The Indian stock market has been one of the biggest beneficiaries of falling international crude oil prices.
(THE OIL EFFECT) Since the middle of July, when crude started falling from its highs, the Bombay Stock Exchange’s Sensex has outperformed other markets very handsomely.
As the chart shows, the Sensex has gone up 22.3% between 15 July and 11 August (taking the closing figures). No market in Asia even comes close to that kind of a gain. Nor have we outperformed merely the Asian markets—over the period 15 July to last Friday (8 August), the Footsie was up 7.2% and the Dow Jones Industrial Average 6.3%. Markets in commodity producers such as Brazil, which were the stars in earlier months, fell during the interval.
That’s not all. As the US dollar strengthened during this period, all Asian currencies, including the Chinese yuan, depreciated against the dollar except for the Indian rupee.
For the dollar investor, therefore, the gains have been even higher in the Indian stock markets, with BSE’s Dollex 30 index rising by 25.85% between 15 July and 11 August.
In a note to clients, analysts at JPMorgan Chase and Co. said: “The low yielding currencies from open economies most leveraged to global growth are taking the brunt of the impact, while less cyclical FX that also benefit from the oil price decline are being impacted the least.”
It’s very probable that Indian stocks too have outperformed for the same reason: the Indian economy is more exposed to an oil price hike and hence it benefits disproportionately from a decline.
Also, it is relatively more insular and hence less exposed to international trade and slowing growth elsewhere.
But curiously enough, Chinese investors are not celebrating, despite the Olympics and in spite of the Chinese economy being a prodigious consumer of crude. The Shanghai Composite index closed at 2,470 on Monday, a level last seen in December 2006.
The latest reason for the poor showing is China’s higher-than-expected producer price index reading for July, which is up 10% year-on-year, compared with a rise of 8.8% in the previous month.
There is a slew of data that point towards a slowdown, such as the July’s reading of the Purchase Manufacturers’ Index, the lowest in the last three years and a fall in electricity production.
The rise in wholesale prices, combined with flat, or lower consumer prices (partly because of price controls), is not good for corporate profits, as firms are unable to pass on the rise in input prices.
The concerns about the Chinese economy are difficult to explain, particularly as Chinese Premier Hu Jintao, at a speech on 1 August, had said, “Growth is China’s priority concern and inflation is China’s major concern”, which was interpreted to mean that henceforth China would emphasize growth to controlling inflation.
China has the wherewithal to easily increase spending on infrastructure, given its low fiscal deficit.
Unfortunately, India does not have that leeway. Nor have fund inflows to India been as promising.
According to EPFR Global, in the first week of August “China Equity Funds again helped the Asia ex-Japan Equity Fund group to post inflows, with the $329 million (Rs1,382 crore) taken in by the former more than offsetting outflows from most of the other fund groups geared to individual Asian markets. The list of fund groups seeing outflows included India Equity Funds…”
Perhaps all that’s happening is that the Sensex underperformed when oil prices were rising and is, therefore, doing better when oil prices are cooling off. After all, year-to-date we’re still one of the worst performing markets. But the recent behaviour of the Chinese market is a reminder that lower commodity prices, on account of slower growth, are hardly something to be celebrated. Investors would do well to watch the Shanghai index.
Hero Honda Motors’ spectacular growth in July
At a time when automobile manufacturers are struggling to maintain sales at last year’s levels, Hero Honda Motors Ltd has reported a 40% jump in volumes in July. Its main competitor, Bajaj Auto Ltd, grew sales by just 4%. Auto makers have been bogged down by rising interest rates and more stringent financing norms, causing a drop in demand. For a company to report a 40% jump in sales, therefore, seems odd. What’s more, the company has said it will raise the prices of its motorcycles by up to Rs850 per motorcycle, to offset rising input costs.
Analysts tracking the auto sector say that Hero Honda has been pushing stock to its dealers aggressively ahead of the festive season later in the year. The Dussehra and Diwali festivals this year are about two weeks earlier when compared with the previous year. At the retail end, that is, as far as secondary sales to customers go, the difference between Hero Honda’s sales and those of its competitors is not as high.
But that’s not to say that the company isn’t doing better than its peers. Analysts expect its growth to be higher this year, not only in terms of volumes, but also in terms of profit.
Late last month, Hero Honda announced an improvement in margins on a year-on-year basis, the only one to do so (besides TVS Motor Co. Ltd, which benefited from an extremely low base) in the auto sector. Apart from benefits of scale, the company also spent less on advertisements when compared with the previous year, when it had sponsored the cricket World Cup. The recent price hikes will further help its margins.
In the first four months of this year, Hero Honda’s vehicle sales have grown by 17.1%, while those of Bajaj Auto and TVS Motors have grown by 6.9% on a cumulative basis. In terms of incremental volumes, while Hero Honda has sold 170,000 additional vehicles compared with the same period last year, the incremental sales of its two competitors together were less than half, at about 82,000 vehicles.
Hero Honda’s superior growth is reflected in its valuations of about 15 times estimated core earnings for the current year. This represents a premium of more than 40% against Bajaj Auto’s core business valuation of about 10.5 times current year’s estimated earnings.
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