Global financial markets ended the week lower ahead of rising tensions between the United States and North Korea. US president Donald Trump refused to back down on its threats to North Korea. Investors rushed towards safe haven assets amidst rising uncertainty between the two nations.

Gold prices hit their highest levels in 2 months before easing down. Earlier last week, North Korea said it was outlining plans for a missile strike near Guam, where the U.S. has a military base, in mid-August. US markets ended lower by 1.1% this week.

European stocks ended the week lower, their worst week in 9 months as geopolitical tensions kept investors away from equity markets. France and UK were the biggest losers in the week and ended lower by 2.7% this week.

Asian markets also slumped this week after tepid numbers from the Purchasing Managers Index (PMI) on services and manufacturing from China. This coupled with geopolitical tensions ensured Chinese markets ended lower by 1.6% this week.

Key World Markets During the Week

 

Back home, Indian share markets tumbled this week due to global uncertainty and poor earnings growth reported by domestic firms. The slump was largely seen in realty stocks, pharma stocks and auto stocks. Pharma stocks continued to struggle due to pricing pressure in global and domestic markets. Indian Pharma companies expect FY2018 to be a difficult year in terms of growth prospects due price erosion across geographies. The Indian stock market ended the week lower by 3.4%.

BSE Indices During the Week

 

Now let us discuss some key economic and industry developments during the week gone by

As per an article in the Economic Times, the Goods and Services Tax (GST) Council is said to have decided to raise cess on luxury automobiles to 25% from 15% now.

The development arises as the overall view within the council was to have the cess on high-end luxury automobiles pegged higher so that it can be raised if the need arises.

The rates, however, may not go up immediately as any increase in the cess rates may require amendment to the GST compensation law.

High-end automobile companies may face some hiccups if the GST Council does increases the cess rates.

Uncertainties with regard to Goods and Services Tax (GST) pulled down sales of passenger vehicles (cars, utility vehicles and vans) in June. Domestic passenger vehicle sales declined by 11.2% to 198,399 units in June from 223,454 units in the same month last year, according to data released by the Society of Indian Automobile Manufacturers (SIAM).

On the macro front, the above development would boost tax revenues for the government.

One shall note that GST is set to aid India's tax revenues in the coming future. This augurs well for the country that has one of the lowest tax revenue as a percentage of GDP compared with other countries.

The higher tax revenue receipt will help bolster the country's financials and also provide further ammunition for the government to spend on social welfare and providing additional infrastructure to its citizens.

Apart from the above, the GST Council revised rates on 19 services on Saturday. It also reduced the job work rate in the textiles sector to 5% from 18%, which will reduce the rate of job work across the entire textile chain.

Speaking of GST, the Goods and Services Tax became the order of the day last month. And all these months we have been subjected to a relentless propaganda by the government and the supporters of the GST, on how it will change our world, only for good.

In other news, the government has announced a new exchange-traded fund (ETF), Bharat-22, that's expected to speed up a disinvestment programme budgeted to raise a record Rs 725 billion in the financial year to March 2018.

The ETF comprises of blue chip PSUs and a few private companies.

The new ETF will contribute strongly to the FY18 disinvestment target of Rs 725 billion. The new fund offer is likely to hit markets soon.

Bharat 22 will represent six sectors from finance to FMCG to energy and will have 22 stocks. The sector exposure limit will be 20% and no single stock will be more than 15% of the ETF's value. The expense ratio is likely to be much lower than mutual funds.

The above development is indeed a smart move by the government. It may fetch better valuations for some of the PSU stocks that otherwise have been dismal performers. It will also help the government get closer to its disinvestment target.

However, for the aam investor, we believe a bottom-up, stock-specific approach is the best way to get exposure to blue-chip stocks.

In further news from economy, the Reserve Bank of India (RBI) has made a surprise move by halving its dividend payout to the government to Rs 306.59 billion for the fiscal year ended June 30, 2017, less than half of the Rs 658.76 billion it paid the previous year.

For the year 2014-15, the RBI had paid Rs 658.96 billion dividend and Rs 526.79 billion in the year prior to that. However, the central bank hasn't given any specific reasons for the sharp fall in the surplus income for the year ended June 2017.

The government had expected Rs 580 billion in dividend from the RBI in 2017-18. In the Union Budget for 2017-18, the government had accounted for a dividend of Rs 749.01 billion from the RBI, nationalised banks and financial institutions for this fiscal. The dividend reduction by the RBI may put pressure on fiscal math and the government would have to find resources to meet its fiscal deficit target of 3.2% for 2017-18.

Explaining the rationale, former RBI Deputy Governor R Gandhi has pointed out that for the past few years, returns have been coming down on the back of negative interest rates in the developed countries. He also explained that due to increased liquidity in the system, the RBI has been borrowing money under reverse repo and paying interest which has implications on the revenue.

As per a leading financial daily, the government has said that job loss through automation in India should not be a matter of concern as the 'growth momentum' of the economy will result in new job opportunities.

