India, China and the Global Pharmaceutical Market

The IndUS Business Journal reports on the Ewing Marion Kauffman Foundation’s study, “The Globalization of Innovation: Pharmaceuticals – Can India and China Cure the Global Pharmaceutical Market?”

…Indian and Chinese scientists are rapidly developing the ability to innovate and create their own intellectual property as a result of Western companies shifting their research and development operations to the two countries. In fact, several non-Indian firms with business units in India and China are performing advanced discovery and have begun to move into the “highest-value segments of the pharmaceutical global value chain,” according to the study.

“Globalization is happening faster than people think. Having India and China conduct such sophisticated research and participate in drug discovery was unimaginable even five years ago,” report author Vivek Wadhwa, an executive in residence and adjunct professor Duke University’s Pratt School of Engineering, and a fellow at the Labor and Worklife Program of Harvard Law School, said in a statement. “The challenge is for America to understand this trend and realize the potential of globalization”…But, it is too early to tell if India and China will eventually rival the United States as important sources of novel drugs, and not just as the world’s top producers of generic medications. Whereas high-tech sectors such as software development and electronics manufacturing have experienced tremendous growth in Asia – the former in India and the latter in China – in the pharmaceutical industry, new products take years to emerge from the research and development stage and then must still clear regulatory hurdles. According to Wadhwa, most of the new risk-sharing agreements between Western and Asian drugmakers are relatively new, dating to 2005, so it could be another decade before they produce concrete results.

Russia, China in Oil for Loans Agreement

Russia has signed up for a $25 billion deal with China to supply oil in exchange for loans to Russia’s state-owned oil firm Rosneft and pipeline firm Transneft. China Development Bank will lend $15 billion to Rosneft and $10 billion to Transneft; in exchange, China will receive 15 million tons — 300,000 barrels a day — of oil annually for 20 years.

China, the world’s second largest oil importer, is looking to diversify its supplies away from the Middle East. The deal is likely to have political significance, as Russia is looking at China and Japan as key markets for its Siberian oil fields. China has huge reserves, and is turning to Russia, Kazakhstan, and countries in Africa and South America, to ensure energy security.

Russia has won $25 billin in loans from China in return for agreeing to supply oil from new fields in eastern Siberia for the next 20 years as Moscow seeks funds to see its oil industry through the financial crisis.

Transneft, Russia's oil pipeline monopoly, said yesterday China had agreed to lend it $10 billion and Rosneft, Russia's state-controlled oil group, $15 billion in return for 20 years worth of oil supplies.

Igor Sechin, Russia's energy tsar and first deputy prime minister, told reporters as he left Beijing after the deal was signed that Russia agreed to supply China with 300,000 barrels of oil a day, for the next 20 years.

The deal, the largest trade financing agreement between the two countries, alleviates the severe refinancing needs of Russia's two state energy groups as they seek to weather the credit crisis with the country facing its first recession in 10 years. It will also provide China, the world's number two oil importer, with an important new secured supply of oil to fuel economic growth.

But analysts warned that Russia could have to divert crude supplies headed to the west in order to meet the terms of the deal as it faces a deepening decline in production this year. "There is no way Russia can deliver that amount of oil right now without taking it away from existing export routes to the west," said Chris Weafer, chief strategist at Uralsib investment bank in Moscow.

Analysts estimate Russian oil output will fall about 500,000 barrels a day this year as the country's industry faces a cash crunch because of a high tax regime, a dearth of financing and the need to invest more in east Siberia and the Arctic.

Oil output from Talakan and Vankor, two big new Siberian fields, is intended to fill the east-bound pipeline being built by Transneft, which will have a capacity of 600,000 barrels a day, and have a spur to China as well as to a hub on the Pacific.

Valery Nesterov, energy analyst at Troika Dialog, estimated the pipeline monopoly would need about $600 million to build the spur to the Chinese border.

PetroChina Co. and China Petroleum & Chemical Corp., the nation’s biggest oil producers, will benefit from China’s push to gain resources as the credit crisis prompts countries such as Russia to sell energy assets, said analysts.

Under the oil-for-loans agreement signed yesterday, the two companies will gain access to Russian oil at about $20 a barrel, said Wang Aochao, the Shanghai-based research director at UOB- Kay Hian Ltd. Oil in New York is trading below $35 a barrel. Investors should buy PetroChina shares, Gordon Kwan, the head of China research at CLSA Ltd., said in e-mailed comments today.

China, the world’s second-biggest energy consumer, agreed yesterday to provide Russia with $25 billion of loans in return for 20 years of crude oil supplies. The world’s third-biggest economy is winning deals as Russia faces its first recession in a decade and as the ruble tumbles after the global credit squeeze cuts demand for its exports.

“The slowdown in the Russian economy, declining crude prices and production and the credit crunch has lent the Chinese far better bargaining power,” Kwan said.

State oil producer OAO Rosneft and pipeline operator OAO Transneft signed the accord with China National Petroleum Corp., parent of PetroChina, in Beijing yesterday. Russia will deliver 15 million metric tons of crude oil a year, or about 300,000 barrels a day, to China for the next two decades, and build a branch from a new Siberian pipeline to the Chinese border, Deputy Prime Minister Igor Sechin said yesterday. The crude oil supply is equivalent to about 4 percent of China’s daily fuel consumption.

Delayed Pipeline

Plans to build the pipeline from eastern Siberia had been delayed because the countries couldn’t agree on the price to transport crude oil to the Chinese border. Construction of the branch link will start this year, an official from state-run China National Petroleum, who witnessed the signing of the oil agreement in Beijing, said in a phone interview yesterday.

