Eurozone: Contagion Pressures Intensifying

Long gone, unfortunately, is the initial wave of enthusiasm surrounding the Euro Summit of late October, when a series of initiatives to deal with the Eurozone’s problems was announced. While somewhat short on details, that announcement included an enlargement of the European Financial Stability Facility (EFSF) that had been supported by Germany’s parliament, a European bank recapitalization plan, and a proposal for a larger voluntary haircut on Greek debt. The initial stock market reaction was quite positive, with bourses around the world rallying strongly for a few days post-summit. But that was short-lived and indeed October 28 proved to be the high water market for most stock markets. Since then, continued problems in the Eurozone have led to surging sovereign bond yields across much of Europe and a November stock market decline across much of the globe, with the S&P 500 declining by -10.2%, the Euro Stoxx down by -17%, the DAX falling -15.4% and the Nikkei dropping -10.8%. Even developing economy stock markets have suffered, with the Shanghai CSI 300 down -12% in November and Brazil down -8%. Commodity-based nations have not escaped the downdraft, either, with Australia’s stock market down -9% thus far in November and Canada dropping by the same percentage.

Europe remains the epicenter of systemic risk, and the European sovereign bond market is increasingly refl ecting high levels of market disappointment and frustration with the absence of a lender of last resort, as neither a European Central Bank (ECB) nor Eurobond-oriented solution appears to be forthcoming. Having already contributed to leadership changes in Italy, Spain and Greece, the bond market is seeking the reassuring presence of a more defi nitive credit backstop, given that is unlikely that even an expanded EFSF will be suffi cient to manage contagion spreading to a larger Eurozone nation, such as Italy. Meanwhile, over the past weekend Germany, the Netherlands and Finland suggested that the International Monetary Fund play a bigger role in absorbing losses from the Eurozone as it has become apparent that the market will require a higher level of subordination in the EFSF in order to be enticed to buy bonds. But the request for IMF member nations to share more fully in the sharing of sovereign credit risk comes across as a bit disingenuous, since Germany has consistently refused to pledge more than its initial contribution of €211 billion to the EFSF and seems intent on limiting its direct exposure to Eurozone sovereign bond downside.

In what is now becoming an all too familiar pattern, European leaders unfortunately continue to take action only when the bond market forces them to. And that bond market pressure continues to intensify, with Italy bond yields breaking through 8% and German bond yields rising by 43 basis points over the past 10 days, a period during which, by contrast, yields on U.S. Treasury bonds declined by 9 basis points. Since November 15,
then, German 10 year bonds have gone from being priced 14 basis points below their US counterpart to 38 basis points above at the close of last week.

While the rise in Germany bond yields could refl ect a view that Germany will eventually have to accept the concept of a Eurobond (which would increase the fi nancial pressure on Germany, being put in a position forced to absorb what would be unlimited liability for the debts of other Eurozone nations) it is also conceivable that the bond market is sending a signal that the boundaries of contagion are wider than was once thought possible. In any event, bond markets continue to be the major driver of change, because
policy initiatives continue to be reactive as opposed to proactive. In that sense, it is conceivable that continued bond market pressures will eventually reach a breaking point and force some more defi nitive action, either through the Eurozone offi cials ultimately acquiescing that there will be a lender of last resort or through either a downsizing of Eurozone members or (less likely but not necessarily able to be defi nitively ruled out)
a potential break up of the Eurozone itself. The latter still appears unlikely, because it would probably be more costly than either the ECB or Eurozone offi cials agreeing to establish a lender of last resort (whether unlimited bond purchases by the ECB or an agreement to move towards Eurobonds). As a result, it now appears to be just a matter of time before a combination of a European recession and unsustainable bond yields across more of the Eurozone force offi cials to move closer to a more permanent solution, as the bond markets are demanding.

