End of the slowdown?
(Sep 23, 2008)
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In this issue:
» Emerging markets losing their sheen
» No respite for Ranbaxy
» ECB limits raised for infra companies
» Mitsubishi picks up stake in Morgan Stanley
» and more!
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||Mobius remains a bull!
Mark Mobius, executive chairman of Templeton Asset Management is of the opinion that the US slowdown will not last long and that the current valuations offer an opportunity to buy low. He says that private equity investors with an investment time frame of five years should especially cash in on the current opportunity. He believes that export oriented industries will do fine as world trade is still expanding.
Moreover, China, India and Russia have the resources to boost domestic spending. In fact, he is increasing stakes in banks and financial institutions in emerging markets. It may be noted that Mr. Mobius had earlier indicated that the Merrill deal and Lehman bust signaled the bottom of the US equities market.
||As you sow so shall you reap
What happens when a country with the most capitalistic outlook urges other nations to be a tad socialist? If the recent events are anything to go by, it meets with a flat refusal. Indeed, efforts of the US government to solicit support from other rich nations of the G7 committee for lending a helping hand in financial sector bailout and thus lighten its burden, has fallen on deaf years.
Although Japan and countries from Europe have offered support to the bailout plan, they seem to be reluctant to provide financing for a problem that has been outright 'Made in America' and a consequence of lax standards. In other words, these countries want the US to reap what it sowed. Furthermore, these nations are also likely to block any bailout that gives undue advantages to US institutions in the global financial markets.
It should be noted that while the treasury plan extends to foreign banks with significant American operations, it is still not clear what would happen to foreign banks that have exposure to US mortgage related securities but do not have a significant US presence. As far as the other six of the G7 nations are concerned, it is the nationality of the product and not the owner that should matter. In that case, the already bloated US treasury liabilities might fatten a little more.
Also read - Casino capitalism?
||Emerging markets getting the axe
BRIC (acronym for Brazil, Russia, India and China) nations are no longer the attractive investment havens they were once touted to be. And the theory that these nations are 'decoupled' from the US given that they were relatively insulated from the subprime crisis no longer holds ground. This is because following the unraveling of the credit crisis in the US and Europe, investors chose to book profits in these emerging markets to salvage the losses suffered in the developed markets.
And the result was a meltdown in the stockmarkets of these countries. Besides this, raging inflation and the prospect of a slowing global economy did nothing to douse investors' fears. At a time when the economies of emerging markets were growing at a much faster pace than their developed peers, investing in emerging markets was considered the flavour of the moment. But given that many investors burned their fingers in the credit crisis, most of them have now converted to being risk averse. As per a survey conducted by Merrill Lynch and published in the Economist, fund managers are now holding more bonds than normal for the first time in a decade. It also states that emerging market funds have seen an outflow of US$ 26 bn, compared with an inflow of US$ 100 bn in the past five years.
As far as India is concerned, while falling oil prices have provided some sort of a breather, the sharp depreciation of the rupee against the dollar this year has meant that the gains will not amount to much given that India imports around 70% of the oil that it consumes. China too has been at the receiving end with the economy growing at a lower rate than what it did last year and exports coming under pressure. This has led to the People's Bank of China going in for rate cuts to stimulate the economy.
Barely able to withstand the global financial turmoil, Indian banking companies which hold outstanding loans in excess of Rs 2 trillion to domestic infrastructure companies, are unwilling to commit long term funds. In such a scenario, infrastructure companies that were hoping to raise funds for a longer tenure seem to be starving for the same as the central bank's monetary measures have rendered domestic borrowing painfully expensive.
Thus in a measure to relieve infrastructure companies of this quandary and ensure the completion of their projects the government has increased their overseas borrowing limit nearly 5 fold to US$ 500 m per year. Will this solve the problem? Not in its entirety.
While the ECB route will offer some window of liquidity to select infrastructure companies rather than increasing money flow in the economy and stoking inflation, the same is unlikely to meet the precise needs of the borrowers. The end use of the foreign currency remains restricted to import of capital goods, overseas investments and refinancing of existing ECBs. Also, the cost of the ECBs when accounted for including the cost of hedging for currency risks are almost at par with the domestic borrowing costs. Thus, companies planning to build roads, telecom and power projects may not find this leeway bridging their funding gap.
||Morgan's marriage to Mitsubishi|
After the last two i-banks standing, Goldman Sachs and Morgan Stanley were granted the approval to transform themselves into bank holding companies, Japanese bank Mitsubishi will acquire around 20% stake in Morgan Stanley thereby infusing cash to the tune of US$ 8.5 bn in the latter and speeding up its process of converting into a commercial bank.
Goldman, in the meanwhile, is planning to raise capital to buy assets assuming that is finds the right opportunities. The demise of Merrill Lynch and Bear Stearns, the bankruptcy of Lehman and the metamorphosis of Morgan Stanley and Goldman into commercial banks means that the era of investment banking, which dominated Wall Street for around 20 years effectively comes to an end.
Regulators all over the world now seem to be following close on Ranbaxy's heels. After the US FDA, Canadian and German regulatory authorities are carefully scrutinizing drugs manufactured from Ranbaxy's plants. Besides this, as reported in the Mint, the European drug regulator called European Medicines Agency and other individual national drug regulators in the European Union are all reviewing the US FDA decision. These developments have indeed blemished the reputation of India's largest drugmaker. The bone of contention are the two manufacturing plants at Dewas and Paonta Sahib which have failed to meet the quality standards of the US FDA. Ranbaxy's efforts in addressing these issues so far have all been in vain and this was amply demonstrated when the FDA put a ban on import of 30 drugs by the US by these two manufacturing plants. Europe and the US are some of the largest markets for Ranbaxy and it is in the best interests of the company that it takes effective measures in correcting the issues raised by the FDA.
||Regulators chasing Ranbaxy
Also read - Ranbaxy appoints US mayor as its trouble-shooter
||In the meanwhile...
Asian stocks closed mixed today. While Japan, Korea and Taiwan notched gains of 1% each, other key indices were at the receiving end. European indices were languishing in the red given the jump in oil prices by a record yesterday and on concerns that the US financial industry bailout will not prevent a recession. The BSE-Sensex closed 3% lower. Crude oil spiked nearly US$ 25 per barrel in a single session yesterday though finally settling at US$ 16.4 per barrel higher than the previous close. This was the sharpest ever rise recorded by oil and eclipsed the US$ 10.8 a barrel gain seen on 6th June 2008.
So what was the reason for this sharp move in crude prices when the entire world is living in fear of a deep economic slowdown (which leads to demand destruction)? One was the covering of short positions by oil traders as yesterday was the last day of trading in the October oil futures contract (trading is usually volatile on the last day of a contract expiry).
The second was the dollar, which crashed against other major currencies on fears that the trillion dollar bailout of financial institutions will exert tremendous pressure on the US government's deficit to rise further.
As a matter of understanding, crude oil is traded in US dollars around the world. As such, oil becomes more expensive when the dollar weakens. As a matter of fact, the combination of spending US$ 700 bn on buying illiquid mortgages and providing another US$ 400 bn to guarantee money-market mutual funds is expected to significantly enhance the US government's deficit.Also read - Pressure on dollar of the US bailout plan
||Gold touches US$ 900 an ounce...
...before retreating to US$ 889 an ounce as investors sold the yellow metal to cover losses in the equity markets.
""Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised"." - Warren Buffett
||Today's investing mantra
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