The Hindu : Business : Bourses in India and the U.S.

Online edition of India's National Newspaper
Monday, Apr 25, 2005

Business

Business

Bourses in India and the U.S.

High gasoline prices are curtailing consumer spending

Coincidence or no, the oil shock has been rediscovered by the sober stock markets at a time corporate performance failed to match expectations.

THE PAST two weeks have shown how the stock markets in India are closely linked to the international markets, especially those of the U.S. That the markets in developing countries are influenced by one another and by the world's principal financial markets has been well known. Developments since the middle of April show how strong these connections are.

For more than a year and a half high oil prices have loomed large over the financial markets. Yet by some logic, supported in part by statistics of global economic recovery during 2004, the markets seem to have learnt to live with the uncertainty despite the occasional hiccups.

For, if according to most economic forecasts the world's gross domestic product could grow by a healthy 4 per cent, there is no need to be overtly concerned over the oil prices. However, such facile optimism was not shared by everybody, certainly not in countries such as India. Elsewhere in the world too high oil prices seem to have knocked off a few percentage points off the growth rates but given the overall optimism the oil shock did not get the attention it deserved.

Oil shocks resurface

From the standpoint of global stock markets at least, if not of policy makers in general, is there a perceptible change in the way the oil shock is perceived? The way stock prices fell recently in the U.S. followed by sharp declines across the world including in India seems to suggest so. The mood of investors in the U.S. and other developed countries seems to have changed suddenly around the middle of April.

The oil shock has become a problem; high gasoline prices are curtailing consumer spending, eating into corporate earnings and slowing economic growth. All the benchmark stock indices in the U.S. fell to their lowest levels in many months. In India as well in the other Asian markets stock prices reacted adversely. In India the Sensex continued to fall at the beginning of last week having lost considerably the previous week. The middle of the week however saw some support emerging.

To every stock market story corporate earnings and expectations fill in the gaps left by a mere analysis of factors that brought down the share prices.

Here again there has been a striking similarity between the U.S. and India. In both countries investors are relying as much on corporate performance as on macro economic data. In a sense inferences from both reinforce each other. The realisation that the oil shock will slow the GDP growth found ready resonance in the form of some disappointing corporate results.

In the U.S. IBM has reported unexpectedly lower earnings. Auto majors General Motors and Ford which have been losing market share have discouraged investors with their warnings on earnings. GM's latest quarterly performance has been its worst in recent years adding to growing speculation that its huge debt will be given junk bond status by the rating agencies. In India, it is more a question of iconic tech companies `disappointing' investors. Infosys 's results for 2004-05 have been impressive: a 44 per cent growth in revenues and 48.4 per cent in net profits. It was its guidance, that is, earnings forecast for the first quarter this year that, according to stock market circles, were disappointing.

Never mind that the company expected to grow by 24.7 to 26.6 per cent during the period. Those are impressive numbers but the market expects such companies to grow by a higher margin all the time.

A similar mismatch between TCS's quarterly performance and the huge market expectations accounted for the decline in the Sensex the day TCS announced its results.

C.R.L. NARASIMHAN

Printer friendly page
Send this article to Friends by E-Mail

Business

News Update

Stories in this Section

Sharing the federal pie fairly

IT boom triggers growth of online job recruiters

Era of `2-in-1' chips has come

Bourses in India and the U.S.

Little excitement over jute policy

Development officers vis-à-vis agents

Reliefs available for property owners during construction