The recent sell-off in the markets has taken a toll on almost all asset classes, indicating that most of them have become correlated. Emerging-market stocks, once touted as essential for diversifying one’s portfolio, have hitched themselves firmly to the developed markets. The MSCI Developed World Index, for example, fell 6.8% between 18 July and 22 August, while the MSCI Emerging Markets index fell 10.1%. Two stock markets were exceptions to the rule and gained even during this period. One of them was China, where the SSE B index, where foreigners can invest, moved up 14.5% between 18 July and 22 August. The other was Saudi Arabia’s Tawadul index, which went up 7.8%. If an investor wants to diversify his holdings of equities internationally, she will have to invest in these very volatile markets.
Among the bond markets , emerging-market bonds went the same way as stocks, but the losses were far more muted, keeping in view the safe-haven status of bonds. The EMBI+ index (the Emerging Markets Bond Index Plus that tracks total returns for external debt instruments in emerging markets) lost 1.4% between 18 July and 22 August. However, bonds in developed countries gained from the flight to safety, and the Citigroup World Bond index rose 2.4% over the period. So bonds are still an effective safe haven. Not so gold, the traditional safe haven, which saw its price drop 3.8% in the one month to 21 August.
Among currencies, the dollar has proved to be a currency to bank on in troubled times. But the Japanese yen has proved to be even more of a contrarian, moving up whenever the carry trade is unwound.
What about commodities? After all, with central banks and international financial institutions such as the Asian Development and the International Monetary Fund reiterating that the economic fundamentals are firm, metals should not be affected. But they too have been hurt badly in the sell-off, with the Economist metals index falling 14.7% in the one month to 21 August. Among commodities, it is food which has resisted the downturn in prices, with the Economist food index showing a gain of 0.7% in the one month period ended 21 August. In India, the MCX Agri futures index showed a drop of 0.7% between 25 July and 25 August. However, the MCX Agri spot index showed a rise of 0.9%.
The Economist Intellige-nce Unit forecasts its food, feedstuffs and beverages Index to rise by 16% this year, with the prices of grain and oilseeds rising the most. Bad weather conditions and diversion of corn for producing ethanol has led to a sharp rise in food prices. In India, the food prices component of the wholesale price index is up 8.8% year-on-year.
Investment gurus Jim Rogers and Marc Faber have been recommending buying agricultural commodities. Given the current uncertainties in the financial markets, agri-commodities could prove to be the real safe haven.
Gillette India Ltd’s shares have underperformed NSE’s Nifty by about 8% since mid-March. This is interesting considering the 7% appreciation in the rupee since mid-March. Being a relatively large importer, the rising rupee should have helped the company.
But there are larger worries that would be occupying minds of investors—sales growth has averaged just 8% in the last six quarters. At the same time, Gillette still enjoys a price-earnings multiple in the range of 35 times trailing earnings. Given the pricey valuations, there was hardly any room for disappointment.
The company’s recently announced results for the quarter ended June show that not only did sales growth remain at 8%, but also that earnings growth assumptions had to be revised because of unusually high corporate expenses. Cumulative profits of the company’s three operating segments grew by a healthy 24.5% last quarter (in the previous five quarters, they had grown at an average rate of 32.2%). But unallocable expenditure jumped 251% to Rs24.5 crore, leading to a 19.4% drop in profit before tax and exceptions. (Gillette has extended its financial year by six months to match Procter & Gamble’s July-June accounting period.) Thus, for the six quarters from January 2006 till June 2007, profit before tax and exceptionals grew 21.6% to Rs173.5 crore. In the five quarters till March, profit had grown at a much higher rate of 35.5%.
Given Gillette’s low floating stock (11%) and traded volume (averaging 2,500 shares a day this year), it’s unlikely that the shares would move considerably from current levels. For that to happen, either the company’s growth rates have to improve substantially or the parent company has to make an offer to buy out minority shareholders.
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