Major global stock markets ended the week in the green, slightly recovering from the sharp pull back witnessed last week on chances of a US air strike on Syria. While concerns are not over yet, US President Mr. Barrack Obama has not been able to gather much support for military intervention at the G-20 summit of world leaders in Russia this week. The stock markets in US were up by 0.9% over the week. Not just US, but the global stock markets are keenly waiting for the U.S job report which is likely to influence Federal Reserve's decision regarding rolling back of the stimulus plan
The European stocks are also heading for a weekly gain as European Central Bank affirmed its accommodative monetary policy. The stock markets in France and Germany gained around 1.8% and 1.3% respectively over the week.
Among the major Asian stock markets, markets in Japan gained around 3.5% over the week. This was supported by rally in the real estate and construction sector on hopes the city will win its 2020 Olympic Games bid this weekend. The stock markets in China were up by 2.0% over the week, supported by Chinese manufacturing data that showed the slowdown in Chinese economy is stabilizing.
Despite the concerns of depreciating rupee and rising fiscal deficit, the Indian stock markets were influenced by slew of measures outlined by the new Reserve Bank of India Governor Mr. Raghuram Rajan, the former chief economist with the International Monetary Fund (IMF) and economic advisor to the finance ministry.
By the end of the week, the rupee recovered to some extent and is now trading at Rs 65.27 to the US dollar. The Indian equity markets closed the week in the green (up 3.5%). Barring software (down 2.1%), all sectoral indices ended the week on a positive note with PSU (up 8.3%) and Capital goods stocks (up 5.1%) witnessing the maximum gains.
Mr. Rajan in his recent statements insisted on monetary stability as the prime role of RBI. Mr. Rajan has said that Indian economy is fundamentally sound and the concerns are overdone.
He further unveiled that the Central Bank will issue inflationary index saving certificates. Mr. Rajan has already outlined a slew of measures since taking charge. These include central bank's permission to exporters to re-book cancelled forward exchange contracts to the extent of 50% of the value of cancelled contracts (versus 25% earlier). Further, a similar facility to importers to the extent of 25% has been extended.
Meanwhile, to develop the money and G-sec markets, the central bank would now introduce cash settled 10 year interest rate future contracts and also examine the introduction of interest rate futures on overnight interest rates. Mr. Rajan has highlighted that the central bank would offer special concessional window to bank for swapping FCNR dollar funds, mobilized for a minimum tenor of three years and over, at a fixed rate of 3.5% per annum for the tenor of the deposit.
Now let us discuss some of the economic developments of the week gone by.
In a move to shield banks and home loan borrowers from risk, the Reserve Bank of India (RBI) has raised a red flag on 20:80 home loan schemes. The move aims to shield banks and home loan borrowers from risk. RBI has asked banks to disburse home loans as per the stages of construction instead of lump sum disbursals to limit the risk of fallout of such housing finance schemes. As per the innovative schemes popularly known as 80:20 or 75:25, the interest or equal monthly installments are taken care of by the builder on housing loans availed by the borrowers. The risks could be on account of disputes between borrowers and builders, delayed or non-payment by the builder or delay in project completion. Even in cases when the default is done by builders, the credit rating or scoring of the borrower may take a hit by credit information companies. Besides this, schemes expose banks to very high risks including the risk of fund diversion. Hence, RBI has come up with a notification that there should be no upfront disbursal in case of incomplete and green field housing projects.
As per widely-tracked HSBC Purchasing Managers' Index (PMI), the manufacturing sector deteriorated for the first time in almost four years in August. The PMI for manufacturing fell to 48.5 points in August from 50.1 points in July, indicating a contraction in the sector. A reading above 50 points indicates growth and that below 50 points depict contraction. This is for the first time since March 2009 that the sector has witnessed contraction. This was led by a decline in new orders, especially export orders. The export orders declined for the first time in 11-months in August. Consumer goods producers registered a slight decline despite expectations of a rise considering the upcoming festive season.
In the wake of rising crude prices and depreciating rupee, petrol price was hiked by Rs 2.35 per litre during the week. This is the sixth time in the three months that petrol prices have been hiked. Since June 31, 2013 the petrol prices have gone up by Rs 9.17 per litre (excluding VAT). In a similar move, the diesel prices have been hiked by Rs 0.50 per litre (excluding VAT). The state run oil refining company Indian Oil Corporation has announced that these hikes exclude local sales tax or value added tax (VAT). The final retail selling prices are likely to be higher and will be different in different cities.
