US recession versus liquidity

US recession versus liquidity
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First Published: Sun, Mar 02 2008. 11 26 PM IST

Updated: Sun, Mar 02 2008. 11 26 PM IST
The impact of the Union Budget is likely to be the least of the market’s worries when it opens on Monday. The Dow Jones Industrial Average fell 315 points, or 2.51%, on Friday on the usual worries about US recession and more trouble for finance companies. That sent the Brazilian Bovespa index down 3.15%. In short, global concerns will continue to dominate the market.
The MSCI World index is down 1.88% in February and 10.19% for the year. But the MSCI Emerging Markets index is up 5.98% in February, although it has lost 7.32% this year. Practically all the emerging markets did well in February and MSCI China, Taiwan, Pakistan and Peru had double-digit returns. MSCI India, down 0.85% for the month, wasn’t the worst performer, although it’s close to being that for the year.
There are signs, however, that investors are getting impatient with the ultra-low returns on the US government bonds (two-year treasury yields are now at 1.8%) and they’re moving out of those extra-safe havens to search for returns. Research outfit EPFR Global says, “Prior to the release of weak US 4Q07 GDP (gross domestic product) and jobless numbers, however, investors recovered their appetite for emerging markets assets, committed more than $1 billion (Rs3,992 crore) to financial sector funds and pulled cash out of money market funds for the first time since the final week of 2007.”
Trouble is, the money isn’t coming to India. Instead, it’s going mainly into global commodity and energy sector funds and into commodity-related emerging markets such as Russia and Brazil. And a lot of the money flowing into Asia ex-Japan funds went to the cheap Taiwanese market, sending the MSCI Taiwan index up 10.38% last month.
But note that EPFR says the money started to flow out prior to the release of new data that showed a very weak US economy. There’s a tug of war going on between the worry over the US economy and the financial sector on the one hand and the liquidity unleashed by the US Federal Reserve on the other. The rate cuts don’t seem to be doing what they were supposed to do: Bankrate.com says fixed mortgage rates in the US are at a four-month high, despite the rate cuts. Yields on corporate paper rated Baa by Moody’s (medium-grade debt) are at elevated levels not seen since 2003.
In other words, while the deteriorating US economy is taking its toll on the markets, the liquidity has to find a home and, at the moment, the preferred home is commodities and gold.
Maruti Suzuki sales may recoup this month on price reductions
Car maker Maruti Suzuki Ltd’s domestic sales growth has averaged less than 3% in the previous three months, a sharp drop from the growth of 18% between April and November 2007. Each time the reason for the low year-on-year growth seems to be a postponement of sales. In December, buyers were said to have postponed sales to get their vehicles registered in the new year, simply because a vehicle bought in 2008 has a better resale value than one bought in 2007. In February, buyers postponed sales because of an expected cut in excise duty on small cars.
It turns out that there was a similar anticipation in February 2006 which resulted in a low base that year. Sales then caught up in March, when they hit a new record. In February last year, domestic sales had risen as much as 61% over the low base, as expectations of a back-to-back cut in excise duties were running low.
Sales may well recoup this month—especially since excise on small and compact cars has been cut by 4% and Maruti has announced corresponding price cuts. This should lure customers, but there is also the possibility that some price discounts offered earlier may be withdrawn, leading to an increase in profitability as well.
Although Maruti hasn’t been affected as much as two-wheeler manufacturers because the increase in interest rates last year, there has been some impact and to that extent the base has now corrected. Last year, auto companies had to contend with a high base in 2006, when auto loans came easily and interest rates were much lower. Keeping this in mind, growth now needs to pick up considerably for investors to get interested in the stock. The stock has rallied about 14% from its lows in February on expectations of the excise cut, but is still 27% lower than its highs last October.
Write to us at marktomarket@livemint.com
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First Published: Sun, Mar 02 2008. 11 26 PM IST