Monday, March 31, 2014

Eurozone inflation has fallen to its lowest level

Since late 2009, slipping to 0.5% on year in March from 0.7% in February and undershooting forecasts of 0.6%. The slowdown is likely to strengthen concerns that the eurozone is sliding towards deflation and could add pressure on the ECB to further ease policy at a meeting on Thursday. The euro was +0.1% at $1.3769 at the time of writing.
Election hopes may have taken the sentiments in Indian stock markets to new highs. But that does not make the economy any less vulnerable to global uncertainties. Key amongst them is the Fed's decision to raise interest rates. While it may seem some time away, any tightening in global liquidity is certain to hurt Indian stock markets. Moreover, the currency stability that India has witnessed over the past month or so may not be here to stay. The sharp decline in the current account deficit is the most important reason why the rupee stabilized. As per Business Standard, a lot of funds have come into India in recent weeks in the hope of a business friendly government. This money will flow out just as quickly if that hope does not materialize. To top that a tighter global liquidity situation could only exacerbate India's currency volatility and deficit woes. So while the going is good, it would only be wise on the RBI's part to shore up the forex reserves. The reserve kitty could act as insurance for difficult times ahead.

Sunday, March 30, 2014

Lehman Brothers will pay out an additional $17.9B to creditors.

This is its fifth distribution since a judge approved the failed investment bank's liquidation plan in December 2011, and bringing the total doled out so far to more than $80B - $15B higher than its initial estimate of how much would be paid to creditors. While much of this most recent distribution involves money Lehman entities owe to one another, the outlook for creditors keeps improving. Those holding bonds issued by the Lehman parent company are now expected to get 26.9 cents on the dollar vs. an earlier estimate of 21.1 cents. For hedge funds who have spent years buying Lehman debt at big discounts, an increase of just a few cents means millions in profits.

Thursday, March 27, 2014

French consumer confidence has strengthened.

 Consumer confidence to 88 in March from 85 in February and topped consensus that was also 85. The rise follows an unexpected return to growth in business activity, as indicated by the latest PMI surveys.

RBI extends deadline on capital norms under Basel III to march 31,2019.

The Reserve Bank of India (RBI) extended the deadline for banks to implement Basel III capital planning rules by a year to March 31, 2019, due to concerns from the industry on potential stress to asset quality  and consequential impact on the performance/profitability of the banks.

The IMF has agreed to provide Ukraine financial lifeline.

With $14-18B as part of an economic-reform program that will enable the country to tap a total of $27B of international support over the next two years. The Senate is set to approve aid for Ukraine, including $1B in loan guarantees and $150M in direct assistance, and the chamber could authorize imposing further sanctions on Russia, although nothing too major. The House has already authorized help for Ukraine.

Wednesday, March 26, 2014

Facebook has agreed to acquire Oculus VR,

The developer of a virtual reality headset, in a cash and stock deal worth up to $2.3B. The deal follows Sony's (SNE) announcement that it's developing a VR headset and reports that Microsoft is working on one as well. "Oculus has the chance to create the most social platform ever, and change the way we work, play and communicate," Facebook (FB) CEO Mark Zuckerberg gushed.

Monday, March 24, 2014

Eurozone business activity has cooled slightly

This month, the flash composite PMI slipping to 53.2 from 53.3 in February but topping consensus of 52.6. Manufacturing and services PMI fell, although the eurozone enjoyed its best quarter for business activity since Q2 2011, says Markit, with the PMI survey signalling a 0.5% increase in Q1 GDP after growth of 0.3% in Q4. German PMI readings disappointed, but France's business activity surprisingly returned to growth.

Chinese factory activity has contracted.

For the fifth straight month in March, with flash manufacturing PMI slipping to 48.1 from 48.5 in February and missing consensus of 48.7. "Weakness is broadly based with domestic demand softening further," says HSBC. "We expect Beijing to launch a series of policy measures to stabilize growth." Hopes of such stimulus helped push the Shanghai Composite up 0.9%, while the Hang Seng rose 1.9%.

