Vanished IPOs and more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Vanished IPOs and more... 

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In this issue:
» Slowdown in the IPO market
» Hot money hurts China
» What's in store for the rupee?
» Oil prices not likely to slow demand
» ...and more!

00:00 The IPOs lost their flavour
During several months to January 2008, when the BSE-Sensex touched highs of 21,000, Indian IPOs were the flavour of the season, with virtually every IPO being oversubscribed many times despite rich valuations. And then the juggernaut slowed. The first signs of a crack was witnessed when Wockhardt Hospitals and Emaar MGF had to first lower their respective valuation bands and then withdraw their IPOs from the market altogether. Suddenly, the flurry of IPO activity witnessed in 2007 was subject to a reversal of fortunes in 2008 when the stockmarkets began to trudge the downward path.

The US seems to be feeling the pinch in the IPO market as well. As per reports, not a single company went public in the second quarter, which is largely being attributed to the US economy sinking into a recession. With no IPO in the three months ended June 2008, the number of IPOs in the first half of 2008 stood at 5, a far cry from the 43 offerings in the same period last year.

  • Also read - Tale of two IPOs...

    00:30 Hot money hurts China
    Problems in China do not seem to end. As if the earthquake and the resultant floods in the country were not enough, the Chinese stockmarkets have fallen at a dizzying speed. Another problem that could weigh heavy on China is the growing hot money flowing into the country. While China's trade surplus has started to shrink, its foreign exchange reserves are growing at a faster clip. Infact, as per the Economist, China's foreign exchange reserves soared by US$ 115 bn during April and May, to US$ 1.8 trillion. In the five months to May, reported reserves swelled by US$ 269 bn, 20% more than in the same period of last year.

    As was the case in India in 2007, growing hot money could hurt China in two ways; one is that capital could suddenly flow out, as it did from other East Asian countries during the financial crisis a decade ago and the second is that rising reserves could stoke inflation. Given that the Chinese government is not interested in the yuan sharply appreciating against the dollar, increasing foreign capital into the country would mean the Chinese central bank buying more dollars and consequently releasing more yuans into the economy. This would lead to an increase in money supply and thereby inflation.

    Interestingly, the Economist states, "The Chinese stockmarket, which continues to plunge, is no home for hot money. Some has gone into property. The lion's share is in standard bank deposits. An interest rate of just over 4% on yuan deposits compared with 2% on dollars, combined with an expected appreciation in the yuan, offers a seemingly risk-free profit for those who can get money into China".

    01:15 Stocks deep-fried as oil boils over
    Keeping aside the strong gains recorded today, the Indian benchmark indices have declined to their lowest levels since August of last year. Factors like record high crude prices (currently hovering above US$ 140 per barrel) and the spectre of rising inflation are acting bugbears for the markets. Investors also fear a slowdown in investment spending and economic growth.

    The spike in crude prices follows rising concerns of an Israeli attack on Iran. As a matter of fact, Iran is the second-largest oil producer within the OPEC (Organisation of the petroleum Exporting Countries) cartel and any interruptions in its exports could push prices higher levels. And if the OPEC President's remarks are something to go by, a barrel of crude oil can hit US$ 170 in a short span of time. He, however, anticipates these prices to fall towards the end of the year, not expecting a barrel's cost to touch US$ 200 as has been predicted by some commodity analysts in the US.

  • Also read - The end-or a new beginning?

    01:43 Firm crude prices not likely to curb demand...
    ...says the International Energy Agency (IEA). This is despite the doubling of oil prices and weakening economic growth. As per the International Herald Tribune, the agency has stated that while the developed countries would witness a small decline in oil consumption, this will be more than offset by an estimated 3.7% a year increase in demand from 2008 to 2013 in the developing economies of Asia, the Middle East and Latin America. This is expected to lead to a further tightening of supplies. The IEA further states that oil demand in developing countries will account for 49% of total global demand by 2013 as compared to 36% in 1996 with demand rising most in China.

    While the increases in supply will be relatively smaller, around 250 major new field projects are expected to begin production in the next few years in the non-OPEC countries. And the spare capacity in OPEC countries is expected to rise from 2.5 m barrels a day in 2008 to more than 4 m barrels a day in 2010. Even then, it will still be less than 5% of global demand. What this essentially means is that firm crude prices are here to stay in the medium term atleast.