“We believe Japan’s recession has given China the negotiating upper hand to take the lead in building the Russian oil pipeline to PetroChina’s Daqing infrastructure with more attractive terms from before,” said Kwan, who set PetroChina’s 12-month target price at HK$7.20.

Japan’s economy, Asia’s biggest, shrank at an annual 12.7 percent pace last quarter, the most severe contraction since 1974. Daqing is China’s biggest and oldest oilfield.

Russia’s economy may contract more than previously anticipated this year, Deputy Economy Minister Andrei Klepach said yesterday. The country is rewriting the budget to include the first deficit since the country’s twin debt default and ruble devaluation in 1998.

Counter Crisis

The oil-for-loans accord will help counter the global financial crisis, Chinese Premier Wen Jiabao said in a Xinhua News Agency report posted on the government’s Web site yesterday. The two nations have “great potential” in expanding cooperation in bilateral trade, investments and hi-tech development, Wen said in the report.

The agreement strengthened the “strategic relationship” between the countries and brings their energy partnership to a new level, China National Petroleum said today.

BRIC Countries Lead Global Equity Markets

While most countries around the globe struggle, including large western nations, the BRIC countries of Brazil, Russia, India and China are still enjoying significant, albeit slower growth, as the emerging markets countries still have consumers spending in them, in contrast to the overall domestic global business in other countries.

Consequently, the large emerging markets countries have outperformed most others in the equity markets, even though of the four, India has fallen by a slight 0.3 percent on the Bombay Stock Exchange, although it still ranks them in the top four of the 15 largest markets across the world.

As far as major stock markets, Brazil, Russia and China are the only ones growing above the 8 percent mark so far this year, while India has changed very little. Even though BRIC countries have slowed down in growth, they're still growing at rates far beyond their North American, European and Japanese counterparts.

Leading the equity growth is China, which has grown by 24 percent this year on the Shanghai composite index, while Russia via the Micex has surged 17 percent, and Brazil has performed at an 8.8 percent growth rate on the Bovespa.

This does show that domestically the consumers in the respective BRIC countries haven't stopped spending, as exports from China, Brazil and Russis have dropped significantly, let by the largest drop in China exports in 13 years, as demand for Europe and the United States has dried up. In the case of Brazil, they've struggle on both sides of the equation, as industrially they've fallen off in output the worst since 1992 in the fourth quarter, while commodity exports struggled in 2008, although it has started to rebound some.

Russia has been hit especially hard because of its reliance upon oil and its prices to shore up its economy, as it's one of the chief exports of the country. The Russian ruble has also experienced a downturn, falling by 16 percent against the U.S. dollar so far in 2009. That of course also increases the cost of financing for Russian companies.

For these reasons, even though domestic spending seems to have continued in these emerging markets countries, some think that it is still probably too early to start investing in BRIC markets until valuations have fallen to the point where it makes risk worth it. If the global recession last longer than expected, it could cause BRIC investors a lot of headaches and time as they wait to not only recoup their capital, but make money on it as well. Most are waiting for valuations to drop to the point where most or all the bad news is already priced into the emerging economies.

Even so, investors in BRIC emerging market countries need to position themselves for when the bull market starts up again, as when they do, those in early enough will enjoy great returns for years ahead.

There's no doubt China will lead the way out of the emerging countries equity slump, as there are already signs it's turning around and Chinese consumers are still saving and spending money, to the benefit of the country. That's in contrast to 2008, when the Shanghai index plunged by 65 percent, and was only trading at 13.2 times the reported profits. Just this week though, the Shanghai index had already climbed to 17.6 percent earngings, already up 32 percent from the lows of 2008. China watchers believe they're either at or close to the bottom. China is expected to come out of the economic slowdown far better than the majority, if not the very best.

Because the BRIC countries are growing both economically and population wise faster than developed countries, specifically China and India, we'll see them continue to outperform in growth for years to come.

Other BRIC emerging markets will enjoy growth as well, and are already starting to turn the corner in some areas of their economies.

Much of India's growth also stems from strong domestic spending, as growth for the year ending on March 31 is projected to expand by about 7.1 percent. That's much more than expectatons of only 0.5 percent from the IMF. The central bank of India also cut interest rates from 9 percent in October down to 5.5 percent as of today.

For Brazil's emerging economy, which relies so much on the exportation of commodities and natural resources, they've rebounded from the Bovespa index shedding 41 percent last year, whic dropped price/earnings ratios down to 7 as of October, to 9.6 today. The BRIC economy enjoyed a resurgence of some metals also, helping them to grow. Internal infrastructure spending also helped the economy grow.

For Russia, even though they've suffered from lost oil revenues, the steel companies have been doing well based on the assumption increased infrastructure spending will increase profits in the industry. The Russian ruble also had a nice jump recently, increasing by 2.5 percnet against the euro and the U.S. dollar. That's four days in a row the currency has risen, pushing investors to move out of foreign currencies as the Russian government defends the ruble.

So how can we invest in emerging and BRIc economies? Investing in BRIC markets can be through bonds in the emerging markets, emerging or BRIC funds, BRIC mutual funds, BRIC or emerging market ETFs, or many of the similar investments we already invest in in the countries we reside in.

For investors with a short term mentality, investing BRIC country investment vehicles is probably not a good idea, as there is much volatility at this time, and they must be entered with a long term outlook. BRIC funds and ETFs, along with the other investment instruments will outperform most if not all of their large competitors in general, but over the short term, just like in developed nations, it's risky to enter emerging markets with a short term time frame.

The BRIC countries and markets of Brazil, Russia, India and China will make fortunes for investors in the years ahead, and those that are patient and in it for the long term, along with doing their homework, will be wildly successful and profiable as emerging markets and emerging economies lead the way economically over the next couple decades.