Inflation in India has been high for quite some time now. More so for the common man who has seen higher prices of items, especially food, burn a hole in his pockets. Despite some lean years on account of poor monsoons, large part of the food inflation has largely been due to several supply side issues. Lack of good infrastructure, inadequate storage facilities and the overall apathy of the government in fixing this has been the problem. Plus, it is also running on huge fiscal and current account deficits. The RBI on its part has been raising interest rates to bring inflation under control. But this has not really had the desired effect. Rather it has only made matters worse at a time when economic growth has also slowed down. The UPA has always been an advocate of the common man. One would have thought that from a political point at least it would do something to ease the pressure off the people. And yet it has not shown much initiative in this regard. This is something that seems to have now caught the attention of the Finance Minister Chidambaram. He recently stated that the UPA will pay a high political price if it does not tackle the problem of inflation. Now it appears that this may be a little too late.
Saturday, November 30, 2013
Points to ponder
Stock price movements are generally governed by future expectations. If you look at the BSE Capital Goods index, it has gone up 36.1% over the last three months. Compared to that, the BSE Sensex has gone up just 10.3% during this period.
Now, the financial performance of capital goods companies are directly linked to the investment cycle in the economy. And the investment cycle is again a function of the overall demand, interest rates and so on. So are investors hoping for a revival in the economy after the new government takes over post the 2014 general elections? As per an article in Financial Express, investors are looking forward to a new government that is business-friendly.
In my view, this is an extremely flawed approach to investing. I have highlighted earlier that a change of government alone cannot solve India's problems. All it could do is lift sentiments in the short run. On the fundamental side, we don't see any immediate revival in the investment cycle. The economy continues to remain subdued. Inflation is still very high to facilitate any easing of the interest rates. So do take into account these factors before falling prey to sentiment-driven investing.
Now, the financial performance of capital goods companies are directly linked to the investment cycle in the economy. And the investment cycle is again a function of the overall demand, interest rates and so on. So are investors hoping for a revival in the economy after the new government takes over post the 2014 general elections? As per an article in Financial Express, investors are looking forward to a new government that is business-friendly.
In my view, this is an extremely flawed approach to investing. I have highlighted earlier that a change of government alone cannot solve India's problems. All it could do is lift sentiments in the short run. On the fundamental side, we don't see any immediate revival in the investment cycle. The economy continues to remain subdued. Inflation is still very high to facilitate any easing of the interest rates. So do take into account these factors before falling prey to sentiment-driven investing.
60:40 or rule of thumb or global gyan
As a rule of thumb, investment advisors and wealth managers say that an ideal portfolio allocation should be 60:40. This means that 60% of the portfolio should be in equities and the balance 40% in bonds. However Burton Malkiel, author of a book on investing called A Random Walk Down Wall Street, stated that investors following this rule would be "badly hurt". The reason is the change in scenario.
You see when the rule was written, bond yields were higher and interest rates were not close to zero in the US. The US had not started printing money and things were different. But now a lot has changed. And this change necessitates a change in asset allocation as well. The one size fits all idea no longer holds. This is something we agree with too. Just because one allocation strategy works for one person, does not necessarily mean it would be equally beneficial for another person. Each individual is different so an asset allocation plan will differ from person to person based on his or her personality traits, age, risk taking capacity and the ultimate investment objective in mind. One cannot take a 'one size fits all' approach.
You see when the rule was written, bond yields were higher and interest rates were not close to zero in the US. The US had not started printing money and things were different. But now a lot has changed. And this change necessitates a change in asset allocation as well. The one size fits all idea no longer holds. This is something we agree with too. Just because one allocation strategy works for one person, does not necessarily mean it would be equally beneficial for another person. Each individual is different so an asset allocation plan will differ from person to person based on his or her personality traits, age, risk taking capacity and the ultimate investment objective in mind. One cannot take a 'one size fits all' approach.
If Bill (Gates) is listening to him then we should also
Vaclav Smil. Chances are most of you are hearing this name for the first time. This should not take anything away from his reputation as a very good writer though. In fact, Bill Gates, the richest man in the world for many years now, seems to swear by Smil's books. Wired.com quotes Bill Gates as saying 'There is no author whose books I look forward to more than Vaclav Smil'.
Well, given the rate at which he comes out with new books, Gates doesn't have to wait too long we reckon. This year alone, three of Smil's books have hit the stands. Ask him about his modus operandi and Smil retorts he has a habit of scanning all horizons. In other words, most people know everything about one thing while he tries to grasp the basic essence of everything.
Well, enough of the man. Let's try and listen to some of the advice he dished out in plenty in a recent interview. There was this one in particular that left a deep impression on us. And we believe it perfectly summed up the current political and economic environment in the country.
Smil is of the view that a country that stops manufacturing falls apart. Simply because manufacturing builds the lower middle class in a society. And if you give up manufacturing, there is huge income inequality to contend with which then gives rise to the total extinction of the lower middle class. And what remains is extreme polarisation.
Well, with the quality and the quantity of population that we have, India should already have been a manufacturing powerhouse. However, the reality is anything but this. So far, we have totally squandered away the population edge that we have. Things have come to such a pass that items like ganesh idols and rakhis can't be manufactured competitively despite the low value add involved and abundance of cheap labour. Thus, what has remained is the extreme capital intensive businesses at one end of the spectrum and a huge unorganised and a parallel economy on the other.
The policies that could lead to promotion and growth of labour intensive and lower-middle class creating ventures are totally absent. Not just that, whatever little is left of the organised economy is also being systematically taken away by high inflation and taxes. Is it any wonder that the economy that was growing at well over 8% till about a few years back is now literally huffing and puffing its way to the 5% mark. And if things are not sorted out soon enough, even this growth will be hard to come by.
Do you think the root cause of India's problems is because of the poor state of its manufacturing? Let me know your comments
Well, given the rate at which he comes out with new books, Gates doesn't have to wait too long we reckon. This year alone, three of Smil's books have hit the stands. Ask him about his modus operandi and Smil retorts he has a habit of scanning all horizons. In other words, most people know everything about one thing while he tries to grasp the basic essence of everything.