A World bank report titled 'Digital Dividends' speculates that automation threatens 69% jobs in India. Minister of State for Finance Arjun Ram Meghwal also said that the report 'inter alia also states that 'even if technologically feasible, large-scale net job destruction due to automation should not be a concern for most developing countries in the short term'.

Meghwal further added that even in medium to long term, the growth of Indian economy of over seven percent and steps being taken to enhance the growth momentum will result in further creation of new job opportunities and absorption of replaced labour.

He added that the government has taken various steps for generating employment like encouraging the private sector, fast tracking various projects involving substantial investment and increasing public expenditure on different schemes.

In other news, as per an article in the Economic Times, the India Meteorological Department (IMD) has said that monsoon rainfall is likely to remain normal in the remaining two months of the season this year.

As per the IMD, the seasonal (June to September) rainfall over the country as a whole is likely to be normal (96% -104% of Long Period Average) as predicted in June.

As per the IMD data, rainfall in the four-month season since June 1 has been normal in most parts of the country, barring the southern states. It has been normal or excessive in the key crop-growing states in northern and western India although the past 10 days have seen relatively weak rainfall.

The above development has set the stage for a good kharif harvest and strong rural demand this year.

One shall note that a normal monsoon is critical to India since most of our farmers are still dependent on monsoon rains for their subsistence.

The rural economy has witnessed two consecutive draughts like situation in the past few years and monsoon has been above normal only since 2012.

So, a normal rainfall this year bodes well for the Indian economy and will certainly aid many sectors.

Movers and Shakers During the Week

Company	05-Aug-17	12-Aug-17	Change	52-wk High/Low
Top Gainers During the Week (BSE Group A)
63 MOONS TECH.	61	64	5.0%	93 / 54
BRITANNIA	3913	4100	4.8%	4,233 / 2776
TATA STEEL	576	596	3.6%	625 / 355
BAJAJ HOLDINGS & INVSTMENT	2415	2489	3.1%	2,675 /1745
TORRENT POWER LTD	188	194	3.0%	241 / 160
Top Losers During the Week (BSE Group A)
HOUSING DEV. INFRA	76	58	-22.9%	102 / 45
LANCO INFRATECH	1.2	0.95	-20.8%	5 / 1
JAIPRAKASH POWER	7	6	-20.2%	9 / 4
VIDEOCON INDUSTRIES	23	19	-19.7%	115 / 16
DLF LTD	190	155	-18.2%	216 / 101

Source: Equitymaster

Some of the key corporate developments in the week gone by

In news from the automobile sector, Ashok Leyland has bagged an order for over Rs 1.2 billion from Rivigo, which is India's most innovative and fastest growing logistics company.

This order of 500 fully-built vehicles is driven by the success of the innovative Intelligent Exhaust Gas Recirculation (iEGR) technology which has been developed indigenously by Ashok Leyland.

For the automobile sector, domestic car sales were up 8.52% at 192,773 units as against 177,639 units in July last year, according to data released by the Society of Indian Automobile Manufacturers (SIAM). Total two-wheeler sales in July grew 13.73% to 16,79,055 units as against 14,76,332 units in the year-ago month.

India is the fastest growing market for passenger vehicles (PV) among the top seven car markets. China continues to be the world's biggest auto market by volume.

During January - May 2017 period, India's PV sales expanded by 11.3% YoY. This came when the top two markets, China and the US saw a declining trend where volumes declined by 2.6% YoY and 9.8% YoY respectively. India's double-digit growth was led by companies like Maruti Suzuki, Hyundai, Honda and Tata Motors.

The double-digit growth came despite the auto industry witnessing some turbulent time in the last six months as demonetisation put a pause on a great run. Towards the end of fiscal year, a Supreme Court order banning the sale of vehicles that don't conform to Bharat Stage IV emission rules saw some fire sale.

Nevertheless, the blip is expected to be temporary. Reduced vehicle prices post GST, low interest rates, attractive discounts and expectation of good monsoons, will provide support to the industry.

S&P BSE Auto index is the best performing sectoral index since the global financial crisis. Auto index has surged by a mammoth 823% since November 2008. This is way ahead as compared to the benchmark index returns of 230% during the same period.

The main reason leading to this surge is the booming consumption story. Driving aspirations of the rising middle classhave pushed up car sales in the world's second most populous country. Further, benign interest rates and lower oil prices too have supported this consumption boom.

Not only this, value migration is pretty much evident in the auto sector. First time car buyers generally interested in entry level cars such as Alto and WagonR, are now hopping into the costlier Swift and Dzire. Five years ago, one out of three (33%) first time buyers purchased these costlier models. Now, one out of every two (50%) first times buyers purchase these costlier models.

In news from banking sector, SBI share price's heavy loan loss provisions dragged first quarter net profit down 20%. Net profit in the reporting quarter was down to Rs 20.06 billion against Rs 25.21 billion.

Asset quality worsened. As a percentage of total loans, gross non-performing assets (NPAs) spiked to 9.97% as compared to 6.9% in the previous quarter and 6.94% in the year-ago quarter.

