Indian firms move briskly

Also, export sales of some Indian products have exceeded domestic sales by 10% over last 3 years, writes Dr Bhaskar Dasgupta.

The India Babble

The week started off on a high note, with Monday seeing the Sensex move up by 50 points, but then the markets turned down dramatically over the next four days and dived from a near high of just under 5000 to 4750 on Friday before recovering in the ending session to close at 4838. The long down-streak was mainly due to the fears over the interest or rather lack of it by the foreign financial institutions. The dollar rupee is relatively stable over the week.

ETIG analysed sales for 550 large Indian companies for the past six years and found that exports have outpaced domestic sales by 10 per cent over the last three years. The top exporters are in the IT, jewellery, textiles, leather, pharma, chemicals etc. sectors. This can be taken in two ways, the first is the optimistic view that Indian products are competing across the world in these sectors and their export sales are now far more than their domestic sales, with all the attendant brownie points of foreign exchange earnings, quality and international competitiveness. The downside is that export markets can dry up dramatically and swiftly and this could well be a potential risk.

Not only that, Indian companies have been moving abroad briskly, there have been more than 35 foreign acquisitions since the beginning of the year, the latest being the potential acquisition of the Daewoo Commercial Vehicle company of South Korea by Tata Motors. The total amount is near three quarters of a billion dollars, in countries ranging from USA, Canada, South Korea, European Countries, Australia and the like. Nice going there guys.

A report in the Economic Times about the cattle and milk production situation in India was rather thought provoking. India has the largest number of livestock and it also produces the biggest pool of milk in the world. While saying that, India has barely a 1 per cent of the world's dairy products market and you can just forget about the milk. Apparently, the milk which we produce is so far below the international standards on hygiene and production standards that it’s not even fit to talk about exporting this stuff. The central government is now trying to introduce these standards into the country so that producers and exporters can have a fair whack at exporting this stuff.

Talking about exporting, the Business Standard reported a fascinating piece of information. India is the second largest exporter of rice and seventh largest exporter of wheat in the world. Guess why? As it turns out, the country has been exporting these food grains mainly because the government is supplying the exporters with grains are prices much below the domestic price, out of the food reserve stocks. This is a pure subsidy which is being given to the exporters. Now, one does ask the question, why? The subsidy bill is going up, the consumers are paying a higher price, the exporters are gaining, and the farmers are at mercy of the government and all in all, a rather silly state of affairs.

The World Babble

With a holiday week coming up, all the markets were soft, with the DOW ending at 9628, down 140 points over the week, while the NASDAQ was down 37 points at 1893 over the week. Mainly due to the worries arising from the potential trade war, investor apathy and the news from Iraq continuously getting people all worried about the direction. The market participants do not seem to look at the week with major concern, taking it to be more of a consolidation aspect rather than serious trouble. Mind you, the fund flows are pointing to a serious problem with the funding of the federal deficit and the labour market is still weak and spongy, which does not behove well for the rest of the quarter. German stock dropped 3.9 over the week while the French stocks dropped almost a per cent on worries over a rising euro and threats of a trade war. London was worried about the terror attacks, US Presidential visit to London and trade fears but still, London managed to claw back 1.7 per cent, closing at 4319.

Funny thing, that Atkins Diet. It’s created such a huge craze in the USA and Europe that the bread makers of the world are getting seriously concerned about the impact. Forty per cent of American consumers are eating less bread than last year. The US National Bread Leadership council (can this really exist, apparently it can in USA) states that the average American ate 54 pounds of bread last year, the French and Italians ate about three times as much but were not obese. On the other hand, the fact that carbohydrates are out but red meat is back in means that beef sales have recovered smartly. Truly, the food habits of us humans are real funny.

The UK government's watchdog is going to investigate local council tax hikes and this will create major issues around everybody involved in politics from the central government to the local government. There is a major groundswell of rebellion in the ordinary citizenry about the council tax rises. This is directly attributable to the current government's rather skewed view of local spending. The education and social security part of the local council spending is fixed by the central government and that leaves very little which the local councils can cut or manage. The memories of the poll tax are still fresh in the government's minds and the rate of increase is shocking. Be that as it may, the pressure to reform local council funding is getting very strong now. Talking about funding,
the UK Chancellor, Gordon Brown, seems to have decided to cap the retirement pool limits to £1.4MM. Let me be blunt about this, if this comes in, there will be an exodus of people who will leave this country and you can add yours truly to the list. This is unbelievable, why am I going to be penalised for saving too much and then get penalised if the markets go up? Absolute robbery, I say.