Sunday, March 23, 2014

One of the biggest reasons for India's slowing growth is the laggard growth of its manufacturing sector. The contribution of the manufacturing sector has stagnated at about 16% of the Gross Domestic Product (GDP). This is significantly lower than many of its Asian peers. For instance, China's manufacturing sector has grown phenomenally from 2.9% of GDP in 1991 to about 34% of GDP now. China's share in world manufacturing is 13.7%, whereas India has a miniscule share of just 1.8%.

Why is India's manufacturing under duress? If India-born British economist Meghnad Desai is to be believed, the root problem that's plaguing India's manufacturing sector is rigid labour laws. As per him, there is pressing need to initiate labour reforms and make labour laws flexible. The other point that he raises is the need to improve productivity to remove poverty. But these factors point at one common problem. India has failed to harness the potential of what it claims to be its demographic dividend. It is high time Indian policymakers take steps to address these important issues.

Italian industrial orders jumped 4.8% on month.

In January after sinking 4.8% in December, while industrial sales rose 1.2% vs -0.3%. The figures add to better-than-expected output in January and suggest that Italy's fragile recovery may be taking hold. Still, it's worth remembering that unemployment remains high and that Italy is flirting with deflation.

Fitch has raised the U.S.'s outlook to "stable"

While affirming the country's AAA rating, citing the suspension of the debt limit last month and strong fiscal consolidation as reasons for the move. Fitch had placed the U.S. on "rating watch negative" in October amid the battles in Washington over raising the debt ceiling and over the federal budget.

Thursday, March 20, 2014

Global equities were lower yesterday.

At the time of writing following surprisingly hawkish comments from Janet Yellen, who indicated that the Fed could raise interest rates "around six months" after it fully winds down QE. With the bond-buying set to end in the autumn, a rate hike could come in April next year, much earlier than expectations for late 2015.

Wednesday, March 19, 2014

As much as the banking licenses are being eagerly awaited, their announcement may not bring enough cheer to India Inc. For as per Business Standard, the RBI is paying a lot of attention to warnings about issuing bank licenses to corporate houses. Economists and global financial regulators have cautioned that the risks of offering banking licenses to corporate outweigh the benefits. Regulators in the US and South Korea do not allow industrial houses to set up banks. Australia, Canada, UK and Hong Kong allow it with restrictions on ownership and voting rights.

Thus taking cues from these, industrial houses like Aditya Birla Nuvo, Bajaj group, Videocon and Reliance Capital may find it rather difficult to pass the RBI's test. Ones like the Tata group and Mahindra Finance have already withdrawn their applications. Moreover, when bank licenses were issued in 1993 and 2004, business houses were not considered. Even India Post may be given a miss due to its government ownership. Thus it appears that only specialized NBFCs and MFIs are in the fray for banking licenses.

The yuan was back below 6.20 to the dollar.

At the time of writing after briefly breaching a level that Morgan Stanley has called a "danger zone." That's because a sustained period under 6.20 could cause losses on billions of dollars of hedging products that Chinese companies have taken out as part of a bet on the renminbi's appreciation. The problem is that the yuan has been going the other way lately.

Japan's trade defecit narrowed.

Japan's trade deficit narrowed to ¥800.3B ($7.9B) in February from a record ¥2.79T in January but exceeded consensus of ¥590B. Import growth slowed to 9% from 25% while exports rose 9.9%. Japan has now experienced a record 20 consecutive trade deficits, and while the figure may have peaked, few economists expect the country to turn a surplus any time soon.

Tuesday, March 18, 2014

Transfer Pricing: After TPO determines the AMP expenditure incurred for benefit of AE, balance is deemed to be incurred for assessee’s business & is automatically allowable u/s 37(1)

Whirlpool of India Ltd vs. DCIT (ITAT Delhi)

