America Is Hit With A Ratings Downgrade
Fitch Ratings downgraded the U.S. government's credit rating, the first by a major ratings firm in more than a decade but Investors don't think Fitch's downgrade will affect the reputation or risk of American Treasury bonds
Our Top Reports For Today
- <00:46> America Is Hit With A Ratings Downgrade, Markets WorldWide React with Sujan Hajra
- <08:36> Reliance Retail Started in 2006 Is More Valuable Than Older Oil To Chemicals businesses
- <10:39> Foxconn’s Many Announcements Across India
- <15:01> Some 75% of Starbucks sales come from cold drinks, not hot coffee.
TRANSCRIPT
NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.
America Gets A Downgrade
“The change by Fitch Ratings announced today is arbitrary and based on outdated data,” is how you think an Indian Government official would react to a ratings downgrade for the country.
Well no, this is what US Treasury Secretary Janet Yellen said in a statement after Fitch Ratings downgraded the U.S. government’s credit rating in turn just a few weeks after President Biden and congressional Republicans came to the brink of a historic default.
The Wall Street Journal says this downgrade is the first by a major ratings firm in more than a decade and is evidence that increasingly frequent political skirmishes over the U.S. government’s finances are clouding the outlook for the $25 trillion global market for Treasurys. Fitch’s rating on the U.S. now stands at “AA+”, or one notch below the top “AAA” grade.
America’s reputation for reliably making good on its IOUs has cast Treasury bonds in an indispensable role in global markets: a safe-haven security offering nearly risk-free returns. Treasuries serve as a critical benchmark for returns on stocks and other bonds, because investors generally demand greater yields on any other securities that they buy.
Investors don’t think Fitch’s downgrade will affect the reputation or risk of American Treasury bonds but yet, this is the first time a ratings firm lowered its headline assessment of the U.S. government’s propensity to pay its bills on time since Standard & Poor’s in 2011 lowered its rating one notch below the top grade.
Moody’s, the other member of the three big U.S. ratings firms, continues to give the U.S. its strongest assessment.
Fitch said Tuesday that the downgrade reflects an “erosion of governance” in the U.S. relative to other top-tier economies over the last two decades.
“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” the agency said.
Biden administration officials criticised Fitch’s decision, blaming governance problems on the Trump administration and arguing that the U.S. was not at risk of missing its debt payments.
Fitch’s move to cut ratings jolted markets around the world.
The S&P BSE Sensex crashed over 1,000 points during the day before closing at 65,783, down 677 points. The Nifty50, on the other hand, hit a low of 19,423 before shutting at 19,527, down 207 points.
"The downgrade of the US credit rating by a notch is sentiment negative for global markets. The US 10-year bond yield spiking above 4 percent and the dollar index rising to 102 are near-term negative for emerging markets, said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, told The Business Standard.
He concluded that it was important to note that the downgrade doesn’t say anything that the market doesn’t know. So, the negative knee jerk reaction is likely to be short lived."
What does a ratings downgrade mean in general and in specific and how should one view it. To understand this, I reached out to Sujan Hazra, Chief Economist & Executive Director at Mumbai-based Anand Rathi Securities
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When Diversifications Pay Off
Reliance Industries retail arm, is now valued at almost twice of its decades old and cash generating oil-to-chemical (O2C) business.
According to stockbroking house Bernstein’s latest report on the company dated August 1, Reliance’s retail business is valued at $112 billion while its O2C business is valued at $57 billion.
The research firm has also valued its JioMart Platforms business at $77 billion and new energy like renewable.energy business is valued at $17 billion.
Bernstein says Reliance is on the path of unlocking across business segments, evident from the recent IPO of Jio Financial Services (JFS), buyout of minorities/potential investor in Reliance Retail & the stabilising of Telecom capex.
These potential unlocking opportunities across businesses with 'path to potential IPOs' are a key medium term catalyst, the brokerage says.
Reliance Retail reported a turnover of Rs. 2,60,364 crore for the financial year 2022-23. As on March 31, 2023, Reliance Retail operated 18,040 stores across 7,000+ towns with a retail area of over 65.6 million sqft.
Bernstein however says it expects the O2C business to be the largest contributor of EBITDA in FY24 at 38%.
Beyond FY24, the digital and retail businesses will grow at a faster rate which will limit the EBITDA contribution from O2C to around 20-30% of total EBITDA. This still remains significant. Digital will represent 35-40% of total EBITDA over the next 5 years.
Retail (offline + online) will grow from 10-12% of total EBITDA in FY23 to 17% by FY27.
From diversification to focus on consolidation.
Gautam Adani’s Ambuja Cements Ltd. is set to buy a majority stake in Sanghi Industries Ltd buying out the owners of, with the deal giving the company a roughly 50 billion rupees ($606 million) enterprise value, according to Bloomberg News.
