The single most important factor affecting world equity markets today is the price of crude oil. If oil prices go up, markets fall; if oil prices cool, markets rise.
Unfortunately, observers can’t agree on the reasons for the rise in oil prices. Some blame speculators, others say the oil producers aren’t pumping enough crude and some blame the falling dollar. Another widely held opinion is that demand from countries such as China and India is the culprit.
(GROWTH SLOWS OIL RISES) So who’s right? Or is a combination of all the above factors to blame? There’s no denying, however, that one aspect of the recent surge in oil prices is rather curious. The price of light, sweet crude has gone up to around $134 (Rs5,758) a barrel at present from around $80 a barrel at the end of September. Yet growth in most parts of the world has slowed over the period. Consider the numbers. Year-on-year gross domestic product growth in the July-September quarter of 2007 was 2.8% in the US, 1.9% in Japan, 11.5% in China, 2.7% in the euro area and 9.3% in India; in the first quarter of 2008, however, those growth rates slowed to 2.5% for the US, 1.3% for Japan, 10.6% for China, 2.2% in the euro area and 8.8% for India.
Two countries that have seen higher rates of growth in the first quarter of 2008 compared with the third quarter of 2007 are Russia and Brazil, but that’s nowhere near offsetting the slowing growth seen elsewhere. The question is: Why have commodity prices risen by 67% since last October, in spite of a clear deceleration in global growth?
One argument has been that commodity prices are a hedge against a falling dollar, but The Economist’s commodity price index in euros too has gone up from 141.8 on 25 September to 159.7 now. In fact, a closer look shows an even more intriguing trend.
Over the same period, The Economist’s metals price index (in dollars) has fallen from 281.4 to 278.9, a small drop, but it’s very different for what’s happening in oil. In short, while slowing growth has led to lower prices for metals, which is what common sense tells us should happen, the same logic hasn’t held true for crude oil. The indices for food and non-food agriculturals too have risen by 40% and 25%, respectively, illustrating the close link between crude oil and food prices, the result of land being diverted to the production of ethanol.
The data indicate that something very special is happening in crude oil. What seems to be clear is that runaway demand growth is not responsible for the price spurt.
As BCA Research recently put it, “The macro backdrop in the developed world is not conducive to sustained underlying price pressures. The US and Japan are close to or in recession, the UK economy is heading there rapidly, and the euro area is on target for a period of below-trend growth.”
Ranbaxy: minority holders’ options
In the deal between Ranbaxy Laboratories Ltd and Daiichi Sankyo Co. Ltd, the Indian company’s promoters are selling their entire holding at Rs737 per share. Minority shareholders of the company, however, will only get an average realization of Rs542 per share, assuming the current traded price leaves no room for arbitrage.
But based on an interesting bit of news about the agreement between Ranbaxy and Daiichi Sankyo that has leaked out in the press, minority shareholders can get themselves a better deal. Media reports say that the promoter’s stake sale would be done through the stock markets in a “bulk deal” transaction. Since Ranbaxy’s current traded price is more than 26% lower than the agreed sale price, it cannot be a negotiated “block deal”—such deals can be done only within a price band of 1% from the ruling share price.
That leaves two options. Either Daiichi buys out all those who have placed sell orders on Ranbaxy on a particular day till the share price reached Rs729.70, and then does the “block deal” at a 1% higher price of Rs737. Else, it just places its large order to buy out the promoters and in the process all other sell orders below Rs737 per share will also get hit. These additional shares which are purchased will eventually have to be sold back in the market at a loss. After all, since prices were artificially inflated because of the large order, they will correct soon after the event.
The reason Ranbaxy and Daiichi Sankyo are willing to go through all this trouble is that it will save the former a tax liability of about Rs1,000 crore, since the stock market transaction will entail no capital gains tax, but only a minimal securities transaction tax. So in all likelihood, Ranbaxy will pick up the tab for the possible losses on the extra shares acquired.
For minority investors to gain, they’d have to put limit orders to sell Ranbaxy shares below Rs729.70 daily so that their order gets hit when the transaction between Ranbaxy and Daiichi Sankyo is effected on the stock exchange. As J.R. Varma of the Indian Institute of Management, Ahmedabad, points out in his blog, the deal is likely to take place on the least liquid exchange since fewer orders from minority shareholders will be hit in the process. Based on current volumes, that essentially means the Bombay Stock Exchange. The date and time, of course, will be secret.
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