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Global stock markets remained weak in the week gone by. Barring Brazil and India where indices remained flat, all the other markets ended in the negative territory. The global markets were weighed down by global economic uncertainty due to the crucial June 23 referendum in the UK, where Britons will vote to decide to either leave or remain within the European Union. Surveys show that public opinion is divided with the Brexit campaign gaining traction. The International Monetary Fund has said that Britain will face a bigger economic risk if it votes to leave the European Union. The stock markets in UK, Germany and France markets were down by more than 1% for the week.
The US markets were down by 0.7%. The Federal Reserve kept the interest rates unchanged in its policy meeting due to the slow recovery in the job market. Further, the Federal Reserve lowered the country's economic forecast for 2016 as well as 2017. The updated projections from Fed points to annual GDP growth of only 2% for the foreseeable future. Lower possibility of the US Fed hiking rates in the near future helped salvage markets to some extent.
Majority of the Asian indices ended in the red with the Japanese market, down 6%, being the biggest loser. The Indian market ended the week on a flat note.
Now let us discuss some key economic and industry developments during the week gone by.
In a positive development, India's merchandise exports contracted at the slowest pace in 18 months in May. Exports contracted marginally by 0.8% for the month. However, the growth in the non-petroleum export turned positive registering a growth of 1.1% YoY.
Reportedly, 13 of the top 30 export items reported a growth in May. Exports of gems & jewellery, chemicals and engineering goods grew by 24%, 11% and 2% respectively. While, exports of pharmaceutical products and petroleum products declined by 14% and 16% respectively.
Further, imports witnessed a faster decline of 13.1%. Imports of petroleum products, gold and iron & steel declined by 30%, 39% and 28% respectively during the month. Resultantly, the trade deficit reduced by around 40% YoY to US$ 6.27 billion during the month.
But inflation is on the rise. The wholesale price index (WPI) rose by 0.79% YoY (year-on-year) in May after a 0.34% rise recorded in the preceding month. It is to be noted that inflation showed the first monthly rise in April after 17 months of contraction.
Inflation has increased primarily due to higher food inflation. Food inflation rose 7.88% in May from 4.23% in April. Vegetable prices increased 12.94% in May, while prices of pulses and potatoes rose 35.56% and 60.01%, respectively.
Further, prices of manufactured products rose 0.91% in May. Manufactured products form a bulk (65%) of the WPI index's weightage. The rise here suggests that the manufacturing sector is finally seeing some pricing power.
Even consumer price inflation (CPI) accelerated at the fastest pace in 21 months in the month of May on rising food prices. The CPI rose to 5.76% in May, from a revised 5.47% in April. Rising fuel costs have also led to an increase in the inflation. The price of the Indian basket of crude oil has gone up by more than 71% between February and mid-May. This in-turn leads to increase in the prices of the food items because of the logistics cost involved.
Further, drought has played its part too. Reservoir levels are down in many parts of the country. This has affected the sowing of crops, leading to lower production and pushing up prices of food items. All eyes are now on the onset of monsoon to keep the inflation level in check.
The gold imports by India, which is the second largest consumer after China, contracted for a fourth straight month in May. Gold imports stood at US$ 1.47 billion in May. This was as against US$2.42 billion recorded a year earlier and recorded a shrinkage of 39% YoY.
Meanwhile, total exports from India declined for the 18th consecutive month in May, a reflection of persisting weakness in the global economy. This is likely to keep India's trade deficit at manageable levels. For the entire FY16, CAD stood at $22.1 billion (1.1 per cent of the GDP) against $26.8 billion (1.8 per cent of GDP) for FY15, according to Reserve Bank of India data.
To empower banks struggling with huge bad loans, the Reserve Bank of India (RBI) has announced a scheme for sustainable structuring of stressed assets (S4A). The scheme allows domestic lenders to convert up to half of the loans held by corporate borrowers into equity or equity-like securities. Under this scheme, banks can split the overall loans of struggling companies on sustainable and unsustainable basis. The amount of loan that current or predictable future cash flow could sustain will be considered as sustainable. The remaining amount can be converted into equity or convertible security.
