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Global markets, food prices & more... - Views on News from Equitymaster
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  • Jan 22, 2008

    Global markets, food prices & more...

    • Mirroring trends in the global markets, the Indian bourses were at the receiving end yesterday as markets shed 7% at the day's close. No surprises here as fears of a US recession continued to rage dragging the US indices and along with them the Asian and Indian indices as well. With the spectre of a recession in the US economy looming large, the US Fed's efforts to cut interest rates to prop up growth have failed to douse investor concerns. Higher food and crude prices have not helped matters either. While India has been considerably insulated from the subprime malaise, the country is nevertheless vulnerable to external shocks given that a large part of the surge in the stockmarkets as of late have been attributed to the FIIs. And this was amply demonstrated in yesterday's trading session when the weakness in the global markets spilled over to the Indian stock market. India's fundamentals continue to remain strong and even though a US recession will impact the former going forward to a certain extent, the growth pace is still expected to be higher than that reported by the developed and some of the developing nations.

    • As is the case with crude prices, food prices worldwide, including India, have been on an upward trend. According to World Bank, in 2007, prices for many staple foods reached record highs and global food reserves are at a 25-year low, making world food supply vulnerable to an international crisis or natural disasters. The increases have been attributed to the rising use of food crops for biofuels (given the firm oil prices), rapid income growth in developing countries, low stocks and droughts. To put things into perspective, US used 20% of its maize production for biofuels and since there was a shift of land from wheat to maize, wheat prices too shot up. Similarly, Brazil used 50% of its sugarcane for biofuels and Europe used 68% of its vegetable oil production (Source: World Bank). As a result the supply of these crops for food has been restricted leading to price increases. Looking ahead, population growth, lifestyle changes, use of crops to manufacture biofuels and climate change are likely to have an important bearing on food prices in the future.

    • Ranbaxy yesterday announced the settlement of its litigation suit with GlaxoSmithKline Plc for the latter's drug 'Imitrex'. This follows the company's initiatives to settle patent suits earlier with GSK Plc for 'Valrex' and Boehringer Ingelham for 'Flomax'. Dr.Reddy's had also taken a leaf out of Ranbaxy's book by settling with GSK Plc for 'Imitrex' as well last year. The biggest positive that can accrue to the challenging company by settling the patent suit outside the court is the certainty with respect to the exclusivity period, consequently enabling the challenging company to generate substantial revenues and profits. Also, given that patent challenges entail sizeable legal costs with no clear visibility in terms of revenues, out-of-court settlements mean that pending lawsuits get dropped obviating the need to incur more legal expenses. Besides this, the certainty of revenues from a particular drug gets more pronounced and the costs associated with legal matters no longer eat into the generic company's profitability. Thus, settling a patent challenge suit is a smart strategy if the risk-reward ratio is skewed towards the former.



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