OPEC's a menace? Here's another one
(Dec 24, 2008)
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In this issue:
» Morgan Stanley PE's India debut
» Lament of an auto giant's MD
» Safe havens in the Bear market
» Another OPEC like cartel in the making
» ...and more!
A message from The 5 Minute Wrapup Team: Tomorrow's issue will not be brought out on account of Christmas holiday.
As you know, the OPEC is a cartel of 13 oil producing nations. Its main purpose is to set the global price of oil. If the oil producers can, why can't the natural gas producers? That's the question countries like Russia have been asking.
And they have recently answered it by forming the Forum of Gas Exporting Countries, headquartered at Doha. As reported by the New York Times, the forum members include: Algeria, Bolivia, Brunei, Venezuela, Egypt, Indonesia, Iran, Qatar, Libya, Malaysia, Nigeria, the United Arab Emirates, Russia and Trinidad & Tobago.
The stated purpose of the cartel is to coordinate investment plans in producing nations, but it is likely to end up as the regulator of world's gas prices.
Europe depends on Russian gas supplies. It must be really worried over Russia's attempt to regain the glory of its Soviet days on the back of its energy sources. It is indeed an achievement for Russia because most members also belong to the OPEC, with whom Russia has had disagreements recently over cutting oil production.
"We have the dry powder, a good team in place and a healthy pipeline, which makes the coming year look interesting." These are the words that one normally does not associate with an investment banker these days. But deals and a quite of handful of them is what seem to be on the minds of executives at Morgan Stanley's private equity unit in India. The outfit cut the ribbon on its India investments recently when it invested US$ 38 m in an unlisted Indian entity that manufactures green substitutes for petrochemicals used in autos, paints and lubricants. Interestingly, Morgan Stanley's dedicated US$ 1.5 bn Asia fund is still only one third invested and hence, could enable the company to snap up some very attractive deals in what clearly looks like a liquidity starved market. What more, it could also force rival firms to bite the bullet. Go on guys, we need you people to inject both money as well as confidence back into the country's capital markets.
While Morgan Stanley's PE arm is fortunate enough to pick and choose, its investment banking brethren in the M&A space globally may not be that fortunate. Because if they thought 2008 was a bad year in terms of withdrawn M&A deals as a percentage of announced deals globally, the 2009 booty could turn out even worse. It is in the nature of a bull market that something that is available in plenty during one bull run becomes scarce in the next. That 'something' during the last bull run was cheap credit. And cheap credit was what the investment bankers had built their castles upon. But not anymore. The era of cheap credit has also pulled the curtains down on huge leveraged buyouts, forcing investment bankers to look for other pastures. And what would be these other pastures. This is what NYT had to say, "There are signs that next year's deals will be smaller and less leveraged, but more complex. Many will involve partial restructurings or defensive mergers between companies close to the wall, like carmakers and retailers." It then goes on to say, "The class of 2009 may not fare much better than its predecessor". We cannot help but agree.
Meanwhile, more skeletons continue to tumble out of the Madoff cupboard. As per Bloomberg, Liliane Bettencourt, the world's richest woman in 2008 and better known as the daughter of the founder of cosmetics giant, L' Oreal SA, is another high profile investor who had entrusted Bernard Madoff with a part of her fortune. It's amazing how people who are otherwise so sane get duped by such Ponzi schemes. It reminds us of the book, "Why smart people make dumb money mistakes?"
While investors in the Madoff scheme suffered in part due to a folly of their own making, the same cannot be said of India's beleaguered diamond industry. Hurt by the significant pullback in discretionary spending across developed markets, the industry is currently going through a crisis of unprecedented proportions. And it looks like the state government of Gujarat, where almost all of the country's processing centres are based is finally waking up to the industry's plight. As per reports, the Gujarat Government has stepped up efforts to announce a series of measures that would help put the diamond industry back on track. Revival of the now defunct GDDB and providing financial assistance to jobless diamond workers are some of the steps that are being considered. It has to be noted that India polishes around 70% of all diamonds sold worldwide and the industry is one of the biggest contributors to the country's forex reserves.
