Local and Global Macro & Micro

Q3FY14 result season has ended on a positive note largely driven by export oriented sectors. The domestic currency has been under pressure from the beginning of 2013 and in the middle of 2013 it plunged by around 30% on backdrop of steeper current account deficit. However, RBI has arrested the fall by implementing various measures and from then onward rupee has stabilized to some extent. This led export related sectors such as IT, Pharma and Auto post significant performance during the quarter. Almost similar kind of performance by India Inc had been seen during Q2FY14, in which rupee depreciation gave a big boost to the earnings. Improving macros in western economy is also a reason for strong export growth. However, companies exposed to domestic economy reported soft numbers owing to sluggish domestic economic growth, persistent higher interest rates and slowdown in investment cycle. The aggregate revenue of CNX 500 companies (excluding Banks, NBFC & Oil Companies) during Q3FY14 registered a growth of 11% yoy, led by export sectors. However, sequentially the revenue growth was muted at 1% as the similar trend had been witnessed during Q2FY14. Operational efficiency for Indian companies has improved considerably as the firms learned to work with tighter budgets and how to cope with economic slowdown. This led Indian companies to post strong Operating profit growth during Q3FY14, where EBITDA for CNX 500 companies surged by 23% YoY, while sequentially the growth was 7%. It is expected that some positive signs witnessed in operational front during Q3FY14 would be carried forward in coming quarters also, where cost rationalization would reap benefits. Learning and benefit from cost cutting could lead to accelerate margin expansion in growing economic environment. Companies which have posted stellar performance during the quarter, the gains have arrived from overseas operations. Consistent slowdown in capex is again reflected in depreciation cost, which grew at much slower pace at 17% YoY compared with 28% YoY in Q2FY14. However, interest cost has shown improvement during the quarter by increasing 17% YoY against 45% in Q2FY14, while sequentially interest cost has declined by 4%. Led by strong operating profit gain along with reducing interest costs, net profitability for CNX 500 companies surged by 25% YoY and sequentially the growth was 8%. Export led sectors such as Auto, technology and healthcare reported strong earnings growth in last 21 quarters. Whereas the core sector such as cement, power and mining still remains in trouble owing to sluggish consumption demand. FMCG sector whose growth is based on consumption, witnessed moderate growth during Q3FY14 as the rural market is weakening owing to loan government spending in rural areas and MSPs (minimum support price) is no longer rising as fast as it was in past. Going ahead, it is expected that post strong Q4FY14 results, India Inc will end FY14 on positive note and the probability is high that it would meet the market expectation.

 

 

The GDP figures for India came in flat at 4.7% for Q3FY14 supported by better numbers from service sector while industry growth continues to disappoint. The interim budget presented during the month also lacked any vigor as first of all it being an interim one, secondly, there is a growing consensus feeling that the UPA2 will not make the final cut for UPA3 and pave the way for BJP. Thus, in any case a new budget will be presented by the new Government with more realistic assumptions. As anticipated, the finance minister has forecasted for a lower fiscal deficit at 4.6% of GDP for FY14, while lowering it even further to 4.1% of GDP for FY15 by cutting down on the planned expenditure and aiming for better disinvestment receipts. Since, the start of UPA2, the economic growth faltered and one of the primary reason being decline in infrastructure led growth (by cutting down planned expenditure) while pushing for populist measures (allocating more to subsidies thus fueling the non-planned expenditure). One of the major reasons for aversion to UPA has been the way the economic prospects have been throttled to death. BJP on the other hand has been portrayed as more pro towards economic growth focusing on infrastructural facilities rather than being populist. A recently conducted poll done by US based Pew Research found out that Indian voters are leaning heavily towards BJP with almost three times the preference over Congress. Pew interviewed 2,464 randomly selected adults in states and territories that are home to roughly 91% of the Indian population. Out of 2,464 respondents in the poll, 63% are of the view that they would prefer BJP to lead the next government while only 19% said they would prefer the Congress to remain in power, 12% support other parties. Although, the sample is too small in respect of the population, however, the sentiment is clearly evident. No wonder, the foreign investors are also eyeing for a political change taking cues from the Gujarat model