Well, enough of the man. Let's try and listen to some of the advice he dished out in plenty in a recent interview. There was this one in particular that left a deep impression on us. And we believe it perfectly summed up the current political and economic environment in the country.
Smil is of the view that a country that stops manufacturing falls apart. Simply because manufacturing builds the lower middle class in a society. And if you give up manufacturing, there is huge income inequality to contend with which then gives rise to the total extinction of the lower middle class. And what remains is extreme polarisation.
Well, with the quality and the quantity of population that we have, India should already have been a manufacturing powerhouse. However, the reality is anything but this. So far, we have totally squandered away the population edge that we have. Things have come to such a pass that items like ganesh idols and rakhis can't be manufactured competitively despite the low value add involved and abundance of cheap labour. Thus, what has remained is the extreme capital intensive businesses at one end of the spectrum and a huge unorganised and a parallel economy on the other.
The policies that could lead to promotion and growth of labour intensive and lower-middle class creating ventures are totally absent. Not just that, whatever little is left of the organised economy is also being systematically taken away by high inflation and taxes. Is it any wonder that the economy that was growing at well over 8% till about a few years back is now literally huffing and puffing its way to the 5% mark. And if things are not sorted out soon enough, even this growth will be hard to come by.
Do you think the root cause of India's problems is because of the poor state of its manufacturing? Let me know your comments
Thursday, November 28, 2013
ARE WE SUFFERRING
2006 to 2008 was a boom period for Asian majors China and India - although things started taking a turn for the worse towards the end of this period. Majority of people would have not expected things to turn out the way they did. The eruption of the global economic crisis has pretty much put the brakes on the growth levels of these - then seemingly slowdown defying economies - quite strongly.
Today, growth rates in these countries have reduced significantly, to more than half (from peak level) in India's case. And things are expected to slowdown going by some of the recent predictions that are making rounds. Clubbing this with the many problems India has been facing and it seems to paint a grim picture. In fact, things are so grim that the negative developments seem to have made Indians to be amongst the most 'suffering' people on this planet.
As per a survey done by Gallup, the South Asian region - which largely constitutes of India - has seen the largest increase in terms of people suffering. The average number of people suffering in the country has more than doubled to about 25% during the 2010 to 2012 period from 10% in 2006 to 2008. On an overall level, India ranked fourth in terms of sharpest change in suffering between these two periods.
The survey was carried out by asking respondents to classify their current and future lives from 0 to 10. Any rating below 4 would be termed as 'suffering', with the other two classifications being 'thriving' and 'struggling'.
Whether this survey should be taken with a pinch of salt is something that would be difficult to comment on. But, we believe it does signify the high frustration levels of Indians. The past few years have been difficult. Difficult because of many factors. First and primarily being the high inflation level, which have pretty much increased the price of nearly everything! Be it basic necessities, food or energy. To add to that, the weak currency has made matters worse! Not to forget the unaffordable housing prices leaving most to extend their dreams of buying and owning a home and improving their lives. To add to that, the many episodes of scams along with the low business confidence levels are also aspects that have added to the frustration.
We are living amidst difficult times. And the way things are going, it seems we will continue to do so for a while. What is the approach an investor must take? The right asset allocation, we believe. Investing through troubled times should be done with care. Investments into relatively risky assets should be done only after keeping aside enough for one's short to medium term requirements.
Do you believe Indians to be the most suffering people on this planet? Let me know your comments
Today, growth rates in these countries have reduced significantly, to more than half (from peak level) in India's case. And things are expected to slowdown going by some of the recent predictions that are making rounds. Clubbing this with the many problems India has been facing and it seems to paint a grim picture. In fact, things are so grim that the negative developments seem to have made Indians to be amongst the most 'suffering' people on this planet.
As per a survey done by Gallup, the South Asian region - which largely constitutes of India - has seen the largest increase in terms of people suffering. The average number of people suffering in the country has more than doubled to about 25% during the 2010 to 2012 period from 10% in 2006 to 2008. On an overall level, India ranked fourth in terms of sharpest change in suffering between these two periods.
The survey was carried out by asking respondents to classify their current and future lives from 0 to 10. Any rating below 4 would be termed as 'suffering', with the other two classifications being 'thriving' and 'struggling'.
Whether this survey should be taken with a pinch of salt is something that would be difficult to comment on. But, we believe it does signify the high frustration levels of Indians. The past few years have been difficult. Difficult because of many factors. First and primarily being the high inflation level, which have pretty much increased the price of nearly everything! Be it basic necessities, food or energy. To add to that, the weak currency has made matters worse! Not to forget the unaffordable housing prices leaving most to extend their dreams of buying and owning a home and improving their lives. To add to that, the many episodes of scams along with the low business confidence levels are also aspects that have added to the frustration.
We are living amidst difficult times. And the way things are going, it seems we will continue to do so for a while. What is the approach an investor must take? The right asset allocation, we believe. Investing through troubled times should be done with care. Investments into relatively risky assets should be done only after keeping aside enough for one's short to medium term requirements.
Do you believe Indians to be the most suffering people on this planet? Let me know your comments
Some more on QE
The US Fed had thrown open the doors of its money printing exercise around 5 years ago with its quantitative easing (QE) programs. Over these 5 years, several other developed countries decided to adopt the same policy. The result is that the global financial system is flooded with cheap money. And has all this money really helped the printing countries take care of their troubles? Not really. But the critics who thought that this money would only lead to inflation in the issuing countries were proved wrong as well. These countries especially US have not seen consumer inflation go up either.
So where has all this money gone? And what has it really accomplished?Well it has led to inflation but just not where it was expected to. The cheap money has found its way into emerging markets and has led to inflation in asset prices in these countries. In a way the inflation has actually been exported to the emerging markets. At the same time the goals of stimulating economic growth in the developed world have fallen short. Banks are still unwilling to lend in these countries as they prefer to use their funds for earning higher yields in emerging markets or risky asset classes. Consumers and industries are not enticed by the lower interest rates and are not borrowing either. They think the low interest rates would continue into the future as well. Given that the QE programs have fallen short of everyone's expectations, won't it be better to just discontinue them?
