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Stronger Euro Drags European Markets
Fri, 21 Jul RoundUp

The strength of the euro does appear to be acting as a bit of a headwind for European stocks as they look to close the week sharply lower in contrast to the performance of UK and US stocks this week.

The European Central Bank (ECB) left its ultra-easy monetary policy unchanged, suggesting that it may delay the decision on tapering bond buys until autumn when the matter will be discussed again. The ECB is not in a hurry to taper down its stimulus as inflation is still not back to its target. After ECB chief Mario Draghi raised the prospect of policy tightening last month, he signalled that any policy tweaks would come only gradually, setting the scene for a possible discussion in September about a long-awaited tapering of its asset buys.

The euro on Friday hit a two-year high in early trading as traders anticipate that the ECB will cut its stimulus programme in the next few months. European markets were trading lower on Friday as investors reacted to the European Central Bank's decision to leave interest rates on hold.

Moving to Asian markets. The Bank of Japan (BoJ) kept monetary policy steady on Thursday. It also raised its growth forecasts and offered a more upbeat view of the Japanese economy. Most of this optimism was fuelled by robust exports and private consumption seen in the economy lately.

The central bank, however, once again pushed back the timing for achieving its ambitious inflation target. This reinforced views that the bank will lag well behind other major central banks in scaling back its massive stimulus programme. The central bank now expects inflation will not reach its targeted 2% level until sometime in the fiscal year ending in March 2020.

Lastly, the central bank also kept intact guidance that it would keep buying government bonds so its holdings increase at an annual pace of 80 trillion yen (US$ 714 billion). One shall note that there remain many issues that can hamper Japan's economic growth. The economy is flooded with excessive money printing, too much debt, too much government intervention, and stock market manipulation.

The BoJ's moves are in line with the easy money policies that central banks have adopted around the world. However, with the changes in policy stance of major central banks in 2016, it seems that the end of easy money is near. The Nikkei index was down by 0.1% for the week gone by.

China's second-quarter gross domestic product (GDP) maintained its annual growth rate at 6.9%. Likewise, urban investment in June remained steady with an 8.6% annual growth rate. The news comes as a welcome breather as investors watch the world's second-largest economy for any signs of a slowdown amid concerns over high debt levels. The stock market in China was up by 0.5% for the week gone by.

Back home, Indian stock markets ended the volatile week on a positive note. The Sensex ended above the psychologically important 32,000 mark. The benchmark Sensex rallied over 120 points above the 32,000-mark on Friday as Reliance Industries reported its highest quarterly earnings. Besides, better-than-estimated results by Wipro gave investors more confidence.

Key World Markets During the Week

On the sectoral indices front, Information Technology and Telecom sector stocks led the gainers this week. On the other hand, stocks from FMCG sector witnessed maximum selling pressure.

BSE Indices During the Week

Now let us discuss some key economic and industry developments during the week gone by

In news from the economy, the Finance Minister Arun Jaitley has said that it will expand the tax net, end 'inspector raj' and bring down prices of goods for the common man describing newly implemented Goods and Services Tax (GST) as a win-win situation for all. Pitching the GST as a measure beneficial for the country, he said that prices of goods have come down between 4-8% since the rollout of new indirect tax regime from July 1 and the real effect could be felt after three months.

Jaitley said that the GST was in the interest of people and states as well, as the latter will get 80% of the revenue leading to more development. He also said that there was no longer tax on tax and the transport of goods across the country was going unhindered now. Finance Minister further added that more than 1 crore firms will be migrating to the new tax regime against around 80 lakh companies earlier. He said tax net has expanded and the country's market has been integrated. Besides, inspector raj is over and the tax burden on the masses has gone down.

In news from the banking sector, the rating agency, CRISIL in its latest report has said that Indian banks are likely to take a haircut of nearly 60%, worth Rs 2.4 trillion to resolve the top 50 Non-performing asset (NPAs) accounts with a debt of Rs 4 trillion. According to the report, these 50 companies are from the metals (30% of total debt), construction firms (25%), and power (15%) sectors, and account for half of the Rs 8 trillion bad loans in the banking system as on March 31, 2017.

The rating agency said that it would be in the larger interest of the economy to pop the bitter pill of a haircut than kick the can down the road. It has estimated that banks have provisioned for about 40% of this loan exposure and added that they used the economic value approach to assess the haircuts. Further, the report noted that a quarter of the debt analysed needs marginal or moderate haircuts, while a third needs aggressive and nearly 40% deep haircuts. It also pointed out that the companies from the power sector would require moderate haircuts, whereas those from the metals and construction sectors would need aggressive ones.

