Dec 31, 2007|
Power stocks, commodities and more...
Terrorism had its impact on global markets last week as the former Prime Minister of Pakistan, Benazir Bhutto, was assassinated on Thursday evening. Most of the global indices closed either in the red or marginally in the positive. Indian markets, however, in a way of their own, continued with strong momentum. Overall, for the week, the BSE-Sensex and closed with gains of just a shade under 6%. The US markets, which closed marginally in the negative, are said to be poised for the worst fourth quarter performance in 7 years.
The much-touted initial public offering (IPO) of Reliance Power got the go-ahead from the stock market regulator, Securities and Exchange Board of India (SEBI), last weekend. This brings to end the uncertainty surrounding the country's biggest proposed IPO ever. A leading daily has reported that the issue is scheduled for late January and will raise Rs 110 bn (US$ 2.8 bn), which is around 16% bigger than the IPO of DLF (June 2007), the leading real estate developer. This newspaper report further goes on to state the extent by which the younger Ambani brother's wealth will spike post this IPO. Smart chief he is! Single-handedly, he has led to a meteoric rise in valuations of utility companies (with and without real businesses) in the country.
Power stocks, which were trading at trailing 12-month P/Es of 15 to 20 times have suddenly risen to trade at P/Es like 37 times (Tata Power) and 54 times (Reliance Energy)! Especially for the latter, much of these valuations factor in what the company plans (plans) to achieve in the next 10 years. As a matter of fact, this company has a history of under-achievements in the past and is now talking of 'ultra-mega' plans for the next 10 years. Even if the achievement is to be 100% (better than the best case scenario!), our calculations show that the valuations have been brought to atrociously high levels! But does Mr. Ambani care? He must be busy practicing for the 2008 version of the Mumbai marathon! Investors beware! As Bill Rodgers said, "The marathon can humble you." We hope this marathon does so for Mr. Ambani.
The American seem to be running an altogether different marathon. The sub-primes out of them have already been humbled. And the banks that created these sub-primes have followed suit. The years 2007 can aptly be described as the 'year of sub-prime' in the US. Since August, there has been no respite for the borrowers who have seen their house values dwindle, and the bankers who have seen their portfolios shrink. 'R' for recession is what these people are learning these days. For 2008 might well see the US economy moving into one (or move deeper into one, as the process has seemingly already started). Let's wait and watch!
As we enter the New Year, deliberations shall begin on the movement of interest rates and commodity prices. In a recent interview with us, Dr. Rafiq Dossani indicated that, "interest rates in India will be much affected by the US interest rates. As such, these are certainly going to fall over the next six month. I don't think anyone knows the extent of this problem of the subprime crisis. It's much deeper than the popular press is aware of. There is a rot in there that people are not talking about. That is not to say that the US economy is not fundamentally strong - in terms of technology, finance, management, education - it's like unbeatable. But there will be a process of readjustment over the next year or so."
On commodity prices, Dr. Dossani indicated, "I think the big drivers of commodity prices are the western economies, which are consumers, and China, which is a producer. So a slowdown in the American and other western economies and Japan, which will all move together, will keep a lid on commodity prices. Now, will China be able to offset that or not is a question. China is still very much an export driven economy. So, I cannot see it being unaffected. I expect Chinese growth rates to slow and to fall below 10%. When that happens, you will see a big fall in commodity prices. I am not a commodity bull at this stage at all. I would be a bear."
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