Global roundup: What’s cooking? - Views on News from Equitymaster

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Global roundup: What’s cooking?

Dec 11, 2004

While the Sensex has fallen by 1.4% in this week, we take a closer look at the performance of the US economy in recent times, key gainers and losers in the ADR market and what is in store for the Indian stock markets with respect to the events that are shaping up in the US economy. As far as the US economy is concerned, while the recent inflation numbers edged higher, the consumer sentiment (measured by an index) increased in the recent month. More importantly, the YoY trend in most of the key indicators like GDP growth, manufacturing index and jobless claims substantiates the fact that the US economy is on the path to recovery. Some argue that it is already well into the recovery phase! The graphs below show the quarterly and yearly GDP growth trend of the US economy. The Federal Reserve is expected to meet on Tuesday next week and expectations of a further rise in interest rates on the back of improved economic performance is not being ruled by the stock markets in general.

Beside positive vibes on the economy front, the softening of crude prices has also provided fillip to the stock markets globally. Despite the decision by the OPEC (Organisation of Petroleum Exporting Countries) to reduce crude output by around 1 m barrels a day, crude prices fell sharply yesterday. Though prices have softened off late, it is still higher on a YoY basis.

As far as ADRs are concerned, after gaining ground in the initial part of the week, HDFC Bank fell towards the end. The bank has submitted its offer document with the SEC to raise capital through an ADR offering. The issue size is expected to be in the range of US$ 300 m. The key losers among Indian ADRs were the technology majors. The Rupee appreciation has raised apprehensions over the sustenance of operating margins of software companies at the current levels. Generally, companies hedge against adverse exchange rate movement and to that extent, the impact is likely to be mitigated in the short-term. However, receivables from new contracts could face pressure.

Conclusion
As the Federal Reserve Governors meet next Tuesday, there is a rising debate whether the Fed will raise interest rate or not and whether the magnitude of increase will be higher or not. Now, as far as investors in India are concerned, increase in interest rates in the US could prove to be dampener for FII inflow into the country in the short-term. It has to be borne in mind that significant FII buying has provided strong support to the Indian markets and if this slows down, there could be selling pressure here. On other aspects, we do not feel that the current valuation levels of Indian stocks are ‘cheap’ as it were before a year and a half.

To support current valuations and expectations, corporate profitability has to keep pace. Given the fact that there is input cost related pressure on Indian corporates, it remains to be seen whether the profit growth momentum could come under pressure in the short-term. We suggest investors to book profits if the target price is achieved and any further investment decision in equities has to be taken with a staggered approach.

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