic expansion as it approaches the 10-year mark and dropped a promise to be "patient" in adjusting rates. Nearly half its policymakers now show a willingness to lower borrowing costs over the next six months.

The Fed continued to regard the labour market as "strong" and said, "sustained expansion of economic activity" and eventually rising inflation were still "the most likely outcomes." The drop in inflation however, was a blow for a central bank hoping to reach its target sometime next year.

Reportedly, they also expect to miss their 2% inflation target next year as well. Seven of 17 policymakers said they expected it would be appropriate to cut rates by half of a percentage point by the end of 2019.

The long-run federal funds rate, a barometer for the state of the economy over the long term, was cut to 2.5% from 2.8%.

Fed Chairman Jerome Powell will hold a press conference to elaborate on the results of the policy meeting, which was the first since President Donald Trump raised tariffs on US$ 200 billion of Chinese imports and threatened imposing new tariffs on Mexican goods.

We'll keep you updated on how the above news pans out in the coming days.

Moving on to the news from the finance sector, Housing Development Finance Corporation (HDFC) is set to acquire controlling stake of 51.2% in Apollo Munich Health Insurance for about Rs 13.5 billion from Apollo Hospitals group and few employees who hold stake in the health insurer.

After the acquisition, Apollo Munich Health Insurance will be merged with the non-life insurance arm of mortgage lender HDFC Ergo. Reportedly, the deal is subject to regulatory approvals and the entire process is expected to be completed in nine months.

Addressing a press meet, HDFC's chairman Deepak Parekh said, "we had to do a two-step transaction since if HDFC Ergo had directly bought Apollo stake, it would have breached the 49% cap on foreign investment in insurance for Munich Re".

Ergo International AG, which holds 49% stake in HDFC Ergo, is a subsidiary of Munich Re and Munich Re also holds stake in Apollo Munich Health Insurance.

After the amalgamation, Munich Re will continue to hold 49% stake in HDFC Ergo and the combined entity will have a gross direct premium of Rs 108.1 billion.

Reports state that the merged entity will have a combined market share of 6.4% in the non-life insurance industry with 308 branches in the country.

HDFC share price opened the day up by 0.3%.

Speaking of the finance sector, stocks of a lot of the mid and small NBFCs were badly hit when the IL&FS crisis deepened in October 2018.

But since then, the recovery in prices has been pretty robust. Have a look at the chart below which shows the price change of some finance stocks in the last one year:

Not All NBFC Stocks Have Fared Badly

Here's what we wrote about it in one of the recent edition of The 5 Minute WrapUp...

• The DHFL saga has only highlighted the fact that the issues NBFCs are facing are not likely to go away anytime soon.
  
  Indeed, funds are very hard to come by for NBFCs these days. Many of them have not been able to borrow at all!
  
  The sector is depending heavily on low-cost, short-term debt financing. This has created a situation where their assets (the long-term loans they provide) are not matching their liabilities (the short-term debt they raise).
  
  Also, NBFCs are also not regulated the same way banks are. So there is a lot of uncertainty in this sector at the moment when it comes to guidelines for infusing fresh capital

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