It was a stellar week for the global stock markets with all countries except for US and China closing the week in the green. US stock markets were trading firm during the week. However, losses in the last trading session due to dismal job market data instilled recessionary fears and erased gains registered earlier in the week. It may be noted that US markets have registered losses in six out of the last seven trading weeks. Nonetheless, President Obama is about to unveil a new job program in order to curtail rising unemployment which is the main cause of concern for US. It would be interesting to see how the markets react to it and whether the propaganda materializes or not.
After registering losses for five consecutive weeks, Indian stock markets finally gained some ground in a truncated trading week. Despite modest GDP growth numbers and rising inflationary pressures Sensex registered healthy gains on the back of bargain hunting opportunities in select sectors like realty and metals. Amongst the other world markets, Brazil was up 6.0% while Singapore was up 3.5% followed by Hong Kong (up by 3.2%). However, China was down by 2.3% during the week.
Source: Yahoo Finance
Moving on to the performance of the sectoral indices, Metals and Realty were the top gainers during the week. Bargain hunting opportunities in these oversold sectors lead to double digit gains. The auto pack was up due to strong monthly sales figures reported by the companies. The rally in Oil & Gas index was fuelled by appreciation in Reliance Industries. Amongst other indices, Pharma was up 3.6% while FMCG and Power were up 2.7% and 2.4% respectively.
Now, let's take a look at key economic developments during the week. India reported its GDP growth numbers for the first quarter of financial year 2011-12 (April to June 2011). While the growth number came in lower than the last 5 quarters, at 7.7% the same continued to remain above broader market estimates. With inflationary pressures showing no signs of easing, interest rates are likely to remain high making it difficult for the economic recovery to gather pace.
Food inflation in India shot up to its highest level in more than four months in the week ended Aug 20. This was driven by a sharp rise in vegetable prices. The wholesale price index-based food inflation rose to 10.05% from a year earlier, compared with 9.8% in the previous week. Food prices have hovered at elevated levels for more than two years now due to increased demand. The Reserve Bank of India (RBI) has attributed this to the growing prosperity in the country that has led to increased consumption of high-protein foods such as eggs, fish, meat and milk. Not just that, the worrying sign is that headline inflation has remained in excess of 9% for eight consecutive months since December 2010. This means that inflation control would continue to remain the focus of monetary policy in September. Indeed, if the RBI does raise interest rates, it will be for the 12th time since March 2010. Moreover, it is not just food prices that is stoking inflation but also rising prices of non-food articles, high government spending as well as supply hindrances in India's distribution chain.
India's biggest passenger car manufacturer Maruti Suzuki is planning to launch 15-20 new vehicle models in a period of 5 years. The main reason for this is to remain competitive and to protect its market share. About 70-80% offerings will be low-cost small car segment models which will include facelifts and variants. Of the new vehicle models planned, 5 are already in the advanced stages of development. Over the next 3-5 years, the company will make an investment of about Rs 10-15 bn on product development. This will also include its upcoming Research & Development (R&D) facility at Rohtak which is expected to be operational by the first half of 2014.
Watch and jewelry maker Titan Industries is aiming to increase its turnover nearly three-fold from watch division to Rs 35 bn by 2014-15, driven by network expansion and introduction of new designs in the branded segment. The company also expects its eye-wear division to break even by FY13. In this regard, the company will expand its eye-wear and accessories business with 177 stores. For the jewellery business under Tanishq brand, Titan will concentrate on opening large format stores for better inventory turns and less than 24 months break even. Further, during the current fiscal year Titan plans to open 100 new exclusive Fastrack stores across the country. It may be noted that in FY11, Titan had a 60% market share in the India's branded watch market.
Coal India Ltd. is mulling investment of around Rs 420 bn in the next few years as its project stuck under environmental norms start getting approvals with a new environment minister at the centre. The investment will include foreign acquisitions, the clearances for which are expected in the next few months. As per initial estimates, the company will need Rs 70 bn to set up 40 odd washeries. It has also estimated RS 60 bn investment for foreign acquisitions and Rs 290 bn for new mining and expansion projects. Around 163 projects have received all clearances with a total production capacity of 440 million tonnes (MT) and these will come at an investment of Rs 289 bn and will attain full capacity in the next five years. The company expects that about 221 MT of production will be achieved from some of these projects during 2011-12. If pending clearances are also granted, the company expects production capacity to increase to 625 MT soon. This along with 190 MT by expansion of existing projects may give it production capacity of about 800 MT in the medium term
State-owned firm Steel Authority of India Ltd (SAIL) is planning to start production from the Chiria mines by 2014. The mines are located in the Naxal-prone Paschimi Singhbhum district of Jharkhand. With proven reserves of over 1.8 bn tonnes, Chiria is one of Asia's largest iron ore mines. According to Chairman C S Verma, the mine will become operational in the next three years with an investment of about Rs 35 bn. On commissioning, it would enable SAIL to more than quadruple its annual steel production capacity to 60 MT over the next decade.
At present, SAIL produces about 14.5 MT steel annually which accounts for about one-fifth of India's aggregate 60 MT production. The company's iron ore requirement is set to increase from the current 25 MT to 100 MT by 2020 as steel production capacity expands to 60 MT over this period. The Chiria mines would fulfill more than 40% of the 100 MT iron ore requirement of the company.
In some other news from the economy, it may be noted that according to HSBC's Purchasing Managers Index (PMI), India's manufacturing sector growth registered a 29 month low in August due to shrinking exports. Weak global economic conditions have dented the export demand resulting in contraction of PMI. A declining PMI indicates contraction in economic activity. With RBI expected to maintain its hawkish stance amidst rising inflationary pressures we expect further slide in manufacturing growth as rising rates are a deterrent to industrial capex.
Indian firms have raised approximately US$ 4.1 bn through External Commercial Borrowings (ECB) and Foreign Currency Convertible Bonds (FCCB) route in the month of July. Although majority of the funds are raised through automatic route (does not require approval of RBI) approximately US$ 490 m were raised through the approval route. This signifies a growing appetite of foreign capital by the Indian firms. As the cost of debt is higher in domestic markets Indian firms have become more keen on raising money from overseas markets. Thus, unless the rate cycle cools down and the interest differential narrows, the appetite for foreign capital would continue to remain high.