So where has all this money gone? And what has it really accomplished?Well it has led to inflation but just not where it was expected to. The cheap money has found its way into emerging markets and has led to inflation in asset prices in these countries. In a way the inflation has actually been exported to the emerging markets. At the same time the goals of stimulating economic growth in the developed world have fallen short. Banks are still unwilling to lend in these countries as they prefer to use their funds for earning higher yields in emerging markets or risky asset classes. Consumers and industries are not enticed by the lower interest rates and are not borrowing either. They think the low interest rates would continue into the future as well. Given that the QE programs have fallen short of everyone's expectations, won't it be better to just discontinue them?
Reality bytes
Property prices in some major Indian cities finally seem to be easing. Consider for instance, India's most expensive property market Mumbai. As per Economic Times, in central Mumbai areas such as Parel, Lower Parel and Mahalaxmi, property prices have declined by nearly 10%. In fact, in the premium category, developers are even offering discounts of about 25% for sizeable upfront payments. On the other hand, home prices in Navi Mumbai, Thane and the suburbs of Mumbai have remained steady or reported marginal increases. Is the Mumbai real estate finally becoming a buyer's market? Well, it seems so. Unsold inventory level in the Mumbai Metropolitan Region (MMR) stand at around 45% with 1.3 lakh unsold units. Moreover, about 2.9 lakh residential units are under construction.
Similar is the case with commercial real estate. During the quarter ended September 2013, vacancy rates in Mumbai and New Delhi crossed the 20% mark. What more, out of the 10 office markets with the worst vacancies in Asia, six are from India.
All in all, it seems that the weakness in the overall economy has clearly impacted both residential and commercial real estate markets. Given the high inventory levels, vacancy rates and the fact that India's economy is likely to remain sluggish in the medium term, a revival in the property market seems unlikely in the near future.
Similar is the case with commercial real estate. During the quarter ended September 2013, vacancy rates in Mumbai and New Delhi crossed the 20% mark. What more, out of the 10 office markets with the worst vacancies in Asia, six are from India.
All in all, it seems that the weakness in the overall economy has clearly impacted both residential and commercial real estate markets. Given the high inventory levels, vacancy rates and the fact that India's economy is likely to remain sluggish in the medium term, a revival in the property market seems unlikely in the near future.
Some Random Thoughts
India's economic problems are no longer restricted to broader macro issues that do not directly affect the common man. We have been battling poor infrastructure, falling industrial growth, corruption, red tape and fiscal profligacy for a while now. But over the past few months, inflation, unemployment and dramatic slowdown in economic growth have severely impacted our standard of living. The economic slowdown has not just hurt job seekers. The extent of the crisis can be understood from the fact that even the search firms are getting out of business.
Once the holy grail of those wanting to land into meaty profiles, the job search firms' client list has now run dry. As per Hindustan Times, nearly 7,000 job search firms have shut down in the past few months. And many more are on the verge of doing so. We believe that it may be a long while before the economic scenario gets any better. And hence it is in the interest of investors to prepare themselves for the worst
The global economy has been enduring an extended slowdown. How have the fortunes of the super-rich (net assets of US$ 30 m and above) been impacted globally? An article in Financial Times shares the findings of an interesting study conducted by Wealth-X. The countries that saw their super-rich population shrink in 2013 were largely emerging economies. Brazil and China lost the highest number of multimillionaires. Only Russia and India reported a marginal increase in the number of super-rich individuals.
On the contrary, the developed economies saw a rise in their super-rich population. Doesn't that sound counter-intuitive? Especially because these economies have been growing through a severe crisis. Then what is it that has led to an increase in the wealthy population in the United States and Europe? Thank the ultra-easy monetary policies of the central banks. The massive money printing drive triggered a strong recovery in the asset prices of these economies. In other words, there has been a massive redistribution of wealth in the developed world. And this has further widened the income inequality gap. We believe this is unsustainable. Policymakers are doing nothing but brewing a recipe for a big economic disaster in the coming years. .
Once the holy grail of those wanting to land into meaty profiles, the job search firms' client list has now run dry. As per Hindustan Times, nearly 7,000 job search firms have shut down in the past few months. And many more are on the verge of doing so. We believe that it may be a long while before the economic scenario gets any better. And hence it is in the interest of investors to prepare themselves for the worst
The global economy has been enduring an extended slowdown. How have the fortunes of the super-rich (net assets of US$ 30 m and above) been impacted globally? An article in Financial Times shares the findings of an interesting study conducted by Wealth-X. The countries that saw their super-rich population shrink in 2013 were largely emerging economies. Brazil and China lost the highest number of multimillionaires. Only Russia and India reported a marginal increase in the number of super-rich individuals.
On the contrary, the developed economies saw a rise in their super-rich population. Doesn't that sound counter-intuitive? Especially because these economies have been growing through a severe crisis. Then what is it that has led to an increase in the wealthy population in the United States and Europe? Thank the ultra-easy monetary policies of the central banks. The massive money printing drive triggered a strong recovery in the asset prices of these economies. In other words, there has been a massive redistribution of wealth in the developed world. And this has further widened the income inequality gap. We believe this is unsustainable. Policymakers are doing nothing but brewing a recipe for a big economic disaster in the coming years. .
TATA says tata to banking licence
When the RBI came out with its long awaited guidelines on the entry of new banks into the banking sector, there was considerable buzz all around. Many of the big corporate houses such as the Tatas, Birlas, Mahindras showed a lot of interest in entering the field of banking. Especially since most of them already had formed separate financial companies to cater to their businesses.
But it was not going to be easy. Globally, banks and financial institutions were the worst hit once the credit crisis in 2008 erupted. But Indian banks emerged relatively unscathed largely on account of the strict norms laid out by the RBI. In an era where increased regulations on banking all over the world seems to be gaining favour, it was imperative for India's central bank to not relax its rules for the entry of new players.
With the bad memories of the global banking crisis still fresh, there was no room for complacency. Hence, the need for stricter regulation. This meant among various other things, it was essential that promoters of the new banks had sound credentials and integrity. Moreover they had to be serious about the banking business from a longer term perspective rather than look for short term opportunities.
