Saturday, November 15, 2008
Germany and Italy dragged the 15-nation euro zone into recession in the third-quarter, as the worst global financial crisis took a heavy toll on continental Europe. Gross Domestic Product (GDP) contracted by 0.2% in the July-September quarter from the previous quarter, after a 0.2% decline in the second quarter, according to the statistical agency Eurostat. A recession is commonly defined as two consecutive quarters of shrinking economic growth. Europe's third-quarter GDP expanded by 0.7% compared to the same period last year, the European Union's Luxembourg-based statistics office said.
The figures were in line with expectations. Economists had forecast a 0.1% quarterly decline and a 0.7% annual rise. The two quarters of contraction marked the first recession since the single currency was introduced almost a decade ago. With the US and Asian economies also struggling, leaders from the world's most advanced and emerging nations will meet in Washington to discuss ways of limiting the fallout from the financial meltdown and credit freeze.
The German economy, Europe's largest, contracted by a bigger-than-expected 0.5% in the third quarter. Joining it and Ireland is Italy, which slipped into its fourth recession in less than a decade, while Spain's economy contracted for the first time in 15 years. Growth in the Netherlands stagnated for a second straight quarter. Bucking the trend, French GDP unexpectedly expanded 0.1% from the second quarter, when it shrank 0.3%. Economists had forecast a contraction of 0.1%.
NTT DoCoMo, Tata Teleservices Ltd (TTSL) and Tata Sons Ltd. announced their agreement on a strategic alliance in India, under which DoCoMo will acquire 26% of TTSL's common shares for around Rs130.7bn. In addition, DoCoMo, in accordance with Indian capital market regulations announced an open offer to acquire up to 20% of the outstanding common shares of Tata Teleservices (Maharashtra) Ltd. (TTML), a TTSL company, through a joint tender offer with Tata Sons. The offer was made at Rs24.70 per share as against Wednesday's closing price of around Rs17.99. TTSL's subscriber base currently exceeds 30mn (including TTML subscribers). TTML shares rose by 26% on the week to end at Rs20.19.
After a highly volatile and tumultuous week, the market may continue to be sideways with a negative bias, due to the deteriorating global economic situation and worsening outlook for corporate earnings. What could perk up the sentiment is the anticipated easing in monetary stance by the RBI after inflation slumped to a nearly six-month low of 8.98%. The central bank has already taken a string of measures to boost liquidity and bring down interest rates. But, apart from public sector banks, private banks are yet to fall in line. They may also lower borrowing costs if the RBI cuts key policy rates further. Another factor could also work some magic for the bulls is some reduction in fuel prices, which will go down well with almost all sections of the population. There is no guarantee that these two events will materialise next week. Also, one should bear in mind that the much improved IIP and inflation numbers have failed to lift the spirits of the bulls.
The market will continue to take its cues from global markets. The outcome of the much-hyped G-20 meeting may not have much bearing, unless leaders of the world's most advanced and emerging nations come up with any concrete step(s) to reverse the global economic slump. The visibility at present is quite poor, with volatility shooting up over the past couple of weeks. One should remain alert and not take aggressive buy calls, as we may not have hit a bottom yet. Every rally is expected to meet with resistance in the absence of conviction and dwindling investor confidence.
In an increasingly slowing economy, offshore providers of human resources services are well positioned to take market share from US-based suppliers as buyer companies are now more focused on early cost savings that can be gained from labor arbitrage, according to a new study by the Everest Research Institute
The Institute study, Human Resources Outsourcing (HRO) Annual Report , provides comprehensive coverage of the global 2008 HRO market, including detailed analyses on market size and buyer adoption, transaction characteristics, and supplier landscape. Study scope includes focus on North America, Europe, Asia Pacific, and Latin America; suppliers having signed at least one HRO transaction; and all industries. Says Gaurav Gupta , Principal & Country Head, Everest Group, "The growth of multi-process HRO market slowed in 2008, and is estimated to reach US $2.9 billion by the end of the year (in terms of annual contract value). Compared to 47 new deals signed in 2007, Everest estimates only 28-32 deals to be signed in 2008. However, multiple factors will ensure market growth in the future. Overall offshore adoption in HRO is low compared to offshoring in finance & accounting, customer service & IT. We expect it to increase in coming times. In the last 12 months, all key offshoring regions grew, both in terms of number of suppliers and FTEs, with India growing the fastest." The number of suppliers of multi-process HRO has grown from 9 in 2006 to 13 in 2007, and while the FTEs have more than doubled from 4600 to 10900, he added.
US Treasury Secretary Henry Paulson unceremoniously buried the idea of buying troubled mortgage assets. Instead he will use the US$700bn Troubled Asset Relief Programme (TARP) to recapitalise banks and non-bank financial institutions such as financing arms of the near-bankrupt car majors. The Treasury has already spent $250 billion on bank recapitalisations. He also disclosed that the Treasury and the Federal Reserve are exploring the creation of a "liquidity facility" to buy top-rated securities backed by credit-card, car and student loans, and perhaps mortgages. Banks bundle many such loans into asset-backed securities which they then sell in the capital markets. But, that market is almost non-existent right now. Congress had approved the package a little over a month ago. Already gloomy investors interpreted the policy negatively and stock markets fell sharply around the world.
