India leading the BRIC
(Oct 29, 2008)
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In this issue:
» Iceland's growing problems
» Oil's future path
» Promoters take the cake
» Fertiliser industry is strapped for cash
» ...and more!!
Iceland, a block of sub-Arctic lava, topped the 2008 table of the United Nations Development Programme's (UNDP) Human Development Index rankings. Meaning that as a society and as an economy - in terms of wealth, health and education - they were champions of the world. The country with the sixth highest per capita GDP in the world, highest number of people buying books, longest life expectancy for men, the highest ratio of mobile telephones to population, the fastest-expanding banking system in the world, rocketing export business and crystal-pure air - now has several things to worry about.
||The party ends...in Iceland
Residents of Iceland, the first western nation to seek financial help from the IMF since the UK in 1976, are not going to have it easy even after receiving the aid. The beleaguered economy will receive about US$ 2.1 bn from the Washington-based fund. However, besides facing an economic contraction (10% fall in GDP as per IMF), coupled with possible hyperinflation and rising joblessness, Icelanders will now also have to bear the highest interest rates in the last seven years.
Iceland's central bank has unexpectedly raised the benchmark interest rate by a staggering 6% to 18% per annum. This comes as a strong blow to Icelanders who have so far been enjoying one of the lowest tax rates, free education and free medical facilities.
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A box of sweets or a stock of ABB? A bar of chocolate or a stock of IDFC? It sounded very tempting indeed when someone asked this question yesterday! It occurred to be such a novel idea of gifting something that your relatives and friends would be able to treasure for a long time to come, and which would also grow in value!
||What did you gift this Diwali?
The new year (Samvat 2065) as per the Hindu calendar, which began yesterday, signaled a lot of optimism and hope amongst investors. Given the enticing valuations at the current levels, we see no reason why the same should not sustain. This is of course barring the outflow of foreign money that is yet to be sucked out from the markets. Nevertheless, this should not deter long term investors from making their own portfolios more robust and adopting new gifting ideas. What say?
In the mayhem that is eroding value from the companies that they have toiled for years to build, the promoters finally have a say. The Securities & Exchange Board of India (SEBI), the country's capital market regulator, has raised the limit to which promoter-holding in a company can be increased through the so-called 'creeping acquisition'. As per the guideline, promoters and stakeholders holding 55% or more can accumulate stakes in their companies by as much as 5% a year, if their holding is less than 75%.
||Promoters take the cake
The regulator also eased rules related to share buybacks. It allowed promoters to raise their stake by 5% a year after a buyback without seeking exemption under SEBI's takeover guidelines. The guidance comes as a welcome relief to promoters and majority stakeholders in companies that have despite their strong fundamentals, lost considerable market value in the past few months.
In terms of current account deficit that is.
||India leading the BRIC
The emerging nations particularly the BRIC (Brazil, Russia, India, China) nations are a harried lot these days. No longer immune from the crippling effects of the credit crisis and the consequent global slowdown, these economies are finding it hard to sustain their growth momentum of the past. Forget BRIC, the Asian region as a whole is finding itself in troubled waters. Given that the Asian countries' population is younger than its developed counterparts and the labour force is growing more quickly, they therefore need to grow at a faster rate to absorb the workforce. Therefore, if the growth engine of these economies starts to slow down, unemployment and poverty will increase.
Asian economies are facing problems on various fronts. The major one being that the growth of exports will be curtailed as the US and Europe slows down. Further, their net imports of capital will also shrink forcing countries that live beyond their means to cut back on spending. Each of the emerging economies have their own set of problems. Take India for instance. As published in the Economist, amongst the BRIC nations, India has the largest current-account deficit, which widened to 3.6% of GDP in the second quarter. While most of it was covered by foreign direct investment, the heavy reliance of many Indian companies on foreign currency borrowings means that the cost of borrowing has become all the more expensive. Add to this the sharp depreciation of the rupee against the dollar and many companies have had considerable forex losses on their books this quarter.
While Russia has a robust surplus on its current account due to oil and gas exports, the overseas liabilities of the Russian banks far exceed their net foreign assets. Brazil's heavy reliance on commodity exports, which accounts for around 9% of its GDP, is also at the receiving end as the prices of commodities are cooling down.
