Of Fed Minutes, China's Rising Debt, and Vishal Sikka's Exit

Minutes from the Federal Reserve's July meeting indicated that Fed policymakers are concerned about the recent decline in inflation. That meant the Fed could delay an interest rate hike in its upcoming meetings.

The readout of the July 25-26 meeting showed that some members called for halting interest rate hikes until it was clear the inflation trend was transitory.

The minutes also indicated the Fed was poised to begin reducing its US$ 4.2 trillion portfolio of bonds.

The Fed plans to start normalizing its US$4.5 trillion balance sheet 'relatively soon'. The central bank is said to follow a plan outlined in June to trim its holdings of US Treasury bonds and mortgage-backed securities.

Normalising the balance sheet could impact emerging markets.

With the US economy chugging along for many months, the Fed has also been gradually easing off the stimulus it provides to the economy by raising interest rates to more normal levels.

Yet so far, the cost of lending has been slow to respond to the interest rate increases. But as the Fed continues with this policy, consumers who borrow to buy houses, cars, refrigerators, and other items will have to pay more for those goods, the reports noted.

But, why should India be worried about which way the American economy and interest rates are headed? As Vivek writes in The Vivek Kaul Letter:

    The answer is simple. The United States still forms around one-fourth of the global gross domestic product (GDP). It remains the largest consumer in the world. And any global recovery isn't going to happen, without the American economy finding its way back to where it was during its heydays or somewhere close to it.

Another data released during the week showed economic growth in China showed signs of fading in July. This came as data showed rise in lending costs and industrial output, investment, retail sales and trade grew less than expected in July.

Factory output rose 6.4% YoY in July. This, however, was the slowest pace since January this year and was far lower than 7.6% seen in June.

Growth in property investment eased to 4.8% in July from a year earlier, versus 7.9% in June. Private investments also ebbed to 6.9% in the first seven months of the year. This suggested that small and medium-sized firms still face challenges in accessing financing.

Retail sales also witnessed a pull back and expanded 10.4% in July, down from 11% seen in June.

That said, respite was sought as China's steel output rose to a monthly record in July this year. Power generation also came in at the highest level since May 2014.

Economic growth in China has been better-than-expected during the first half of this year. However, there's no surety that this would continue ahead. This we say is because most of the economic growth seen was backed by heavy government spending, rise in housing markets, and higher bank lending last year.

China is also staring at a rapid domestic credit growth. And the country's structural reforms are not enough to arrest its rising debt.

The International Monetary Fund (IMF) has again warned China over its ballooning debt crisis. The IMF this week said that China's massive debt is on a dangerous path, raising the risk of a sharp slowdown in growth.

The report by IMF stated that while China's near-term growth outlook has firmed up, it is at the cost of further large and continuous increases in private and public debt, and thus increasing downside risks in the medium term. It also warned that the country's debt load could soar from around 235% of gross domestic product (GDP) last year to more than 290% in 2022.

Note that, while the Fed's balance sheet expanded rapidly during the financial crisis, from less than US$900 billion before 2007 to US$4.5 trillion in 2014, the PBOC's balance sheet less than doubled in size during that period.

Moody's Investors Service has downgraded China's sovereign ratings by one notch to A1. The agency expects the financial strength of the world's second-largest economy to erode in coming years as growth falters and debt continues to rise.

Many economists are also of the view that central bank stimulus measures are masking the deeper problems of industrial overcapacity and high levels of corporate debt in China.

So there remain many concerns for China.

A recent issue of Vivek Kaul's Inner Circle (requires subscription) takes a closer look at the Chinese economy and explores how America and China are on the verge of swapping their economic ideologies.

Global share markets ended the week on a mixed note. Benchmark indices in the US corrected marginally by 0.8% during the week. Moving on to European markets, benchmark indices in Germany and France posted gains of 1.3% and 1.1% during the week. The indices would have ended on a higher note if not for the terror attack which took place in Barcelona on Thursday. Benchmark index in China and Hong Kong posted gains of 1.9% and 0.6% during the week.

