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Sensex Trades on a Positive Note; Realty Stocks Witness Buying
Thu, 6 Jul 11:30 am

After opening the day on a positive note, stock markets in India have continued their momentum. Sectoral indices are trading on a positive note with stocks in the realty sector and FMCG sector witnessing maximum buying interest.

The BSE Sensex is trading up 164 points (up 0.5%) and the NSE Nifty is trading up 41 points (up 0.4%). The BSE Mid Cap index is trading up by 0.6%, while the BSE Small Cap index is trading up by 0.8%. The rupee is trading at 64.78 to the US$.

Minutes from the Federal Reserve's last meeting released showed a lack of consensus on the future pace of US interest rate increases.

This came as Fed policymakers were increasingly split on the outlook for inflation and how it might affect the future pace of interest rates hikes.

According to the minutes, several officials wanted to announce a start to the process of reducing the Fed's large portfolio of Treasury bonds and mortgage-backed securities by the end of August.

The Fed, in its last meeting held on June 13-14, raised its benchmark interest rate by 25 basis points to 1.25%. This was the third such increase in six months - and a message of confidence from the Fed in the strengthening of the US economy.

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US Federal Reserve rate hikes generally have a negative impact on emerging economies. But India is currently seen as better equipped than other emerging markets to ride the impact of higher US interest rates. That's largely because of its stronger economic growth and impressive foreign exchange reserves of more than US$300 billion.

Foreign portfolio investors may not drain funds from India in a knee-jerk reaction to the Fed rate hike, as that would mean missing out on the enormous growth opportunities Indian markets offer.

One shall also note that most Fed policymakers now think that the central bank should take steps to trim its balance sheet later this year as long as the economic data holds up.

However, trimming the balance sheet could tighten financial conditions.

Since 2008, the Fed's swelling balance sheet has propped up the US economy. And it has aided the rally in emerging markets all these years. So any change to the Fed's balance sheet will have an immediate impact on emerging stock markets.

Only time will tell how this all pan out. Meanwhile, we'll keep you posted on the latest developments.

For domestic markets, the Fed's decision may bring some concerns for Indian share markets in the short run. However, a crash can be an ideal time to bet on solid Indian companies that are well-shielded from adverse developments in global markets. As these companies can turn into bargain buying opportunities.

In other news, Lupin share price continued to rise after the company announced the launch of generic version of a conjunctivitis drug in the US market.

Speaking of pharmaceuticals sector, one shall note that a downgrade in the earnings estimates has led to a sell-off in pharma stocks. And this, in turn, has led to a contraction in the price to earnings ratio (PE ratio) of pharma index.

One other reason for the above sell-off is increasing USFDA alerts on Indian pharma companies during the past few years. As we stated in yesterday's edition of The 5 Minute WrapUp:

  • USFDA alerts on Indian pharma companies have increased over the past few years. Regulators used to visit the plants every two years. Now they come every eight months. Increasing inspections has led to a total of 41 import alerts in the past eight years - 33 of them (80%) in just the last four years (2013-16). This clearly signifies increased USFDA scrutiny on Indian pharma firms. If that wasn't enough, increasing pricing pressure in the generics segment has dented realizations.

However, the recent development of USFDA expediting the drug approval process can bring some respite for Indian pharma companies. This comes as drug approvals for Indian companies have gone up 50% in the period from January to June 2017 compared to the same period last year, as can be seen from the chart below:

Expediting Drug Approval Process to be a Positive for Industry

With the above developments, we believe, companies with strong R&D capabilities and compliant plants (subscription required) will do well over the long term.

In the latest issue of The India Letter (subscription required), we have identified a pharma stock which we believe will outlast others in the long run.

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

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