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Of politics, pharma and more... - Views on News from Equitymaster
 
 
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  • Jan 1, 2008

    Of politics, pharma and more...

    Today marks the advent of 2008 and while one hopes for a 'happy and prosperous new year', there are still some issues of 2007 especially with respect to the credit crunch, expected US recession and the movement of crude prices, which are likely to play a role in shaping up 2008 as well.

    • Political turmoil continues to play its part in impacting the financial markets and this is no longer confined to a particular country but the world at large. The latest development, of course, was the assassination of Pakistan's former Prime Minister Benazir Bhutto last Thursday. As reported by a leading daily, 'the Indian security and foreign policy establishment promptly went into a huddle on Thursday evening to discuss the implications for India'. Add to this the fact that a member of Al-Qaeda has claimed responsibility for the same; terrorism has once again reared its ugly head. And while India's proximity to Pakistan could mean serious consequences for the former in the longer term, the developed nations of the West are worried as well. The foremost concern in their minds is the nuclear capabilities of Pakistan.

      Certainly these are not easy times for the global stock markets, which are still reeling under the blow dealt by the subprime mess and where global political turmoil is further acting as a catalyst to increased volatility. Is more bad news yet to flow in? We do not know.


    • Speaking of subprime crisis, Citigroup continues to be tormented by negative publicity. Just when the financial conglomerate announced further write downs of US$ 8 bn to US$ 11 bn after earlier declaring write downs of US$ 6.4 bn, it seems that the beleaguered bank's troubles are far from over. As per reports, Citigroup could write off as much as US$ 18.7 bn in the fourth quarter and cut its dividend by 40%. This itself highlights the fact that given the complicated financial instruments woven around these subprime loans, no one (including the central banks) are able to gauge with precision the extent of these losses. And while the central banks are infusing liquidity into the banking system hoping that their shot in the dark hits bang on target, it does not seem likely that the same will result in expansion of credit given that increasing fear has made banks wary of lending further.


    • 2007 has been a considerably volatile year as far as crude prices are concerned, with oil prices hovering below US$ 50 a barrel in January 2007 before scaling higher to touch US$ 100 per barrel couple of months back. With their respective economies growing at a scorching pace, China and India have been responsible for the strong growth in demand for oil. Also, geopolitical tension and gradual change in the climate have not helped matters either.

      However, India has not been facing a huge impact despite importing around 70% of its crude requirements. This is largely due to oil subsidies and an appreciating rupee. Oil prices being a politically sensitive issue, the government has so far refrained from aligning domestic oil prices with international prices. As a result, oil in the form of petrol, LPG and kerosene is being made available to Indian consumers at subsidized rates and in the process is causing state oil companies to bleed. Which way the oil prices are headed in 2008 is anybody's guess but the Indian consumer may not feel the pinch if the government continues with its protectionist policy.


    • A leading business daily reported that pharma companies such as Ranbaxy and Dr. Reddy's are shifting their focus towards acquiring brands and making strategic investments rather than make cross border acquisitions. 2006 and 2007 saw a flurry of cross border deals in the pharma sector as the domestic companies looked to acquire scale to counter the severe price erosion afflicting the US and some of the European generics markets. However, inking these deals requires considerable resources given that valuations are on the higher side and efficient integration post acquisition. Besides, given the pricing pressure, companies are laying emphasis on niche products and 'biotechnology' is the buzzword doing the rounds. That said, investors should note that while the steps initiated by Ranbaxy, Dr. Reddy's, Glenmark and the like to foray into biotech are in the right direction, it will be a while before revenues from this field make a significant contribution to overall revenues.

     

     

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