Meanwhile, the UK has, aside from its ongoing commitment to the IMF, largely stayed out of direct involvement in the Eurozone fray, remaining focused on its own issues and policy. UK policy has a dual emphasison government austerity and quantitative easing, in the hope that accommodative monetary policy will both refl ate asset prices and stimulate economic activity. Economic growth has been positive for the third consecutive quarter, up 0.5% in third quarter, but a key issue for the UK economy is whether it can continue to grow when one of its largest trading partners, the Eurozone, falls into what seems almost certain to be an upcoming recession.

The Next Phase for China

China’s economic slowdown appears to have stabilized,reducing the risks of a hard landing despite what hasturned out to be an overextension of credit formation since 2008 that has resulted in an oversupply of commercial and residential real estate. Although both traditional and shadow banking has resulted in excessive credit formation that will almost certainly result in credit losses, China has adequate fi nancial resources in the form of large capital reserves to absorb such losses. Now, facing another threat from a European recession that will reduce China’s export trajectory, the world’s second largest economy may be ready to begin restimulating economic growth in 2012 in order to avoid a slowdown in other parts of the world, in a smaller version of what it did in 2008.

However, the next wave of China stimulus will probably be much more centrally controlled at the federal government level and more focused upon sectors that are not currently overcapitalized. Stated another way, the next wave of expansionary initiatives is likely to be done through state controlled banks as China attempts to rein in shadow banking, and likely directed at sectors and industries that represent the next stage in China’s planned growth into a its next stage as a more advanced developing economy. That means that the next phase of hinese expansion is likely in the technology and information industries, moving beyond last decade’s focus on core durable goods manufacturing industries. China had previously announced that it had seven “emerging industries” in mind that it wanted to expand, and it is conceivable that its desire to offset a likely European recession combined with its apparent success in reducing infl ation and achieving a soft landing may make 2012 the right time for China to launch that initiative.

Indian Market Open Gap Up

The Indian market closed the first day of a new week at the high point of the day on the back of good global cues which led to positive trade across the board. The broader markets, too, participated in this rally. Sensex closed at 16177, up 481 points (provisional) and Nifty at 4851, up 141 points (provisional) from the previous close. CNX Midcap index was up 1.95% and BSE Smallcap index was also up 1.9%. The market breadth was positive with advances at 994 against declines of 314 on the NSE.

After gap up open market through out go up and most of mid cap and small cap stock recover very fast like Hindalco, IDFC, Educomp etc. Now other U.S. and Europe market also looks positive trend so this week looking good for Indian market upto 17200 of sensex and nifty touch likely 5200.

Sector looks good : Cement

 Three big cement stocks –ACC, Ambuja Cement and Ultratech have outperformed the Sensex by 22 -29% since August 2011. However, it seems that performance of these stocks is not in line with fundamentals of the industry.
 The industry is witnessing a scenario of weak demand for the product, increasing capacity addition and falling capacity utilisation.
 It seems that cement demand recovery is not yet in sight as weakness is seen most of the cement consuming sectors. Profit margin of cement companies is under pressure and the industry is not in a position to hike cement prices because of the rising threat of government intervention. In this scenario, premium valuations of cement stocks are unjustifiable.
 It seems that stock prices are anywhere close to 2007 peak levels, but industry fundamentals are nowhere close to that of 2007.
 Factoring deteriorating fundamentals of the industry, ‘reduce’ rating is assigned to ACC and Ambuja Cement while Ultratech is recommended to ‘hold’.
 Also recommended to reduce exposure in to the sector as current valuation of cement stocks is at heavy premium.
 It seems that ACC is at higher risk of volume and price declines as it has the highest exposure to the southern region.
 Ultratech is recommended to hold on as the company is expected to benefit from volume growth from its capex getting commissioned by FY14.
 Capacity utilization in the industry at multi – year low and any breakdown of co-operation among producers may lead to sharp decline in cement prices.
 Any unfavorable result of the ongoing investigation on cartelization also poses a threat to premium valuations.

