Most stock markets across the world have bounced back pretty sharply after the panic caused by the Bear Stearns Companies Inc. collapse. The Dow Jones Industrial Average hit a low of 11,650 on 17 March and it’s up 8.2% from there. The MSCI World index is up even more, gaining 8.9% between its closings on 17 March and 4 April.
Many traders believe the measures taken to bail out Bear Stearns and the expansion of the collateral acceptable to the US Federal Reserve to include mortgage-backed securities marked a watershed in the markets. The credit markets have certainly pulled back from the brink. In the US, the spread between mortgage-backed securities and treasurys has narrowed from 200 basis points (bps) on 12 March, before the Bear Stearns bailout, to 170 bps. An index of investment-grade bond spreads, which was 190 bps on 12 March, is down to 111. 30-year fixed mortgage rates have come down from 6.13% to 5.88%. Yields on safe haven two-year treasurys have also dropped. Sure, spreads are still very high, but at least they’re going down.
The improvement in the credit markets sparked a rally on Wall Street and in most other markets. Risk appetite too has bounced back, evident from the fact that the MSCI Emerging Markets index is up 15% since its close on 17 March. While some of that could be on account of the rally in commodities and crude oil, even the MSCI EM Asia index is up 10%, more than the rise in the MSCI World index. As fund flow tracker EPFR Global points out, “Asia ex-Japan Equity Funds enjoyed their best week of the year in early April, absorbing a net $599 million (Rs2,396 crore), as investors found some value in China and continued to commit fresh money to Taiwan in the aftermath of the 22 March presidential election. China and Taiwan Country Funds took in $377 million and $191 million, respectively, while Singapore Country Funds absorbed another $110 million.”
Unfortunately, the Indian market is one of the worst performers even among emerging markets. MSCI India is up a mere 3.4% since 17 March. Indonesia, which is down 1.2% since 17 March, is the other market left out of the rally. Incidentally, both countries have recently seen a spike in inflation.
One reason for the Indian market’s underperformance could be relatively high valuations. That’s also seen from the fact that although the MSCI China index is up since 17 March, the Shanghai Composite index is actually lower since that date. High price-to-earnings markets are not in favour.
Perhaps it’s because the MSCI India index has outperformed the emerging markets index over the last five boom years—its annualized growth rate has been 35.28% compared with 27% for the MSCI EM index and 24.19% for EM Asia. But if we are to pay now for better performance in the past, the question is: wasn’t the outperformance supposed to be a reward for higher growth and for the great India story?
No respite for auto industry
Passenger automobile sales in March were quite a tangle, giving conflicting signs on whether the excise duty cuts helped the industry.
In the motorcycle industry, market leader Hero Honda Ltd grew sales by 15.4%, which according to analysts, was because of the cut in excise duty. March happened to be among the best months in the year for Hero Honda, whose sales had fallen by about 1% in the preceding 11 months of the financial year. But Bajaj Auto Ltd and TVS Motors Ltd, who together have a market share of about 45%, reported an 11% decline in sales.
The passenger car segment was hardly any different. Maruti Suzuki India Ltd and Tata Motors Ltd saw a decline in sales of compact cars, the segment which benefited from the reduction in excise duty. But Hyundai Motor Co.’s local unit reported a 52% increase in overall sales, thanks to demand for its small cars, including the newly launched i10 hatchback. Hyundai has benefited from the commissioning of a new plant in Chennai, which may have also helped the jump in sales. Even General Motors India Ltd registered a healthy jump in sales.
But in both two-wheeler and car segments, overall sales have been sluggish—a few have gained market share at the expense of others. The impact of the cut in excise duty hasn’t been as much as expected. After reporting sluggish sales in February, some had claimed customers postponed purchases to gain from the benefit of duty cuts. But considering that industrywide sales have been sluggish, this doesn’t seem true.
High interest rates and the difficulty in getting vehicles financed (this problem is most evident in the two-wheeler segment because of rising defaults) continue to impact the industry. When auto shares had underperformed considerably last year, and it seemed like interest rates may be lowered this year, some analysts had recommended buying these shares. But now, with inflation at record highs, there’s a likelihood that interest rates could increase. Meanwhile, the inflation in raw material costs continues to be a concern and competition is intense. The only positive for the passenger vehicle industry as they enter a new financial year is that they have to contend with a lower base, unlike the previous year.
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