HDFC SEC Viewpoint: Change of Heart at the RBI?

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The SGX Nifty suggests a tame opening for our markets this Monday morning. Nifty is expected to open with a small slide of 20 points. Probably the confirmation of a slow growth in Chinese manufacturing PMI that came in just at the border of 50, has doused Asian sentiments.

This is not something new. The flash PMI, which had come in earlier had also indicated that the manufacturing was on the verge of a decline, when it reported a reading of 50. So this should not come as a surprise.

We are not bothered too much about China as long as we can create an environment of confidence within our industry and stimulate growth. While top bankers don?t see any traction in the demand for credit, the political establishment is putting pressure on the Governor to cut rates to cheer up the investment climate in the industry.

The street does not expect a rate cut. But we believe that the landscape has changed beyond the imagination of the RBI. It is for these reasons, we believe there is a good chance that the RBI governor could spring a surprise, if he wants to

1.    Inflation is below the RBI target of 6%

2.    Crude is way below the wildest imagination of the RBI. It is no hurry to move north.

3.    The GDP data shows that the economy needs a dose of booster 

4.    But the biggest indication that there could have been a thawing of the RBI ice is that they have had the courage to abolish the 80:20 scheme in Gold imports.

5.    China, which is much more  dependent on international trade than India, has gone ahead and cut rates. So why can?t India?

This is a wild guess and with no voice in the market even remotely thinking on these lines.

So traders and investors should go with the street thought that rates will remain intact and accordingly position themselves.  

We believe there is still room for the downstream crude plays or those that use Crude as a raw material to move north, be it paints, tyres, OMCs or Lubricant companies. The only thing you have to remember is you have to average them lower. Fundamentals have just changed and they will continue to manifest themselves, in the near future was well.
 
Gold Imports: RBI Lifts the Re-export Requirement

The Central Bank on Friday, made Gold imports easy. It did away with its requirement of exporting 20% of the Gold Imports. The scheme which was popularly known as 20:80 was announced in August last year to keep the widening current account deficit in check.

High current account deficit had the Indian rupee vulnerable and the currency had depreciated by as much as 20% against the dollar at one time. But as gold imports shrank because of the restrictions, the country's current-account deficit tightened from 4.8% of gross domestic product in the fiscal year ended in March 2013 to just 1.7% of GDP in the three months through June.

India is the world's second-largest consumer of gold, which is traditionally used for jewelry and as one of the main sources of savings in the country where hundreds of millions of people do not have bank accounts.

Gold prices plunged by Rs 270 on Saturday to trade at Rs 26,400 per 10 grams in the national capital after the RBI  eased the curbs on import of the precious metal. Besides, a weak global trend where gold weakened on the back of a stronger dollar and falling crude prices, curbing demand for the precious metal, weighed on the gold prices.

Silver also extended losses for the third day and tumbled by Rs 820 to Rs 35,380 per kg on poor off take by industrial units and coin makers. Scrapping of the scheme is likely to enhance supplies and check smuggling of the precious metal.

The government was also concerned that the rule was encouraging importers to hoard gold causing a distortion in trade. Friday's decision to scrap the restriction took the bullion markets by surprise as they were anticipating a tightening of rules following a surge in gold imports in October to around 114-115 tonnes from less than 25 tonnes a year.
 
Swiss Referendum rejects Gold Purchases

The Swiss on Sunday rejected a referendum requiring the Swiss National Bank hold at least 20 per cent of its 520-billion-franc ($540 billion) balance sheet in gold. Had it been approved, it would have led to purchases of at least 1,500 metric tons over five years.

The initiative would have also prohibited the SNB from selling any of its bullion and required the 30 per cent currently stored in Canada and the U.K. to be repatriated. With the referendum being voted down by 77 percent to 23 percent, Gold prices are likely weaken as the Swiss National Bank will not have to buy additional 1,500 tonnes of gold.

Adding just 300 tonnes of Gold every year would have meant increasing the demand by 7% per annum, which could have moved the prices. Gold purchases by central banks around the world have helped support Gold prices.  

According to the World Gold Council, the central banks have added an average of 372 tons to reserves annually from 2010 to 2013. Purchases will probably be 400 tons to 500 tons this year, the group estimated in November.

Switzerland currently holds 1,040 tons of gold. The Swiss already have the world?s highest amount of bullion per capita. With lower oil prices reducing costs for consumers and the U.S. considering raising interest rates, demand is fading for hedges against inflation such as gold.

