31 Jan 2014

This week markets dominated by monetary policy decisions

Breaking News: Fed to continue monetary stimulus at $65bn a month; emerging economies forced to act to protect their currencies; India raises repo rate by 25 basis points. This week markets were dominated by monetary policy decisions and agenda-setting news services stoked up the tapering tremors again. The Nifty gave up 177 points to close 2.9% down at 6090 after trading in a range of 4%. FIIs were net sellers of $443mil of cash equities, as domestic institutions bought a net $231mil on daily trading averages around the twelve-month trailing average. Not surprisingly, volatility edged up but not by much: the India VIX traded up as high as 19 before settling back to close at 17 for a gain of a point on the week. Market breadth was weak with declines outnumbering advances by four to one; financials were notable on the downside with the leading names knocking the Nifty for 65 points. Index futures closed at a premium of 1.5% to cash

On the results front, the overall picture is that 63% of the top hundred listed companies have beaten or matched sales forecasts, with a similar proportion for earnings. From our own portfolio, we saw ICICI Bank reporting Net Interest Income ahead by 21.6% and profits by 12.5%, reflecting a tax adjustment charge. Pidilite Industries reported sales ahead by 15.1% but profits declined by 6.3% as currency adjustments on imported raw materials offset an otherwise excellent performance. Balkrishna Industries reported sales ahead by 25.5% and profits up by 66.5%, driven by strong export sales.

The first monetary policy decision to emerge was India’s, when governor Rajan surprised the market with a 25 basis point increase in the policy rates. The market had not been expecting a rise but it was absolutely consistent with the RBI’s commentary following its December meeting, as sticky CPI inflation fed a slight increase in WPI. This month’s commentary suggested a more doveish tone in future, with the chairman saying further increases were not foreseen. 

24 Jan 2014

Most equity markets in the red

This week the UK burnished its recovery credentials with a sharp reduction in unemployment and China reported a positive surprise on Q4 growth. Nonetheless, most equity markets were in the red, as the movers and shakers decamped to Davos to contribute to global warming. The Nifty bucked the negative trend but only just, adding five points on the week to close 0.1% up at 6267 after trading in a range of just 2% and touching a new record on the way. With average daily trading volumes a touch off the trailing average at $2bn, FIIs were once again to the fore, buying a net $171mil of cash equities, mostly from domestic institutions which sold a net $99mil. As a matter of interest, HDFC became the first Indian stock to be owned more than 74% by foreigners this week. Volatility stayed around the mid-teens with the India VIX trading below 14 at one point before closing at 16 for a gain of a point on the week. Market breadth was evens, with advances matching declines and no particular concentrations in narrow trading across the board.  Nifty futures closed at a premium of 1.3% to cash though the outlook for next week has been clouded by more tapering tantrums emerging around the Davos talk.

Four more results to report this week. Ultratech Cement saw sales contract by 1.3% in weak demand conditions and earnings fell by 38.5% as the cost of excess capacity weighed on operating margins. Kotak Mahindra Bank reported net interest income rising by 13.6% but profits by only 2.4% as credit growth slowed. Torrent Pharma was the week’s big surprise with sales rising 27.4% and profits up by 41.1%. With this kind of cash generation, it will make short work of any dilution arising from the Elders’ acquisition previously reported. Finally, Larsen and Toubro has started to benefit from its burgeoning order book, surprising the market with sales up by 11.8% and profits by 10.6%.

17 Jan 2014

The World Bank is forecasting global GDP growth

The World Bank is forecasting global GDP growth of 3.2% this calendar year, with developed markets seeing “bounceback” to 2.2% on average. The Bank is encouraging emerging countries to pursue a “virtuous cycle” of investment and output. Meanwhile, the Nifty recovered its poise this week, adding 90 points, to close 1.5% ahead at 6262, after trading in a range of 2.5%. Daily trading volumes were just below the 12-month rolling average, at $2.1bn even as FIIs turned from net sellers to buyers again, picking up $219mil of cash equity; domestic institutions were sellers of $308mil. Volatility continued to be soft: the India VIX traded around last week’s close of 16 before fading slightly to close at 15. Market breadth was good as advances exceeded declines by two to one. Concentration was evident with the re-emergence of FII buying: four stocks added 77 out of the 90 points’ gain. Nifty futures closed at a premium of just 1.3% to cash as good early Q3 earnings numbers instilled some confidence.

On the earnings front, we had a rush of reports from our holdings late in the week note a trend for the quarter so far of a struggle to meet sales expectations but profits doing somewhat better on improving operational performance. First out of the traps was TCS, bettering arch-rival Infosys with a 32.5% advance in sales and 49.6% profit growth. Bajaj Auto reported sales down by more than 5% on weak demand but profits up by 10.5%. ITC reported sales ahead by 13.1% and profits ahead by 16.3%. HDFC Bank reported net interest income ahead by 16.4% but, predictably, profits ahead by 25.1%. Finally, Reliance Industries reported sales ahead by 10.3% but because of declining refining and petrochem margins, in combination with lower spreads than the previous quarter, profits were flat. This, nonetheless, met market expectations and the share price is being sustained by the fact that the government has now “notified” the post-April 2014 price formula for natural gas, which should bring a price of almost double the current one. 

10 Jan 2014

2014 has opened cautiously

For the first commentary of 2014, we look at how our markets are starting the year against the background that developed markets generated spectacular returns in 2013, notably the US. This year has opened cautiously and the week ended with US employment numbers showing the fragility of the economic recovery. In India, the Nifty has dropped 2.1% from its year-end close, giving up 133 points to close at 6171 on Friday after trading in a range of 3.6%. Average daily trading volumes matched the yearly average of $2.3bn but FIIs were net sellers of $130mil as were domestic institutions, of $27mil. Volatility was steady with the India VIX hovering around the mid-teens before closing a point up at 16.  Breadth was negative with declines outweighing advances by three to two. There was heavy concentration in points’ contributions with one stock (ITC) adding a third of the net and two (ICICI Bank and L&T) deducting two-thirds. Nifty futures closed at a premium of 1.3% to cash.

The Commerce Ministry appears to be working on further liberalisation of FDI rules, specifically in Railways, Construction and e-Commerce. Meanwhile, the Foreign Investment Promotion Board (FIPB) approved two FDI proposals, from Tesco and Vodafone, worth more than $2bn between them. The Tesco one drew attention for two reasons: it is the first FDI proposal in multi-brand retail by a multi-national since the new rules came into effect and it was cleared extraordinarily quickly. It took a matter of weeks, when Ikea struggled for more than a year before getting clearance for its single-brand application. Vodafone is the first telecom major to move its investment to 100% and now it appears to be in negotiations to acquire Tata’s loss-making unit. Despite pressure, the government has maintained FDI in the Pharma sector at 100%; the sector has seen aggregate FDI investment of over $2bn in nine months of FY14.