The World This Week - September 30 - September 27, 2013
The World This Week
Sept 30 – Oct 5, 2013
Last week was a positive week for the markets with 1.3% gains in Nifty. As we have been discussing
earlier, we will see the beginning of the earnings season this week starting with the IT companies. Infosys
will be the first one to declare its Q2 results. We expect a decent set of Revenue Growth in terms of
Dollars as well as decent Bottom-Line Growth for most of the IT companies. We would expect a Dollar
Revenue Growth somewhere between 13% – 15% which would be extremely healthy after a much muted
Dollar Revenue Growth for companies in the last couple of years. There has been around 15%
depreciation of the Rupee against the Dollar which would also help most of the IT companies face the
margin challenges. Hence we expect a very healthy Profit-Growth from most of the IT companies.
The top picks continue to be Tech Mahindra and TCS and we expect IT as a space to continue to do well
over the period of next 3 -4 quarters. This is on the back of a very robust U.S. BFSI sector revival and we
are expecting good Revenue Growth in Dollar terms to continue. There has also been some kind of a
bounce back in terms of European Business activity and that will also help most of the IT companies in
the short to medium term.
We had the Auto Sales numbers coming out in India. The Two-Wheelers sector data was generally ahead
of expectations. We are also seeing some kind of an inventory build-up ahead of the festive season.
October and November are traditionally strong months for Indian Automobile companies because of the
festive season and this year too we have seen a decent amount of inventory build-up at the dealer level.
It is yet to be seen whether that translates into actual sales numbers on the ground; however so far the
signs are encouraging. The Four-Wheeler numbers continue to be disappointing and we expect that as far
as car sales numbers are concerned they would stay muted for some more time. There is a lot of talk in
the market that government is going to come up with some kind of discounts or some kind of interest
rate subsidy for financing Auto loans. We have not yet heard of what kind of a plan is to be executed for
the same but there is an expectation that something shall happen to boost the Auto space.
In terms of other Macro Economic data, we have key data points coming up in terms of Current Account
Deficit (CAD) numbers. The Q1 CAD was around $21 Bn which was broadly in line with expectations. The
good news however is that for Q2 – gold imports have come down very significantly because of which the
CAD numbers are expected to be almost half of what they were in the previous quarter. We are
expecting our second quarter CAD to be around $10 - $11 bn.
This would definitely boost the Rupee in the short to medium term and this also allays a lot of concerns
about the short term direction of the Rupee. This coupled with the fact that Dollar-Index has been
weakening for the last 2 weeks because of concerns about debt negotiations and debt ceiling discussions,
we would believe that Rupee would find some kind of stability around these levels and probably if the
CAD continues to playout the way it has been playing out for the last 2 -3 months, we would have
experienced the worse in terms of how the Rupee has played out. That’s good news for most macro
parameters and also good news for both Equity and Debt markets in the short to medium term.
As far as U.S. is concerned, there is still no clear solution to the dead lock that we are seeing about the
debt ceiling discussions. The 17th of October continues to be a deadline and we believe that there’s a lot
of posturing happening and eventually a deal would happen. We are not expecting a big event as far as
the markets are concerned and hence while we would continue to monitor the events, we don’t believe
that there’s a possibility of something turning out to be a very big negative as far as Equity and Debt
markets are concerned in the short to medium term.
The finance minister may have to slice at least 200 billion rupees from government spending to prevent a
budget blow-out, which could threaten to send the country's credit rating into "junk" status
The Current Account Deficit (CAD) for the three months through June was $21.8 billion, or 4.9 percent of
gross domestic product, driven by sluggish exports and high gold imports in April and May before the
government hiked tariffs on the metal to a record 10 percent.
The HSBC Manufacturing PMI, compiled by Markit, rose to 49.6 in September from 48.5 in August, but
remaining below the watershed 50 mark that separates growth from contraction.
In Portugal, the government raised its 2014 growth forecast to 0.8 percent from 0.6 percent. It expects the
economy will shrink 1.8 percent this year, less than its previous estimate of 2.3 percent. The
unemployment will be 17.4 percent this year, lower than an earlier projection of 18.2 percent.
Lagarde said growth in the United States has already been hurt by too much fiscal consolidation, and will
be below 2 percent this year before rising by about 1 percentage point in 2014, assuming political standoffs
The United States has been picking up some of the slack, with the economy having grown 2.5 percent in
the second quarter. Manufacturing, too, appears to be gaining momentum after having contracted as
recently as May.
China is the largest single holder of U.S. government debt, a side effect of its managed exchange rate
policy, which requires it to purchase massive amounts of dollars from Chinese trading companies to hold
back the yuan from appreciating.China's foreign exchange reserves stood at $3.58 trillion in the third
HSBC PMI edged up to 50.2 from August's 50.1, hitting a five-month high and showing slight growth, but
still a let-down for investors as it was below last week's flash reading of 51.2.
Satadru Mitra Varun Goel Jharna Agarwal
Abbas Naheed Kinjal Doshi
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