SBI was the first bank to cut the savings deposit rate by 50 basis points to 3.5% for deposits up to Rs 10 million.

SBI's rate cut could ignite a rate war among the large state-run and private banks, but most mid-sized and small finance banks looking to gain incremental market share could decide to hold rates.

Axis Bank also followed suit by reducing its interest rate on savings bank accounts by 50 basis points to 3.5% for deposits up to Rs 5 million.

The bank, in a regulatory filing said that it will continue to pay 4% interest on deposits of above Rs 5 million. The new interest rates will be effective from August 8.

Bank of Baroda also cut the rate to 3.5% on deposits of up to Rs 5 million. While Kotak Mahindra Bank retained the existing rates of 5% on savings deposits up to Rs 100,000 and 6% on deposits between Rs 100,000 and Rs 10 million, it reduced the rate on savings deposits of amounts above Rs 10 million crore and up to Rs 50 million from 6% to 5.5%.

The move comes just at a time when credit off-take was at a decade low.

According to RBI data, credit off-take was down to a decade low of 5.1% in FY17 compared to 10.7% a year ago. This was despite a declining cost of borrowing. The data shows the economy might still be reeling from the aftershocks of notebandi.

In another development, Union bank of India share price reported nearly 30% fall in first-quarter net profit as provisions for bad loans remained high. Net profit fell to Rs 1.17 billion, for the three months ended 30 June, from Rs 1.66 billion a year ago.

Moving on to news from stocks in the paints sector. As per an article in The Hindu Business Line, paint prices have moved up between 5 and 6% since March this year with top manufacturers such as Asian Paints, Berger and Kansai Nerolac increasing product prices.

While market leader Asian Paints hiked prices twice in March and again in May, Berger, the number 2 player and Kansai Nerolac have also initiated similar price hikes, during this period. Reportedly, further price hikes could not be ruled out if cost of materials inch up.

Despite the price rise, margins for paint majors continue to remain under pressure.

For Asian Paints, the operating profit margin saw a sequential decline to 16.78% in June quarter from 17.14% (in the January-March quarter).

Reportedly, Kansai Nerolac saw a minor 18 basis point dip sequentially to 15.79% in Q1FY-18. In case of Berger, OPM declined to around 14.7% in Q1 from 16% in the preceding three-month period.

Moving on to news from stocks in the pharma sector. Cadila Healthcare announced that it had received final ANDA (abbreviated new drug application) approval from the US Food and Drug Administration (USFDA) for its Diltiazem Hydrochloride capsules.

Diltiazem Hydrochloride capsules, will be manufactured at the company's formulation manufacturing facility at the Pharma SEZ in Ahmedabad. The drug is used to treat high blood pressure, angina (chest pain) and certain heart rhythm disorders.

Citing IMS Health sales data for the 12 months to June 2017, the company said Diltiazem achieved annual sales of US$ 191.1 million.

The company's current portfolio consists of 140 products authorised for distribution in the US marketplace and has so far filed over 300 abbreviated new drug applications (ANDAs) since it commenced filings in 2003-04.

The Indian pharmaceutical industry has come under a lot of regulatory pressure in the past few years. The sector has faced great volatility over the years.

Sun pharma industries share price announced its first quarter earnings on Friday. Weak US performance due to pricing erosion & muted domestic growth due to GST impact dragged profits down. Also, a one-time settlement for its Modafinil drug resulted in a consolidated loss of Rs. 425 crore in the quarter.

It's subsidiary Taro Pharmaceutical Industries (Taro) reported dismal results for the quarter earlier in the week.

Taro's net income halved to US$ 54.5 million in Q1FY18 as compared to an income of US$ 109.9 million in the same period last year.

Net sales during the quarter under review also declined 31% to $161.3 million, due to continuing increased competition and the challenging pricing environment; despite an overall increase in volumes.

Taro's sales were hurt due to a difficult pricing environment in the generics business and increased competition, especially in the US. New entrants to the market and the USFDA's higher approval rate for new drug applications also affected the company's sales.

Sun Pharma is a majority shareholder in Taro Pharma, and holds about 73% stake in the company.

And here's an update from our friends at Daily Profit Hunter...

The Nifty 50 Index traded in a downtrend during the week. On Monday, it opened the session a bit higher but bears quickly started to dominate and the index slipped sharply to cut more than 350 points (-3.53%) by the weekly session close.

In earlier note, we mentioned the index was trading near its channel resistance line and the RSI indicator was forming a double top pattern. This indicated limited upside and thus we expected a correction towards the channel's support line at 9,800. Our rollover report also signaled the possibility of a correction.

The index corrected sharply; in fact, it broke the channel's support line on the last day of the week. It also closed below the 50-day exponential moving average (EMA), which acted as support during previous reaction.

Does this indicate a further downside in the index?

If the index sustains below the channel's support line and the 50 EMA, the bears might have the upper hand. But if the index recovers above the channel's support line and the 50 EMA, the bulls might be back in action.

Nifty 50 Index Slips 3.5% for the Week