Markets tumble, India downgraded & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Markets tumble, India downgraded & more... 

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In this issue:
» Freddie and Fannie cast their nets wide
» Food woes continue; this time it is oilseeds
» Ranbaxy is making headlines...
» Aluminium prices heading northwards
» ...and more!

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 00:00    Freddie and Fannie cast their nets wide
The predicament faced by the US' largest mortgage financiers Freddie Mac and Fannie Mae continued to have a dampening effect on markets around the world with most of the Asian indices ending in the red on Monday. The scenario has not improved today either. The weight of the subprime crisis was too much to bear for these two institutions and last week saw the stock of these two companies plummet by 18% and 16% respectively in a single day. In the latest development, the Bush administration has announced plans to bail out these institutions by asking the Congress to approve a package that would infuse a staggering sum of around US$ 300 bn into them. After the unraveling of the subprime crisis, this is the second time that the government has come to the aid of financial institutions, the first one being its involvement in bailing out Bear Sterns out of trouble. And this has again brought to the fore the extent of the credit crisis, which appears to be much deeper than what was envisaged earlier.

Not surprising then, that the Asian markets are reacting negatively to this development given that a majority of them rely on exports to the world's largest economy. As if this is not enough, high oil prices and steep inflation is only adding more fuel to the fire.

 00:45    India has been downgraded
With its finances taking a turn for the worse, it was being feared that global ratings agencies might downgrade India. Those fears have been conformed by Fitch Ratings. The ratings agency has lowered India's domestic rating outlook from stable to negative and has attributed the same to the government's worsening fiscal position. While the government aims to restrict the fiscal deficit within 2.5% of GDP in FY09, it certainly looks like a tall order. This is given the fact that besides mounting interest payments and public wages, it has to deal with higher subsidies and bonds issued to oil and fertilizer companies. Not to mention the Rs 700 bn farm loan waiver. Fitch expects fiscal deficit to rise to around 6.5% of GDP in FY09 or even higher.

As far as the external account is concerned, while the trade deficit is expected to widen due to firm oil prices, Fitch expects the current account to be largely unchanged at 1.5% of GDP. One must say that high inflation, the struggle to stay in power and overall global weakness is testing the mettle of the Indian government.

In a related development, within 18 months of India being lifted to the 'investment grade' category by global rating agency Standard & Poor's (S&P), failure to respond adequately to negative macroeconomic developments and political instability has led the agency to propose a downgrading of the economy's debt rating.

  • Also read - S&P downgrades India

     01:30    Food woes continue; this time it is oilseeds
    Insufficient rainfall is expected to render India vulnerable when it comes to oilseeds. India is the world's second largest buyer of oilseeds after China and a spell of dry weather in the biggest growing regions of the country means that it will have to import the same. India of late has seen its inflation surge within a striking distance of 12% and needs to boost cooking oil supplies to temper prices. As per reports on Bloomberg, increased imports of oilseeds by India will support prices of palm and soybean oils, which already reached record levels last year. Statistics further reveal two not so enthusing facts - one is that India's edible oil imports rose to 13% in the eight months ended June as compared to the corresponding period last year; the second one being the fact that the June-September monsoon rains, which account for four- fifths of the nation's annual rainfall, was 20% less than normal in the week ended July 9. This certainly does not bode well for the Indian economy, which is also reeling under high oil prices.

  • Also read - Food Vs Fuel: The argument continues...

     01:55    Ranbaxy is making headlines...
    ...but for the wrong reasons this time! The pharmaceutical giant was on the front page of leading news dailies earlier when it announced that the company's promoters are selling their stake to the Japanese pharma company Daiichi for a sum between US$ 3.4 bn to US$ 4.6 bn. This time, Ranbaxy is in the news on allegations made by the US FDA that the company has forged crucial data in a bid to get marketing approvals for its drugs in the US market. Readers would do well to recall the fact that the company was at the receiving end last year when Ranbaxy's Paonta Sahib facility was not complying with the standards set by the US FDA. This had led to a shut down of the plant and a delay in the launch of some of its products in the US, including 'Pravastatin 80 mg' for which Ranbaxy had a 180-day exclusivity.

    The US FDA's allegations may not go down well with the new owners of the company, Daiichi. While Ranbaxy has denied these allegations, in the event that they are proven to be true, then it will be detrimental to India's largest pharmaceutical company, for which the US contributes around 24% to total revenues. Not to mention the vast sum that the company may have to dole out in potential damages. Given that US is a highly litigious nation, any class action suits filed could also prove to be detrimental to the company. The stock, which was duly pummeled on Monday with losses of 11%, closed lower by another 15% today, amply demonstrating that the stockmarkets have not seen this development in a favourable light.