When Equitymaster conducted polls on India's Most Trustworthy Corporate Group in the last two years, the Tata Group emerged at the top on successive occasions. That is not all. Readers of the Honest Truth, were asked two questions, (1) Who should get a banking license, and (2) Who I would like to keep my deposit with. For both the questions, the Tata Group edged over the others by a wide margin. So the Tata Group was obviously the most favoured conglomerate depositors would park their money with.
But here is the twist in the tale. The Tata Group yestersday announced its decision to pull out of the race to secure a banking license. The reasons that it cited for this were more or less the same that were pointed out by another entity that had earlier pulled out, Mahindra Group. The Tata Group believes that the regulations and norms outlined by the RBI are too cumbersome. It opines that entering the banking business will impact the successful running of many of its other businesses.
What does this mean? Does the pullout tarnish the reputation of the company? Does it cast a doubt that maybe the Group was not that serious about the banking business? The banking business at the end of the day is about more than just capitalising on profitable opportunities. It is also about protecting the capital of depositors, lending responsibly and aiding economic growth. So if the Tata Group felt that it was not upto the task, it probably makes sense for them to withdraw. And so, all eyes are now on the RBI and the decision that it takes on whom to award licenses among the list of remaining applicants.
Do you think that pulling out of the race to secure a banking license will hurt the reputation of the Tata Group? Let me know your comments
But it was not going to be easy. Globally, banks and financial institutions were the worst hit once the credit crisis in 2008 erupted. But Indian banks emerged relatively unscathed largely on account of the strict norms laid out by the RBI. In an era where increased regulations on banking all over the world seems to be gaining favour, it was imperative for India's central bank to not relax its rules for the entry of new players.
With the bad memories of the global banking crisis still fresh, there was no room for complacency. Hence, the need for stricter regulation. This meant among various other things, it was essential that promoters of the new banks had sound credentials and integrity. Moreover they had to be serious about the banking business from a longer term perspective rather than look for short term opportunities.
When Equitymaster conducted polls on India's Most Trustworthy Corporate Group in the last two years, the Tata Group emerged at the top on successive occasions. That is not all. Readers of the Honest Truth, were asked two questions, (1) Who should get a banking license, and (2) Who I would like to keep my deposit with. For both the questions, the Tata Group edged over the others by a wide margin. So the Tata Group was obviously the most favoured conglomerate depositors would park their money with.
But here is the twist in the tale. The Tata Group yestersday announced its decision to pull out of the race to secure a banking license. The reasons that it cited for this were more or less the same that were pointed out by another entity that had earlier pulled out, Mahindra Group. The Tata Group believes that the regulations and norms outlined by the RBI are too cumbersome. It opines that entering the banking business will impact the successful running of many of its other businesses.
What does this mean? Does the pullout tarnish the reputation of the company? Does it cast a doubt that maybe the Group was not that serious about the banking business? The banking business at the end of the day is about more than just capitalising on profitable opportunities. It is also about protecting the capital of depositors, lending responsibly and aiding economic growth. So if the Tata Group felt that it was not upto the task, it probably makes sense for them to withdraw. And so, all eyes are now on the RBI and the decision that it takes on whom to award licenses among the list of remaining applicants.
Do you think that pulling out of the race to secure a banking license will hurt the reputation of the Tata Group? Let me know your comments
Sunday, November 24, 2013
ARE WE READY FOR QE TAPPERING
Will the US Fed taper its QE program or not? When will it taper? These questions have been on everyone's mind in the financial world. Ever since Ben Bernanke first hinted at a likely taper in May 2013, the world financial markets have reacted sharply to news pertaining to the Fed taper.
As we know, FIIs are the most important market movers as far as Indian stock markets are concerned. So an obvious question follows: How will the Fed taper impact India? Is India better prepared now to deal with such a situation?
Well, if you compare our present situation with what it was in May, you can say we are somewhat better off now. The government imposed curbs on gold imports. Exports are picking up. RBI took a series of measures to reign over the currency fall. So yes, relatively we are in a better position. But we have seen in the past how markets tend to come down like a house of cards when FIIs have dumped Indian stocks. So it's would be a bit presumptuous to say that the Fed taper will not impact Indian markets much
Growth may have slowed down in China, but that has not stopped large asset management companies from investing in the country. As reported in an article in Bloomberg, one of the reasons for this is the massive US$ 3.66 trillion currency reserves that the dragon nation has amassed. The US Fed's decision to taper its QE program some months back had given global markets the jitters. As a result, there was an exodus of capital from emerging markets including India. For the latter, this posed a problem because it is burdened with a rising current account deficit. But China has no such problem. Some of the other factors that are in favour of investments in China include the country's intention of moving away from an investment and exports based business model. But that does not mean that there are no other problems. For quite some time now, China has been plagued by issues such as shadow banking, unregulated lending and increasing debt burden of local governments. Efforts to bring these under control have led to cash squeezes that helped drive up borrowing costs. Also, China is looking to make the Yuan fully convertible. But this may not be that easy given the opaqueness with which the currency is managed. Thus, investing in China is not without its share of risks.
They say good things come in small packages. Currently there is not a single economic statistic that is showing some sign of recovery. The global economic risks are expected to get worse, much worse, before they get any better. Large corporates are reeling under the pressure of low profitability and poor interest coverage. Banks at the same time are courting networth erosion with mounting bad loans. In the midst of this, few midcap and smallcap stocks, that are by nature a high risk asset class, are showing a ray of hope. As per an article in Business Standard,274 companies listed on the BSE have surpassed their FY13 full year profits in first half of FY14 itself. Most of these stocks belong to the midcap and smallcap indices. Now, while this may be a reason to feel enthused about recovery, there is hardly enough case for investors to react.
Is the rise in profits reason enough for investors to jump at the opportunity of buying any and every mid and smallcap stock? We believe that the time is ripe for investors to exercise utmost caution. Instead of getting drawn to just the bottomline growth, investors must investigate if the growth is sustainable. More importantly if the companies recording high growth have safe balance sheets and good business models. Else going by such raw statistics to invest in such high risk asset classes can be a dangerous move we believe.
If you go shopping, you would certainly like to buy things that are flying off the shelves isn't it? You would buy the most popular thing out there. Not so when it comes to investing however. In investing, buying what's popular is not going to take you anywhere. Simply because if it's popular, it's more often than not fairly valued. Therefore the idea out there has to be to buy the most unloved asset and wait for the eventual upside to come. We believe gold could be a perfect candidate for this experiment. This is because its popularity keeps coming down with each passing day.
