Deadly flu spooks world markets - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Deadly flu spooks world markets 

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In this issue:
» World markets hit by swine flu
» We're into 2nd worst recession since 1975
» ICICI Bank pays the cost of aggression
» India stands tall on another 'corruption' index
» ...and more!

As if greedy bankers and sleeping policymakers were not enough to shake the world with the financial pandemic they helped create, the pigs are having their day in the sun now. Originating in Mexico, where 1,614 people have been taken ill and 103 dead, a deadly swine flu is fast spreading its wings across the world.

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As reported in international media, flu cases have also been confirmed in the US, Canada, Brazil, Europe, and New Zealand. Governments across the world are said to be racing to find and contain pockets of flu around the globe, seeking to stem both the threat of a pandemic and public panic. The US government, for instance, has declared a health emergency within the country. A spokesman for the World Health Organisation has said that the virus was spreading quickly in Mexico and the southern US and has the potential to become a pandemic and a global threat.

The big concern now is that the disease reportedly has been transmitted not simply from pig to human, but from human to human. While there's no news the flu entering India so far, we need to keep our fingers crossed. After all, the memories of SARS are still tough to forget. Though India was relatively untouched by SARS in 2003, we live in more 'connected' times now.

World markets already seem to have been caught in the flu endemic, given the way stocks in Asia and Europe are behaving today. While key markets across Asia, excluding India, closed weak today, stocks in Europe have also opened in the negative.

As reported by MarketWatch, stocks of airline companies traded weak across Asia on fear that the spread of the flu is expected to slow foreign travel. However, on expectations of greater demand for their products to treat the epidemic, stocks of drug makers traded strong. Much like SARS did in 2003, this endemic could deal another blow to the travel and leisure industry, as travel gets curbed from an already low level.


The US economy is in dumps is now known to one and all. But how deep is the trouble? Going by the 'Index of Coincident Indicators' compiled by the Conference Board, a US based independent economic think tank, this recession is the worst since the one in 1973-75 (Great Depression excluded since the index did not exist then). As per the four measures used by the agency to test the severity of a recession, the current downturn is now the worst in two of those - employment and industrial production (see image below), and the second worst in manufacturing and trade sales.

Image source: The New York Times

As per a New York Times report, "this recession is also bidding to be the longest in recent history. If it ends in May - which seems unlikely - it will have lasted 16 months, tying it with the 1973-75 and 1981-82 downturns as the longest since World War II."

With a fair number of Indian companies having made their March quarter results public, a trend line can be drawn across profit numbers without running the risk of going drastically wrong. After putting up with a poor December quarter, things have begun to look up for India Inc. in the current quarter. While the topline is getting a boost in some cases on account of the government fiscal sops, worst for the operating margins also seems to be behind us as easing raw material prices is helping companies earn more per unit of product sold.

The same conclusions were also drawn from a study conducted by one of leading business dailies on about 169 companies, together accounting for 20% of corporate India's revenues and a 33% of its profits. Although profits for the universe fell 13% YoY during the quarter, it was still better than December quarter, where profits for the same universe had shrunk 21% as per the daily. On the topline front, although net sales have come in lower by 6% YoY, we expect the full year number to remain in the positive as unlike developed economies, India is still expected to log in positive GDP growth rate for FY09.

Growth comes at a cost, especially when too much of it is targeted too quickly. ICICI Bank's aggression to tap the growing Indian populace of increasingly affluent middle income group was seen as a winning strategy until a year back. It was seen benchmarking itself to the likes of Citibank in terms of international reach, acquisition of scale through inorganic route, large fee base and technology orientation.

This year, ICICI Bank has reported the biggest drop in profits (down 35% YoY) in six years. The bank like its global benchmark got a little complacent in terms of pricing in the risks. However, thankfully due to the RBI's strict supervision, it stopped short of seeking bailout and conserved capital. Nevertheless, the bank did erode its shareholders wealth this fiscal and has disclosed additional risks on its balance sheet. Wary of incremental NPAs it has reduced its exposure to domestic retail and corporate loans to 61% of the bank's asset book in FY09 as against 73% at the end of FY08. While it may not be appropriate to criticize ICICI Bank's strategy of pioneering the retail credit boom in India since 2004, it has had to pay the price for getting callous.

As per Global Financial Integrity (GFI), India ranks 5th globally among 127 developing countries. For what you ask? Something that will surely not delight you to know about, but as an alert citizen need to know about nonetheless. India ranks 5th for illicit financial outflows, which involve activities such as corruption (bribery and embezzlement of national wealth) and proceed from illegal businesses.

These flows of money enable drug cartels, terrorist organisations and tax evaders to move cash around the globe. They undermine the goals of the World Bank and other lending institutions, strip developing nations of critical resources, and contribute to failed states. The total illicit financial outflows from India rose to about US$ 27 bn per year during the period 2002-2006. According to GFI, such a massive loss of assets is the greatest impediment to economic development and poverty alleviation.

In a recent interview with Newsweek, Nouriel Roubini a.k.a. "Dr. Doom", the New York University professor and one of the very few who rightly predicted the collapse of the global financial system, has indicated that the pace of economic decline is going to slow down going forward.

On being asked whether the world is staring at an economic depression, he said, "I don't believe we are going to end up in a near depression. Six months ago I was more worried about an L-shaped near depression. Today, after the very aggressive policy actions taken by the U.S. and other countries, the risk of that near-depression L has been reduced from 30 percent to 15 or 20 percent. We are instead in the middle of a U."

In the wake of growing anti-offshoring sentiment in the US, Indian IT companies are preparing to increase the proportion of foreign employees in their workforce. As per an Economic Times report, while Infosys and Wipro plan to take up their foreign employee base to 10-15% of their total employee base in three to five years' time, from around 5% now, TCS has set for itself an aim to double its foreign workforce from the current 10,000 over the next five years.

While these announcements might soothe some frayed nerves in the US as offshore outsourcing has been blamed for job losses, such a move will have a detrimental impact on the profitability of Indian IT companies who will have to pay a significant premium to hire foreign resources. But then, saving business from overseas clients will be first priority for these companies. Saving profitability can come next, especially given that their current high profitability provides enough headroom to sacrifice some of it.

India needs more private investments. This is what Dr. Subbarao, the RBI governor, believes. After cutting benchmark interest rates six times since October 2008 and still seeing banks not passing on the benefits to borrowers, he is now urging them to do so to encourage business spending. "To go back to 9% (GDP growth), we need the world to recover fully. Private investment demand has to pick up and banks must reduce the cost of credit," he said at a recent conference in Washington.

04:58  Today's investing mantra
"It is easy in the world to live after the world's opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude." - Ralph Waldo Emerson
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