The move is intended to help restore the flow of credit to crucial sectors such as infrastructure and iron and steel, among others. It also aims at reducing the stress on corporate borrowers and resolve the issue of bad loans across banks. The implementation and proper regulation of this scheme will bring in the much needed relief to the banking sector.
One shall note that bad loans across the 40 listed banks in India increased to Rs 5.8 trillion as of the end of March 2016. This was as against Rs 4.38 trillion recorded at the end of December. This hit the profitability of many banks during the fourth quarter ended March 2016, mainly public sector banks.
|Top Gainers During the Week (BSE A Group)|
|Top Losers During the Week (BSE A Group)|
Now let us move on to some of the key corporate developments in the week gone by.
The Union Cabinet approved the merger of five associate banks and Bharatiya Mahila Bank with SBI. SBI has stated that the ratio of the merger will be decided post valuation analysis over next two months. As per SBI management the merger process may get completed by March, 2017.
Tata Consultancy Services (TCS) has entered into a global partnership with Randstad Global IT Solutions. The partnership is aimed at designing and deploying one of the world's largest end-to-end public cloud marketplaces for IT infrastructure services.
Tata Power will purchase 25% of Resurgent Power for US$300 million as part of a consortium to primarily buy coal-fired and hydro power assets in India.The new joint venture with overseas sovereign and pension funds is part of Tata Power's plan to quickly build a sizable coal and hydro power portfolio. The company reportedly plans to cut down non-performing assets of power producers (Subscription Required) in their books by hawking these assets to cash-rich companies.
Resurgent Power is founded by a consortium of two sovereign funds from Middle East, an overseas pension fund from Canada and local private equity fund ICICI Ventures. The three global funds will invest US$ 500 million and will own 65% stake, while ICICI Ventures will own the remaining 10% stake. Reportedly, the company will be capitalized up to US$ 850 million and can raise up to three times debt of the equity capital.
Tata Power is set to acquire renewable energy company Welspun Renewables Energy Pvt Ltd for an enterprise value of Rs 92.5 billion, including debt of Rs 55 billion. This will add to the consolidated debt on Tata Power's balance sheet, which stood at Rs 372.5 billion as of 31 March. The acquisition will make the Tata group utility firm, the second largest producer of renewable energy in India with a combined renewable energy capacity of 2.3 gigawatts (GW) between solar and wind.
Dr Reddy's Laboratories has entered into a conclusive agreement with Teva Pharmaceutical Industries Ltd and Allergan Plc to acquire a portfolio of eight abbreviated new drug applications (ANDAs) in the US. The deal is for US$350 million and is aimed at strengthening the company's US business. Presently, US business contributes to about half of Dr. Reddy's revenues. The company is looking to finance the transaction using a combination of cash on hand and available borrowings under existing credit facilities.
Teva is selling the drugs to Dr. Reddy's as part of its planned US$4.2 billion acquisition of Allergan PLC's generics business. The US Federal Trade Commission has yet to approve the purchase of the drugs which is apparently contingent on completion of its deal with Allergan.
Coal India Ltd (CIL) and National Thermal Power Corporation (NTPC) Ltd have signed a 50-50 joint venture (JV) agreement named Hindustan Urvarak & Rasayn Ltd. The JV will take over the Fertilizer Corporation of India's assets to run its Sindhri and Gorakhpur units. It will set up two urea factories on the premises of ailing Fertilizer Corp. of India Ltd (FCIL) to help in its resurgence. Further, both the companies together are expected to produce 1.27 million tonnes of urea per annum. The gas would be made available through the proposed Jagdishpur-Haldia pipeline to be constructed by GAIL.
The outcome of the Brexit issue will continue to influence the direction of the stock markets in the coming week. However instead of getting bogged down by these short term fluctuations, investors should utilize correction to accumulate stocks with strong moats and that are available at attractive valuations.
The index traded on an extremely volatile note throughout the week. It opened with a gap down on Monday and recovered most of the losses by Wednesday and finally ended the week with nominal losses. The index is currently trading in a very small range of 150 points from 8,050 to 8,200. The broader range for the index is 8,000 to 8,300. One expect range bound action with high volatility in this eventful week. You can read the detailed market update here.
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