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Positive Economic Data Offsets Geopolitical Concerns
Sat, 2 Sep RoundUp

Global financial markets ended the week on a positive note. This is on the back of positive economic data coming in from the US, China and the UK.

US stock indices have recovered from steep early losses triggered by fears that hostilities in the Korean Peninsula could escalate to close higher. Revised second-quarter GDP showed the economy grew 3% in that period, above the 2.6% figure previously calculated. The US benchmark index ended the week marginally higher by 0.8% as investors reacted to economic data and took cautious hope from Washington's latest promises for long-awaited details of a tax reform plan.

The stock market in the UK ended the week higher by 0.5% as support from commodities-related stocks and financials helped the blue-chip index score its second consecutive monthly gain. In the UK, the manufacturing purchasing managers' index (PMI) rose to a four-month high of 56.9 in August.

Moving on to Asian markets, China's official manufacturing PMI rose to 51.7 in August, beating the 51.3 forecast in a Reuters poll. Meanwhile, the official services PMI dropped to 53.4 in August, compared with 54.5 a month earlier. The stock market in China was up by 1.1% for the week gone by. Meanwhile, Japan's Nikkei was up by 1.3%, helped by a pullback in the yen.

The stock market in Hong Kong posted an eighth successive month of gains as China's economic recovery and continuous money inflows from the mainland sustained the bullish momentum. The stock market in Hong Kong was up by 0.4% for the week gone by.

Key World Markets During the Week

Back home, the BSE Sensex was up 0.9% during the week. While BSE Small Cap and BSE Mid Cap index posted hefty gains of 2.8% and 3.2% during the week. Weaker-than-expected economic growth data raised hopes the central bank would cut interest rates at its next policy meeting in October. Similarly, strong August sales data unveiled by automakers and firm global cues helped investors shrug off dismal GDP data for the April-June quarter. Meanwhile, India's factory activity expanded in August, snapping back from a contraction the previous month, as disruptions stemming from confusion over GST eased. The Nikkei India Manufacturing PMI rose to 51.2 in August from a 101-month low of 47.9 in July.

BSE Indices During the Week

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

As per the data released by the Central Statistics Office (CSO) on Thursday, the Indian economy grew 5.7% in April-June, sharply lower than last year's 7.9% expansion in the same quarter as also the previous quarter's 6.1% growth, signs that the country was still reeling from the shock of demonetisation and disruption caused ahead of GST's rollout. The April-June growth estimate, the lowest in at least five quarters, trended down on account of a sharp deceleration in manufacturing growth. Reportedly, the silver lining was the buoyant performance by some segments of the services sector.

Meanwhile, the Gross Value Added or GVA growth, which serves as a more closely watched estimate for quarterly growth, remained unchanged from the previous quarter at 5.6% in April-June but fell sharply from the 7.6% growth recorded in the April-June quarter last year.

GDP growth may have raced slightly ahead of GVA, driven by strong indirect tax collections in April-June, masking a wobbly state in factories and firms.

In other news, according to the Reserve Bank of India's (RBI) 2016-17 annual report, the total number of suspicious transaction reports filed by banking companies in the financial year 2016-17 stood at 4,73,003. This represents a whopping 706% increase in suspicious transactions than what was filed in 2014-15. This means that suspicious banking transactions increased by a whopping 300,000 in 2016-17 (from 61,361 in 2015-16 to 361,214).

Spurious deposits made after the demonetisation exercise in November 2016 could very well account for the spike. This trail of 'suspicious transactions' and dubious deposits could provide valuable information to the authorities in tracing the unaccounted money. The government and the RBI would do well to follow this trail of suspicious transactions. The Reserve Bank of India (RBI) in its annual report stated that fiscal consolidation may come under threat at the central and state level due to the immediate effects of Goods and Services Tax (GST), loan waivers, and pay revisions. The apex bank stated that these factors are likely to weigh on the overall growth matrix this year.

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One must note that in the last one decade, India is making serious efforts to reduce the fiscal deficit level. Ever since the new government came in, it has been in favour of fiscal consolidation and wants to meet the long term fiscal deficit target of 3% by FY17-18. That said, challenges remain. The demonetisation exercise has resulted in a slowdown. Further, the government has announced a flurry of projects but the execution is still pending.