The avowed object of the TP adjustment on account of AMP expenses is to first find out and attribute the amount spent by the assessee towards promotion of its foreign AE’s brand/logo etc and then make addition for such amount with appropriate mark-up. By this exercise, the total AMP expenses get segregated into two classes, viz., one benefiting the assessee’s business and two, benefiting the foreign AE by way of promotion of the brand. Whereas the first amount is deductible in full subject to the regular provisions, the second amount is added to the total income with suitable mark-up by way of the TP adjustment. Once the total amount of AMP expenses is processed through the provisions of Chapter X of the Act with the aim of making TP adjustment towards AMP expenses incurred for the foreign AE, or in other words such expenses as are not incurred for the assessee’s business, there can be no scope for again reverting to s. 37(1) qua such amount to make addition by considering the same expenditure as having not been incurred `wholly and exclusively’ for the purposes of assessee’s business. If the amount of AMP expenses is disallowed by processing under both the sections, that is 37 and 92, it will result in double addition to the extent of the original amount incurred for the promotion of the brand of the foreign AE de hors the mark-up.

Transfer Pricing: A transaction (such as a corporate guarantee) which has no bearing on profits, incomes, losses or assets of the enterprise is not an ‘international transaction’ u/s 92B(1) and not subject to transfer pricing

Bharti Airtel Limited vs. ACIT (ITAT Delhi)

(iii) When an assessee extends assistance to the AE, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction u/s 92B (1)
U.S. CPI data is due out this morning, with economists expecting that inflation fell to 1.2% on year in February from 1.6% in January. The figures will come as the FOMC convenes for its first meeting with Janet Yellen as Chair of the Fed. Policy makers are expected to trim another $10B from the bank's QE program, while they could also abandon the 6.5% unemployment trigger for considering a rate hike and link policy to a range of economic indicators instead.

Monday, March 17, 2014

S. 56(2)(vii) does not apply to bonus & rights shares offered on a proportionate basis even if the offer price is less than the FMV of the shares

Sudhir Menon HUF vs. ACIT (ITAT Mumbai)

The assessee held 15,000 shares in Dorf Ketal Chemicals Pvt. Ltd representing 4.98% of the share capital. Pursuant to a further issue, it was allotted 1,94,000 shares at the face value rate of Rs.100 each, on a proportionate basis. The AO held that as the book value of the shares was Rs.1,538 per share, computed under Rules 11U & 11UA), the difference of Rs.1,438 per share (aggregating Rs. 27.89 crore) was “inadequate consideration” and assessable to tax u/s 56(2)(vii)(c). This was upheld by the CIT(A). On appeal by the assessee to the Tribunal HELD allowing the appeal:
 
S. 56(2)(vii)(c) (ii) provides that where an individual or a HUF receives any property for a consideration which is less than the FMV of the property, the difference shall be assessed as income of the recipient. S. 56(2)(vii) does not apply to the issue of bonus shares because there is a mere capitalization of profit by the issuing-company and there is neither any increase nor decrease in the wealth of the shareholder as his percentage holding remains constant. The same argument applies pari materia to the issue of additional shares to the extent it is proportional to the existing share-holding because to the extent the value of the property in the additional shares is derived from that of the existing shareholding, on the basis of which the same are allotted, no additional property can be said to have been received by the shareholder. The fall in the value of the existing holding has to be taken into account. As long as there is no disproportionate allotment, i.e., shares are allotted pro-rata to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares; there being only an apportionment of the value of their existing holding over a larger number of shares. There is, accordingly, no question of s. 56(2)(vii)(c) getting attracted in such a case. A higher than proportionate or a non-uniform allotment though would attract the rigor of the provision to the extent of the disproportionate allotment and by suitably factoring in the decline in the value of the existing holding
If there were any doubts that the Chinese economy is slowing down, data released with respect to industrial and retail activity would help dispel it further. As reported in various business dailies, industrial output rose 8.6% YoY in the January-February period. This is down from a 9.7% increase in December and is the slowest since 2009. Growth in fixed-asset investment also reduced to 17.9% YoY, the weakest pace since 2002, down from 19.6% last year as a whole. Indeed, it is likely that GDP growth for the first quarter of 2014 could be lower than the 7.7% rate logged in during the same period in 2013. Overall, China has pegged a 7.5% growth in GDP for 2014. Given that China is one of the largest consumers of raw materials in the world, the slowdown there has had a telling effect on commodity prices as well. For instance, both copper and iron ore have seen a significant correction in prices. Since growth continues to stagnate in the developed world and the emerging markets most notably China are slowing down, the overall GDP growth rate for the world economy is most likely to be tepid this year. 
India's current account deficit (CAD) narrowed sharply to 0.9% of GDP in 3QFY14. For the month of February, the absolute trade deficit was down to 5 month low of US$ 8.1 bn. And this was predominantly due to restrictions on gold imports and not due to rising exports. In fact, export growth, as a measure to tame CAD, is likely to face challenges in future. The February growth number for exports already reflects that. In the month of February, exports declined 3.7% YoY. This is believed to be a secular decline for months to come. That's because EU's scheme which gives preference to exports from developing countries will no longer be applicable to India henceforth. This obviously shall hurt export volumes of India. Further, rupee appreciation from here can make the matters eve n worse. As such, future export growth is under cloud. Another worrying factor is inability to check imports. While restrictions on gold imports have helped curb the overall deficit, non-gold and non-oil imports are a cause of worry. Though they too have declined but the pace of their decline has been modest. Thus, there are doubts whether the current decline in CAD can be sustained. Prima facie, it appears to be a difficult task.
Absolute Trade Deficit Down to 5 Month Low

