Stock markets rally on reform hopes

Sat, 22 Sep RoundUp

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Global stock markets witnessed a mixed performance this week. Release of data regarding slowing growth in China, Europe and the US fuelled investor concerns amidst the ongoing European debt crisis. In the US, the week was marked weak employment numbers which resulted in a negligible move in the markets.

The Indian stock markets were up on hopes of more policy reforms by the Union government. The formal notification by the Government on allowing Foreign Direct Investment (FDI) in multi brand retail and aviation improved investor sentiments. The markets rallied on the last day of the week (by 2.2%) and ended the week higher by 1.6%.

Amongst the other markets, China (down by 4.6%) was the biggest loser followed by France and Brazil which fell by 1.4% and 1.3% respectively. The others ended the week almost on a flat note.

Source: Yahoo Finance

Moving on to the performance of sectoral indices- it was a mixed performance. While realty (up by 8.8%) and banking (up by 7%) stocks rallied, Pharma (down by 2.2%) and software (down by 3.6%) were the top losers.

Source: BSE

Now let us have a look at key economic developments during the week. The Reserve Bank of India (RBI) in its mid-quarterly monetary review, cut the cash reserve ratio(CRR) by 0.25%. CRR is the ratio of cash that banks deposit with the RBI. However, the central bank maintained status quo on key interest rates. The move is expected to provide liquidity in the banking system to the tune of Rs 170 bn. As expected the RBI decided to not reduce the interest rates on concerns of high inflation. The wholesale price-based inflation for August moved up to 7.55% from 6.87% in the previous month.

In some more economic news, the government formally announced FDI in multi brand retail and aviation. This move was long awaited and is expected to provide much needed funds and technology to these ailing sectors. Earlier, the government had announced a hike in the prices of diesel and LPG cylinders too. All these policy changes seem to have boosted investor sentiment thereby resulting in stock markets registering huge gains.

Now let us take a look at few corporate events that unfolded during the week. The increase in prices of diesel by the government has not deterred the plans of automobile companies. The auto companies' plans of launching new sports utility vehicles (SUV) are still intact. Companies like Mahindra & Mahindra (M&M), Tata Motors, Nissan and Ford, are in the process of finalizing and freezing their launch plans for UVs. According to these auto makers, the hike in diesel prices will only be a short term issue and the onset of festival season will bring in more demand for such vehicles. The reason for this optimism lies in the fact that no petrol variants are available in the larger utility vehicle segment.

Tech Mahindra has acquired a 51% stake in Comviva Technologies which is a Bharti group owned mobile Value Added Service (VAS) provider for Rs 2.6 bn. In the new entity formed by the name of Mahindra Comviva, Tech Mahindra will hold 51% stake, Bharti 20% and the remaining will be held by private equity investors and employees. Tech Mahindra will make an upfront payment of Rs 1.25 bn while the balance will be paid over 5 years. This marks Tech Mahindra's entry into the mobility products market.

Tata Steel has received a letter of intent from Eiffage Rail for the supply of high-quality rail for a new 182-km high-speed line in France for an order value of Rs 3.15 bn. Tata Steel will supply rail for the new Brittany-Loire Valley line equaling 50,000 tonnes. This line will connect cities of Le Mans and Rennes. The steel will be manufactured in the UK and then it will be rolled into rail at Tata Steel's plant in France. It is expected that this will generate employment for 10,000 people during the construction phase. The project is likely to get completed in 2016.

Movers and shakers during the week

Company	14-Sep-12	21-Sep-12	Change*	52-wk High/Low
Top gainers during the week (BSE-A Group)
NCC Limited	34	46	35.1%	72/28
Canara Bank	341	430	26.3%	566/306
Oriental Bank	233	292	25.5%	324/190
Union Bank	165	201	21.9%	274/150
Lanco Infratech	11	14	21.6%	25/9
Top losers during the week (BSE-A Group)
Tulip Telecom	66	54	-18.3%	163/54
MTNL	41	38	-8.0%	45/21
TCS	1,412	1,303	-7.7%	1438/970
Dr Reddy's	1,746	1,644	-5.9%	1818/1444
GSK Pharma	2,090	1,974	-5.5%	2338/1830

Source: Equitymaster
Now, let us discuss developments from the engineering space. Larsen and Toubro (L&T) has bid for building Saudi Aramco's refineries. These multi- billion- dollar refineries have received 19 other bids too which are mostly from South Korean firms. The proposed refinery in Jizan is a part of the kingdom's plans to boost its oil refining capacity. Jizan is an underdeveloped province bordering Saudi Arabia's southern neighbour Yemen. The refinery is expected to be operational from 2016 and along with 2 other new refineries under construction, will raise Aramco's refining output to 3.5 million barrels per day.

The Indian government has shown its willingness towards key policy reforms with the announcements of FDI in retail and aviation as well as the fuel price hikes. However, the list of impending reforms is still quite large. The investors are now hoping for more such policy changes like hike in foreign direct investment limits in the insurance sector, reforms in the goods and services tax, and a debt restructuring for state electricity boards. Political uncertainty is also a concern after a key ally withdrew support. All these would decide the future course of Indian stock markets.