In other news, the Gujarat High Court dismissed Essar Steel's plea against the Reserve Bank of India (RBI) directive asking lenders to initiate bankruptcy proceedings against the debt-laden company, observing that the regulator and banks are empowered to do so. Earlier, last week, the RBI had informed the Gujarat High Court that Essar Steel was far from reaching its restructuring stage, implying a counter against the company's claim. The central bank said it had not treated the company differently and said it has followed a statutory process to resolve the bad loans issue.

The above case comes under the new Insolvency and Bankruptcy Code (IBC), which aims at quick resolution and recovery of non-performing assets (NPAs) for most of the banks.

In the news from the cement sector, a report by ICRA has stated that India's cement demand growth is expected to recover to around 5% during FY18. The rise here, as per ICRA, would come on the back of a pickup in the infrastructure and housing segments. This rise would be against the 1.2% decline seen in cement demand during FY17. One must note the cement industry witnessed marginal signs of improvement during the April-June quarter, after the demonetisation effect in 1QCY17.

Also, the implementation of GST bodes well for cement companies. Cement has been taxed at 28% under the GST regime, as compared to 30-31% in the previous system of taxation. Following this, cement companies have reduced cement prices effective from July 1 to pass on the benefit to consumers.

Speaking of GST, the Goods and Services Tax became the order of the day at the start of this month. And all these months we have been subjected to a relentless propaganda by the government and the supporters of the GST, on how it will change our world, only for good.

Our colleague Vivek Kaul, has studied the finer aspects of the GST and predicted what could go right and wrong.

Download his special report - The Good, the Sad and the Terrible (GST).

Movers and Shakers During the Week
Company14-Jul-1721-Jul-17Change52-wk High/Low
Top Gainers During the Week (BSE Group A)
JAIPRAKASH ASSO.21.2527.127.5%24 / 7
UNITECH6.998.4821.3%9 / 4
JAYPEE INFRATECH19.0522.317.1%22 / 6
BAJAJ FINSERV4,361.754,925.2012.9%4,745 / 2516
JUBILANT FOODWORKS1,110.751,248.8512.4%1,335 / 761
Top Losers During the Week (BSE Group A)
VIDEOCON INDUSTRIES31.9526.05-18.5%115 / 16
GRASIM IND.1,287.301,062.50-17.5%1,332 / 782
ITC LTD338.65288.4-14.8%353 / 222
SHREE CEMENT18,775.8017,720.00-5.6%20,560 / 12,555
SHRIRAM TRANSPORT FIN.1,025.50969.9-5.4%1,325 / 778
Source : Equitymaster

Some of the key corporate developments in the week gone by

In the news from airlines stocks, as per an article in The Livemint, Interglobe is planning the sale to help cut its owners' stake to achieve the minimum public shareholding of 25%. To meet requirements, the company or its controlling shareholders must sell a 10.85% stake, worth about Rs 49 billion (US$761 million) based on the current share price. IndiGo this year surprised investors by announcing plans to launch flights on regional domestic routes from November, and expressing its interest in bidding for Air India Ltd to launch low-cost international operations.

India's aviation industry is on a high-growth trajectory. India's domestic air passenger traffic has almost doubled in the past six years. This is on the back of strong economic growth and emergence of low-fare airlines. Indian carriers have now set their sights on International traffic. Indian carriers have been slowly increasing their market share. It is important to note that foreign carriers still dominate international traffic to and from India.

In the latest development, the government has approved explorer Oil and Natural Gas Corp's (ONGC) plan to buy its 51.1% stake in state-refiner Hindustan Petroleum Corp Ltd (HPCL). As per The Economic Times, ONGC will be exempted from making an open offer to other shareholders of HPCL in the transaction, which is expected to be completed in a year. More such integration of oil companies is in the offing. One must note that the proceeds from the deal will cover about 40% of the government's divestment target of Rs 725 billion for 2017-18.

The combined market value of ONGC and HPCL would be US$42 billion, comparable with Russian energy giant Rosneft's US$56 billion, but much smaller than global giants such as ExxonMobil (US$340 billion), Shell (US$220 billion), Total (US$128 billion) or BP (US$114 billion). Integration with a downstream company such as HPCL helps players like ONGC to de-risk their business to a large extent. The government has planned a number of mergers and acquisitions in the PSU space this fiscal year.