But hang on! All is not lost. The silver lining in the cloud for Asian nations is the fact that they tend to save more than their developed counterparts and this will ensure that they do not witness the same fate that befell the people of the US and Europe, who have been used to living beyond their means.
Mirroring the US stockmarkets, which saw the Dow Jones rise by as much as 11%, major Asian indices such as the Nikkei (up 7%) and the Hang Seng (up 1%) closed firm. The Sensex closed marginally higher. The optimism caught on with the European indices too, which are currently trading in the positive having raked in gains of 4% to 7%. The buoyancy has been seemingly prompted by expectations that more rate cuts by the central banks (especially the Bank of Japan and the US Fed) are on the anvil.
||In the meanwhile...
Whether this will put an end to the weakness prevailing in the markets is hard to say given that most of the economies are facing a slowdown in growth. While governments guaranteeing bank deposits and injecting money into the financial system to ease the liquidity crunch have led to stockmarkets rallying, this optimism has not lasted for long as losses from mortgage related investments mounted to a mind-boggling US$ 680 bn.
Meanwhile, crude prices rose by 6% to US$ 66.7 a barrel as the OPEC plans to meet again before December to consider a second cut in production especially if prices fail to react to last week's 1.5 m barrel a day output reduction. Gold also gained by 1.5% to US$ 758 an ounce as global equities rallied and the dollar weakened on expectations that the Fed will cut interest rates today.
Oil prices have been considerable volatile in the past one year. Just as it had touched the record high US$ 147 a barrel mark this July at a dizzying speed, so has its fall left everybody especially the Gulf nations in a state of bewilderment. Experts at Goldman Sachs, who had raised the possibility that prices could reach US$ 200 this year, now believe that oil could drop to US$ 50 a barrel in the event of a global recession. The US, which was facing a double whammy what with oil prices rising and economy slowing down, cut back on its consumption. Given that the country accounts for a quarter of the world's oil consumption, oil prices began to retreat. Demand in the US has now slipped to its lowest level since 1999. The ripples are being felt in the other developed nations too such as Japan and France which are witnessing a drop in demand.
||Where is oil headed?
Amongst a host of reasons attributed to the surge in oil prices till July this year, China's insatiable demand for the commodity was cited as an important factor. As per data published in the International Herald Tribune, in the past decade, Chinese demand for oil soared 85%. In fact, China accounted for a third of the world's extra oil demand last year. But growth in China is also now slowing down. While oil falling to below US$ 65 a barrel has been a boon to oil importing nations including India, producers especially the Gulf nations are obviously not happy with the current state of affairs.
Whatever be the case as far as demand is concerned, on the supply side, various problems still continue to haunt the oil industry. These include inaccessibility of oilfields in remote locations, declining productivity of the existing fields, political upheaval in the Middle East and steadily rising costs of production. For the near term atleast, the global economic meltdown is expected to keep the crude prices benign unless the Gulf decides to go in for a drastic cut in production.
The woes of fertilizer companies do not seem to end. As it is the industry is highly regulated and while it is able to recover 20% of its production costs from the farmers, it is heavily dependent on the government for the balance 80%. Massive dues of these companies are still pending and the payment of the same will depend upon the quantum of additional resources the government is likely to generate. That in itself is not likely to be easy given that the government is labouring under the strain of an increasing fiscal deficit, which leaves little headroom to raise further resources. Infact, as reported in a leading business daily, the government is likely to overshoot its fiscal deficit targets in light of the ongoing global financial crisis and slowdown in economic growth.
||Fertiliser industry is strapped for cash
While pending dues account for a considerable chunk of the projected Rs 1.2 lakh crore subsidy bill, budgetary provisions for the year were a meager Rs 31,000 crore. As a result, fertilizer companies are urging the government to pay up the dues and more importantly in cash and not in bonds. The anathema against the latter is attributed to the fact that when companies were trying to sell the bonds in the market, there were not many takers. However, it does not look like the going will be easy for these companies given the state the government is finding itself in and will have to make do with bonds for the time being atleast.
"You only have to do a very few things right in your life so long as you don't do too many things wrong" - Warren Buffett
|| Today's investing mantra
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