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US economy, petrodollars & more...

Mar 4, 2008

  • With the Union Budget hogging the limelight last week, markets lost no time in shrugging of the impact of the same on Monday as US recession fears continued to haunt the global stockmarkets including India. While the Dow tanked 3% on Friday, Asian indices such as the Nikkei (down 4%), the Hang Seng and the Strait Times (down 3% each) also closed into the red. This spilled over to the Indian stock market as well with the BSE-Sensex recording a fall of 939 points (down 5%). This week is an economic data laden week for the US, which will give some indication of whether the concerns regarding the US economy slipping into a recession are indeed founded. The most important amongst them is the February jobs report to be released on Friday. It may be noted that the January data reported a net jobs loss (the first in almost four years) and a decline in payrolls is expected in February as well.

    Meanwhile, the subprime crisis claimed one more victim on Friday namely American Insurer Group, which is US' largest insurer. The company reported a gargantuan loss of US$ 5.3 bn during the fourth quarter and thereby etched its name in the book of subprime casualties, which includes the likes of Citigroup, Merrill Lynch, Societe Generale amongst others. As a result, volatility and uncertainty has loomed large in stockmarkets the world over and this has been afflicting the Indian stockmarket as well, which continues to grope for direction.

  • Oil prices do not seem to abate as emerging markets like China and India continue to guzzle oil to support their rapidly expanding economies. With the oil prices touching the psychological US$ 100 per barrel mark, the same is expected to boost the flow of capital into petrodollars. As per Morgan Stanley, at the current pace of production and exports and oil at US$ 100 a barrel, the GCC, non-GCC OPEC and other oil-exporting countries are projected to earn a total of US$ 2.1 trillion annually. While these petrodollars have been utilised for investments in infrastructure in the Gulf countries, a large part of them have been invested in global financial markets thereby creating huge liquidity. Thus, creation of asset bubbles in the future cannot be ruled out if petrodollars relentlessly keep pouring into various asset classes.

  • The Union Budget proved to be friendly to the pharmaceutical sector by halving the excise duty on all pharma goods from the current 16% to 8%. This is a huge positive for the companies as the excise duty is being paid on the MRP (maximum retail price) of the drug thereby putting pressure on margins. It must be noted that competition in the pharmaceutical industry both in India and abroad is intense and in India, the top player (i.e. GSK Pharma) barely enjoys 6% market share. Besides this, relentless pricing pressure has become a regular feature in the global generics space largely attributed to more and more players vying for a slice of the generics pie. In this scenario, a let up in excise duty is certainly beneficial to companies operating in the domestic market and will provide some breathing relief on the margins front.

    The reduction of customs duty on all life saving drugs from 10% to 5% is also a boon and will enable pharma companies to lower prices of these drugs, an act which the pharma industry considers more apt than the price control imposed by the DPCO.

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