Moving on to the news from Tata stocks. As per an article in a leading financial daily, Tata Group is considering a plan to streamline its technology and infrastructure businesses. Reportedly, the restructuring plan would involve moving several of its technology businesses under Tata Consultancy Services Ltd (TCS).

Tata group is also considering a plan to merge several infrastructure businesses into a single company. Its Voltas Ltd. affiliate, which makes most of its money providing air conditioning systems, also offers engineering services and develops turnkey water treatment projects. Further, Tata Realty & Infrastructure Ltd. has a business that builds bridges and airports, while Tata Projects Ltd. works on roads, railways and power transmission networks.

Meanwhile, Kotak Mahindra Bank posted a 23% jump in June quarter net profit, buoyed by higher interest and fee income. The bank's June quarterly results rose from a year-ago period to Rs 9.12 billion, from Rs 7.41 billion in 2016. The bank reported that its Gross Non-Performing Assets rose to 4.1% in its June quarter, while, on a year-on-year basis, it jumped 21.8%.

As a percentage of total loans, gross NPAs stood at 2.58% as compared to 2.59% in the previous quarter and 2.5% in the year-ago quarter. Net NPAs dipped to 1.25% in the June quarter from 1.26% in the previous quarter.

In the news from IPO space, SBI Life Insurance, a joint venture between the State Bank of India (SBI) and BNP Paribas Cardif, has filed its draft red herring prospectus with the Securities and Exchange Board of India (SEBI). According to the offer document, SBI holds 70.1% and BNP Paribas 26% in the life insurance company. SBI, the country's largest bank, is selling up to an 8% stake, or 80 million shares, in the unit as part of the IPO. BNP Paribas group is selling up to 4% stake.

Apart from the above, HDFC Standard Life Insurance Co. Ltd's board has also approved a proposal to sell as much as 20% of the insurer through an initial public offering (IPO). The public issuance would be an offer for sale by HDFC, the parent company, and UK-based Standard Life, which holds a 35% stake.

This would make it the third major life insurer heading to stock exchanges after ICICI Prudential Life, which listed last September, and SBI Life which has filed an offer document with the markets regulator.

The share price of ITC is witnessed maximum selling pressure in the FMCG space on Tuesday. Most of this brunt is seen after the GST Council amended the cess on cigarettes. The Goods and Services Tax (GST) Council has decided to increase the cess on cigarettes to offset reduced tax revenue from the product following the GST rollout. Accordingly, the tax burden on cigarettes will go up by Rs 4.8-7.9 per 10 sticks, depending on their length and whether or not they have filters.

As per Finance Minister Arun Jaitley, the increase in cess is expected to help the government raise around Rs 50 billion of additional tax revenue which would have been pocketed by cigarette companies. The stock of ITC had surged to a record high lately after the announcement that GST rates were reducing the tax on cigarettes by around 6-7% compared to that in the earlier regime. However, with the above development, the tax incidence will be the same as before and accordingly the rates will be at par with those under the old regime.

For investors, this comes as a reminder for considering the impact of regulatory risks such as the above while considering stocks for investment.

Moving on to the news from mining stocks. As per an article in The Economic Times, the government has decided to defer stake sale in Coal India this year after the share price fell sharply, close to a 52-week low, making it impossible for the government to fetch the sum it hoped for. The government planned to sell up to a 10% stake in the company by August to raise Rs 200 billion. Reportedly, a disinvestment of Coal India would now be considered if the share price improves. The stock has declined 23% in the past year and recently touched a 52-week low. At the current market capitalisation, the sale of 10% equity would fetch about Rs 153.45 billion. Coal India share prices fell after profit was lower than expectations and production declined as demand growth was less than anticipated.

And here's a note from Profit Hunter:

The Nifty 50 Index traded the week on a volatile note. On Monday, it opened the session gap up to hit a fresh lifetime high. It then gap down 83-points the following the day and witnessed selling pressure. But the index recovered strongly going into the weekend. On Friday, the index witnessed some more volatility but finally ended the week with 0.29% gains.

Last week, we mentioned the 9,700 level might offer good support as per the change of polarity principle (previous resistance now support). The 20-day exponential moving average (EMA) might also act as a support on reactions if any.

Although the index did not come even close to this level, the 20 EMA (now placed near 9,770) and 9,700 level might act as a good support in the coming week as well.

Nifty 50 Index Trades on a Volatile Note
Nifty 50 Index Trades on a Volatile Note 

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Feb 23, 2018 (Close)