This means, once again, the government needs to fight dual challenge. First, maintaining its stance on fiscal consolidation and sticking its fiscal deficit target of 3% of GDP for FY17-18. Second, it must relax the deficit target for reviving the economy from the shock of demonetisation.

In news from the Goods and Service Tax (GST) space. The government approved an ordinance to increase the ceiling on cess to 25% from the present 15% over the peak rate of 28% GST on luxury cars and sports utility vehicles (SUVs). The exact quantum of the increase and its timing will be decided by the GST Council.

The ordinance seeks to restore tax revenue from the automobile industry that unintentionally got affected in the transition to the new indirect tax regime. Makers of SUVs and luxury cars have criticized the GST Council's plan to raise the cess, warning the move will lead to production cuts and job losses and dent the "Make in India" initiative. The decision has upset the growth plans of the luxury car industry, which had seen a flat performance in 2016, owing to demonetisation and the ban on 2,000cc diesel cars in the National Capital Region for the first eight months of the year.

In news from the steel sector, the domestic rating agency, ICRA in its latest report has said that steel prices in the domestic market staged a smart recovery, taking cues from the buoyancy in global steel prices despite a moderate demand growth of 4.4% in the first four months of the financial year of 2017-18. It also said that since June 2017, global steel prices have registered a sharp recovery, mainly driven by the Chinese government's supply-side reforms to reduce domestic steel over-capacity, a steadily declining trend in Chinese steel exports on the back of resilient Chinese domestic steel demand.

Apart from structural factors like the closure of excess capacity, it believes that up-fronting of production and purchases ahead of a planned winter shutdown in China is also a factor leading to the buoyancy in steel production and prices witnessed since June 2017. Therefore, it noted that continuity of this price momentum hinges upon the sustainability of demand from the steel intensive real-estate and infrastructure sectors in China. Further, it explained that a steadily rising export volume has enabled domestic steel mills to register a healthy annualised production growth of 7% and a capacity utilisation of around 81% during the period from April to July of FY18.

In news from the economic sector, as per Livemint, the Reserve Bank of India (RBI) has sent commercial banks a second list of at least 26 defaulters with which it wants creditors to start the process of debt resolution before initiating bankruptcy proceedings. As per the reports, the accounts should first be resolved through any of the RBI's schemes before 13 December, failing which cases should be filed against these companies under the Insolvency and Bankruptcy Code.

Reportedly, the defaulters' list comprises companies primarily in the power, telecom, steel and infrastructure sectors. Videocon Industries Ltd and Jaiprakash Associates Ltd are the two large companies among the list of 26 defaulters, accounting for over Rs 1 trillion of debt.

In the news from Goods and Services Tax (GST) space, GST collections have exceeded estimates in the month of July - the first month of the landmark levy's rollout. This was seen despite a significant number of assessees not having filed returns yet. As per an article in the Economic Times, Finance Minister Arun Jaitley stated that GST mop up in July is pegged at Rs 922.8 billion and could rise further.

There has been a jump in the number of registered tax payers under the goods and services tax (GST). Reportedly, as of 24th July, around 7.95 million applicants had sought GST registration. That is 99.3% of the 8 million tax base under the earlier system comprising of assesses of state value-added tax (VAT), service tax and central excise duty. The above development will aid India's tax revenues to a greater extent in the coming future. This augurs well for the country that has one of the lowest tax revenue as a percentage of GDP compared with other countries.