The dollar hit a record low against the Euro on Tuesday as capital flows weakened sharply and the US current account deficit made the market very nervous. The Euro was trading at 1.953 against the dollar. It seems like people are less willing to invest in the US economy and the simmering trade war between Europe and USA over steel, GM foods, foreign trade tax credits, not to mention the other opening shot against China with restrictions on some textile efforts caused the markets to worry about how this will pan out for the American economy. This clothing dispute is causing major ructions around the world economy on Wednesday, gold went through $400 an ounce, the euro went up even more, bond prices staggered down and the Nikkei dropped almost 3 per cent.

An interesting news item crossed my inbox from my erstwhile colleagues at Citigroup. Apparently, Chuck Prince, the new CEO of Citigroup, the largest bank in the world, seems to have hit limits of growth. After saying that he would not have bought Fleet Boston at the inflated prices, he said that it is very difficult to transform Citigroup, and perhaps the only way to do it is to merge with Canada. He said, Citigroup was too big but still said that he would be looking at small fill in deals to plug local deficiencies and local markets.

The mutual fund scandal in the USA is rumbling ahead, with reports that the SEC has decided to charge Morgan Stanley for illegal mutual fund sales practises. Putnam is suffering heavily with major sums of money leaving the giant mutual fund company. On the other hand, this scandal is again showing how incompetently the US financial markets are regulated. The SEC and government have just not learned anything from the previous research scandal. It is still fragmented, and no single oversight of any industrial sector is there, which means that there are significant gaps on regulatory coverage.

Not content with mucking up investment banking, equities and the mutual fund industry, it’s now the turn of the foreign exchange sector to be in the criminal limelight. 47 people in the foreign exchange market were charged this week from a staggering array of blue chip banks such as JPM, Societe Generale, UBS, DKW and even a former member of the Fed. Millions of dollars were involved and apparently has been going on for the past 20 years. I wonder when the US authorities will seriously consider that the image of the US financial sector is taking a major hammering because of all this and this essentially makes the homeland of capitalism totally unfit to do business in. Confidence and trust is everything in financial markets, and we are already seeing that trades are being difficult to do with the smaller American players by rest of the world.

The plan by several continental and UK building societies to launch 25 year long term fixed rate mortgages is an interesting step. Unlike the continent and USA, most of the mortgages in the UK are variable rate which means that over the short term, they are cheaper specially when the rates are low and inflation is controlled as is now. This variability unfortunately makes the British economy very susceptible to interest rate changes and as the UK chancellor pointed out, if we adopt the euro, this will hurt the British economy massively when the European Central Bank changes interest rates. Unfortunately, I cannot see a way out as variable interest rates will always be cheaper in the days of low interest rates.

Something which made me laugh long and hard. The London Underground union RMT had to postpone its strike ballot by 4-5 days. The idea is that the union will send out strike ballots to all its members and the members will vote on the ballot whether to strike or not and post the ballots back to the union headquarters whether they will be counted and suitable action taken. Unfortunately, the delay was caused because the postal workers were on strike and the snail mail was significantly delayed. London, anyway, is a high volume market and the postal worker strike would not help deliveries at all. Workers of the world are not obviously united at all. For that matter, the workers of the developed world are very upset with the workers of the developing world for taking all their nice little jobs away.

On the trade front, things have been happening. The Free Trade Agreement for Americas is currently under discussion and because of what happened in Cancun, people are very sceptical about this entire thing. Brazil along with India was leading the charge to push out the farm subsidies while the USA and Europe were resisting it. Now that they are talking about FTAA, it was but natural that Brazil and USA will butt heads. So, at the most, expect a desultory and lightweight agreement. On the other side of the pond, Pascal Lamy, the EU trade commissioner, seems to be verging towards dropping the Singapore issues. Good for them, finally good sense seems to be breaking out in those dim European corridors.

(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.)