Battling slowdown & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Battling slowdown & more... 

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In this issue:
» Dollar to notch gains
» Supply worries push up crude prices
» India's industrial growth picks up
» In-licensing in pharma catching on
»  ...and more!

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00:00 Slowdown the world around
Recession seems to be catching up on the US, Europe and Japan. It has been a year since the credit crisis first made its impact felt and the world is still reeling under it with no immediate respite in sight. Meanwhile, inflation is scaling higher across the countries and central banks are probably busier than ever trying to keep their respective economies from going under. To put things into perspective, Japan's GDP shrunk by 2.3% in the three months ended June and faces the gloomy prospect of its first recession in six years.

Britain is also struggling to keep its head above the water. As per reports, recession in Britain is expected to be deeper and last longer than in the US. This is because the country's two main industries namely housing and finance are in a state of turmoil. The problems in the US sparked by the subprime crisis and followed by falling house prices and gargantuan write downs by financial firms are well documented. The developing economies are also facing the heat with China and India struggling to battle the rising inflation.

This effectively means that a slowdown in economic growth seems inevitable and realising this, stockmarkets across the world are rapidly losing their sheen. Stocks that were trading at ridiculous valuations earlier have seen their prices crash and long term investors with a three to five year investment horizon can certainly take this opportunity and invest in sound companies with strong fundamentals and good managements. The pessimism prevailing all around should not dissuade serious investors to shy away from stocks and in fact they should capitalise on this opportunity to make some sound investments and reap the rewards in the long term.

00:47 The dollar will gain strength...
While one cannot say with conviction that the US economy is on a path to recovery, it has not stopped the dollar from inching upwards against the Euro. The recent gains in the dollar have largely been a result of a slump in the European economies rather than a revival of the US economy. The fact that the European Central Bank has kept rates unchanged to rein in inflation has also played a major role in boosting demand for the dollar. And while the US economy is chugging along at a snail's pace, the slowdown in Europe in comparison is touted to be much steeper.

In fact, Marc Faber in his recent interview with Bloomberg has adopted a bullish stance on the dollar. According to him, weak demand in the US leading to lower imports and higher oil prices tightening global liquidity would strengthen the US dollar. He expects the dollar rally to continue for the next three to six months.

What this would mean in the Indian context is depreciation of the rupee against the greenback. The rupee last year notched considerable gains against the dollar due to a surge in FII inflows and the weakening of the dollar globally after the exposure of the subprime crisis. Taking into account the widening fiscal deficit, lower investments by FIIs as compared to the previous year and an appreciating dollar, any gains for the rupee seem limited.

  • Also read - Where is the rupee headed?

    01:30 India's industrial growth picks up pace in June
    As reported on the Bloomberg, India's index of industrial production (IIP) is estimated to grow by 5.4% YoY in June 2008, up from the 3.8% YoY growth recorded in the May. However, if one were to take a consolidated view for the first six months of this calendar year, growth in production has averaged 5.5%, less than half the pace it clocked in 2007. Now with the RBI on an interest rate hiking spree on the back of inflationary pressures, industrial growth might still slow down further.

    Bloomberg also reports that the impact of rising interest rates and slowing discretionary spending has led to India's monthly car sales falling for the first time since November 2005. Quoting a report from the Society of Indian Automobile Manufacturers (SIAM), the business portal has indicated that volume sales of passenger cars in July fell 1.7% YoY to 87,724 units. The fact that more than half the vehicles sold in India are bought on credit has aggravated the situation with consumers now paying almost 12% interest on auto loans compared with around 7% in 2003. Tough times indeed for the domestic automakers who are grappling with rising input costs and a subsequent pressure on margins.

    Auto: A tough June quarter
    (%) OPM in 1QFY08 OPM in 1QFY09 Sales growth in 1QFY09
    Maruti 14.6% 9.8% 20.9%
    Tata Motors 12.1% 7.5% 14.4%
    M&M 10.6% 7.5% 26.1%
    Ashok Leyland 10.8% 6.2% 16.2%
    Punjab Tractors 3.7% 9.1% 80.6%
    Bajaj Auto 13.1% 11.5% 9.6%
    Hero Honda 10.8% 12.0% 16.2%
    TVS Motor 2.4% 3.4% 16.3%
    Source: Equitymaster Research

    02:14 Crude impacted by fears over supply
    Geopolitical issues have come to the fore and with it have pushed the crude prices up as fears over disruption in supplies takes the centrestage once again. The recent development which has nudged oil upwards is the conflict between Russia and Georgia. Bloomberg reports that the Russian bombers attacked the Baku-Tbilisi-Ceyhan pipeline supplying Azeri crude across Georgia and Turkey to the Mediterranean Sea.