Thursday, March 13, 2014

Debt is not really a bad thing. It is, in fact, a great catalyst for economic growth. But debt can prove to be a double-edged sword if not used with restraint. We have seen how excess leverage has not just killed many corporates but has even brought countries down on their knees. China's phenomenal growth would have been impossible without debt. But it seems that the dragon economy's growth model of debt-driven investments has run its course. The economy is now sitting on a mountain of debt coupled with slowing growth prospects. Over the last six years, China's overall debt levels have shot up by 95 percentage points to 244% of GDP in 2013. This is the highest in Asia. Its ability to service its debt has been deteriorating. These are indeed ominous signs. While the dragon economy has proved many 'China bears' wrong in the past, if they proved right even once, it would wreck havoc not only in China but the entire global economy.

Sharp plunge in Baltic Dry Index(BDI).

Lead economic indicators provide crucial input in forecasting future growth rates. Baltic Dry Index (BDI) happens to be one such indicator. It measures the movement of freight cost while transporting dry bulk cargo via sea. Indirectly it is a measure of trade activity across the globe. An increase in global demand for commodities indicates that production is bound to increase. And that demand movement is tracked via the trade activity. BDI does this job. Thus, it signals beforehand that economic growth is bound to improve or decline. Hence, it is avidly followed by many.

But what it is hinting currently? A complete doom, it seems. The BDI plunged 8% in a single day which is probably the biggest drop in last six years. Peaking Chinese inventory at ports signify that movement of bulk cargo has slowed down. And this has led to a fall in the index. This is not good news. It signifies that global demand has slowed down at least for iron ore which is a widely used industrial commodity. Slowing demand will jolt production and hurt global growth rates. Thus, it seems that the global recovery may take longer than usual.

Indian CPI fell for three consecutive month.

Indian consumer inflation fell for the third consecutive month in February, dropping to 8.1% on year from 8.79% in January and coming in below consensus of 8.3%. The decline comes as the Reserve Bank of India considers setting a CPI target after having raised interest rates three times since September. Meanwhile, industrial output surprisingly rose 0.1% in January vs expectations for a contraction of 0.9%.

China economy is slowing.

China has released more data indicating that its economy is slowing,with industrial production growth slowing to 8.6% on year in January and February from 9.7% previously and missing consensus of 9.5%. Retail sales softened to +11.8% from +13.6%, while urban fixed-asset investment also weakened. The disappointing readings follow data which showed that exports plunged in February.

Wednesday, March 12, 2014

Outlook for China seems gloomy.

The outlook for China going forward does not look too enticing. And this is evident not only from GDP numbers but also from copper prices. China is the world's biggest consumer of copper. Thus there are concerns that a slowdown in GDP in the dragon nation will take a toll on the demand for the industrial metal. As reported on Moneynews, copper has dropped 13% this year, the most among 34 commodities tracked by Bloomberg. Global demand will trail production by 81,000 metric tons in 2014 as per Barclays Plc estimates. Not just that, importing copper into China has become uneconomical given that domestic output is likely to gain. What is more, Chinese banks have slowed the issuance of letters of credit for imports. All of this means that lower demand from China for copper will lead to fall in prices for the metal. Indeed, even the GDP is expected to come in at 7.5% which is much lower than the 9% plus growth that the country was used to in the past. 

