Asia melts as Dubai heats up

Fri, 27 Nov Closing

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Dubai's debt crisis shook Asian markets today. India wasn’t spared either. The benchmark indices here closed deep in the red. Realty, banking and engineering stocks were the worst losers. On the BSE, five stocks closed with losses for every stock that gained today.

The BSE Sensex and the NSE Nifty closed with losses of around 200 points (1.2%) and 60 points (1.2%) respectively. Stocks from the mid and small cap spaces also followed suit. The BSE Midcap and BSE-Smallcap indices closed lower by around 1.3% and 2.1% respectively. The rupee was trading at 46.72 to the US dollar at the time of writing.

All Asian markets closed weak today. Hong Kong and Korea (each down around 5%) were the biggest losers. Following these were the markets of Japan (down 3%) and China (down 2.5%). Investors also curtailed their exposure to commodities amid uncertainty about the global fallout from Dubai's financial troubles. This led to oil prices falling by around 4.5% to near US$ 74 a barrel.

In what suggests that the credit crisis is far from over, the investment arm of the Dubai government (Dubai World) is staring at a default. It has in fact asked its lenders to defer its debt repayments by six months. It is also looking towards its oil rich and financially conservative neighbour Abu Dhabi for lending a helping hand.

For starters, Dubai had borrowed around US$ 80 bn to fund its 4-year construction boom. The aim was to transform its economy into a regional tourism and financial hub. However, it suffered a massive property slump in last year's credit crisis. If one were to go by reports from Deutsche Bank, home prices there have fallen by around 50% from their 2008 peak. This has sparked off fears of a debt default.

These developments show that it is premature to declare that the world economy is out of danger. The developed economies and especially their banks are still vulnerable. In our opinion, investors would do well to remember that there are substantial risks to the buoyant markets. For every bubble, there is always a needle somewhere. And when they meet, all of us learn some very old lessons.

Bloomberg in fact has quoted Mark Mobius, Chairman of Templeton Asset Management Ltd., as saying, "If Dubai has to default, that could start a wave of defaults in other areas. This may be the trigger to allow for the market to take a rest and pull back." Mobius oversees US$25 bn in emerging-market assets and has a very good idea on the implications of the Dubai default scare.

Coming back to the Indian markets, these faced the ire of investors who now fear another round of defaults and credit crisis around the world. In fact, today's decline in banking stocks said it all. The BSE's banking index fell by around 3.3%, second worst to the realty index that closed down by almost 4%.

Bank of Baroda was amongst the biggest losers in the banking pack. It was closely followed by Bank of India, IDBI Bank, Kotak Bank, and ICICI Bank. The selloff in Bank of Baroda was on the back of a knee jerk reaction to reports that the Dubai default might affect the company's business out there. The management has however clarified that the bank's exposure to Dubai is at just around 5-6% of its loan book. This is not significant. It has further clarified that all its Dubai loans have been serviced up-to-date and there are no over dues on them.

As for realty stocks, worst performers included HDIL, Sobha Developers, and Parsvnath Developers. Heavyweights like DLF and Unitech also closed deep in the red. This was despite these companies’ denial that they have any exposure to the Dubai realty market. Selling in these stocks was seemingly on the back of fears of another round of credit crisis, the first round of which had taken a severe toll on their balance sheets.

Tata Power was the lone gainer among power stocks today. Major losers here included GVK Power, PTC India, and Jaiprakash Hydro. Gains in Tata Power were despite the 30% decline the company has reported in its consolidated profits for 2QFY10. Weak sales performance and higher taxes impacted the company's profits during the quarter. While sales dipped by 1% YoY, effective tax rates jumped to 39%, from 16% in 2QFY09.

The company's power segment sales were impacted by lower tariffs as it passed on the benefits of lower fuel costs to its customers. Tata Power's expansion is progressing as per plans. We however see the stock's valuation as reasonable and not offering much to investors even from a 2 to 3 years perspective.