     

               

Globally, the US continues to keep the emerging nations guessing with its quantitative easing taper plans however, broadly, there has been a revival in growth in the developed nations and among emerging nations India and China are still favourites as expressed in the recent report by the IMF after the G20 meet. The same is reflected in the performance of the stock indices with the stock markets for US and Germany trading near highs. The report also highlighted that economic distress in the Eurozone region is turning the corner. PIIGS (Portugal, Ireland, Italy, Greece, Spain ) are in better shape and in fact Ireland and Spain have been learnt to have left the bailouts and Portugal is about to follow suit in May while Greece is beginning to recover and might emerge out of recession this year. No wonder the same have been captured in the 10 year bond yields for the nations which peaked during 2011. One of the reasons also being that the ECB has kept the rates at 0.25% and promised to keep it low. The ECB in a way is encouraging banks to borrow more and the same is probably reflected in higher bond purchases in PIIGS nations in lure of higher bond yields. Probably, this is another reason which is driving the bond yields lower

While India has its own sets of problems, the recent rebalancing of the China’s economy to consumption led one, doesn’t seem to bode well with the world markets. Unlike other emerging nations, China has a current account surplus and doesn’t have to worry of the funds flowing out of the nation. However, there are concerns that the long standing stories of a hard landing of the Chinese economy have intensified. The China’s economy is finally slowing but there are fears that it might be a prelude to more disappointing stories. The monetary system is believed to be hardest hit if the fears of housing bubble and shadow-banking blow up. The Chinese yuan had to face the wrath of the global investors besides widening spread between sovereign yield to interest-rate swap (hovering at 2007 levels). The currency has so far appreciated against the US dollar when currencies from other emerging nations were falling like ninepins (particularly in August 2013). The concerns are further aggravated by comments from eminent investors, George Soros and Bill Gross highlighting that the China’s situation is similar to the US crisis in 2008. The facts were further corroborated by the weakening manufacturing PMI and industrial production data. 

While it seemed that the worst is over for the world economy, there has been a new kid on the block, Ukraine. The country is heading for a financial collapse with almost a quarter of its estimated $73bn due for repayment over the next 18 months. Ukraine relied on Russia to buy some of its debt, but those bond purchases have been shelved amid tension between the two neighbouring nations. Russia is believed to have declared war and deployed troops in Crimea, an autonomous region of eastern Ukraine with strong loyalty to neighboring Russia. By late night on 2nd March, Russian forces are reported to have completed operational control of the Crimean Peninsula, however a single fire has not been shot yet. The tension started in the region after when pro-Russia leader Viktor Yanukovych was ousted on February 21. The developed nations have been weighing out options to bail out the nation but are skeptical unless Ukraine's new government is established—presidential elections are due May 25. U.S Secretary of State John Kerry condemned this act by Russia terming it as "incredible act of aggression." The present political tension can turn into bitter story after statements that U.S. is "absolutely" willing to consider sanctions against Russia and there is a speculation that U.S. may skip an upcoming G8 preparatory meeting in Sochi, Russia. The present tension might throw unpleasant surprises for the world economy (especially Europe) as Russia supplies about 25% of Europe's gas needs, and half of that is pumped via pipelines running through Ukraine. Thus, disruption and cut off of the gas flow will push up energy prices as Russia being the world’s biggest oil producer. Further, Ukraine being one of the world's top exporters of corn and wheat, the supply of grain to the World will be impacted. Ukraine's currency hryvnia hogged the limelight after falling to 10 year lows and crossing below 10 to a dollar. While Russia’s stocks, bonds and currency fell heavily following the turmoil. The ruble, already down nearly 10% this year, fell below 50 to the euro and 36.4 to the dollar for the first time