Wed, 26th April 2017

Anirudh Sethi Report


Archives of “capital” Tag


Investments in domestic capital markets via participatory notes (P-notes) have surprisingly surged to 4-month high of Rs 1.78 lakh crore at the end of March despite stringent norms put in place by Sebi to curb inflow of illicit funds. P-notes are issued by registered Foreign Portfolio Investors to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly. They however need to go through a proper due diligence process.

According to Sebi data, total value of P-note investments in Indian markets – equity, debt and derivatives -increased to 1,78,437 crore at March-end, from Rs 1,70,191 crore at the end of February. Prior to that, the total investment value through P-notes stood at Rs 1.75 lakh crore in January-end and Rs 1.57 lakh crore in December-end. In March, investments through the route had touched the highest level since November, when the cumulative value of such investments stood at Rs 1,79,648 crore.    

Upside to corporate profitability limited in FY18: CRISIL

Rating and research agency CRISIL said the upside to corporateprofitability will be limited in 2017-18 after the 100 basis point (bp) improvement it expects this financial year (FY17). It expects a gradual recovery in top line growth for India Inc, according to its India Outlook, Fiscal 2018 report released on Thursday.

With an estimated eight per cent growth in FY18 sales, Corporate India will miss the double-digit revenue growth mark once again. Therating agency said “single-digit revenue growth seems to be the new normal”. However, this would be the highest growth clocked by the 1,200 companies in its universe after FY2014. 

CRISIL doesn’t rule out the possibility of operating profit margins taking a knock because of increasing commodity prices.
The sectors that are expected to see a deterioration in the EBITDA margin are airline services, FMCG and tyres, with the fall pegged at about 100 bp each, even as the three sectors will see an acceleration in revenue growth to the tune of 400-900 bp. EBITDA is earnings before interest, tax, depreciation and amortisation.
Barring a few sectors, majority of them including the likes of organised retail, pharmaceuticals, IT services, auto and auto components, capital goods, cement and construction will see moderate increase in EBIDTA margin to the extent 0-50 bp. The ones where the margin is expected to rise the most include telecom services, aluminium and oil & gas, with improvement pegged at around 100 bp each, while power sector too should see margin rise by about 60 bp.

Credit Suisse Announces Another 6,500 Layoffs After Reporting 2016 Loss

After Credit Suisse reported yet another significant loss for the full year 2016, amounting to 2.35 billion Swiss francs, more than the CHF2.07bn expected, the Swiss banking giant said it was looking to lay off up to 6,500 workers and said it was examining alternatives to a planned stock market listing of its Swiss business.

“We’re setting a target now of between 5,500 and 6,500 for 2017,” Chief Financial Officer David Mathers said in a call with analysts on Tuesday after the bank published earnings. The bank did not specify where the extra cuts would come but said this would include contractors, consultants and staff, Reuters reported.

For the fourth quarter, Credit Suisse reported a 2.35 billion franc net loss, largely on the back of a roughly $2 billion charge to settle U.S. claims the bank misled investors in the sale of residential mortgage-backed securities.  Despite the loss, Credit Suisse proposed an unchanged dividend of 0.70 francs per share, in line with market expectations.

CEO Tidjane Thiam, who took over at Switzerland’s second biggest bank just over 18 months ago, is shifting the group more toward wealth management and putting less emphasis on investment banking. As part of his turnaround plans, the bank is looking to cut billions of dollars in costs and cut a net 7,250 jobs in 2016 with more to follow this year.

China’s 2016 capital outflows estimated at over $700bn

A new report from Standard Chartered estimates capital flows out of China totalled almost $730bn in 2016, a near-record level.

Analysts Shuang Ding and Lan Shen estimated outflows had moderated in December to $66bn, down from November’s $75bn.

Beneath the headline figure foreign direct investment flows turned positive for the first time in eight months with a $3bn inflow, while non-FDI outflows remained unchanged from the previous month at $69bn.

They also estimated China’s foreign exchange reserves had fallen $41bn last month to end the year at $3.01tn as depreciation of the euro, yen and pound against the greenback. That reduced the dollar value of China’s holdings in those currencies by about $13bn.

Japan: Nov Machine Orders -5.1% m/m (expected -1.4%) & Dec PPI -1.2% y/y (expected -1.4%)

Japanese data for machinery orders and PPI

November Machine orders
 -5.1% m/m
  • expected -1.4%, prior +4.1%
  • largest decline since April 2016
  • Not a positive sign for capex intentions (its regarded as an indicator of capital expenditure in the coming six to nine months)
 +10.4% y/y
  • expected % +8.1%, prior -5.6%
And PPI for December
 0.6% m/m
  • expected 0.4%, prior 0.4%
-1.2% y/y
  • expected -1.4%, prior -2.2%

Fitch says Chinese banks may need $246bn to cushion off-balance sheet risks

Chinese banks reported declining a nonperforming loan ratio over the first three quarters of 2016. But beneath the veneer of stabilizing asset quality looms a far greater hazard brought by fast-growing off-balance sheet lending and investment activities through channels such as so-called wealth management products (WMPs), according to ratings agency Fitch Ratings.

As a buffer against this risk, the agency estimates that mainland banks may need about 1.7 trillion yuan ($246 billion) in additional capital.

