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Indian stocks, global banks & more...

Jan 29, 2008

  • Volatility refuses to recede from the Indian bourses and while the surge of around 1,000 points on Friday possibly cheered investors over the weekend, yesterday's trading session once again saw the bulls retreat and give way to widespread selling pressure. Movements in the global markets are heavily influencing the movement of the Indian indices, which seem to be rudderless against the twin storms of subprime malaise and US recession. This is despite the fact that the fundamentals of the Indian companies are expected to remain strong going forward. While it is true that a recession in the US will have some impact on India's economy, especially the export oriented industries, the impact is not likely to be severe as some of its Asian peers, which derive a large chunk of revenues from exports to the US.

    However, what seems to be worrying is the increasing liquidity in the country with the FIIs pumping in huge sums of money to capitalise on the India growth story. The Fed cutting interest rates has not helped matters either as this has widened the interest rate differential between the two countries. While rising liquidity has caused the Indian indices to soar higher (with the valuations of some companies way ahead of fundamentals), their vulnerability to any outflow of money was underlined last week when the Indian markets fell deeper into the red. To put things into perspective, FIIs have pulled out US$ 3.6 bn from Indian equities since Jan 17, 2008.

  • Trouble does not seem to be over for banks across the US and Europe as of yet. While banks, central banks and markets across the world are finding it difficult to digest the acidic impact of subprime losses, they were rocked on their heels last week when one of France's 'respected' banks - Societe Generale - announced gargantuan losses of around US$ 7 bn in a fraud caused by a lone trader working in the bank. In fact, as per newspaper reports, Societe Generale is also receiving flak for being responsible for causing the European indices to spiral downwards while unwinding the trader's positions thereby prompting the Fed to undertake the interest rate cuts. Whatever be the case, this event highlights further the troubled times that banks are facing and puts a question mark on the risk management practices being followed by them. And the Fed cutting interest rates further does not seem to have any impact on banks who are facing a liquidity crunch and are hesitant of lending further thereby curtailing credit growth and the propensity of the American consumer to spend.

  • The October to December 2007 results of pharma companies have begun to trickle in and at a glance do not appear to be too enthusing. As expected, pricing pressures in the developed markets continue to take its toll and domestic pharma companies are adopting a host of strategies to counter this pressure. These include challenging patents to secure the lucrative 180-day exclusivity period, settling legal suits with innovators to ensure some sort of certainty with respect to securing the exclusivity window and increasing emphasis on biotechnology, which has relatively lesser competition due to high entry barriers such as complexity of manufacturing products, skilled expertise in marketing products to doctors and costs of conducting truncated clinical trials. Many of them are also focusing on the emerging markets, where the generic products are branded thereby ensuring higher margins.

    That said, besides pricing pressure in the US markets, certain markets in Europe, notably Germany, are also facing price declines due to regulatory changes undertaken by the German government causing a host of companies to slash prices of their products. Under the new laws in Germany, insurance companies are expected to play the key role in determining prices and Indian companies competing in these market will not only have to keep up the flow of product launches but also make sure that these products are listed with the German insurance companies. While profitability will be impacted due to increased rebates to the insurance companies, volumes will play a key role in augmenting revenues from this market going forward.

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