Bearish Dow, car demand & more... - Views on News from Equitymaster

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Bearish Dow, car demand & more...

Jul 3, 2008

Stocks in the US slumped yesterday after crude oil price made another high. A barrel of crude's cost increased US$ 2.6 to settle at US$ 143.6. As a matter of fact, crude has already risen by 50% this year in response to tightness in supply and geopolitical tensions in the Middle East. Continued demand from guzzlers like the US and China has also added to oil's woes over these months. In the meanwhile, CNN's financial website has talked about stocks being in a 'bear market territory'. This is considering the technical definition of a bear market - defined as a drop of 20% off the cyclical highs. The Dow Jones Industrial Average (US' benchmark index) has already dropped 21.5% since the highs it had touched in October 2007. Well, if that definition were to apply to Indian stock market, we have almost been in a bear market 'twice over' since the start of this year. That is because the BSE-Sensex has dropped almost 40% (excluding yesterday's recovery) since making its high in January 2008.

  • Also read - Death of equities?

    Cars 'steel'ing the show...
    Steel prices have surged as India and China build more bridges and houses and their increasingly affluent populations buy more cars and appliances. Steel production has however failed to keep pace with the rising demand because of rising costs and a lack of investment in new plants in the past decade. The price of flat steel, a key raw material for consumer durables, is ruling in the range of Rs 47,000 per tonne (up 29% YoY). Carmakers in India have had to pass on the rise in input costs to their customers in order to protect their margins. However, the industry, which is one of the largest consumers of steel, does not seem to show any adverse impact of rising prices on its sales volumes.

    The sales of leading car makers like Maruti, Hyundai Motors, M&M, Tata Motors and Honda Siel have gone up by 8% YoY in the month of June 2008. These five carmakers together sold 160,000 vehicles during the month as compared to 148,000 units last year. Demand for passenger cars is a function of growth in per capita income in the hands of consumers. Thus, higher prices and increasing cost of funding only has a temporary impact on the demand.

    In India, while the per capita GDP (gross domestic product) grew at a compounded annual growth rate (CAGR) of 7.1% between FY92-FY06, passenger car sales increased at a CAGR of 14.5% during the same period. The correlation seems to be strong, even if one considers the 20 and 10 years trend. As economy grows and income levels increase, demand for passenger cars is also likely to improve over the very long term.

  • Also read - Our outlook on the Indian auto sector

    ...but trucks are off the road
    Indian truckers, who haul the majority of the nation's goods, have gone on strike to protest against taxes and rising fuel costs. More than 4 m heavy and light commercial vehicles are staying off the nation's roads after talks with the government to avert the strike failed. The strike is expected to cause shortages and hamper the transportation of food articles and manufactured products. That may thwart efforts by the RBI and the government to curb inflation running at the fastest pace in 13 years.

    The truckers are striking to protest against the multitude of taxes and increases in input costs due to the rise in retail fuel prices that has hurt their profit margins. Food retailers are having to store nearly a month's inventory rather than the usual 15-20 days' normally stored. A recent week-long strike by truckers in South Korea last month cost the economy about US$ 5.9 bn in lost trade, dealing a blow to the main driver of the economy's growth.

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