Movers and Shakers During the Week
Company26-Aug-1701-Sep-17Change52-wk High/Low
Top Gainers During the Week (BSE Group A)
CENTRAL BANK809518.8%125/71
ADANI ENTERPR. 11913614.4%161/58
JAYPEE INFRATECH161813.9%25/6
MRPL1281409.6%144/78
RELIANCE CAPITAL7898588.8%878/408
     
Top Losers During the Week (BSE Group A)
LANCO INFRATECH0.770.8814.3%5/1
GUJ. STATE PETRONET197.0187.05-5.0%204/119
BANK OF BARODA144138-4.0%202/136
J&K BANK8279-3.9%96/55
CORPORATION BANK4745-3.0%65/36
Source: Equitymaster

Some of the key corporate developments in the week gone by

In the news from the pharma stocks. As per an article in the Livemint, California-based pharma firm Vivus Inc and Dr.Reddy's Laboratories have entered into a settlement agreement resolving a patent litigation pertaining to Qsymia (phentermine and topiramate extended-release) weight management capsules.The agreement permits Dr. Reddy's to begin selling a generic version of Qsymia on 1 June 2025 or earlier under certain circumstances. In the event of a launch earlier than 1 June 2025, Vivus will receive a royalty on sales of the generic version of Qsymia.

The settlement with Dr. Reddy's concludes all patent litigation brought by Vivus against generic pharmaceutical companies that had filed ANDAs seeking approval to market generic versions of Qsymia.

As per an article in The Economic Times, Nestle India expects its registered sales growth to be impacted till June next year because GST. However, sales volume is not expected to be impacted as much. The company has stated that the excise duty has got subsumed in the GST rate post July 1 and will be netted from the sales, which will be higher than the pre-GST regime. In the pre-GST regime, sales were registered gross of excise duty and excise duty used to be a separate cost line and the VAT which was paid on sales was netted from sales.

The range of the GST rates for each of the company's categories is between 5% and 28%.

The company also recently stated that it is likely to foray new categories like water and pet care in the country. The company said about half of its growth now comes from its non-noodles portfolio, and that it will focus now on driving double digit volume growth, sustaining profitability, and fortified products across categories.

Sun Pharma share was in focus this week after the pharma major's Halol unit received clearance from the UK's pharma regulatory body according to media reports. The company has got clearance for good manufacturing practices as directed by the UK's Medicines and Healthcare Products Regulatory Agency, said the report. However, Sun Pharma has not commented on the report.

The company's Halol manufacturing unit has faced regulatory issues from the U.S. Food and Drug Administration (USFDA). In December 2016, USFDA had issued a warning letter to the plant for failing to prevent microbiological contamination. The Indian pharmaceutical industry as a whole has come under a lot of regulatory pressure in the past few years.

We had written about the current predicament of Indian pharma companies in one of the premium editions of the 5 Minute WrapUp:

  • Over the past few years, risk in the US markets has increased. The US Food and Drug Administration has become stricter on products entering US borders. Surprise inspections have increased and companies are being issued warning letters. This has impacted the business and earnings of Indian pharma players, causing major volatility for the sector.

The list of pharma sector woes is long. So, is there light at the end of the tunnel? Girish Shetty, our research analyst thinks there is.

As per him, it doesn't make sense to paint all pharma stocks with the same brush. The leaders of the industry will certainly survive this phase. There are interesting, niche pharma stocks that are worth your attention.

Moving on to news from automobile stocks. Maruti Suzuki share price was trading on an encouraging note (up 1.6%) after the company reported a 23.8% increase in total sales at 1,63,701 units in August as against 1,32,211 units in the year-ago month as dealerships prepare for the festive demand that begins later this month. Maruti's growth will also ensure a double-digit growth in the industry's sales for the month.

The company's domestic sales stood at 1,52,000 units, up 26.7% from 1,19,931 units in August last year.

Sales of mini segment cars, including Alto and WagonR, witnessed a marginal decline to 35,428 units during the month under review from 35,490 units in August 2016.

Eicher motor's motorcycle division reported a 22% jump in total sales in August 2017 at 67,977 units, as against 55,721 units in the same month last year. During August 2017, the number of motorcycle units exported, increased by 12% to 1,105 units from 986 units in August 2016.

The company's motorcycle division Royal Enfield on Monday commenced production at its new factory at Vallam Vadagal near Chennai. The plant is Royal Enfield's third manufacturing facility and will produce motorcycles for domestic and international markets. Royal Enfield has planned to invest Rs 8 billion during this fiscal, largely towards capacity expansion at Vallam Vadagal, new products and platforms, and technical centres in Leicester, UK, and Chennai to support its growth plans.