The latest to give the yellow metal the cold shoulder is billionaire investor John Paulson. Turns out Paulson has clearly told his clients he wouldn't personally invest more money in his gold fund. For he has no idea when inflation could accelerate, a scenario that usually makes gold the asset class of choice. Paulson can afford to do so for he already has gold in his gold fund. But those of you who don't, now is not a bad time to invest a small 5%-10% of your total wealth in the yellow metal. For as even Paulson acknowledges, inflation will eventually accelerate. It is only a matter of when.
Global markets gained modestly on favorable US economic data, including tame inflation and fewer-than-expected weekly jobless claims. Although the Fed has so far held off on tapering its monthly bond purchases, central bank officials still expect to begin to reduce the quantitative easing program in the coming months. The minutes of the Fed's late-October policy meeting indicate that officials are searching for other ways to provide support for the economy and that short-term interest rates are likely to remain low for a long time. The US markets closed at record high (up 0.6%).
China's central bank followed up this week on last week's announcement of significant economic and financial reforms. The Chinese equity market ended the week up 1.4%.Overall weakness in the Eurozone stood in contrast to rising business confidence in Germany. The Eurozone composite purchasing managers' index slipped to 51.5 in November, from 51.9 in October. All the major European equity markets closed the week in the red.
As we know, FIIs are the most important market movers as far as Indian stock markets are concerned. So an obvious question follows: How will the Fed taper impact India? Is India better prepared now to deal with such a situation?
Well, if you compare our present situation with what it was in May, you can say we are somewhat better off now. The government imposed curbs on gold imports. Exports are picking up. RBI took a series of measures to reign over the currency fall. So yes, relatively we are in a better position. But we have seen in the past how markets tend to come down like a house of cards when FIIs have dumped Indian stocks. So it's would be a bit presumptuous to say that the Fed taper will not impact Indian markets much
Growth may have slowed down in China, but that has not stopped large asset management companies from investing in the country. As reported in an article in Bloomberg, one of the reasons for this is the massive US$ 3.66 trillion currency reserves that the dragon nation has amassed. The US Fed's decision to taper its QE program some months back had given global markets the jitters. As a result, there was an exodus of capital from emerging markets including India. For the latter, this posed a problem because it is burdened with a rising current account deficit. But China has no such problem. Some of the other factors that are in favour of investments in China include the country's intention of moving away from an investment and exports based business model. But that does not mean that there are no other problems. For quite some time now, China has been plagued by issues such as shadow banking, unregulated lending and increasing debt burden of local governments. Efforts to bring these under control have led to cash squeezes that helped drive up borrowing costs. Also, China is looking to make the Yuan fully convertible. But this may not be that easy given the opaqueness with which the currency is managed. Thus, investing in China is not without its share of risks.
Is the rise in profits reason enough for investors to jump at the opportunity of buying any and every mid and smallcap stock? We believe that the time is ripe for investors to exercise utmost caution. Instead of getting drawn to just the bottomline growth, investors must investigate if the growth is sustainable. More importantly if the companies recording high growth have safe balance sheets and good business models. Else going by such raw statistics to invest in such high risk asset classes can be a dangerous move we believe.
The latest to give the yellow metal the cold shoulder is billionaire investor John Paulson. Turns out Paulson has clearly told his clients he wouldn't personally invest more money in his gold fund. For he has no idea when inflation could accelerate, a scenario that usually makes gold the asset class of choice. Paulson can afford to do so for he already has gold in his gold fund. But those of you who don't, now is not a bad time to invest a small 5%-10% of your total wealth in the yellow metal. For as even Paulson acknowledges, inflation will eventually accelerate. It is only a matter of when.
China's central bank followed up this week on last week's announcement of significant economic and financial reforms. The Chinese equity market ended the week up 1.4%.Overall weakness in the Eurozone stood in contrast to rising business confidence in Germany. The Eurozone composite purchasing managers' index slipped to 51.5 in November, from 51.9 in October. All the major European equity markets closed the week in the red.
Diesel Deregulation
Indians are considered to be people sensitive to pricing. Since consumers are price sensitive, usage usually drops when prices go up and vice versa. This seems to be true for oil products as well. As per Petroleum Planning and Analysis Cell (PPAC), consumption of price sensitive products has taken a hit this year. The growth in consumptions this year (January to October period) is actually much lower than what it was during the same period last year. In fact it is not just the consumption of the 'sensitive products' like diesel and LPG that has declined. Even the growth of all other oil products has been subdued this year. The price of diesel has been hiked by 50 paise since January this year. But even these small hikes have hurt the consumption of the fuel. The oil minister has recently stated that he plans to deregulate the prices of diesel completely within the next 6 months. If the trend till now is anything to go by, any further increase in diesel prices would most likely hurt its consumption in the short term at least. But the high point of this is that it would also help reduce the fiscal burden to a large extent. Oil subsidies on products like diesel and LPG have weighed down on the country's fiscal position. Therefore any taper off in consumption and/or prices would be a welcome relief.
Fiscal deficit and Tax hike
In the Union Budget presented in February 2013, the Finance Minister had vowed to keep the fiscal deficit at 4.8% of GDP. Even then most of us were skeptical about this target. We were worried that it would be a long and difficult task for this target to be achieved.
And now it seems that we were right with our skepticism. In its recent report, the Finance Ministry has reportedly admitted that there have been fiscal slippages in the first half of the year. The findings of this report (as carried by Business Standard) state that there was an increase in expenditure. And a shortfall in revenue. As per the report, the fiscal deficit has already touched 76% of the budget estimates in the first half of the financial year.
The total expenditure for the six month period ended September 2013, was 48.6% of the budget estimates. This is higher than the 46.5% seen during the same period last year. On the other hand revenues, particularly the tax revenues, were much lower. The disinvestment target is not even close to being met as of now.
Even then there have not been any announcements on whether the government plans to cut down on its expenditure to achieve the fiscal deficit target. Given that the elections are due next year, cutting down any of the populist expenses like subsidies, etc, would not bode well. So how would the Finance Minister achieve his target?