    02:19 What's in store for the rupee?
    Volatility in the movement of the Indian currency continues to hog the limelight. After appreciating by nearly 11% in 2007, Bloomberg reports that JP Morgan Chase & Co, expects the rupee to weaken to Rs 45/US$ by the end of the year, against an earlier forecast of Rs 40/US$. Rising crude prices and India's widening current account deficit have been cited as the primary reasons for the depreciation of the Indian unit. Readers would do well to remember that surging FII inflows into the country and the RBI's intermittent intervention in the forex market had led to the strengthening of the rupee in 2007. The stockmarkets too kept marching upwards as the US Fed's continuous lowering of interest rates widened the interest rate differential between India and the US. The unraveling of the subprime crisis in the global financial markets, spectre of food shortages and rising inflation, one after the other, began to put the breaks. With the stockmarkets exhibiting a volatile trend in recent times, the focus has once again shifted to India's widening trade deficit, thereby strengthening the case for the rupee to weaken.

  • Also read - Indian rupee: Scaling new heights

    02:51 In the meanwhile...
    After the hammering received on the bourses yesterday, the Indian indices recovered strongly today to close higher by 5%. This is in sharp contrast to the Asian indices, which closed the day in the red. Rising oil prices and concerns about a slowing global economic growth continued to weigh heavy on these indices. As per Reuters, oil prices rose towards the US$ 142 a barrel mark led by forecasts that global supply will lag demand and further weakness in the dollar. The euro gained against the dollar on expectations that the European Central Bank would raise interest rates on Thursday. Akin to India, the European markets too have opened in the green with most of the major indices trading higher by 1%.

    03.13 India's trade deficit blues
    The balance of payment numbers released by the RBI for the fourth quarter ended March 2008 do not appear very enthusing. These numbers in a nutshell highlight a sharp rise in trade deficit due to a steep rise in crude oil imports, steady growth of invisibles, a current account deficit during the quarter as against a surplus in the same period last year and a considerable rise in capital inflows led by FDI, ECBs leading to a large accretion to reserves. However, volatility in the global stockmarkets meant that FIIs were net sellers during the fourth quarter as against net buyers in the corresponding period last year. For the full year ended March 2008, oil imports recorded a growth of nearly 35% YoY mainly driven by the surge in global crude prices. That said, in terms of quantity imported, growth was subdued.

  • Also read - Economy: That invisible(s)' touch...

    03:46 Zeroing in on energy efficiency
    The meeting of the G-8 (Group of Eight) countries in July this year will have several important agendas. The centre stage will be taken by the discussion on energy efficiency. India itself will be a strong participant in this having initiated a 'climate change' plan weeks before the meet.

    The Indian government has pledged to devote more attention to renewable energy, water conservation and preserving natural resources in the country's first-ever climate change plan, but it did not set any concrete goals or pledge to cap harmful emissions. According to the recent World Bank data, India is the fourth-largest emitter of carbon dioxide (the main gas linked to climate change) after the US, China and Russia. On a per person basis, though, Indians emit far less carbon dioxide than people in those countries and European nations.

    According to the report, the average Indian generates about one-tenth the amount of carbon dioxide as someone in Japan or Europe, and one-twentieth that of an American. According to the scientists in the West, blistering economic growth and huge populations in India and China mean these countries are contributing more to the growth of emissions than developed countries. But, on a per-person basis, these nations still produce far fewer pollutants and gasses than developed countries. Thus, China and India would argue that this is how their contribution to climate change should be judged.

    It may be recalled that in April this year, the US President Bush pledged that his country would halt the growth of greenhouse gas emissions by 2025, without giving any specifics about how that would happen. This was after US had long resisted emission caps and refused to join the Kyoto Protocol on limiting such emissions. On the other hand, China's first climate change plan released last year called for improved energy efficiency and expansion of renewable and nuclear energy sources. But none of the targets were really met.

  • Also read - As you sowed carbon

    04:50 Today's investing mantra
    "In the business world, the rearview mirror is always clearer than the windshield." - Warren Buffet.

  • Also read - More lessons from Buffett
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