What should a retail investor do?

If there is a marriage in the family or some other event which will necessitate buying gold in the next 10 years, investors should start an SIP in a Gold ETF. Don?t get into an argument, whether the gold prices are headed up or down in the long term, just make it simple by planning to buy the required quantity through planned monthly ETF purchases. 

If the prices tumble, you will be average lower, if they rise, you will be happy that you began early. More important, your objective of having that much of gold by the desired date, would have been achieved.

Street expectation: RBI unlikely to lower the repo rate

This is the street expectation.  The RBI is unlikely to lower its key lending rate at the fifth bi-month monetary policy review on Dec 2 as the fall in inflation has been mainly due to cooling of global commodity prices rather than proper address of supply-side constrain.

Indias consumer price, so called retail inflation fell to all time low of 5.52% in October on account of a decline in food prices and the softening global crude oil prices. This has caused India's Finance Minister Arun Jaitley to urge the central bank to cut repo rate at December policy review as growth slows in India.
 
GDP growth eased to 5.3% in Q2FY15

Indian economy grew at 5.3 % in the second quarter of the fiscal year as against 5.7% of Q1FY15 on account of high base effect and slowdown in manufacturing activities. In the same quarter last year, it reported a growth of 5.2%. However the figure was higher than street expectations of 5%.

The pace of growth in manufacturing eased to 0.1 % against 3.5 % QoQ, while agriculture sector 
growth came in at 3.2 % against 3.8 % a quarter ago. On a flip side, service sector showed an improvement with 7.1% growth registered in Q2 as against 6.8% of Q1, due to higher government spending. Within this sector however, Finance, Insurance, Real Estate & Business  Service  activities slowed down to 9.5% growth from 10.4% a quarter ago.

Petrol price cut by 91 paise per litre, diesel by 84 paise

Petrol price was cut by 91 paise a litre effective Sunday, the seventh reduction since August, and diesel by 84 paise per litre, the third straight cut, as international oil rates continued to slump.
In Delhi, petrol price will cost Rs 63.33 a litre as compared to Rs 64.24 per litre previously while in Mumbai the reduction will be 96 paise to Rs 70.95 per litre.

Diesel will cost Rs 52.51 a litre in Delhi from Monday as against Rs 53.35 currently while in Mumbai the price will be cut by 93 paise to Rs 60.11 per litre.

China Nov HSBC manufacturing acvitivy falls to six-month low to 50.0

The final HSBC/Markit China Manufacturing Purchasing Managers' Index (PMI) edged down to 50.0 in November, a six-month low and right on the boom-bust level that separates growth from contraction on a monthly basis.

The reading was unchanged from a preliminary "flash" finding and down from a final 50.4 in October.
 
Hero MotoCorp to set up plants in Brazil, Argentina

Eyeing aggressive expansion in Central and South America, Hero MotoCorp plans to set up manufacturing units in Brazil and Argentina, even as it expects its upcoming plant in Colombia to help widen its reach in the region. The factory at Colombia will be a good hub for supply to other markets in Central and Latin America, Munjal said.

"We will get into manufacturing in Brazil. Argentina also requires us to manufacture locally, which is also on the cards. We would like to enter the Brazilian market along with the Rio Olympics in 2016," Munjal added.
 
SAIL offloads full stake in Bokaro cement JV; Rakes in  Rs 235-cr
  
State-run steel maker SAIL has sold its entire 26 per cent stake in a cement joint venture for about Rs 235 crore to an indirect subsidiary of Dalmia Bharat.

SAIL had formed the 74:26 venture, Bokaro Jaypee Cement, with Jaiprakash Associates to produce 2.1 million tonne cement using slag. Jaiprakash Associates had sold its 74 per cent stake in the venture to Dalmia in March.

SAIL executed the transaction at Rs 67.50 per share.

American Tower Corp set to pick up 51% in tower company Viom for $1 billion

American Tower Corp (ATC) is close to sealing a deal worth $900 million-$1 billion to acquire a 51% stake in Viom Networks, which will be followed by a merger of the Indian unit of ATC with Viom, bringing the curtains down on year-long talks.

Viom is majority-owned by the Tatas (54%), who hold the stake through unlisted telecom arm Tata Teleservices.
Srei, promoted by the Kolkata-based Kanoria family, owns around 18.5% while the rest is held by a clutch of PE funds including IDFC Private Equity, SBI Macquarie, Oman Investment Fund, GIC of Singapore and AMP Capital.
 
