Daily Market Update – Oct 20th

unnamed Daily Market Update   Oct 20th

 

Foreign portfolio investors or FPIs infused nearly $540 million into Indian bonds in the month of September. This is a vast departure because the FPIs were sellers in Indian bonds for 10 consecutive months prior to that. In Mar-20 alone, FPIs had sold Indian bonds to the tune of $10 billion, so the September infusion may look small in front of that. There are two important factors. Firstly, the concern that interest rates would keep going lower has been arrested by the RBI holding rates. Secondly, the Indian rupee has stabilized versus the dollar, largely due to the abundant forex reserves, helping bonds.

At a time when the world economies are struggling to arrest GDP contraction, China has posted real GDP growth of 4.9% in the Jul-Sep quarter. The data was released by the Chinese official agency on Monday. This comes on top of the 3.2% growth that China reported in the previous quarter ended Jun-20. Of course, these are annualized growth rates but are still a far cry from the kind of contraction that even India is currently talking about. India had reported -23.9% contraction in the Jun-20 quarter and IMF has projected a full year contraction of -10.5% for FY21. A poll of economists by Reuters had forecast growth of 5.2% for China but that is hardly material. According to the IMF, the Chinese economy is expected to expand by 1.9% for the calendar year 2020. Travel has grown 80% yoy.

According to a study done by ICICI Securities, Indian listed companies spend just about Rs.36,000 crore in the form of R&D spending over the last 6 year combined. In percentage that is just about 0.9% of GDP. If we compare this figure to the global average, then it is normally about 1.5-2% in the case of emerging markets and about 2.5% in the case of advanced economies. The share of R&D is extremely critical as it is tantamount to the investment that companies make on future growth, especially in industries like pharma, chemicals, technology etc and signals if companies can move up the value chain in the industry.

Sugar production for the current sugar cycle (Oct-Sep) is expected to rise by 13% to 310 lakh tons, even as the industry is already grappling with surplus opening stock. The markets are worried that this may call for a sharp spurt in export of sugar and also in the use of ethanol blending to avoid another hit on sugar prices. That could only worsen the situation of dues to the sugar farmers. The previous year output was 274 lakh tons, but the growth came predominantly from a 48% growth in output in Maharashtra, the second largest sugar producing state after UP. India already has inventory of 106 lakh tons.

Brookfield of Canada will buy 18% assets in Bangalore based RMZ for a consideration of $2 billion. RMZ is one of the leading real estate developers in Bengaluru but is currently grappling with debt of Rs.12,500 crore. RMZ will be selling the stake in its commercial property portfolio to Brookfield. These properties are spread across Bengaluru and Chennai and on completion will make RMZ into a zero-debt company. This will also help fund the future growth of RMZ which plans to grow its portfolio to 85 million SFT by 2025. Out of its current portfolio of 67 million SFT, it will sell 12.5 million SFT to Brookfield.

With most PSU banks struggling to service their AT1 bonds, some bank managements have come out with an alternate proposal of writing off their accumulated losses against the share premium account. This refers to the share premium they collected at the time of IPO, over and above the par value. This proposal has been put up by a clutch of strained banks and is awaiting regulatory approval. This is nothing new because IOB had done exactly that way back in 2018. It will not impact the net worth or the capital ratios of the banks but will reduce accumulated losses and improve capital raising capacity.

 

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