     02:30    Markets spiral downwards
    There seems to be simply no respite for stockmarkets around the world. The dollar sank to a record low against the euro; in fact the lowest since the inception of the euro since 1999. This is on the back of Fed Reserve chief Bernanke's comments that the credit crisis would hurt economic growth. Financial stocks were hammered and weighed heavy on the overall indices. The US government's plan to bail out Freddie Mac and Fannie Mae did nothing to soothe fears and only highlighted the depth of the subprime crisis.

    While the major Asian indices recorded losses between 2% and 4%, Indian stockmarkets too were at the receiving end, falling by a substantial 5% on the back of overall global weakness and political turmoil in the country. This gloom has spilled over to the European markets as well with the key indices trading lower by around 2% to 3% at present. After a record run on the bourses, which saw the Indian indices touch 21,000 levels in the early part of the year, the BSE Sensex is now nearly back to the levels seen in July 2006!

  • Also read - Results scoreboard

     03.15    Aluminium prices to cart an upward path
    As per reports on Bloomberg, China is set to cut aluminium production by as much as 10%, which in turn is expected to lead to a 21% rise in aluminium prices. For the past six years, China has been grappling with increasing power shortages. Aluminium is the most energy intensive metal to make and Bloomberg further reports that the energy used by China's aluminium smelters each week is enough to provide power for more than 2 m people for a year. It is no surprise then that output has been curtailed. Another fallout would be a curb in Chinese aluminium exports that substantially soared in more than three years in June.

    Indian aluminium players will stand to benefit from high aluminium prices in the form of better realisations. However, other sectors may lose out due to higher input costs. To put things into perspective, as aluminium is used in making of parts in planes and cars, this is certainly not good news for the airlines and auto sector, which is already reeling under the double impact of rising energy prices and high inflation.

     03.55    India surpasses China...
    ...in the quantum of redemptions that is. Following the volatility and uncertainty that is prevailing in markets around the world, funds investing in emerging markets including India are facing increased redemption pressures. Infact, as per reports in a leading business daily, India-dedicated funds have witnessed outflows to the tune of US$ 944 m in the month to July 9. This is the highest redemption faced by any country-specific funds group in the period. In this regard, there is a considerable distance between India and China; the latter occupying the second spot with outflows of US$ 469 m.

    The deadly cocktail of subprime meltdown, the US economy teetering on the edge of recession, skyrocketing oil prices, mounting inflation and political turmoil have accentuated headaches for investors who are looking for a way out. FIIs seem to be leading the pack in this regard and have pulled out around US$ 5.7 bn from equities between January and June 2008.

     04.15    Indian diamonds: A cut above the rest?
    India is reportedly looking to emulate or even surpass Antwerp in the diamond industry. At present, the production and distribution of diamonds is largely consolidated in the hands of a few key players, and concentrated in traditional diamond trading centers. The most important being Antwerp, where 80% of all rough diamonds, 50% of all cut diamonds and more than 50% of all rough, cut and industrial diamonds combined are handled. This has effectively made Antwerp the diamond capital of the world. Since the Second World War, families of the Hasidic Jewish community have dominated Antwerp's diamond trading industry. However, in the last two decades, Indian and Armenian traders have also been playing an important role.

    India has been very strong in the area of polishing diamonds and is looking to make a major foray into the trade of rough diamonds. The International Herald Tribune states that in FY07, India imported US$ 8.8 bn worth of rough diamonds and exported US$ 10.9 bn of polished gems. Other two points in India's favour; the first one being that 40% of the trade in Antwerp is controlled by Indians, the second one being that Indians make up about half of De Beers' elite customer list. Having said that, there are some caveats to be considered.

    Due to increasing competition, India's share of diamond polishing by value is likely to fall to 49% by 2015, as against 57% at present. Further, India lacks infrastructure. For instance, the construction of the diamond bourse in Mumbai has taken ages to be completed. Besides Indian polishers being one of the lowest paid diamond workers in the world, the industry is also at the mercy of the Indian rupee. This was more apparent last year when the sharp appreciation of the rupee against the dollar hampered jewellery exports.

     04.52    Today's investing Mantra
    "If a business does well, the stock eventually follows." - Warren Buffett

  • Also read - More lessons from Buffett
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