Moving on to news from the energy sector. As per an article in The Economic Times, Indian Oil Corporation (IOC) will invest Rs 320 billion to ramp up its output by fiscal 2021 to meet the rising demand for petrochemicals, especially plastics and polymers.

This investment is part of the overall Rs 1.8 trillion capex planned for the next five to seven years. Indian Oil has already executed petchem projects worth Rs 208 billion and is close to commission a Rs 31.5 billion polypropelene plant at its 15-million tonne refinery at Paradip in Odisha. The petchem business contributes a quarter of the most profitable PSU's profit, which rose to the highest at Rs 191.06 billion in fiscal 2017.

In the news from IT space, Wipro has got shareholders nod for its share buyback. Speaking of share buybacks, many buybacks, mainly from the IT sector are set to hit a new record this financial year. As per Prime Database, in the first five months of FY18, at least twenty companies have offered to buy back shares worth Rs 480 billion.

As per Rahul Shah, co-head of Research, investors should not assume buybacks are always good. Here's an excerpt of what he wrote in a recent edition of The 5 Minute Wrapup:

  • The reason behind the buyback must be investigated. At the end of the day, an increase in earnings should be more a function of the inherent robustness of the business, as that's what will help it continue to grow at a healthy pace.

The topic also brings us to ask: Do buybacks offer an arbitrage opportunity for retail investors? Ankit Shah has answered this question in a recent edition of Equitymaster Insider. You can access the issue here.

Moving on to the news from telecom space. Bharti Airtel has completed the proposed acquisition of shares of Tikona Digital Networks. With the said acquisition of shares, Tikona Digital Networks has become a wholly owned subsidiary of the company. The transaction for the trading of the spectrum in Rajasthan circle is still pending for approval from the DoT.

Speaking of the telecom sector woes, Reliance Jio had triggered a tariff war by offering free voice and data for the first six months of its operations that began in September last year. The resultant competition saw Bharti Airtel acquire Telenor's India business and 4G business of Tikona Networks. Vodafone India and Idea Cellular also decided to merge to create India's largest telecom operator.

And here's an update from our friends at Daily Profit Hunter...

The Nifty 50 Index ended its August expiry this week. Let's have a look how the index performed during the expiry.

The index traded on a weak note during the expiry. It witnessed buying during the first week of the expiry to hit a life high of 10,137. But the buying was temporary as the index slipped sharply during mid-expiry. The index then recovered some of its losses and traded in a range of 9,750-9,900 for the rest of the expiry. Finally, it ended the expiry with a cut of 1%.

In our previous rollover report, we mentioned the bulls were gradually existing their positions. This was suggested by low rolls and low absolute open interest (OI). Technically as well the index seemed overheated and was trading at the channel's resistance line. All of this suggested a strong correction in the Nifty. And the index did correct to the 9,685 level - down from 10,020.

During the expiry, the index bounced strongly from support level of 9,700 (previous resistance now support). It also found support from its 50-day exponential moving average (EMA) and channel support line.

This week, the index also closed above the minor resistance level of 9,900 - 9,950. So does this indicate the bulls are back in action?

Find out what the rollover data suggest in Profit Hunter newsletter in the Market Notes section.

You can read the detailed market update here...

Nifty 50 Index Ends August Expiry 1% Down
Nifty 50 Index Ends August Expiry 1% Down 

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

Read the latest Market Commentary


Please Note: The stock price of Yes Bank on NSE-50 is not adjusted for face value split. Kindly refer to its BSE's quote today for the adjusted price.

Equitymaster requests your view! Post a comment on "Positive Economic Data Offsets Geopolitical Concerns". Click here!

1 Responses to "Positive Economic Data Offsets Geopolitical Concerns"

mohankumar b

Sep 3, 2017

hi,
theory is different practical is different it's fact.

my knowledge excpet 52 week high & multibagger methodology is very good.

practically simple easy & psychologically usage should be also easy in all trends stock market.

Above types of any methodology if there kindly update me.

with regards.

MohaN

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