Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Crude, currency & more... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Apr 28, 2008

    Crude, currency & more...

    • A handful of commodities including iron ore and oil have fired the inflation rates to historic levels across the globe. Crude oil prices show no signs of cooling off. This is at a time when not just the US but also the emerging economies are vying for added supply of the commodity to sustain growth. According to the International Energy Agency (IEA), China, India, Russia and the Middle East will for the first time consume more crude oil than the US, burning 20.7 m barrels per day in 2008, an increase of 4.4% YoY. In fact, the demand from the US is expected to contract by 2% YoY to 20.4 m barrels a day during the year.

      Clocking economic growth in excess of 8% per annum coupled with increasing vehicle ownership among the countries' combined population of 2.5 bn people, is certainly expected to drive China and India's energy requirements (to grow by 4.7% YoY in 2008) beyond that of the US. At the same time, oil usage worldwide will increase 2% YoY in 2008 because of the growth in emerging markets, as per the IEA. Having said that, the study conducted by IEA shows that the emerging markets burn a fraction of the energy consumption of the US, thus leaving room for growth. The 2.5 bn people in China and India used only half as much crude as the 301 m Americans in 2007. The average person in China consumed less than 20% as much energy as the average American in 2005, according to the US Energy Department. In India, the per capita energy consumption is less than 10% of that of the Americans, notwithstanding the acute power shortage.

      The view that the demand for energy will continue to rise in the coming years, despite limited supply, is drawing investors to this asset class by the hordes. Investors have transferred money into commodities, especially energy, during the past year because their returns have outpaced equities and bonds. To put things in perspective, oil prices gained 22% in the last 12 months, while the S&P 500 slid 5.6% and the BSE-Sensex gained 19.8% during the same period.

    • Currency risks have never before appeared as perilous as some of the top banks in the country succumb to losses of billions of rupees due to derivative positions taken on behalf of corporates on the same. Many banks like SBI, ICICI Bank, Axis Bank and HDFC Bank are undertaking profit hits as their customers are repudiating contracts and refusing to accept the losses in certain derivative transactions they entered into. In a currency derivative transaction, a customer tries to hedge against the losses due to movement in the value of currencies. However, with the sharp movement of the rupee against the US dollar in the past few months, some companies that have faced losses on their derivative positions have filed cases against banks on certain disputed transactions. SBI has declared that it needs to provide around Rs 6 bn against the losses in derivatives transactions in the domestic market. On the same lines, Axis Bank has declared in its FY08 results that it has as provided for Rs 720 m against such loss making derivative transactions. Further, there are matters pending in courts pertaining to the other banks.

      Apart from derivatives fiasco, banks are also paying for their exposure to the mortgage (subprime) crisis in the US. Banks having international investment portfolios are having to book mark to market (MTM) losses on their portfolios, as the value of these securities depreciated after the interest rates shot up in the aftermath of the subprime crisis in US. While the cues of economic growth and credit off-take are certainly muted in FY09 as compared to the last fiscal, the heavy write-offs are clearly signs of diminishing profit margins for most large players in the banking sector.

    • The Chinese government is expected to limit the listing of new shares and allow investors to borrow money to buy equities in an effort to boost the world's sixth worst performing equity market. The Chinese markets have underperformed in recent times on concerns that the government's initiatives to curb inflation would hurt corporate profit. The year-to-date decline in the value of equities wiped out US$ 1.1 trillion in market value (Source: Bloomberg). Further, the necessity to revive the equity markets is pertinent as transactions on the two main stock exchanges in the country slipped to a weekly average of 6.3 bn shares in 2008, from 14.7 bn shares in 2007.



    Equitymaster requests your view! Post a comment on "Crude, currency & more...". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Here's What Driving Gold Prices Up These Days (Outside View)

    Aug 21, 2017

    PersonalFN explains the chief factor pushing gold prices up of late.

    How Unique Are the Companies You Invest In? (The 5 Minute Wrapup)

    Aug 21, 2017

    One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 21, 2017 02:26 PM