    Importantly, Georgia is a key link for the US as it serves as an important link between the Caspian Sea region and the world, bypassing Russia. Therefore not surprisingly, the US has been very vocal in condemning the attack. The attack has raised concerns about a disruption in supply as a result of which oil prices rose by US$ 1 a barrel to nearly touch US$ 117. Having said that, oil is still 20% below the high of US$ 147 a barrel it had touched on July 11, 2008.

  • Also read - Is this the end for commodities?

    02:43 In the meanwhile...
    Asian indices closed mixed today. While China and Indonesia closed lower by 5% and 3% respectively, Japan closed 2% higher. The Indian stockmarkets also scaled higher to close with gains of 2%. The buoyancy in some of the Asian markets has been attributed to falling commodity prices and prospects of a better growth in corporate earnings. According to Bloomberg, a measure of six metals traded on the London Metal Exchange dropped 3.6% on August 8. While zinc lost 3.4%, copper and nickel were down by 3.5% and 3.7 % respectively. The European stock indices are trading firm currently.

    02:59 Construction activity worldwide on hold
    The construction industry around the world, which was booming at one point of time, seems to have caught the recessionary fever, which has now put the brakes on growth. The International Herald Tribune (IHT) has reported that the list of infrastructure projects that have been either scrapped or kept on hold is increasing and has been attributed to a plethora of reasons ranging from rising crude prices and raw material costs to regulatory hurdles and environmental concerns. Add to this the fact that credit is slowing down and consumers are vary of making any purchases against a backdrop of falling house prices and rising interest rates, the scenario for this industry in the near future does not appear to be very rosy.

    The US so far was able to tide over the weakening conditions in the country due to strong demand overseas especially the emerging markets. However, this is likely to change. The economies of the European region are slumping and the emerging markets are battling to counter rising inflation. The IHT further states that Morgan Stanley has forecasted the value of projects that had been delayed or canceled worldwide to approach US$ 60 bn this year, almost four times the annual average, and that projects now counted as delayed would be canceled eventually.

    However, there is the other side of the coin to be considered. The World Bank has estimated that emerging economies are likely to spend US$ 1.2 trillion on roads, railways, electricity, telecommunications and other projects this year, equivalent to 6% of their combined GDPs-twice the average infrastructure-investment ratio in developed economies. As far as India is concerned, juxtaposing the opportunity in the infrastructure space with the fact that lack of the requisite infrastructure is the prime hindrance to India's growth, the visibility of the earnings potential of Indian infrastructure companies looks very robust in the longer term.

  • Also read - Opportunities in India's infrastructure build-up

    03:45 Flavour of in-licensing catching on?
    It is a well know fact that Indian pharma companies in the past had largely been looking to out-license some of their potential candidates in the R&D (research and development) pipeline to global innovator companies in return for milestone payments. This achieved two purposes. One is that it enabled the immediate monetisation of their R&D assets, given the riskiness and the uncertainty surrounding the business and the second is that it provider a breather in terms of curtailing costs. The global innovator's better expertise in doing research was an added advantage. Amongst domestic pharma companies, Glenmark has been the most successful as compared to its peers in this regard managing to find partners for at least three of its molecules.

    A reversal of roles is likely to slowly catch on and this was demonstrated by Ranbaxy, which in-licensed a molecule in the dermatology space from a Canadian company for development. As per the terms, it will be Ranbaxy that will be doling out milestone payments depending upon the progress of the molecule and bearing costs upto a pre-determined cap. Investors would do well to recollect that post the Daiichi deal, the R&D business of Ranbaxy will not be demerged into a separate company. The R&D efforts of Indian pharma companies are still in the nascent stages and while Ranbaxy's deal could set a trend going forward, it will be awhile before these companies can match the resources and the capabilities of global pharma innovators.

  • Also read - Pharma: Why out-license?

    04:25 Your house can be seized...
    ...even if you are diligently paying the equated monthly installments (EMIs) on your house loan, reports a leading business daily. This is because a clause in the loan agreement states that in the event of house prices falling drastically, home loan lenders can either seize the property or ask the borrower to bring in extra collateral. If none of the latter conditions can be met, then the home loan lender will brand the borrower as a defaulter. While it is a well known fact that a default in the payment of EMIs will result in banks recovering the loan amount by selling the collateral, the above mentioned clause in agreement may not be such as well known fact. Having said that, there have not been instances as of yet when this clause has been invoked and while prices in some parts of the country have fallen by around 15%, in the other parts prices have not yet shown significant signs of cooling off.

    04:46 India walks the golden path
    India made its mark at the Beijing Olympics by winning its first ever individual Olympic gold and the distinction for the same belongs to Abhinav Bindra in the men's 10 metres air rifle event. India's last Olympic gold was from hockey in the 1980 Olympics event. In a nation, which is crazy about cricket, this is definitely a very significant event. Way to go India!

    04:55 Today's investing mantra
    "There seems to be some perverse human characteristic that likes to make easy things difficult." - Warren Buffett.

  • Also read - More lessons from Buffett
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