India to grow at, 8%!

Nov 11, 2008

In this issue:
» Stimulating the auto industry
» Export target hard to achieve
» Porsche breaks hedge funds
» IEA to cut oil demand forecast
» ...and more!

 Making a case for auto
The economic slowdown has taken its toll on the US auto industry. Biggies such as General Motors, Chrysler and Ford have reported a more than 30% fall in volumes in the month of October. The industry is highly dependent on the financing environment. And with the situation remaining grim in terms of higher interest rate, lack of financing and weak consumer confidence, the auto industry worldwide has taken the flak.

Further given that auto is an integral part of the manufacturing industry and is the first to get impacted by a slowdown, the newly elected Democrats are making a case for pulling the industry from the slump. This is part of the camp's strategy to give first priority to repairing the battered US economy.

As reported on Bloomberg, President-elect Barack Obama's camp does not agree with the current Treasury Secretary Henry Paulson that the US$ 700 bn bailout package announced should not include non-financial companies. Whether Obama's team will be successful in implementing these policies remains to be seen and a clearer picture will emerge only when the newly elected President assumes office in January 2009. But it is obvious that a rollback of many of the Bush policies is on the cards.

As far as the Indian auto industry is concerned, times remain tough for the manufacturers. As per SIAM (Society of Indian Automobile Manufacturers), the auto industry that accounts for 30% of India's manufacturing output, has recorded a 14.4% YoY decline in sales (from automakers to dealers) during October 2008. Commercial vehicles (CV) segment has suffered the most with its sales declining by 36% YoY. While 2-wheeler sales declined by 14.5% YoY passenger car market recorded a 9% slump during the month. This is the weakest sales performance by the Indian auto industry in eight years and has incidentally come in the month that generally records the highest sales (due to the festive season) in any given year.

Automakers fear that the next two months (November and December) will be equally bad considering that many buyers defer purchase decisions to the new year, as has been the case in the past. So, are Indian policymakers expected to take cues from their US counterparts in voicing their concerns on the state of the country's auto industry? We doubt, given that they (the Indian policymakers/politicians) are already quibbling over their political future, which shall be decided in the upcoming general elections.

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 Export target hard to achieve
Already burdened with a burgeoning trade deficit, things are not looking good on India's exports front. As per Assocham's data published in a leading business daily, Indian exports are likely to fall short of the targeted US$ 200 bn in FY09 by about 20%.

The industries which are likely to be impacted the most, are textiles, apparel, gems and jewellery, diamonds, brassware, handicraft and leather. This is worrisome given the fact that they account for a larger chunk of India's exports to the US, European Union (EU) and the ASEAN (Association of South East Asian Nations) region. Not surprisingly the reasons attributed for the same include deepening recession in the developed countries of the US and Europe and rising ocean freight rates.

Lack of infrastructure and increase in input costs are some of the other factors that are expected to bog down growth in exports. Given the poor state of India's infrastructure, rising logistics and transportation costs are expected to chip away the competitiveness of the exports industry. The silver lining in the cloud is the fact that exports of pharmaceuticals, engineering, metal products and FMCG are likely to witness good growth as the demand for these goods is robust in the economies of the Middle East, South East Asia and Africa.

 In the meanwhile...
Asian stocks were at the receiving end today with the key indices closing lower in a range of 1% to 5%. European indices too are languishing in the red. The India's benchmark BSE-30 index closed lower by 7%. Weakness was prompted by speculations that the profit slump will worsen. Crude oil fell by 3% to US$ 60 a barrel as the International Energy Agency (IEA) forecast a slowdown of oil demand in 2009. This was in sharp contrast to the scenario yesterday when crude oil surged by more than 5% led by China's stimulus package and news of Saudi Aramco, the world's biggest state oil company intending to cut production in December.

Meanwhile, with the global financial turmoil uppermost in everybody's minds, the group of 20 industrial nations (G-20) urged the governments and central bankers across the world to lower interest rates and take spending a notch higher to prevent economic growth from flagging. Ironically, cheap money is propagated as the mantra to cure problems created by cheap money in the first place.

 India to grow at 6%... or 8%
Predictions about the growth rate of the second fastest growing economy have drawn myriad views from several agencies and experts. This is particularly in the wake of the fact that the Western world is not expected to grow at all and the fastest growing economy, China, has unveiled a mega package to keep its growth rate above 8% in FY09.

While the predictions of most agencies and experts stand in the periphery of 6.5%, which has been India's average growth rate over the last decade, our Prime Minister begs to differ. He believes that India's growth in this fiscal will continue to edge closer to 8%. And in fact, his views have been supported by a leading economic research agency that tracks the country's economic data. The Centre for Monitoring Indian Economy (CMIE) believes that that even in a worst-case scenario, the country's growth is unlikely to dip below 8%.