Indian Indices End on a Positive Note

Back home, Indian stock markets ended the week on a positive note. The BSE Sensex gained 1% during the week. While, BSE Small Cap and BSE Mid Cap index posted hefty gains of 3.9% and 3.3% during the week. Vishal Sikka's resignation as CEO of Infosys dragged the benchmark index lower on Friday as the index corrected by 0.8%.

Infosys share price was in focus this week as the company's CEO and MD Vishal Sikka announced his resignation with immediate effect.

With the above development, U B Pravin Rao has been appointed Interim Chief Executive Officer and Managing Director reporting to Sikka under the overall supervision and control of the company's board.

The board of directors of Infosys have accepted the resignation and said that Sikka would continue as Executive Vice-chairman.

One shall note that Infy's fate has gone through a transformation after Vishal Sikka took over as CEO and Managing Director in August 2014.

From one of the editions of The 5 Minute WrapUp...

    When Sikka took over on 1st August 2014, there was a lot of uncertainty around the business. Many people in senior management roles did not know what the long-term strategy was. Many project managers felt stuck in their jobs. The company had lost the vibrant culture of its past. This was reflected in the deal momentum to an extent. There was a very real concern that Infosys was not able to communicate the value that it could deliver to its clients.

    Things have changed significantly since then. The company has a clear (but ambitious) plan for 2020. The rough targets are: Revenues of US$ 20 billion, operating (i.e. EBIT) margin of 30% and revenue/employee of US$ 80,000.

    To make this a reality, Sikka has appointed the right people in the right positions. He himself decided to reside in Palo Alto instead of Bengaluru, to be closer to Silicon Valley clients. He also decided to be personally involved in all deals of value US$ 50 million and above, as well as in all acquisitions.

Market participants are now keeping tabs on the company's board meeting scheduled today to consider a share buyback.

In news from IPO space, HDFC Standard Life Insurance Company, or HDFC Life, is likely offload 15% of existing shares through its proposed initial public offering (IPO) in the coming months.

The company is expected to file the draft red herring prospectus (DRHP) with the regulator on within the next few days. This follows soon after General Insurance Corp (GIC) and New India Assurance Co. (NIA) also filed their DHRP with the regulator last week.

HDFC Life, plans a total stake dilution of 15%. HDFC will sell 9.6% holding in the insurance firm while its partner Standard Life will sell 5.4%.

HDFC currently holds 61.5% of the issued and paid-up share capital of HDFC Life, Standard Life owns 35%, while the remaining is with employees and PremjiInvest.

HDFC Life could attract a significant valuation. Last month, HDFC Life board had approved selling up to 20% of its equity in a public offering. The insurer had earlier sought the approval of the insurance regulator IRDAI for the IPO.

Another private sector insurer, SBI Life, has already filed prospectus for an IPO.

HDFC Life is the third largest private life insurance company in the country. It has a market share of 6.8%.

By combining and compounding underwriting profits and stock returns year after year, insurance companies can produce very high returns. This is why Ankit at Equitymaster Insider has been watching some of the largest insurance companies in India, particularly SBI Life and New India Assurance, which will both be listing on the exchanges soon.

In the news from Goods and Services Tax (GST) space, the cabinet has cleared the Central Goods and Services Tax (CGST) refund scheme with a budgetary allocation of Rs 274 billion.

The development will bring relief to many units in the pharma sector, auto sector, FMCG sector, etc.

As stated in the Economic Times, units in the above sectors, which hitherto enjoyed exemption from central excise for 10 years, will get a refund of 58% of CGST.

Finance Minister Arun Jaitley stated that within the framework of the GST Act, each industry will be entitled to its own refund mechanism during this particular period (i.e. until March 31, 2027).

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.

Our colleague Vivek Kaul has studied the finer aspects of the GST and predicted what could go right and wrong.

Download his special report - The Good, the Sad and the Terrible (GST).

