The India Babble
After a near 50 per cent jump in the markets in the past 4 months, a correction kicked in on Monday with a drop of 112 points in the Sensex to 4196. The market seems to think of it as a correction to the sharp rise. Institutional investors were not present and news that there was a negative inflow of institutional money last Friday, meant that a slight scare was felt in the
market. Public sector utilities were hit pretty hard as fears of a delay in the sell-off process grew.
Tuesday, the fears came true when the Supreme Court ruled that the BPCL and HPCL privatisation programs should get parliamentary approval before proceeding with the sale. Well, from a legal perspective, the learned judges are right; the firms were established under a parliamentary act and can only change ownership once Parliament agrees. This completely knocked the stuffing out of the privatisation program and the market values of the two firms collapsed. This is going to have far-reaching consequences as Parliament is not noted for its economic acumen and they love to score points.
With the coalition politics in the centre, getting parliamentary approval for disinvestments is going to be very critical and the timing sucks as well. Watch the deficit zoom. After a brief up tick on Wednesday, the market kept on going down and on Thursday, the Sensex plunged over 100 points to close at 4134, but then it recovered a bit on Friday and ended the week on 4217
The rupee fell after the RBI decided to cut the interest rates on NRI accounts. The RBI is getting quite concerned with the sheer inflow of capital into the country, it also banned overseas corporate bodies from trading on primary markets, while secondary market trading has already been banned for 2 years. The rupee steadily dropped over the week and importers are rushing to hedge their exposures which were left open on the feeling that the rupee can only appreciate.
Indian pharmaceutical companies are doing well in the western markets, especially in the US markets with their generics. Cipla, Dr Reddy Laboratories, Wockhardt all have long applications pending with the Food and Drug Administration (FDA) for approval of their generic medicines. Indeed, Wockhardt estimates that the bulk of its revenues will come from its overseas operations over the next 3 years, as the sales of OTC and generics soar in the western world. Dr Reddy's Laboratories and Ranbaxy Laboratories have recently won US regulatory approval to sell generic drugs.
The outsourcing bandwagon rolls on, with PeopleSoft planning to hire up to 700 more employees. Accenture is also rapidly hiring, some reports suggested up to 200 per month, which is an amazing number. Another report by an analyst seems to suggest that India will take off in terms of electronics manufacturing and outsourcing with double digit growth expected in the coming years. The core of this growth comes from the high quality of educated people in India, and the news report, that in Gujarat 98 per cent of the children are now enrolled in primary school, is a good one, specially the state's chief minister's attempts to increase female educational enrolment numbers by giving monetary incentives. For those people foaming about Gujarat, take a look, its not really that bad..
India's anti-dumping duty on Chinese silk yarn has made it more expensive; add the issue of quality testing and the Chinese exporters are feeling the pain. In fact, India is one of the biggest users of the anti-dumping mechanism. In a way, it is good that India is using the world trade rules to defend its domestic economy, but it should be careful that it does not slip
into the protectionist mode.
The Babble in the Ivory Towers
Jean Helwege of the Ohio State University and Nellie Liang of the Federal Reserve System have written an interesting working paper on Initial Public Offerings (IPO's) in hot and cold markets. Some theories of IPO's say that hot IPO markets are characterised by clusters of firms in particular industries for which a technological innovation has occurred, suggesting that hot and cold market IPO firms will differ in quality, prospects, or types of business. Others suggest hot market IPO's are firms which take advantage of irrational investors. The authors analysed IPO's in a number of hot and cold markets during 1975- 2000, examining them at the time of the IPO and during the following five years. They found that both hot and cold market IPO's are largely concentrated in the same narrow set of industries. Hot markets for many industries occur at the same time. They also found few distinctions in quality and scant evidence that hot market IPO's have better growth prospects.
Their results suggest that technological innovations are not the primary determinant of hot markets, because IPO markets cycle with greater frequency than the underlying innovations, and are more in line with the view that hot markets reflect greater investor optimism. This is very interesting, because the last boom was totally predicated by a bubble forming out of irrational investor exuberance, which relied on the belief that the internet/technology boom will give these new economy firms greater earning potential. Another nail in the coffin of new economy valuations and the take away from this research is that when investors want to invest in IPO's, they should examine the fundamental factors and not get carried away by hype. (Fat chance of that happening)
Details of this paper and past columns are available on
The World Babble
Well, it certainly was an interesting week. This week, your columnist was enjoying the excellent climes of Florida and was able to keep close tabs on the US markets. The NYSE scandal kept the markets nervous, mainly hitting volumes. To top it all, Hurricane Isabel decided to pay a visit the USA. For a moment, I thought that I will have to spend the next week in Florida but thankfully, it missed Florida and moved up north. The expected damage to the insurance sector isn't that much, the initial estimate being hardly 500 million dollars. An interesting point is the rapid rise in catastrophic (re)insurance and thus the impact of Hurricane Isabel and the next one (My friend Shaun tells me that the next one is going to be called as Hurricane Juan) will be better managed. Volumes were pretty high over the week and the Dow Jones Industrial Average rose 1.8% to close at 9644, the S&P 500 gained 1.7 per cent closing at 1036, and the NASDAQ Composite climbed 2.7 per cent.