Reuters first reported that Ambuja reached an agreement to buy Sanghi, started by entrepreneur Ravi Sanghi.
Sanghi has an annual production capacity of 6.6 million metric tons of clinker and 6.1 million metric tons of cement, according to its website.
Adani already controls around 67.5 million tonnes of cement capacity between Ambuja Cements and ACC, two companies it acquired earlier.
Indigo Reports Highest Ever Profit
It obviously helps when one of your competitor’s roughly 60 aircraft are sitting on the ground and unable to challenge you for seats.
IndiGo was back in the black in the April-June quarter (Q1) of financial year 2023-24 (FY24) after it posted its highest-ever quarterly net profit of Rs 3,090 crore during the period.
It reported a net loss of Rs 1,064 crore for the same period last year though it did report a lower profit in the previous quarter ended Mar 31, 2023
Passenger ticket revenues were up around 31%.
Indigo shares of IndiGo closed 3.7 per cent higher at Rs 2,666 apiece as against 1 per cent slide in the benchmark S&P BSE Sensex.
What is Foxconn Up To?
FOXCONN , a key Apple supplier, is to Invest $600 million in two manufacturing projects in Karnataka, including one in partnership with U.S.-based Applied Materials, a state government statement said.
Foxconn will invest $350 million to set up a unit to manufacture components for smartphones, including for iPhone.
It will invest $250 million in a second plant for producing chip making tools in partnership with Applied Materials, a major player in semiconductor equipment.
All good.
Except that on Tuesday, Foxconn refuted reports saying it was investing $194 million or Rs 1,600 crore in Tamil nadu for a electronic components manufacturing facility to create 6,000 jobs.
This was told to Reuters by a Government source.
"We did not sign any investment agreement," FII was quoted as saying by the Securities Times newspaper, adding the company had issued a statement in July refuting similar "rumours."
Around three weeks ago, Foxconn walked out of a much publicised $19.5 billion semiconductor joint venture with Indian metals-to-oil conglomerate Vedanta.
The world's largest contract electronics maker had signed a pact with Vedanta last year to set up semiconductor and display production plants in Gujarat.
So while Foxconn will clearly keep stepping up investment in India, it is also shopping around the country. As it does that, obviously state Governments among others are leaking the conversations which may or may not be at an early stage in some cases.
Which leads to some of the speculative reports.
From what I could take away from telecom research firm Counterpoint Research, at this point, Foxconn has four plants in Tamil Nadu including one dedicated to Apple.
Expansions announced also include in Telangana and in future maybe other areas depending on their beyond smartphone strategy such as automotive, IoT and other devices.
Jobs
India’s overall unemployment rate fell in July as rural areas saw increased demand for agriculture labour with the onset of monsoon rains.
The total joblessness rate fell to 7.95% in July, from 8.45% in June, according to data released by the privately owned Centre for Monitoring Indian Economy. Rural unemployment rate fell to 7.89%, from 8.73% in June, while urban unemployment rate was up, to 8.06% from 7.87% in the same period.
After a slow start, monsoon rains have picked up sharply, improving the outlook for agriculture production and economic growth.
Starbucks May Have Started WIth Hot Coffee But Cold Drinks Are Now Bigger.
Starbucks became a multibillion-dollar coffee business selling hot coffee. But cold drinks are now bigger than ever at that coffeehouse chain.
Cold drinks accounted for 75% of beverage sales in the company's third quarter.
"We're particularly encouraged to see cold espresso beverages were up 13% year over year," Indian origin CEO Laxman Narasimhan said during the chain's third-quarter earnings call on Tuesday.
Starbucks reported record sales from its cold espresso and other elaborate coffee drinks, but the coffee chain said that employee wage increases and investments in its cafes dragged down its profit.
Cold foam, in fact, is the fastest-growing add-on at Starbucks, he said. Add-ons, also known as modifiers – such as sugary pumps of syrups, extra espresso shots, and sauces – are a $1 billion business for Starbucks.
"Over 60% of beverages were customised, representing a 9% growth when compared to just five years ago," Chief Financial Officer Rachel Ruggeri said.
Narasimhan also said U.S. store operations are improving. The company is installing new ovens and coffee machines in stores, and baristas are staying in their jobs for longer.
Narasimhan, who became chief executive in March, has said he is seeking to improve Starbucks’s supply chain, staffing and equipment to boost the shopping experience for customers. He said Tuesday that the company was making progress on a revamp of the coffee chain. Starbucks said last year that it would invest in store equipment, improve its store designs and increase its incentives for workers.
Narasimhan said he thinks Starbucks can open more stores in smaller cities in the U.S. Delivery sales are growing and Starbucks will continue to invest in its to-go offerings, he said.