Global equities are mostly lower.

Global equities are mostly lower  as concerns about China's economy apparently occupy market thinking following a plunge in exports even though the data is a few days old already. Copper is continuing to sell off on such worries and is -0.65% at $2.932 a pound after sharp losses yesterday.

Tuesday, March 11, 2014

The Quantitative Easing program was designed for many reasons; with a key one being to boost growth levels in the US. Given the declining GDP, the country needed to increase its overall output levels. However, the US seems to have now realized that the projected long term growth rates are not likely to be met, or touch full potential, and thereby need to be revised lower. As such, what should be expected? A quicker than expected tapering in money supply.

In an interesting article, Bloomberg discussed about the likelihood of the country's projected future potential output not being reached on the back of the severe impact of the recession that has hit the economy over the past few years. And as such, the Congressional Budget Office has had to revise the country's potential output targets downwards (for the year 2017, which was set in 2007). And with the same happening, the US would need to revise its unemployment targets - given the lower output would require lesser people in the workforce - and thereby reducing the need for QE all the more. If this was to come true, we could possibly see the hot capital moving out of emerging market nations such as India much faster than what has been anticipated.

German exports and imports grew at the fastest rate

In almost two years in January, with exports rising a better-than-expected 2.2% after dropping 0.9% in December. Imports jumped 4.1% following a fall of 1.4%, causing the trade surplus to slip to €17.2B from €18.3B. "Exporters' business with the eurozone is working better," economists  expect German economic growth of 1.7% in 2014 (and) it might even be slightly more."

As expected, the Bank of Japan has left its key interest rate.

Interest rate at 0.1% and maintained its program of expanding the monetary base by ¥60-70T a year. The BOJ upgraded its assessment of industrial output and investment but cut its analysis for exports. The bank's latest policy decision comes ahead of next month's rise in sales tax, which is expected to drag on the economy.

Monday, March 10, 2014

Italian output tops consensus but France, Spain disappoint.

Italian industrial output rose 1% on month in January after falling 0.8% in December and topped consensus of +0.4%. However, French industrial output fell 0.2% despite expectations for growth, while Spanish production rose 1.1% on year, although that was down from 2.2% and below forecasts of 1.8%.

Japan cuts GDP growth estimate.

Japan has revised down its Q4 GDP growth calculation to 0.2% from an initial 0.3%, with the economy held back by weaker-than-estimated capex and consumer spending. The current-account deficit increased to a record ¥1.59T ($15.4B) in January from ¥638.6B in December. "Capital spending remains weak and exports are not coming back to strengthen the recovery," says economist Yoshimasa Maruyama. "Without support in these areas, Japan's economy is going to contract significantly in the second quarter."

Plunging Chinese exports hit Asian stocks.

Chinese exports dropped 18.1% on year in February vs growth of 10.6% in January and consensus of +6.8%. However, the trend may have been distorted by the Lunar New Year holiday and fake invoicing that boosted the data a year earlier, while the severe winter weather in the U.S. may also have had an effect. Still, the data sent the Shanghai Composite tumbling 2.9% and helped drag other Asian indices lower.

Sunday, March 9, 2014

Transfer Pricing: Companies in ITES cannot be classified into low-end BPO services and high-end KPO services for comparability analysis but have to be classified based on the functions performed. Comparables with abnormal profit margins cannot be discarded per se but must be examined to determine whether the high margins are due to normal business conditions or not

The Special Bench had to consider two issues: Whether, for determining the ALP under TNMM, (i) a company performing (high-end) KPO functions is comparable with a company providing (low-end) back office support services, given that both are in the “ITES” sector? & (ii) companies earning abnormally high profit margin have to be discarded from the list of comparable? HELD by the Special Bench:
 
