Emerging markets underperform last week

The week gone by was a mixed one for global stock markets. Japan led the gains with its benchmark index ending higher by 2.3%. US and Germany followed suit with gains of less than 1% each. The positive sentiments in Japan were led by higher expectations of an ease in the monetary policy under its new leadership. In fact, the country's index closed at its highest levels in about 4.5 years. Gains in the US were largely on account of better than estimated retail sales and jobless claims data, which boosted optimism. On the other hand, stocks of emerging markets namely Brazil, China and India were amongst the top underperformers this week. While Brazil was down by about 2.7%, markets in Hong Kong and China were down by 2.4% and 1.7% respectively.

Indian stock markets ended the week lower by 1.3%. Sentiments in India were negative largely due to the pessimism surrounding the banking and auto stocks. While banking stocks were under pressure due to news related to money laundering, stocks from the auto space were not in favour on concerns related to declining sales volumes.

Source: Yahoo Finance

Amongst sectoral indices, barring FMCG stocks (up 1.5%) and healthcare stocks (flat), all sectoral indices were lower on a week on week basis. Stocks from the consumer durables (Dow by about 4%), banking (down 3%) and auto sector (down 2.3%) led the pack of losers this week.

Source: BSE
Moving on to developments from the corporate sector during the week gone by - The slowdown in growth and high interest rates has resulted in a 42.6% rise in bad assets in the banking system. High interest rates have impacted the debt repayment capacities of corporates leading to deterioration in the quality of assets. As a result, the quantum of restructured assets across the banking sector has also increased. The slowdown in the economy has also played a role as it has dented the performance of corporates and thereby their ability to generate sufficient cash flows to pay off the debt. The gross NPA ratio of the system increased to 3.5% in December 2012, as against the 2.9% in December 2011. PSU banks suffered the worst with a 48% jump in NPAs, while the same for private banks stood at a much lower 10%

Further, the Reserve Bank of India (RBI) stated that the intake of bank credit by industry is showing signs of slowdown. In January 2013, bank credit to the industry grew by a sluggish 15.2% as compared to a growth of 20.2% registered in the corresponding month in the previous year. However, the saving grace is that the bank credit off take to sectors such as chemicals, coal products & nuclear fuels, wood and leather has grown faster than the corresponding month last year. The overall non-food credit in January 2013 grew by 14.6%, slower than 15.9% growth in the corresponding month last year. Even credit to the services sector slowed down to 12% from 15.1% rise in January 2012. But the bank's credit to the agriculture sector in January 2013 accelerated to 19.8% from 6.3% in January 2012.

Despite news India's leading textile company Raymond resuming its operations at its plant in Valsad district of Gujarat, the stock ended lower during the week gone by. In fact, the stock is currently trading at its 52-week low price. The plant was closed a while ago due to notice given by Gujarat Pollution Control Board (GCPB). The closure notice was served on the plant after one of its sewage discharge pipelines was broken and was releasing waste water in the open. Also, the power connection to the plant was disconnected.

Food and tobacco major ITC has reportedly increased prices of 74 mm size cigarettes by Rs 10 per pack. The prices have been increased to offset the impact of higher value-added tax (VAT) and excise duty on cigarettes. Post the Union Budget 2013 , the VAT has increased on an average by 1.5%. At the same time, excise duty has been increased by 18%. The excise duty on cigarettes was hiked up to 21% last year. As a result, cigarette companies had increased prices up to 15%. In the Budget, the states of Assam and West Bengal increased tobacco taxes to 25% from 20% earlier. It must be noted that Assam and West Bengal account for 3% and 7% of ITC's volumes, respectively.

According to data from the Society of Indian Automobile Manufacturers (SIAM), car sales have fallen most during Feb 2013 in the last 12 years. The sales have declined by 25.7% YoY. This was the 4th consecutive month, which has witnessed decline in the sales volume. Car sales were down by 4.6% during the first 11 months of the fiscal year ending in March. Sales volumes during the month of March are unlikely to see major improvement and thus this fiscal is expected to end up in the 'negative territory' for the first time since FY03. Companies have been trying to realign their inventories by trimming down their production. Further, Maruti Suzuki recently declared that it will suspend petrol car production at its biggest and oldest plant based in Gurgaon.

However, other auto makers may cheer the fact that petrol prices have been cut by Rs 2 a litre recently. The reduction in petrol prices has happened due to international crude prices declining from $112.73 per barrel to $ 107.41 per barrel.

Movers and shakers during the week
Company 8-Mar-12 15-Mar-13 Change 52-wk High/Low
Top gainers during the week (BSE-A Group)
Jubilant Foodworks1,144 1,301 13.7%1,373 / 1,000
Lanco Infratech11 12 12.9%20 / 10
Ranbaxy Labs403 439 8.9%570 / 371
Asian Paints4,660 5,013 7.6%5,013 / 3,004
Siemens533 573 7.5%830 / 482
Top losers during the week (BSE-A Group)
Suzlon Energy17 15 -11.0%29 / 14
Nalco45 40 -10.1%62 / 40
Core Education67 61 -9.4%342 / 49
Multi Commodity Exchange of India970 885 -8.7%1,594 / 838
Gujarat Mineral Development Corp.180 165 -8.3%217 / 158
Data Source: Equitymaster

All eyes will be on the RBI monetary policy which is scheduled for next week. Given that the inflation situation has not being moving in the desired direction, we believe the possibility of any big market moving announcement is less. Nevertheless, long term investors can continue looking for fundamentally strong stocks and snap them up if the valuations are enticing enough.