Markets jumped higher this week after the Indian government provided a 'stimulus' in the form of recapitalisation of public-sector banks that was higher than market expectations.
The Nifty climbed 1.7 percent, although the gains were much higher for the Sensex - up 2.4 percent for the week. Both mid-cap and small-cap indexes underperformed in terms of percentage gains. The banking index stole the show by registering sharp gains.
FIIs were active buyers during the week, pumping in 73 billion rupees ($1.12 billion), with Wednesday alone accounting for 68 billion rupees ($1.05 billion). On the currency front, as the dollar has been gaining strength against euro and yen, sooner or later we may see the rupee coming under selling pressure. In the short term, the rupee has seen strong accumulation between 64.80 -65 against the dollar and we may see it inching towards 66 in the coming weeks.
Finance Minister Arun Jaitley announced a mega bank recapitalisation plan of 2.11 trillion rupees ($32.4 billion) for state-run banks, which is expected to help support a recovery and pick-up in private investments. In fact, the capital injection target of this quantum is higher than the total infusion in more than a decade. Larger state-run banks such as SBI and Punjab National Bank were on a roll, appreciating between 20-50 percent within two days of the announcement.
The government expects that the fiscal deficit target of 3.2 percent of GDP for the year will be not breached despite the recapitalisation move. One may recollect that an earlier infusion of 700 billion rupees ($10.7 billion) was touted by experts as insufficient to meet capital requirements. The current round of infusion is expected to be adequate to cover Basel III requirements and support credit offtake. Though the announcement had the desired impact on markets, it is very important that implementation is done in a timely manner. If the recap is not followed by banking sector reforms, we could have a repeat of the same non-performing asset (NPA) issues.
Shares of road construction companies gained after the Cabinet approved the country’s 7 trillion rupee ($107 billion) road construction plan, including the ambitious Bharatmala. The huge spending is expected to give a fillip to private sector investments according to the finance minister. The Bharatmala Pariyojana is a 5.35 trillion rupee ($82 billion) investment to construct 34,800 km of roads. This along with the bank recap announcement is the government’s biggest decision just before the assembly polls in the states of Gujarat and Himachal Pradesh.
Earnings declared during the week were a mixed bag. Ambuja Cement, Asian Paints, Maruti Suzuki, HUL and Zee Entertainment exceeded expectations. HDFC Bank, ITC, Kotak Mahindra Bank and Infosys met market expectations with HDFC Bank reporting stable asset quality.
Infosys cut its FY18 revenue guidance and now expects a 5.5-6.5 percent revenue growth for FY18 in constant currency terms. This is apparently Infy’s slowest projection in a decade as its main segments such financial services and retail scaled back on outsourcing work.
Frontliners that missed market expectations were Yes Bank, IOC, Biocon and ICICI Bank. ITC said that two of its business segments namely cigarettes and consumer goods remained under pressure. The company saw an overall contraction in its margins and demand remains sluggish after Goods and Services Tax (GST).
Maruti reported stellar numbers as it reported higher-than-expected margins of 16.9 percent as it experienced economies of scale. PAT rose 3.4 percent on a 7 percent rise in revenue. The valuation (in terms of P/E ratio) of Maruti Suzuki now stands second in the world in the auto industry after Tesla.
In stock-specific action, the RBI imposed a 60 million rupee penalty on Yes Bank and 20 million rupees on IDFC Bank for violations of various norms set by the regulator. Other private sector banks reporting divergences in NPAs include ICICI Bank and IndusInd Bank. Public sector banks, on the other hand, are reporting minimal divergences.
Telecom companies were in focus after Reliance Jio announced a hike in tariffs for its flagship scheme by about 15 percent. Shares of Bharti Airtel and Idea Cellular were in action as investors believed that the price war was gradually easing.
On the global front, the European Central Bank issued a more dovish policy statement than the market was expecting. It kept interest rates on hold and announced plans to cut its QE purchases to 30 billion euros per month from its current 60 billion euros starting in January. The U.S. House of Representatives passed a Senate budget that is likely to open up the path for U.S. tax reform. Advance quarterly GDP for Q3 came in at an annualized 3 percent, significantly exceeding expectations of 2.6 percent.
Prominent names announcing their numbers in the coming week include HDFC, Bharti Infratel, Lupin, Tata Steel and Bharti Airtel.
On the macro front, September IIP data is scheduled to release on Tuesday. Manufacturing PMI data for October will be announced on Wednesday. Services PMI data will be announced on Friday - it had jumped to 50.7 in September from 47.5 in the preceding month.
The coming week will be exceptionally busy in terms of global macro-economic events. The U.S. Federal Reserve, Bank of England and the Bank of Japan will be announcing their monetary policy decisions, which will be followed by the highly anticipated U.S. jobs report at the end of the week. Markets are expecting status quo at the Fed meeting and the next rate hike to occur in December. Nonetheless, the tone of this November meeting will be watched in setting expectations going forward. Also in focus this week will be the announcement of the next chair of the U.S. Federal Reserve.
Despite the huge liquidity and the run-up in stocks driven by news reports, it is advisable to be selective at current levels and continue booking profits.
(Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.)