Nifty 50 Index Traded on a Positive Note

The Nifty 50 Index traded on a positive note during the week. On Monday, it opened the session gap up and traded with a positive bias until Thursday. Finally, on Friday, the index gap down and witnessed some selling pressure but ended the weekly session 1.29% up.

In an earlier note, we mentioned that if the index recovers above the channel's support line and the 50-day exponential moving average (EMA), the bulls might be back in action. And as a result the Nifty ended the week positive.

So if the index continues to sustain above the channel's support line and 50 EMA, we would see higher levels. But on the flip side, if it break below the channel's support line and 50 EMA, the bulls need to be caution.


Marginal Losses for Gold

Gold traded on a flat note during the week. It opened its session on a positive note and maintained momentum during the start of the week. Most of the buying interest came as market participants sought safe-haven bets after taking cues from a weak trend overseas. Slight losses were seen during the end of the week. Finally, gold traded on a volatile note on Friday and ended its session with marginal losses.

Gold Trades on a Flat Note

Silver Witness Losses

Silver traded on a negative note during the week. It opened its session higher but failed to maintain momentum during the week. Losses were seen on the back of a weak global trend and a selling bias in the precious metals market. During the end of the week, silver traded on a negative note and ended its session with losses.

Volatile Trades for Crude Oil

Crude oil witnessed volatility this week. Prices rose during the start of the week after data showed a decline in US crude inventories. As per the data, US crude inventories fell by 9.2 million barrels in the week to August 11.

Crude oil also witnessed buying interest during the end of the week. However, concerns regarding supply glut limited these gains.

Crude oil has been witnessing losses lately on concerns regarding the rising output from OPEC. Owing to the supply glut, crude oil prices have been remarkably silent over the last two years. Prices have remained within a tight range, rarely dropping below US$40 or rising above US$60. Volatility has crashed.

On the domestic front, falling oil prices bode well for the Indian economy. That's because India is hugely dependent on petroleum imports.

India is the world's third-largest oil consumer. And energy consumption in India is set to grow as our economy remains one of the few 'bright spots' in a slowing, aging world economy. And India could face a potent risk with a rise in crude oil prices.

The only way out for India is to reduce its dependence on oil imports and achieve fuel-sufficiency.

Crude Oil Ends Higher

Natural Gas Witness Selling Pressure

Natural gas traded on a negative note during the week. The commodity started the week lower. The downtrend continued during the end of the week and natural gas ended its session in the red.


Fed Minutes Bring Losses for Dollar

The dollar traded on a negative note during the week. It opened its session lower on the back of weak global cues and continued to witness losses during the start of the week. Most of the losses came on the back of Fed minutes that suggested the central bank is in no hurry to raise its interest rates. During the end of the week, the dollar witnessed volatility and ended its session on a negative note.

Dollar Trades on a Flat Note

Weak Economic Data Drags Euro Lower

The euro traded on a negative note during the week. It opened its session in the red and continued the downtrend during the early trades of the week. Most of the losses were seen on the back of weak economic data released during the week.

Marginal Losses for Sterling

The pound traded on a negative note during the week. It opened its session down and extended the fall amid weak global cues. Losses were also seen during the end of the week.

Yen Trades on a Volatile Note

The yen witnessed volatile trades during the week. Gains were seen as market participants sought safe-haven bets in the currency after taking cues from weak trend overseas. The currency also rose on the back of a weak dollar overseas. Some losses, however, were seen during the end of the week. Finally, the yen ended its session with marginal losses.

Commodities 11th Aug 18th Aug % Change
Gold/10 gms 29,203 29,163 -0.14%
Silver/kg 39,194 39,063 -0.33%
Crude Oil/barrel 3,127 3,104 -0.74%
Natural Gas/mmBtu 191.70 186.00 -2.97%
Currencies 11th Aug 18th Aug % Change
USD / INR 64.26 64.21 -0.08%
EUR / INR 75.65 75.45 -0.26%
GBP / INR 83.42 82.78 -0.77%
JPY / INR 58.90 58.89 -0.01%

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