On Thursday, the Dow and S&P closed at their highest levels since mid-June 2002. This is surprising, especially when one considers that the interest rates were left unchanged, industrial production grew by just 0.1 per cent in August compared to 0.7 per cent in July, car manufacturing declined, 3.1 per cent fall in metals production, trade deficit rose to $40.3 billion in July and core CPI growth fell to 1.3 per cent in August (lowest since 1966). Economic news was uniformly bleak and because the numbers coming out of Europe was better, the dollar took a hit. The German business confidence index rose to 60.9, a ninth month of steady increases. The political moves by Chancellor Gerhard Schroeder to improve the German political decision making seems to be bearing fruit, still the FT Eurotop 300 rose barely by 6 points over the week and ended at 915.
London wasn't too sure of itself, the RPI rising by only 0.2 per cent in August, unemployment fell making employment the bright spot and all this meant that the index did a hump and closed few points down on the weekly open at 4257.
Richard Grasso, the embattled chairman of the New York Stock Exchange (NYSE), finally gave up on the pressure and resigned from his $140 million job. As usual with American regulations and trial by media, the point man falls on his sword and the real culprits escape. For example, who is going to check the functioning and make up of the remuneration committee of the NYSE? Surely, Grasso's pay-package was not made up in a vacuum and the remuneration committee members should be dragged over hot coals to explain on what basis they provided such remuneration to Grasso. But then, considering that they are earning similar sums, it would not be surprising to hear that they are providing similar levels of remuneration to the head of the NYSE. Perhaps, the NYSE's board of directors could explain themselves, but fat chance there.
The other scandal of the late trading at the mutual funds is gathering speed, with criminal charges being placed against a former Bank of America executive, and NY attorney general Eliot Spitzer seems to expect more cases to be filed. Bank of America, Janus Capital, Strong Capital Management and Bank One are the primary targets for the probe. This is a warning shot across US congress and the SEC. When the regulators are slack and not backed by a strong regulatory regime, then state attorney generals will step into the picture and clearly muddy the regulatory landscape. The problem is, they may well be doing this out of political ambitions, the affected parties pay a fine and everything heads to the back of the mind or is forgotten. This is dangerous and it could really hurt the economy something major.
Crude prices are falling with news of increased production from Iraq and prices have stayed below the $28 per barrel level. Still, Nigeria's oil workers strike and the volatility of oil production in Iraq, the political instability in Venezuela will keep the prices within the top of the $25-30 range. Gold fell back from $381 per ounce to $372.50 per ounce on easing of fears of terrorism. Over one year, Gold has risen by almost 18 per cent, which shows how the global markets have reacted to the general rise in risk.
Japan powered ahead by almost 400 points to a 15-month high before falling back to close at 10938. The good US market numbers helped the Japanese markets to go up. On the other hand, the dollar's fall meant that the yen strengthened to 114.7, a 2.5 year low. Banks were well into the news and heavy buying was observed in the major banking stocks, such as Mizuho financial group. There has been significant inflow from American and European pension funds.
On the trade front, well, as expected and mentioned several times in this column, the Cancun trade negotiations collapsed amidst the welter of accusations from all ends. The blame falls squarely on almost everybody, starting from the USA, Europe, Japan, the lesser developed countries, the NGO's and the rest of the lot. The Americans refused to let go of their cotton subsidies, the Europeans stuck with their Singapore agenda and refused to let go of their indecent subsidies, the Japanese refused point blank to remove their rice subsidies, the Group of 21 refused to move on the Singapore agenda without movement on the subsidies front and finally, the NGO's created mayhem.
The trouble is, that bilateral and regional trade blocs will form, and almost everybody will lose out on economic growth. The Doha round is dead all right. The saving grace is that the economic condition of Europe and Japan will progressively make it difficult for them to hold on to subsidies. Japan is too small a market to worry about, Europe can't afford the subsidies after the 10 additional countries join but the emerging market needs to get one thing straight. They should form their own agricultural bloc and reduce their subsidies. That will push the developed countries into handling the negotiations properly. If regional trade blocs are the way forward, then it behoves the G21 to create a strong bloc of its own.
(Dr Bhaskar Dasgupta writes a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.)