US Economic events

The most important data due this week is the Non-Farm Pay Roll data for the month of November. But that data is stacked at the rear end of the week on Friday. The U.S. has added at least 200,000 jobs for nine straight months - the last time that happened was 30 years ago.

And yet for Friday, the Wall Street is just expecting more of the same when the November employment report is released. Economists expect a net increase of 230,000 jobs in November.
 
Five years into the recovery, the U.S. has only produced 300,000 jobs or more on two occasions. These kind of outsized gains are only possible in the beginning of the recover and not at this stage.

The unemployment rate has shrunk rapidly over the past year and it?s likely to fall another notch to 5.7% from 5.8%, bringing it down to the lowest level since mid-2008. And hourly wages are likely to continue to rise at a 2% annual rate as they have done over the past four years.

These mediocre numbers is what the markets need. Not large enough to make the Fed hasten the process of interest rate hike and not small enough to hurt the GDP growth.

The Institute for Supply Management survey comes before the job numbers. Back-to-back 1.3% declines in September and October however have not gone down well with the markets.
The Federal Reserve?s regular snapshot of the economy known as the Beige Book, comes Wednesday. The Fed has become more optimistic in its forecasts, particularly in the past few months.
 
U.S. Indices Close Mixed as Sliding Crude Pulls Down S&P

Key U.S. indices closed mixed on Friday as the markets opened briefly for a short session after the Thanks Giving Holiday. Participation was low and volumes even thinner in the half a day session.

The S&P 500 lost 5 points or 0.23% at 2,068 as sliding crude took its toll on the broad based benchmark. The Nasdaq Composite inched 5 points higher or 0.1% to 4,792, a new 14 year high for the tech heavy index.

The Dow Jones Industrial Average first surged 65 points in early morning and then fell 85 points form the top to close in neutral territory. The blue-chip index closed in the green with barely a fraction of a point. For all practical purposes the Dow closed at its Wednesday?s close only at 17,828. On a monthly basis, the Dow and S&P 500 each added 2.5% in November, while the Nasdaq added 3.5%.

Fridays shortened session was the first day of response from the U.S. markets after OPEC maintained its 30 million barrels a day production diktat. Energy shares got slammed as a result, pulling the S&P 500 down and not allowing the Dow to close with solid gains.

Fridays action, however, was not sufficient to dampen the sentiment or the weekly charts, as the main indices closed with gains for the sixth week running. The second estimate of third quarter US GDP saw a higher revision, surprising economists, who were expecting a decline. Growth was revised up to a quarterly annualized rate of 3.9% vs. 3.5% in the prior estimate and expectations of 3.3%.

Consumer confidence fell to 88.7 in November from 94.1 in the month prior, largely due to drops in lower income earners that may be seeing the optimism from lower gas prices wear off. 
The crude oil benchmark West Texas Intermediate plummeted 7.7% to $68 a barrel. Oil prices have dropped 35% since mid-year.

Exxon Mobil tumbled 4.2%, Chevron fell 5.4% and BP dropped 5.5%. The Energy Select Sector ETF declined 6.4%. Among other energy shares, Transocean sank 9.7%, ConocoPhillips fell 6.7% and Halliburton erased nearly 11% of its value. It was a particularly brutal day for U.S. shale companies, with several posting double-digit percentage declines.

Plummeting oil prices, however, proved a boon to retail and airline stocks, balancing out the selloff among energy stocks on the S&P 500. Airline stocks gained  as investors predicted the slip in gas prices might benefit the carriers' profitability. Southwest Airlines added 6.5%, Delta Air Lines climbed 5.5%, and United Continental gained 8.2%.

Retailers were also rallying, buoyed by the hope that lower gasoline prices will stimulate consumer spending. Shops opened the doors for their annual Black Friday sales. Wal-Mart reported early Friday that Thanksgiving Day delivered its second-highest online sales day ever, topped only by Cyber Monday last year. Wal-Mart advanced 3%, Amazonrose 1.5% Macy?s added 2.2%, and Best Buy Co. advanced 1.7%.

European markets were mixed as the eurozone reported a slip in inflation in November to 0.3% from 0.4%, while unemployment remained high at 11.5%. In Germany, the region's largest economy, October retail sales surged 1.9%, better than an estimated 1.5% increase.
Stock 600 companies are expected to post third-quarter earnings growth of 11.6%. Of the companies that have reported so far, just over half of the index, 52%, have beat analysts' earnings estimates.