This is the eighth hike in diesel prices since Government's announcement in January 2013 to let oil companies raise prices of diesel in a phased manner. It is important to note here that while petrol is a deregulated fuel, diesel prices are still controlled. The move will give state run oil companies some relief from the mounting fuel under recoveries on account of the fall in the rupee and firming up of oil prices. As per the petroleum ministry estimates, the under recovery losses for the current financial year are likely to be around Rs 1,810 bn, up 13% year on year (YoY). As such, the petroleum ministry is making a case of further hike in the prices of the retail fuels.
Now let us take a look at news from the corporate side.
<>Tata Motors Ltd is likely to undergo a major organization revamp with an aim to cut costs and bring better synergies through economies of scale. The company is planning to move towards 'One Part One Vendor' strategy. It is important to note here that currently, the company operates on three different platforms for sourcing for passenger cars, Nano and commercial vehicles. Each of these has a separate independent sourcing group. As per the new strategy, all platforms are likely to be consolidated into a single sourcing group. Hence, the company will have one supplier for one product, instead of 5 -8 at present. Tata Motors has the largest vendor base in the domestic automotive segment. Currently, it ranges over 1,200 to 1,400 across the country. With the new strategy, the company plans to reduce the number by more than half over the next three to four years. The move is likely to result in a quicker and leaner organization with better focus on quality.
In an interesting development in the steel sector, the domestic steel companies are looking to earmark considerable chunk of their production towards exports. The decision is in wake of the weak macroeconomic environment in the country that has led to the slowdown in the demand. The other is that these companies want to reap the benefits of a falling rupee. The aim is also to utilize expanded capacities as well as to build a better product basket. For instance, Steel Authority of India Limited (SAIL) is looking to double export volumes to 700,000 tonnes this year. Export revenues too are expected to double to Rs 25 bn in FY14.
Power Grid Corporation of India Ltd (PGCIL) has approached the Central Electricity Regulatory Commission (CERC) for cancellation of two power transmission lines projects awarded to <>Reliance Infrastructure. The projects are Talcher-II transmission system and North Karanpura transmission project. The two projects are worth Rs 41 bn and were awarded in 2010. These are also among the first ultra mega transmission projects awarded to private companies. The 592-km long Talcher-II transmission project was to cover Orissa and Andhra Pradesh. It was scheduled to be operational by October 2012. The 1,045-km-long North Karanpura transmission line, which was to connect Madhya Pradesh, Chhattisgarh, Uttar Pradesh and Haryana, was supposed to be operational by November 2013. However, Reliance Infrastructure has not yet begun work on these projects. The resulting delay is affecting construction of other transmission lines by PGCIL.
The city gas distribution company Gujarat Gas has signed a memorandum of understanding (MoU) with Gujarat State Petroleum Corporation (GSPC) for a long-term gas procurement deal. As per the MoU, GSPC has agreed to supply 0.85 million metric standard cubic meters (mmscm) of gas per day to Gujarat Gas from 1st January, 2014 to 30th June, 2025. The gas price will be determined in the relevant Gas Sales Contracts (GSC) and it is likely to be formula-based. The MoU is effective till 31 December 2013 or the signing of the relevant GSCs, whichever is earlier.
Mahindra and Mahindra Ltd is planning a major expansion. The company is likely to invest Rs 100 bn in the next three years on capex and launching new products. The company is scouting for locations, including options outside its Chakan plant in Maharashtra, to set up its new plant to manufacture new products. Of the total, 75% has been earmarked for capex on automotive and farm equipment. The rest of the investment will be on group companies. As part of overall capex, the company is developing two-three new platforms for brand new products which will hit the market around FY16. These new products will be rolled out from completely new plant the location for which will be decided within this fiscal. The company is also working on six new engines out of which three will be from Mahindra and Mahindra and three from Sangyong. The company is also working on smaller engines with higher power.
The global stock markets remain in a cautious mode over uncertainty as to when the cutback in stimulus measures will take place and jitters over US led strike on Syria. Going forward, the US jobs report, one of the most important monthly indicators for the world's largest economy will influence the global stock markets. We would suggest investors not to get too affected by short term movements in the indices. The focus should instead be on investing in quality companies having a sound management and healthy financials which are available at reasonable valuations.