The country's diamond industry though is not the only one that has been roiled by the crisis. It has several other industries for company. But none so big and with as many backward linkages as the auto industry. And although government has already approved a small bailout package for the industry, Ravi Kant, the Managing Director of Tata Motors, India's largest CV player is hardly amused. Speaking to one of India's leading business dailies, Mr. Ravi Kant was of the opinion that only a big bang approach could help the auto sector cope with the sudden slowdown. He went on to add that while it was normal for the industry to go through business cycles, everything that happened in the current crisis was behind the control of the industry. Mentioning the company's impressive new model lineup and huge capacity expansion plans, he thundered that while he has got the products and the capacity, all he needs was customers and this is where the government can step in. "The government should be pragmatic and seize the situation. They should prioritize and direct banks to provide vehicle-financing, working capital for auto makers, (and) some kind of a holiday for the huge investments made with good intention by the industry." Mr. Ravi Kant, we hope the government is listening.
A development took place in the parliament yesterday that could well help swell the total FDI tally. It was the introduction of the Insurance Amendment Bill, a legislation that strives to increase the maximum permissible foreign investment in insurance companies to 49% from the current level of 26%.
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Industry players welcomed the move as it would result in more equity flowing into the sector, which at present is massively under-penetrated and in some real need of fund inflows. Another bill, the LIC Bill was also introduced in the parliament yesterday. This bill seeks to put a cap on the government guarantees on LIC's (Life Insurance Corporation) obligations. This in effect means that not all your LIC insurance policies will be guaranteed by the government and is now likely to be a function of the solvency of LIC. The move is likely to deal a big blow to the competitive position of LIC as it will create more of a level playing field between the public sector behemoth and private insurers.
FMCG and pharma stocks were probably not the cream of the picks during the stock market rally, but they are proving to be a safe bet now. This explains why these stocks are considered defensive plays. While investment in these stocks failed to set the pulse racing when the markets were reaching dizzying heights, they have not crashed as much as other stocks either in the current meltdown. The premise is simple. The growth of these sectors is not too tied up with the growth of the economy. For instance, personal care products and drugs will continue to witness demand as these are necessary items that have to be consumed even if the economy is slowing down. While stocks across sectors have taken a beating, certain blue chip stocks such as HUL, GSK Pharma and Hero Honda have managed to buck the trend. Probably the adage 'Slow and steady wins the race' aptly describes the performance of FMCG and pharma stocks in these times.
2008 has been a year of many 'first times' for India. Some of them good, some of them bad. Here's one more - as per a Mint report, FIIs pulled out at least US$ 13 bn in 2008, which is the highest in 15 years. Also, this is the first time in 11 years that there has been a net outflow of FII money from India. There may be many reasons for this. But most importantly, the worsening of the liquidity crunch meant that these institutions had no choice but to pull out from the markets at whatever price they got, so that they could meet their obligations back in their own countries. What made it worse is that they all did it at the same time. A clear indication that companies' share prices had to take a beating irrespective of their fundamentals. Much like the distressed sale of a house that automatically puts the seller at a big disadvantage, and consequently the buyer at a big advantage!
Asatya (lie) continues to pour out of the Satyam baggage. After continuous denials by the company's management of its mis-doings in the Maytas deals, the World Bank has alleged that it had banned the company three months back from doing work for its high-profile clients. Satyam has supposedly been involved in data thefts at the bank while working on a project.
And this is what Satyam had said in October in its defense on the issue that was just erupting - "The story that claims Satyam was involved in an alleged security breach at the World Bank has no validity. Satyam takes this matter very seriously. We hold ourselves to the highest standards in the industry, and we take extraordinary care to develop secure networks and IT infrastructure for all our clients." How high the standards really were is now there for everyone to see!
In the meanwhile, it was another disappointing day for most of the Asian markets as they continued to trade in the negative. The worst hit seemed to be the Japanese benchmark, Nikkei, down by more than 2% as recessionary fears heightened in the world's second largest economy. Indian benchmark, BSE-Sensex didn't fare well either, losing more than 1%. Trend in the European markets does not seem very positive either as a majority of the indices is trading in the negative currently. Oil on the other hand rose by 1%, supported by the tough OPEC talk of a possible emergency meeting to decide on further production cuts. Sparse trading was witnessed in the US markets yesterday but this did not stop the indices from drifting further into the red. Both the Dow as well as the Nasdaq lost 1% each.
"Risk comes from not knowing what you are doing so wide diversification is only required when investors [are ignorant]. You only have to do a very few things in your life so long as you don't do too many things wrong" - Warren Buffett
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