In October 2013, Reuters had reported that the Finance Minister could push about US$ 15 bn worth of subsidy expenses of this year to 2015. This would help him achieve the target this year at least. But what would happen next year and the year after that? Guess thegovernment has not really thought this through for the long run.
If the FM does not postpone the expenditure then what are the other alternatives that he has? One is to expedite the disinvestment program. As reported yesterday, the Finance Ministry is toying with the idea of introducing innovative financial instruments for this. Another alternative that the government has is to raise taxes.
The truth of the matter is that India is in a bad shape thanks to its government. And unfortunately the onus of satisfying the government's ambition would once again fall on the common man. Let us not forget that the high inflation and interest rates have already taken a toll on our pockets. At the same time the slowdown has made income streams volatile. With the way things are, the honest tax payers could be asked to stretch themselves even further. And all for what? So that the government can win popularity votes and come back to power!
Do you think the government would be able to meet its fiscal deficit target this year? Let us know your comments
And now it seems that we were right with our skepticism. In its recent report, the Finance Ministry has reportedly admitted that there have been fiscal slippages in the first half of the year. The findings of this report (as carried by Business Standard) state that there was an increase in expenditure. And a shortfall in revenue. As per the report, the fiscal deficit has already touched 76% of the budget estimates in the first half of the financial year.
The total expenditure for the six month period ended September 2013, was 48.6% of the budget estimates. This is higher than the 46.5% seen during the same period last year. On the other hand revenues, particularly the tax revenues, were much lower. The disinvestment target is not even close to being met as of now.
Even then there have not been any announcements on whether the government plans to cut down on its expenditure to achieve the fiscal deficit target. Given that the elections are due next year, cutting down any of the populist expenses like subsidies, etc, would not bode well. So how would the Finance Minister achieve his target?
In October 2013, Reuters had reported that the Finance Minister could push about US$ 15 bn worth of subsidy expenses of this year to 2015. This would help him achieve the target this year at least. But what would happen next year and the year after that? Guess thegovernment has not really thought this through for the long run.
If the FM does not postpone the expenditure then what are the other alternatives that he has? One is to expedite the disinvestment program. As reported yesterday, the Finance Ministry is toying with the idea of introducing innovative financial instruments for this. Another alternative that the government has is to raise taxes.
The truth of the matter is that India is in a bad shape thanks to its government. And unfortunately the onus of satisfying the government's ambition would once again fall on the common man. Let us not forget that the high inflation and interest rates have already taken a toll on our pockets. At the same time the slowdown has made income streams volatile. With the way things are, the honest tax payers could be asked to stretch themselves even further. And all for what? So that the government can win popularity votes and come back to power!
Do you think the government would be able to meet its fiscal deficit target this year? Let us know your comments
Wednesday, November 20, 2013
India No Longer Poor Country: World Bank
One of the country's parliamentarians recently said that poverty is just a state of mind and self confidence is needed to overcome it. This was probably the most bizarre definition of poverty we have ever come across. It speaks volumes of what the government thinks of this social evil. It is probably deeming poor citizens to be just voters who can be flattered by promises. With no intent, nothing can be done to eradicate poverty in India. And now one of the means through which poverty can be eradicated has also been trimmed
The World Bank has curtailed its window which offered concessional loans to India to fight poverty. These concessional loans are available to countries that are below a certain benchmark. The benchmark in this case is per capita GDP. With India surpassing that benchmark, it is now no longer eligible for such concessional loans.
This effectively indicates that India is no longer poor and the standard of living has improved. However, in reality more than half of the country's population can barely afford a reasonably decent standard of living. And with no hope of redressal, neither from the government nor by way of international aid, Indians may have to learn to live in poverty.
World banks' withdrawal has indeed come as a setback to India. But we believe this is because of the use of a flawed benchmark. Per capita GDP measure gives wrong picture of any nation's standard of living when there is a huge income divide. Increasing wealth amongst the rich can result in higher per capita GDP. And this is precisely what is happening in India. Rich are getting richer and poor are getting poorer. While this increases the per capita GDP, it does not reflect the true picture of India.
Now considering that support window from World Bank has been curtailed, it is yet another setback to poverty eradication in India.
We pity that even after 65 years of independence, there are no visible signs of large scale poverty reduction in India. As per one World Bank report nearly half of the Indians still do not have access to basic sanitation facilities. And this is a sorry sign for a country which is en route to conquering Mars!
The current state is a result of rampant corruption and lack of intent from the politicians. Money destined to be used for the poor is siphoned off. Then there are scams, subsidies and wasteful expenditures which swallow the balance money!
We feel that no government can change the face of India unless there is an intent to do so. And the intent can change only when people at the helm rise above their own personal self interests and work towards creating a more equitable society.
Do you think money alone can eradicate poverty in India? Let me know your comments
The World Bank has curtailed its window which offered concessional loans to India to fight poverty. These concessional loans are available to countries that are below a certain benchmark. The benchmark in this case is per capita GDP. With India surpassing that benchmark, it is now no longer eligible for such concessional loans.
This effectively indicates that India is no longer poor and the standard of living has improved. However, in reality more than half of the country's population can barely afford a reasonably decent standard of living. And with no hope of redressal, neither from the government nor by way of international aid, Indians may have to learn to live in poverty.
World banks' withdrawal has indeed come as a setback to India. But we believe this is because of the use of a flawed benchmark. Per capita GDP measure gives wrong picture of any nation's standard of living when there is a huge income divide. Increasing wealth amongst the rich can result in higher per capita GDP. And this is precisely what is happening in India. Rich are getting richer and poor are getting poorer. While this increases the per capita GDP, it does not reflect the true picture of India.
Now considering that support window from World Bank has been curtailed, it is yet another setback to poverty eradication in India.
We pity that even after 65 years of independence, there are no visible signs of large scale poverty reduction in India. As per one World Bank report nearly half of the Indians still do not have access to basic sanitation facilities. And this is a sorry sign for a country which is en route to conquering Mars!
The current state is a result of rampant corruption and lack of intent from the politicians. Money destined to be used for the poor is siphoned off. Then there are scams, subsidies and wasteful expenditures which swallow the balance money!