 As suggested in the OECD Guidelines on Transfer Pricing, determining a reliable estimate of arm’s length outcome requires flexibility and the exercise of good judgment. It is to be kept in mind that the TNMM may afford a practical solution to otherwise insoluble transfer pricing problems if it is used sensibly and with appropriate adjustments to account for differences. When the comparable uncontrolled transactions being used are those of an independent enterprise, a high degree of similarity is required in a number of aspects of the AE and the independent enterprise involved in the transactions in order for the controlled transactions to be comparable. Given that often the only data available for the third parties are company-wide data, the functions performed by the third party in its total operations must be closely aligned to those functions performed by the tested party with respect to its controlled transactions in order to allow the former to be used to determine an arm’s length outcome for the latter. The overall objective should be to determine a level of segmentation that provides reliable comparables for the controlled transaction, based on the facts and circumstances of the particular case. The process followed to identify potential comparables is one of the most critical aspects of the comparability analysis and it should be transparent, systematic and verifiable. In particular, the choice of selection criteria has a significant influence on the outcome of the analysis and should reflect the most meaningful economic characteristics of the transactions compared. Complete elimination of subjective judgments from the selection of comparables would not be feasible but much can be done to increase objectivity and ensure transparency in the application of subjective judgments;
Just as the economic slowdown is taking its toll on big corporates, small and medium sized enterprises are facing the heat as well. Indeed, for some of the smaller companies the impact of the slowdown has been so adverse that they have been forced to apply for sick status. This is so that they can protect themselves from creditors in case there is liquidation. This is something that is reflected in the statistics as well. As reported in Mint, 2013 saw the highest number of companies registering with the Board for Industrial and Financial Reconstruction (BIFR) for "sick" status since 2006. A total of 92 companies registered with BIFR in 2013, compared to 118 in 2006. These companies include both listed and unlisted entities. Many of these small companies are suppliers to their bigger counterparts. So when the big companies delay in making payments, the working capital requirements of these smaller firms increase piling on the pressure on them. Moreover, smaller companies also face hurdles in terms of securing funding from banks or when it comes to debt restructuring. Thus, unless the economy picks up, we may see more of these instances in the coming months as well.

China suffers first corporate-bond default.

As expected, China's corporate-bond market has suffered its first ever domestic default, with Shanghai Chaori Solar Energy Science & Technology failing to fully pay 89.8M yuan ($14.7M) in interest that was due today. Until now, China had bailed out distressed companies. Moody's believes that the development will help the growth of China's bond market. It will "signal regulators' higher tolerance for corporate-bond defaults amid financial market reforms, which is in line with the current central administration's shift to adopt more market-oriented policies," Moody's says.

Thursday, March 6, 2014

The current Fed chief Janet Yellen has stated that the US economy is falling short of the objectives set out by the central bank. And she believes that more will have to be done to ensure full employment and maintain stable prices. Interestingly, the US Fed began trimming its bond purchase program recently on the claim that the US economy is beginning to witness signs of a recovery. But it is looking more and more apparent that this recovery could be a false alarm considering that growth has remained sluggish and unemployment has not come within acceptable levels. That the job scenario is not too good is something that even Janet Yellen acknowledges. So future strategies with respect to the bond purchase program will depend a lot on the how the outlook pans out. If this turns out weak, it will hardly be surprising if the Fed reverses its policy and goes in for bond buying again. Ms Yellen is also keen on strengthening the financial system through the Dodd-Frank Act. So far, clamping regulations on the financial system post the crisis has been a murky affair. So it will be interesting to see whether the Fed chief will be able to make significant progress on this front.

India sets date for world's biggest election.

India's government has called what is poised to be the world's largest ever election, with 814M people registered to vote. A nine-stage process is due to start on April 7 and the results are scheduled for May 16. The favourite is the Bharatiya Janata Party (BJP) led by Narendra Modi, who has the backing of big business and has built up support amongst the middle classes. Modi is up against the ruling center-left Congress Party headed by Rahul Gandhi of the Nehru-Gandhi dynasty.

China headed for first onshore corporate-bond default.