The basis of this conclusion has been the demand for key infrastructure facilities like electricity and sustained consumption on the back of higher disposable income and higher savings. The CMIE believes that the biggest sector attracting investment currently is electricity, where there is no lack of demand. Hence infrastructure investment is set to continue, albeit at a marginally slower rate. Similarly, the tax relief offered to individuals and farmers in the last Budget coupled with the benefits of revised salaries under the Sixth Pay Commission recommendation and increased employment in rural areas will help in keeping consumption demand and savings undisturbed by the global meltdown. Amen!

 Demand for crude on an oily slope?
The IMF recently warned of the first concurrent recession in the US, Japan and Europe in more than 60 years. In a related move, the IEA may cut its 2009 forecast for oil demand for the third time. Currently the IEA estimates demand to grow by 0.8%. As per former analysts of IEA as reported on Bloomberg, it may be lowered to as much as 0.4%. It may be noted that industrialised economies generate bulk of the steady demand for oil while growing giants like China and India generate the incremental demand. The wobbly economic situation in the industrialized countries and a slowing China has taken much of the steam out of crude prices.

 Trouble down under
Australia came out pretty much unscathed through the 1997 financial crisis and even the dot-com bust. But this time around things are different. The mining boom in the country during the past five years aided a 30% surge in household incomes. The country's economy is heavily dependent on the export of commodities, and emerging economies have been one of the biggest customers to the country.

A dip in the global demand for commodities would have grave consequences on the export earnings that helped boost Australian incomes. Thus the performance of emerging markets, especially China, holds the key to the fate of the country's economy going forward. The chain reaction that was set off in the US is bound to have an effect on China. And Australia in turn has a direct relationship with China. Thus all in all, Australia now finds itself staring at the prospect of the first recession in the country since 1990.

 DHL shakes up Ohio
"That's one small step for a man, a giant leap for mankind," exclaimed Neil Armstrong on putting his first foot on the moon. Something similar, though in the negative sense, can be said of the global delivery major DHL, which has reduced 9,500 employees from its US-only operations. The company will discontinue air and ground operations within the US by the end of January 2009 though its international delivery operations will continue.

DHL's main hub in the US is in Wilmington, Ohio, a town of about 12,000 people. And about 3,000 residents of this city and the nearby Clinton county work at the DHL hub. Residents have been devastated on hearing the news of job cuts. Wilmington is already reeling from DHL's decision six months ago to have UPS (another delivery major) take over the company's domestic air shipping, which put thousands out of work. Ohio, as a matter of fact, is already grappling with one of the highest jobless rates in the US, which was 7.2% in September.

"We see a significant shortfall in the US part of our express business due to the fact that the economy has weakened deeply. We have taken a massive action in the US," said Frank Appel, the chief executive of DHL's parent company Deutsche Post World Net, and reported by CNN's financial website." DHL has an employee base of 285,000 across 6,500 offices globally.

Now, one man's misery is another man's gain. UPS' sales force has swung into action post DHL announcing its exit from the US express mail market. And the "Welcome Center for DHL customers" on UPS' Web site has started popping with the following message.

 When automotive engineer turns a financial engineer
Volkswagen (VW), one of the world's biggest auto companies until late last month had seen its stock price languish at the Euro 200 levels for most of 2008. Then all of a sudden, it spiked to astonishing levels of Euro 1,300 in just one trading day, making it the world's most valuable company, albeit for only a short period of time. Indeed, it is not everyday that one sees a stock as big as VW jump more than six fold in a single day. Frenzied buying, mostly from hedge funds in order to cover up their short positions was the key reason behind the huge spike.

Porsche, the rival automaker had been building up stake in VW for quite some time now. Its purchase of shares had bid up the price of VW to levels where it had started looking expensive. On sensing that the VW shares were now ripe for a fall, hedge funds indulged in short selling and sold shares in company that they did not own.

Then came a huge announcement, sending shivers down the spine of short sellers.

Porsche claimed that it had a huge option position in VW and planned to take a majority stake. Concluding that they would be caught in a very bad squeeze and forced to buy shares at any price, the short sellers rushed to buy stocks at exorbitantly high prices, ending up with huge losses in the bargain. Porsche on the other hand, reported profits on the deal that was eight times as high as its profits from automotive operations. However, the company is likely to come under scanner for its clandestine purchases of VW shares, which although does not breach the law, is still morally questionable. As for hedge funds, they got a lesson in financial engineering from a company that no doubt excels in engineering, but of the automotive kind.

 Today's investing mantra
"Success in investing doesn't correlate with I.Q. once you're above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing" - Warren Buffett

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