We feel that no government can change the face of India unless there is an intent to do so. And the intent can change only when people at the helm rise above their own personal self interests and work towards creating a more equitable society.
Do you think money alone can eradicate poverty in India? Let me know your comments
Tuesday, November 19, 2013
The oily way
What happens in Saudi Arabia can have a significant impact on oil supply dynamics across the world. The OPEC nations have a reputation of manipulating supplies so as to get the maximum benefit. Many of them have been blamed for keeping production deliberately low to keep supplies limited and command high prices for crude.,
However, as consumption of oil across the globe is surging, Saudi Arabia, one of the largest OPEC member is keeping pace to some extent. Infact, the higher supplies from the region have resulted in the recent slip in the Brent crude price. This is despite the fact that the kingdom's own need of oil is on a rise to meet power and travel needs. Not inclined to lose on the export revenues, Saudi Arabia is replacing crude oil with fuel oil to meet internal needs. It is even planning to focus more on the usage of gas.
But can we predict anything about the oil prices based on such developments? While higher supplies have eased crude prices for now, with so many variables affecting crude prices, it is hard to tell where prices will head from here.
However, as consumption of oil across the globe is surging, Saudi Arabia, one of the largest OPEC member is keeping pace to some extent. Infact, the higher supplies from the region have resulted in the recent slip in the Brent crude price. This is despite the fact that the kingdom's own need of oil is on a rise to meet power and travel needs. Not inclined to lose on the export revenues, Saudi Arabia is replacing crude oil with fuel oil to meet internal needs. It is even planning to focus more on the usage of gas.
But can we predict anything about the oil prices based on such developments? While higher supplies have eased crude prices for now, with so many variables affecting crude prices, it is hard to tell where prices will head from here.
American Recover: Myth or Reality
Anyone who thinks the recovery in the US is sustainable and that it is actually leading to greater prosperity across all sections of society, they could do well to listen to Marc Faber. Writing for thedailyreckoning, Dr Doom opines that wealth creation in the US in recent years has been totally lopsided. Thus, while the top 1% in terms of net worth has seen most of their wealth go up by 2%, the bottom 50% are still down more than 40%!
If this is not enough, here's something even worse. The same bottom 50% have actually increased their debts meaningfully post 2007. In other words, they are more indebted than they were in 2007. And thus it is this higher indebtedness that must have caused whatever little improvement there is in the US economy and must have taken corporate profits higher. But now what? The debt levels of the bottom 50% cannot go on increasing forever. Besides, there is also a limit to which the Governments can support them. As a result, long term US economic growth much below its trend line does look like a strong possibility.
Much of what is written about the US economy often focuses on the short term scenario. Short term growth rates... Short term employment data... and so on... Many policymakers and Wall Streeters seem convinced that the current slowdown is only cyclical. And that the US economy would soon bounce back on its growth path.
But once in while some long term thinkers do pose a valid question. Can the US economy really grow the way it did in the past? Are the problems in the US economy more structural in nature? As per an article in Business Insider, several economists have significantly cut down their long term growth forecasts for the US economy.
The 2008 financial crisis marked the end of an era for the US. In the aftermath of the crisis, policymakers have been making desperate attempts to revive spending and investments in the economy through their ultra-easy monetary policies. But the economy is showing no sign of revival. We believe that the US economy is likely to remain subduedfor an extended period. And this period could actually be several years.
If this is not enough, here's something even worse. The same bottom 50% have actually increased their debts meaningfully post 2007. In other words, they are more indebted than they were in 2007. And thus it is this higher indebtedness that must have caused whatever little improvement there is in the US economy and must have taken corporate profits higher. But now what? The debt levels of the bottom 50% cannot go on increasing forever. Besides, there is also a limit to which the Governments can support them. As a result, long term US economic growth much below its trend line does look like a strong possibility.
Much of what is written about the US economy often focuses on the short term scenario. Short term growth rates... Short term employment data... and so on... Many policymakers and Wall Streeters seem convinced that the current slowdown is only cyclical. And that the US economy would soon bounce back on its growth path.
But once in while some long term thinkers do pose a valid question. Can the US economy really grow the way it did in the past? Are the problems in the US economy more structural in nature? As per an article in Business Insider, several economists have significantly cut down their long term growth forecasts for the US economy.
The 2008 financial crisis marked the end of an era for the US. In the aftermath of the crisis, policymakers have been making desperate attempts to revive spending and investments in the economy through their ultra-easy monetary policies. But the economy is showing no sign of revival. We believe that the US economy is likely to remain subduedfor an extended period. And this period could actually be several years.
The Tata Way: Admitting mistake
Just like investors, companies too need to be careful about their acquisitions and investments. Paying too much of an asset could turn out to be a disaster in the long run. And it does not help create shareholder value either. Rather a bad, overpriced acquisition can actually destroy shareholder wealth instead. However, despite all the due diligence that companies conduct, they can still end up over paying for an acquisition. When this happens, the company's management has two choices. The first is the easier one to continue holding the assets as it is on the balance sheets and keep justifying the same.
The second and tougher one is to admit their mistake and write down the assets. This would entail a onetime pain but it is a sign of a more prudent and conscious management. This seems to be the case with the Tata Group companies. As reported by The Mint, the group's Chairman is writing down nearly US$ 15.5 bn of assets. These write downs are related to the acquisitions made by the group companies over the last decade. The move could be inferred as a prudent and ethical corporate practice of the management admitting their mistakes.
The second and tougher one is to admit their mistake and write down the assets. This would entail a onetime pain but it is a sign of a more prudent and conscious management. This seems to be the case with the Tata Group companies. As reported by The Mint, the group's Chairman is writing down nearly US$ 15.5 bn of assets. These write downs are related to the acquisitions made by the group companies over the last decade. The move could be inferred as a prudent and ethical corporate practice of the management admitting their mistakes.
Global Outlook on energy
As reported in the Economist, total global demand for energy is expected to rise by a third by 2035. This is according to the World Energy Outlook, published by the International Energy Agency (IEA). The most significant jump in demand will be seen in countries such as India and China. Consequently, the Asian region which includes both these countries will account for 11.4% of the total energy demand as opposed to 7.4% in 2011. Demand in the developed economies will barely move. This is hardly surprising given that the Asian region has still been growing at a faster clip than the developed world despite theslowdown in India and China. Thus, the impact of this on prices will depend on how supply is able to ramp up by that time.