In an attempt to help struggling homeowners in the US, the agency that oversees Fannie Mae and Freddie Mac outlined a plan to avoid preventable foreclosures. The terms of AIG’s bail-out were renegotiated, resulting in an expanded package worth US$153bn. The insurance giant also reported a US$24.5bn net loss for the third quarter and booked more write-downs. Meanwhile, General Motors’ share price plummeted to a 65-year low after it made another big loss, though analysts were more concerned at the rate at which GM and Ford were burning their cash to see them through an adverse market. The credit crunch has left millions of potential customers unable to finance car purchases, crushing sales for an already weakened industry. GM is now at risk of running out of cash within months.
The murmurs of a bailout plan for the Detroit auto majors increased this week, with president-elect Barack Obama discussing the same with President Bush. The Fed gave American Express the go-ahead to turn itself into a bank. Circuit City, an electronics retailer with 40,000 employees, sought bankruptcy protection. Intel and Wal-Mart cut their sales outlook as did No. 1 electronics retailer Best Buy.
Across the Atlantic, UBS confirmed that American prosecutors have charged one of its most senior executives with conspiring to help wealthy clients hide assets from the Internal Revenue Service. UK's HBOS rebuffed an attempt by two former Scottish banking chief executives to scuttle its rescue merger with Lloyds TSB. UK's unemployment rate reached an average of 5.8% for the three months to September. Telecom giant BT said it was cutting 10,000 jobs. Hypo Real Estate Holding AG, the lender that received a 50 billion euro (US$63bn) bailout last month, said it expects a third-quarter provisional pretax loss of 3.1bn euros.
China pledged a 4 trillion yuan (US$586 billion) stimulus plan to prop up growth in the fourth-largest economy as the world heads toward a recession. Australia's central bank signaled it's prepared to add to the most aggressive interest-rate cuts in 17 years as it tries to ensure the economy sidesteps a looming global recession. The cost of protecting against a default by Russia soared after the central bank increased the ruble's trading band and lifted its benchmark interest rate to stem record capital outflows.
Hedge-fund managers, including George Soros and Philip Falcone defended their practices and profits while splitting over whether the US should impose stricter regulations. They told US Congress that they broadly agreed that largely unregulated financial vehicles ought to be subject to greater disclosure, though they warned of excessive regulation.
In another positive surprise, India's widely watched inflation tumbled at the beginning of the month on account of a steep reduction in fuel prices, the Government said. This is the first time that inflation has fallen to single digits in five months, sparking speculation of further easing in monetary policy, to arrest the slide in economic growth. Inflation, based on the wholesale price index (WPI), fell to a near six-month low of 8.98% for the week ended November 1, a drop of almost 4% from the 16-year high of 12.91% struck on August 2. The point-to-point inflation rate fell the most in at least 18 years. It had gained at a 10.72% pace in the previous week, the Commerce Ministry said in a statement yesterday. The reading was way below average estimate of economists, which ranged between 10.2-10.5%.
The WPI fell in the week to Nov. 1 because of a decline in the prices of fuel products such as jet fuel, naphtha and furnace oil. The energy index dropped 9.22%, compared with 14.09% in the previous week, after Indian oil marketing companies cut the price of jet fuel by 17%. The index of manufactured products that includes cooking oil and steel products, with a 63.7% weighting in the inflation basket, dropped to 8.06% compared with 9.09% a week ago, the Commerce Ministry said. Inflation rate may be revised in two months, after the Government receives additional price data. The Commerce Ministry increased the inflation rate for the week ended Sept. 6 to 12.42% from 12.14%. Inflation is likely to fall further, given the bleak scenario, where commodity prices are falling, demand is shrinking and producers losing pricing power.
As expected, industrial output recovered somewhat in September from a sharp slowdown in August, as manufacturers stepped up production ahead of Diwali, bringing some relief to policymakers, companies and financial markets. The index of industrial production (IIP) stood at 273.0 in September as against 260.5 in the same month last year. This translates into a growth rate of 4.8% as against 6.9% recorded in the same month last year, the Central Statistical Organization (CSO) said. IIP growth for September was expected to come in at 4-5%. Meanwhile, the Government revised August's industrial production to 1.4% from a provisional estimate of 1.3%. The cumulative growth in IIP for the period April-September 2008-09 stands at 4.9% versus 9.5% in the corresponding period of the pervious fiscal year. In terms of IIP's constituents, the manufacturing sector, which has a weight of over 75%, grew by 4.8% versus 7.4% in September last year. In August, manufacturing growth had slumped to 1.4%. Mining and Electricity expanded by 5.7% and 4.4%, respectively in September compared to 4.9% and 4.5%, respectively. In August, growth rate in these two components of the IIP stood at 2.7% and 0.8%, respectively.
As many as nine out of the 17 industry groups showed positive growth during September compared to the corresponding month of the previous fiscal year. Basic Goods, Capital Goods and Intermediate Goods grew by 4.6%, 18.8% and -3.3%, respectively in September as against 6.5%, 20.9% and 10.1%, respectively in the same month last year. Consumer Durables and Consumer Non-durables recorded a growth rate of 13.1% and 2.8%, respectively, with the overall growth in Consumer Goods being 5.6%. In September 2007, they had a growth rate of -7.3%, 2.6% and -0.2%, respectively.
Finance Minister P. Chidambaram welcomed the improvement in September IIP numbers, calling it more encouraging. "I say this even while I maintain that data collection must be improved and made more relevant, contemporary and universal," he added. But, economists warned that the rebound in industrial production would be short-lived after the global credit crisis spread to India in October. They said that industrial output will slow in the coming months, as the global credit crisis froze money markets. "August's record-low IIP number was an exaggeration, and although September's data marked some improvement, it continued the slowing trend we have been seeing in the last few months," Goldman Sachs said in a note.