U.S. Budget Update

Lost in the intense investor attention being devoted to the sovereign debt issues of the Eurozone, have been the on-going federal budget debates in the U.S. While it is likely that President Obama and Congress are happy to have attention devoted elsewhere, there are some critical dates rapidly approaching which are likely to refocus attention back on Washington. By way of review, it should be recalled that under the law passed last July (called the Budget Control Act or BCA),which raised the debt ceiling, a sequester mechanism was created which will cut federal spending across the board starting January 1, 2013 unless Congress can agree to $1.2 trillion in budget savings, spread over 10 years, the end of this year. To assist in this process, the BCA created a commission of Congress, called the Joint Dei cit Reduction Committee, composed of 3 democrats and 3 republicans from the House of Representatives and 3 democrats and 3 republicans from the Senate. This Committee (popularly called the budget super committee) is required to make its ecommendations back to Congress by November 23, and Congress must then approve or reject the recommendations by December 23 with no opportunity for amendment. Those ecommendations that are approved then go to President Obama for signature and become law. In the meantime, the BCA gave the President the authority to raise the dei cit ceiling further starting in January 2012 (within limits) to keep the government operational in 2012 and beyond. So, what if the budget super committee makes no recommendation? After all, it takes a majority of 7 members to recommend and the committee is equally divided by political party. It is also possible that Congress will approve only some or even none of the recommendations. What then? That is when the sequester mechanism kicks in. The BCA charges the budget super committee to deliver $1.5 trillion of budgetary savings. However, if they deliver less than $1.2 trillion and/or Congress approves less than $1.2 trillion, the automatic, across the board sequester mechanism starts to cover any shortfall. A simple example will illustrate how the sequester mechanism might operate. There is some consensus that the budgetary super committee might agree on a small mix of $500 billion or so of spending cuts and modest revenue increases (mostly involving higher user fees or highly specii c taxes). Assuming a $500 billion savings number, the following is an example (in billion $)

$ 1,200.0 (Total Sequester)
- 500.0 agreed to dei cit reduction
= 700.0
÷ 9 years (no sequester in FY 2012)
= $77 * total annual sequester

*ignores any interest expenses which are exempt from sequester.

buy’ GSPL –Target Price Rs.140

 2QFY12 revenue at Rs.281 crore has beaten market estimates on better than expected gas
transmission tariff of Rs.835 /tcm as against the market expectation of Rs.750 /tcm.
 Volume of 35.2 mmscmd was below the street estimate of 37 mmscmd.
 EBITDA of Rs.258 crore and EPS of Rs.2.3 have beaten market estimate by 11% each.
 However, it seems that the market has not enthused much from better than expected numbers
because of stagnated volume over four quarters. Better than expected margin and EPS are primarily due to higher than market expected tariff and it is unlikely to sustain.
 The stock is trading below the fair value because the market expects the regulator to cut gas transmission tariff to a level lower than the market expected tariff of Rs.750 /tcm.
 The stock is recommended with a target price of Rs.140 over one year. Risks to the target price are lower than expected gas transmission volume and lower than expected transmission tariff.

Kingfisher to collect Rs 800cr through fresh equity

Bankers to the cash-strapped Kingfisher airline today asked its promoters to infuse Rs 800 crore worth of fresh equity if they are to consider a second restructuring of existing debt, as opposition mounted to any bailout of the private carrier.
The Kingfisher Board also had a crucial meeting in Mumbai to work out a debt restructuring plan on the eve of the announcement of its latest financial results.
The bankers have asked the troubled airline to come out with a "credible" plan. The lenders a 13-bank consortium led by SBI, who were yet to decide on ways to soften the troubled airline's Rs 7057.08 crore debt burden, are due to meet Kingfisher management here tomorrow.
The bankers have made it clear that the promoters have to put in at least Rs 800 crore worth of fresh equity as the lenders cannot act as promoters of the airline. "Bankers want more information on their fleet, equity, continuation of fuel supply. Banks can come in as lenders not promoter.
We will respond how it unfolds," said Pratip Chaudhuri, Chairman of SBI which leads the 13-bank consortium that has financed Kingfisher.
Kingfisher is big trouble if they do not collect the money through fresh equity because lenders comes to KFA and collect their money.

