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US recession, Indian pharma and more...

Jan 8, 2008

  • Crude and gold prices continue to scale higher as investors flock to commodities as investments in wake of the slumping dollar. While crude touched the US$ 100 a barrel mark last week, the figure for gold stood at US$ 861 per ounce. It would seem that a rise in crude prices would curb the demand for oil, which in effect is not happening. Faster growing countries such as India and China continue to guzzle oil helping to keep the demand firm. Besides this, the falling dollar has made the price of oil in other currencies relatively cheaper thereby further preventing oil prices from retreating.

    While the falling dollar is just one of the various reasons (some others being geopolitical issues) that is propping up crude prices, it has been the prime catalyst for the rise of gold as the latter is seen as a safe haven in the face of a weakening dollar. Hence, while the US economy looks to be heading towards a recession in 2008 prompted by one of the worst meltdowns in the housing market, rising energy and food prices could fire up inflation thereby leading to the phenomenon called 'stagflation'.

  • A slew of weak economic reports in the US of late have sparked the downward spiral of the dollar and expectations that the Fed will further cut interest rates when it meets on January 30. For instance, the employment data released last Friday showed that the job growth slowed to the lowest since 2003. The US manufacturing index (highlighting the country's manufacturing activity), slowed to its lowest level since 2003. Not surprisingly, conditions in the housing market continued to deteriorate. In all these reports, the actual results were lower than estimates raising concerns about a possible recession in the US. Interestingly, despite this bleak outlook, the US consumer confidence rose from 87.3 to 88.6.

  • Indian pharma stocks have failed to entice investors and this can be gauged from the fact that the healthcare index has underperformed the BSE-Sensex for the past three years. The hiccups that the sector had to endure in 2007 were the sharp rupee appreciation, rise in raw material costs as imports of intermediates (used in making bulk drugs) from China got expensive and pricing pressures in the US and some of the European generic markets.

    We believe that rising competition, pricing pressure and regulatory risks besides rupee appreciation will continue to plague the sector going forward. Having said that, in the generics space, a rise in the patent expiries of drugs could provide a breather and boost revenues. The focus will shift more towards niche products, which have limited competition and consequently higher margins and biotechnology is quickly emerging as a strong focus area for a majority of leading domestic players. We believe that partnerships are likely to play a crucial role in driving growth. This could be in generics, research, new product introduction and custom manufacturing for innovator companies. For MNC companies, while new product introductions from their parents' folios will be the key to success going forward, the price of the same will most likely be subject to negotiation.

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