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Anxiety grips global markets

May 25, 2002

Gripped with anxiety and worries about terrorism, global markets remained depressed during the last week. US government’s admission that the bounce back in the economy may not be as strong as earlier anticipated added to the weakness. The revised US GDP growth number for the first three months of the year at 5.6% was only marginally lower than its earlier estimates of 5.8% growth. This represents the strongest ever growth reported by the economy in the last two years. However, participants realized that there was devil in the details as the consumer and business spending failed to match expectations.

Europe’s biggest drug maker, GlaxoSmithkline (GSK) Plc shares hit a two year low on the last trading session after a US court quashed patents for its top selling anti-biotic, Augmentin, paving the way for generics. It was GSK’s second biggest selling drug last year with global annual sales of almost US$ 2 bn. However, the company is set to appeal against the ruling and would seek damages against generic players if it wins the case on appeal. Geneva, an affiliate of the Novartis is likely to be the first generic player to enter the market with the drug. However, Novartis AG shares also fell on Friday.

Meanwhile, Berkshire Hathaway Inc, created ripples by announcing a placement of the first ever negative interest rate securities, raising US$ 400m. These securities are convertible and investors showed willingness to accept a loss now, in the hopes of buying Berkshire shares at a good price five years down the line. The company only recently announced that a strong surge in demand for insurance and tightening of supply post Sept’11 resulted in insurance and re-insurance rates soaring, after a decade of decline. Berkshire declared a 51% rise in net profits for the quarter ended Mar’02. Earnings per share were US$ 598 (Rs 29,900) for the quarter. Berkshire's Class A stock, which has not been split in Buffett's 37 years at the company’s helm, trades at $75,700 (Rs 3.8 m a share).

Indian ADR’s: Roll coaster ride
(Price in $) 18-May-02 25-May-02 Change
Dr. Reddy's 21.3 21.9 2.8%
MTNL 6.0 5.7 -5.0%
Infosys 67.0 63.3 -5.5%
HDFC Bank 15.3 15.1 -1.3%
Wipro 35.0 32.8 -6.3%
Satyam 10.8 10.9 0.9%
Rediff 0.8 0.8 0.0%
VSNL 7.7 7.6 -1.3%
ICICI Bank 7.1 6.8 -4.2%
Satyam Infoway 1.0 1.0 0.0%
Silverline 1.7 1.7 0.0%

It was roll coaster ride last week. The week began with extreme pessimism over fears of war on the India-Pak border. Investors dumped stocks in the beginning of the week on signals of war. However, stock prices registered a smart recovery on the last trading session as war fears receded. Markets reacted positively to a tone down in aggressiveness from both India and Pakistan, emanating from several statements given by both sides yesterday.

With emerging pressure from countries across the globe, nerves seemed calming down. Moreover, the undertone of the PM's speech gave a feeling that the country was not interested in aggravating tensions unless the situation worsens. The derived interpretation of this could be that the military build up is more of a precautionary measure rather than a full-fledged war preparation. Markets seem to be re-considering the war risk premium. The bounce back in equities on the last trading day was not only in index heavyweights but also in the broader market.

Indian ADR’s moved inline with market sentiment. The highlight for the week was Satyam Computers, which remained heavily volatile during the week. Markets are expecting the company to divest its loss making subsidiary ‘Sify’ soon. Dr. Reddy’s ADR was the top gainer during the week. The company’s anti-diabetic molecule is in the last stage of clinical trials.

Red all around
Indices 18-May-02 25-May-02 Change
Nikkei 11,847 11,976 1.1%
BSE 3,334 3,256 -2.3%
FTSE 5,218 5,169 -0.9%
Dow 10,353 10,104 -2.4%
Hang Seng 11,975 11,627 -2.9%
Dax 5,036 4,899 -2.7%
NASDAQ 1,741 1,661 -4.6%

Though slow, the expectation of recovery in the US is gaining ground. As far as India is concerned, the situation with Pakistan is likely to have a greater influence on the movement of the indices in the near term.

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