China's $1.5T publicly traded corporate-bond market is set to experience its first ever default after Shanghai Chaori Solar Energy Science & Technology said it may not be able to fully meet an 89.8M yuan ($14.6M) interest payment that is due on Friday. Until now, the government has bailed out at-risk companies. The news of the expected default weighed on Chinese stocks, although market strategist Chris Weston said it would be a good thing, as "a normal economy needs defaults to better price bonds and other debt products."

Eurozone business activity better than initially estimated.

Eurozone services PMI increased to 52.6 (flash 51.7) in February from 51.6 in January, while composite output rose to 53.3 (flash 52.7) from 52.9. The data suggests that eurozone GDP is on track to grow 0.4-0.5% in Q1, which would be the "best performance for three years." Meanwhile, retail sales blew past expectations with a rise of 1.6% on month in January - the largest increase since November 2001 - after falling 1.3% in December.

Tuesday, March 4, 2014

World stocks recover as Putin eases tensions a bit.

Global equity markets have rallied from sharp losses yesterday while gold and oil have fallen following what could be interpreted as a de-escalation of tensions by Russian President Vladimir Putin, who ordered some military units back to their bases after a surprise training exercise that began last week. Some of the drills took place near the border with Ukraine, exacerbating fears about a possible Russian invasion of its neighbour. At a press conference, Putin said his country has no need to use force against Ukraine but retains the right to consider all its options, and it has no intention of annexing Crimea.
There is always one risk associated with MNC companies operating in the Indian market either through listed subsidiaries or joint ventures. That they will form another 100% owned unlisted venture and divert profits to that subsidiary thereby robbing minority shareholders of the listed entity. The latest company to face the ire of the investing community is Maruti Suzuki and its plans of setting up of the Gujarat plant. As per Equity Masters, it was Maruti Suzuki which was to set up the Rs 40 bn plant in Gujarat. But on the day it declared its 3QFY14 results, the management came out with a completely different strategy with respect to how this plant was to be set up.

As per the new plan, the promoters of the company, Suzuki will form a 100% subsidiary in India solely with the aim of setting up the Gujarat manufacturing plant. This means that the funds required to set up the plant will be brought in by Suzuki into the subsidiary. Maruti Suzuki will source cars from this subsidiary to be sold not only in the Indian market but also for exports. The company has assured that the unlisted subsidiary will not make any profits and that Suzuki will benefit only though its stake in the listed entity i.e. Maruti Suzuki. But this so far does not seem to have soothed various investors who claim this to be an act against the interest of minority shareholders. Whether that is actually the case will depend a lot on the fact that the parent company sticks to its word and uses the subsid iary for the objectives that it has stated up front. Do you think Maruti Suzuki's shareholders are being taken for a ride? 

Monday, March 3, 2014

Eurozone manufacturing PMI weakens.

Eurozone manufacturing PMI slipped to 53.2 in February from 54 in January, with the German print slipping but staying in growth territory. The French reading surprisingly improved but the sector contracted again. The overall survey is consistent with eurozone industrial output growing at 1% in Q1, while GDP is set to rise 0.4-0.5%, "With new orders and backlogs of work still rising at reasonable rates, further ongoing expansion is signalled for coming months."

Buffett hints at bigger deals as Berkshire profit rises.

 Berkshire Hathaway's (BRK.A) Q4 net profit climbed almost 10% to $4.99B, or $3,035 per class A share, helped by gains at the company's insurance units. Berkshire's annual letter indicated that the conglomerate could make more major deals. "NV Energy will not be MidAmerican’s last major acquisition," Warren Buffett wrote of last year's $5.6B purchase. Berkshire ended 2013 with $48.19B in cash and equivalents, which gives the company a sizable war chest.

Chinese manufacturing, services PMIs diverge.

China's HSBC manufacturing PMI fell to a seven-month low of 48.5 in February from 49.5 in January, while the official reading slipped to 50.2 from 50.5. In contrast, official non-manufacturing PMI rose to 55 from 53.4. "We are seeing a higher share of services in GDP, and we cite that sometimes as one of the signs of rebalancing in the economy," says BBVA economist Stephen Schwartz. "If that's part of a longer-term trend, that's somewhat encouraging."