 “In the past few years, we’ve seen WMPs carried off balance sheets continue to increase,” Jack Yuan, associate director at Fitch, said in a conference call on Thursday. He found that more than three-quarters of outstanding wealth management products, totaling 20 trillion yuan, resided outside banks’ loan books as of June.
 Wealth management products were particularly prominent at midtier banks such as China Merchant Bank, China Everbright Bank, and Ping An Bank. Their wealth management products represented over 30% of their total assets, and more than half of their deposits.  

State-owned commercial banks, with the exception of the Bank of Communications, are relatively less exposed. However, their issuance is considerable in absolute terms. Industrial and Commercial Bank of China(ICBC) is the single-largest issuer of wealth management products, with around 2.6 trillion yuan in outstanding issuance, according to Fitch.

Deutsche Bank on a ‘Once in a century event’

Deutsche Bank strategist George Saravelos says to stop whining about globalisation   

  • Its not irreversible
  • Globalization ebbs and flows over long cycles
  • And right now it is ebbing, and Trump’s election win will see an acceleration of this shift: “the peak and potential unwind of globalization.”
Saravelos  writes in his note: “Deglobalization Is Here: What It Means for Global Macro:”
  • The weakness in global trade, the rise of anti-globalization politics and the decrease in capital mobility all point towards a reversal of the neo-liberal word order constructed since World War II. In this note we introduce a framework to think about the impact of de-globalization on global macro
  • First, we argue de-globalization will shrink international trade imbalances. Because these are mirror images of international capital flows, de-globalization should also shrink the pool of global savings. Surplus nations such as Germany and Japan will have to spend more while deficit nations such as the US will have to pay more to borrow, which means Treasury yields will rise

Record investment in Japanese startups

Japanese investment in startup companies is surging, driven by interest in a number of powerful new technological trends.

In the first six months of 2016, unlisted startups in the country raised a record 92.8 billion yen ($897 million) of capital, up 21% from the same period the previous year.

 Total investment in entrepreneurial ventures in 2016 is likely to reach the highest level since data started being compiled in 2006.

The trend has been led by companies keen to invest in ventures which own cutting-edge technology in areas like artificial intelligence.

Japan Venture Research, a Tokyo-based research company, has estimated the amount of money raised by some 8,600 unlisted companies by analyzing data concerning their capital. The startups covered are mainly ventures seeking to develop competitive technologies in areas like the internet of things.

Nonfinancial companies are providing the largest share of funds for such startups.

These companies are well aware of the importance of such new technology as artificial intelligence and IoT for the development of products and services that can capitalize on new market trends. But they do not have sufficient human resources of their own with enough knowledge in these areas.

India less vulnerable to banking distress risks than China: BIS

India is better placed than neighbouring China and Brazil in terms of banking distress risks, says a report prepared by the Bank for International Settlements (BIS), which also flagged that high corporate debt levels have caused overheating in some emerging economies.

The observations are part of the report submitted to the G20 International financial architecture working group and it comes at a time when there are concerns about the rise of bad loans in the banking system in India, which is also a key member of the G20 grouping.

Based on certain indicators, BIS noted that they suggest “heightened risk of banking distress in a number of emerging market economies”. “This is in particular the case for Brazil, China and Turkey where the credit-to-GDP gaps are close to or above 10%. In the past, two-thirds of banking crises were preceded by credit-to-GDP gaps breaching this thresholds during the three years before the event,” it said.

Further, the report observed that debt-to-service ratio based indicators paint a similar picture. India’s credit-to-GDP gap has been estimated at (-3.2) whereas that of China was 29.7 and Brazil 8.5. Among other economies, the figure for Turkey was 11.8, Korea (3.9) and Mexico (7.7).

Debt service ratio of India was 1.8 compared to 5.5 for China and 7.4 for Brazil, as per the report. In a scenario where interest rates rise by 250 basis points, the report showed that India’s debt service ratio would be 2.9.

With tepid demand, Q1 brings no liberation for India Inc

As earnings season draws to a close, it is clear India Inc’s recovery is going to be a slow one and it is primarily the ability to rein in costs, on the back of soft commodity prices, that is driving operational efficiencies. Demand continues to be tepid for consumer and capital goods and this is true not just for the home market but also some overseas markets. Moreover, the competitive intensity, across a host of sectors, especially in the services space, continues to rob companies of pricing power.

The aggregate revenue growth for a clutch of 2,045 companies, in the June quarter was 9.2% year-on-year but if Rajesh Exports —which made a large acquisition in July 2015 — is excluded the growth slips to an anaemic 3.2% y-o-y.

Most heavyweights have turned in performances that are below the Street’s expectations and chances of earnings being downgraded are high. Anticipating some headwinds — globally and locally — analysts have downgraded estimates for nearly two dozen heavyweights including Infosys and Wipro.

The bad news is that the capex cycle doesn’t seem to be turning: at Larsen& Toubro, orders inflows from the infrastructure segment were negligible indicating companies are not adding to capacity immediately. The Mahindra and Mahindra stock has been downgraded by a few analysts who believe volumes for the auto player could moderate in a competitive environment. The Street was disappointed with M&M’s operating profits for Q1FY17 which were pressured by the sharp fall in realisations for tractors and lower-than-anticipated margins for the automotive business.