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US scares global markets - Views on News from Equitymaster
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  • Jun 16, 2001

    US scares global markets

    A fresh wave of earnings warnings and a negative economic outlook drifted the tech savvy NASDAQ lower by 8% over a week. In the old economy stocks on the other hand the decline was not as sharp, which resulted in the Dow ending lower by 3.2%.

    So far in this quarter, 498 companies have indicated fall in their earnings. The latest profits warnings came from companies ranging from old economy giants to leading tech majors. Nokia, Juniper, Nortel and JDS Uniphase surprised the markets by announcing aggressive job cuts and indicating huge quarterly losses. Telecom sector is facing one of the worst times and is unlikely to recover before the end of third quarter. The sluggish economy has also affected the prospects of old economy companies. H. J. Heinz, McDonald’s, P&G and Bausch & Lomb joined the chorus by forecasting discouraging future outlook.

    The US economy is showing no signs of improvement. The retail sales inched up by a marginal 0.1% in May compared to 1.4% rise in April. The US consumer sentiment index fell to 91.6 in June from 92 in May. The core CPI too registered a marginal gain of 0.1% in May from 0.2% in April.

    Internet stocks gains
    (Price in $) 09-Jun-01 16-Jun-01 Change
    Rediff 2.1 2.2 3.8%
    Satyam Infoway 3.8 3.9 3.7%
    VSNL 14.6 14.0 -4.3%
    ICICI 11.7 10.9 -6.4%
    Wipro 34.6 32.0 -7.5%
    ICICI Bank 6.3 5.7 -8.9%
    Satyam 10.4 9.4 -9.6%
    Infosys 73.8 65.6 -11.0%
    Dr. Reddy's 17.6 15.6 -11.3%
    Silverline 3.7 3.2 -11.5%

    Indian ADRs also failed to generate buying interest. Following the NASDAQ trend, tech ADRs tumbled. Internet stocks Rediff and Sify however soared in an otherwise sliding markets.

    Earnings warnings from Nortel and Nokia scared the investors. These companies are one of the largest clients of Infosys and Wipro accounting for over 5% of their revenues.

    Silverline was the largest loser, down by 11.5%. The company is considering an acquisition of the US based $ 20 m IT solution company, CTC Corp., in an all-stock deal. This is its fifth acquisition in the last 2 years. However, Silverline’s plan of issuing 10 m warrants to its promoters has not been accepted favourably by the markets, as it will dilute the equity base of the company.

    Rediff was one of the most volatile stocks during the week. The company has entered into an alliance with Standard Chartered Bank to provide online and offline banking services. Rediff will offer the entire range of consumer banking products of Standard Chartered to over 6.4 million online customers. Apart from this agreement Rediff also plans to forge strategic alliance with some of India’s leading online and offline financial services companies in the fields of retail banking and insurance.

    Satyam Computer’s 52% subsidiary, Sify, gained 3.7% over a week. Although, the company reported a loss US$ 54 m in FY01, the management has maintained that it will break even in the current year. Sify has recently launched ExpressMeet, a virtual conferencing tool to facilitate companies and individuals across the world to communicate, using multi-point data exchange.

    The world markets are displaying an uncertain trend since the beginning of this month. Most of the indices moved up sharply in the first week of June. However, with a stream of earnings warnings the markets crashed. The worst is still not over; tech majors are waiting in a queue to declare the future outlook, which could further create nervousness in the markets.

    Volatile markets
    Indices 01-Jun-01 09-Jun-01 16-Jun-01 Change*
    Hang Seng 13,141 13,809 13,103 -0.3%
    NASDAQ 2,149 2,215 2,028 -5.6%
    Nikkei 13,262 13,430 12,790 -3.6%
    Dow 10,990 10,977 10,624 -3.3%
    BSE 3,558 3,496 3,373 -5.2%



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