Market Out Look

After three days working weeks i hope Indian market bounce back because all global market ends positive only Indian market close ends at very low level. U.S. market shut near 2% also Europe market lead to U.S. market with 2% to 3% up words movement only Indian market suffer a big correction with some Asian market.

Now on Monday sharp up trend see with gap up opening because it is a very crucial level and a good support level of nifty at 5180 it is stable on Friday. Most of stock correct very sharply specially Banking and Metal stock bounce back comes in those stock and market recover very fast it is quit possible.

Buy Prestige Estates Projects Ltd (PEPL) –Target Price Rs.100

 Prestige Estates Projects Ltd (PEPL) is recommended to buy with a target price of Rs.100 over one year. There is nothing commendable about 2QFY12 results. However, the bright spot is the momentum in sales / leasing numbers.
 Quarterly revenue at Rs.140 crore is down 46% qoq as project delay (Neptune Courtyard, Kochi) has significantly impacted 2Q revenue recognition.
 EBITDA margin is 18.7% in Q2 versus 14% in 1Q. The company has sold 1.98 million sq ft of residential area in 2Q as against 0.4 million sq ft in 1Q.
 Average sales price (ASP) is Rs.3587 /sq ft versus Rs.4720 sq ft in 1Q. The decline is due to the shift towards mid income house projects from premium house projects and this shift looks positive from the long term view.
 It has also leased 0.8 million sq ft in 2Q versus 1 million sq ft in 1Q.
 The company has unrecognized sales balance of Rs. 2450 crore, which is 1.5 multiple of FY11 revenue.
 Contracted sales in 2Q is Rs.780 crore and the company is short of only Rs.500 crore to reach its contracted sales target of Rs.15 -16 billion for FY12.
 Net debt of the company increased by Rs.100 crore because of capex incurred on office assets and incremental land payments.
 The stock is currently traded at 13.5 multiple of FY12 expected earnings and at 11 multiple of FY13 expected earnings.

Indian Stock Market Suffer From Friday Fear

The markets made moderate gains today with metal being the top performer in today's session. Other sectors with substantial gains included capital goods and banking and oil & gas was the only sector that closed negative. The Sensex closed at 17563, up 81 points from its previous close, and the Nifty shut shop at 5284, up 18 points. The CNX Midcap index closed with 1% gain while the BSE Smallcap index gained 0.4% in today's trade. The market breadth was positive with advances at 818 against declines of 612 on the NSE. The top Nifty gainers were Ambuja Cements, Hero MotoCorp, Hindalco andCairn while the biggest losers included Ranbaxy, Tata Power, Reliance Infra and Dr Reddy's.

Just mid cap selected stock move up very sharply at bear trend there is some good news to move up otherwise market lost all gain because of three days week after friday.

‘buy’ IRB Infra – Target Price Rs.240

 Buy rating on IRB Infra is maintained with a target price of Rs.240 over one year, as against
the earlier target price of Rs.250.
 With the sale of 30 million shares of the promoter group, the overhang of distressed sale of pledged shares has been significantly reduced.
 The chairman of the company along with his family has increased their stake in the company to 60%.
 As the overhang on pledged shares is substantially removed, investors could now focus on
fundamentals, which are strong in this weak environment.
 Any project win from its Rs.16 billion plus project bid pipeline, earning surprise from its construction business or interest cost savings would be positive catalysts for the stock.
 Goa project is excluded from estimates because of persisting uncertainties over land
acquisition and the target price has been reduced to Rs.240 from Rs.250.
 Risks to the target price are lower than expected growth in traffic or daily collections in new projects, lower EPC margins, project delays etc.