Paintings, Racehorses and Bubbles
The excessive money printing by central banks around the world only highlight the fact that they have not learnt any lesson from the global financial crisis. Indeed, the financial crisis was a product of loose policies by the US Fed that led to Americans going on a borrowing binge as interest rates remained low. Bubbles began forming and ultimately it burst in 2008.
Since then, the only response of the policymakers has been to do more of the same. They have again resorted to loose monetary policies and massive money printing. Rather than bolstering growth and job prospects, all it has done is concentrate wealth in the hands of few people. As reported in Moneynews, with so much money sloshing around, most of it is finding its way into rather unusual places such as rare paintings, gemstones, racehorses and the digital currency bitcoin. Indeed, the very fact that these assets are finding takers means that there is too much money floating around and the wealthy are looking for all possible avenues to park this money.
In the US, the most inflated prices seem to be in smaller pockets of the markets than they were back then. But one should not be deluded into thinking that consequently there is less risk. Indeed, a series of small bubbles bursting as opposed to a big one can also cause a lot of pain. And as evident from the 2008 crisis, so interconnected are the global markets that toxic assets in one region can erode the value of good assets elsewhere. This is because investors will choose to sell the good assets and raise cash to mitigate losses. The adverse impact of the central banks' easy money policy has been reflected in the global stock markets as well. Most of the markets have soared even though the underlying fundamentals remain weak.
Frothiness has become apparent in the IPO market as well. According to Moneynews, 199 US companies have gone public in the year so far. This is the highest number since 2007. The gains for some of them including Twitter have been big even when the financials have been quite poor. All of this only reinforces the point that liquidity is the single biggest factor driving the rally in the indices and other asset classes.
The US Fed, in the meanwhile, is contemplating easing from its bond buying program in 2014. That seems highly unlikely given that the only possible outcome of such a move will be a resounding crash across global financial markets.
A lot of this money has come into India as well. Indeed, despite the Indian economy slowing down, the rally in the Indian indices in the past few months has largely been the result of liquidity. In such a scenario, it would make sense for investors to take stock of the situation and not invest in asset classes simply because of a sense of immense optimism. And as long as central banks continue to print money, which seems quite likely, it also makes sense to include some gold as part of one's investment portfolio as a hedge against future risks.
Do you think that growing investments in paintings, racehorses etc. are signs that bubbles are forming everywhere? Let me know your comments
Since then, the only response of the policymakers has been to do more of the same. They have again resorted to loose monetary policies and massive money printing. Rather than bolstering growth and job prospects, all it has done is concentrate wealth in the hands of few people. As reported in Moneynews, with so much money sloshing around, most of it is finding its way into rather unusual places such as rare paintings, gemstones, racehorses and the digital currency bitcoin. Indeed, the very fact that these assets are finding takers means that there is too much money floating around and the wealthy are looking for all possible avenues to park this money.
In the US, the most inflated prices seem to be in smaller pockets of the markets than they were back then. But one should not be deluded into thinking that consequently there is less risk. Indeed, a series of small bubbles bursting as opposed to a big one can also cause a lot of pain. And as evident from the 2008 crisis, so interconnected are the global markets that toxic assets in one region can erode the value of good assets elsewhere. This is because investors will choose to sell the good assets and raise cash to mitigate losses. The adverse impact of the central banks' easy money policy has been reflected in the global stock markets as well. Most of the markets have soared even though the underlying fundamentals remain weak.
Frothiness has become apparent in the IPO market as well. According to Moneynews, 199 US companies have gone public in the year so far. This is the highest number since 2007. The gains for some of them including Twitter have been big even when the financials have been quite poor. All of this only reinforces the point that liquidity is the single biggest factor driving the rally in the indices and other asset classes.
The US Fed, in the meanwhile, is contemplating easing from its bond buying program in 2014. That seems highly unlikely given that the only possible outcome of such a move will be a resounding crash across global financial markets.
A lot of this money has come into India as well. Indeed, despite the Indian economy slowing down, the rally in the Indian indices in the past few months has largely been the result of liquidity. In such a scenario, it would make sense for investors to take stock of the situation and not invest in asset classes simply because of a sense of immense optimism. And as long as central banks continue to print money, which seems quite likely, it also makes sense to include some gold as part of one's investment portfolio as a hedge against future risks.
Do you think that growing investments in paintings, racehorses etc. are signs that bubbles are forming everywhere? Let me know your comments
Monday, November 18, 2013
Tap on LAF
The era of easy money for Indian banks may be coming to an end. Unlimited access to cheap overnight funding from the Reserve Bank of India (RBI) was tightened mid-year as part of measures to support a plunging rupee, and now the central bank is keen to use the restrictions to help it deepen money markets.
The ability of banks to continuously tap funds through the central bank's Liquidity Adjustment Facility (LAF) lowers their need to raise cash in the markets, which has thwarted the development of a proper money-market yield curve.
That seems set to change under new Governor Raghuram Rajan, who has pledged to deepen and develop India's financial markets. As a first step, he wants to encourage use of new term repos.
Sources say the RBI will deliberately go slow in removing the cap on funds banks can borrow via the LAF, even as it unwinds other emergency measures imposed to prop up the rupee.
Having a money-market yield curve would help investors and companies better price risk across a range of maturities, and should make markets more liquid.
"Globally, many central banks rely more on term lending than overnight lending. We also want to move to that kind of a system where the reliance on overnight borrowing from the RBI will be reduced to the minimum. This will help in building a smooth yield curve," said an official aware of the issue.
TURNING OFF THE TAP
Under the LAF, banks borrow overnight funds at the central bank's main lending rate, the repo rate, currently at 7.75 percent.
The facility is intended to help lenders smooth over daily fluctuations in their liquidity needs, but banks have instead used it to borrow easy money, and fund longer-term lending by repeatedly rolling over their collateral.
That changed since mid-year when the RBI limited borrowing first to 1 percent of bank deposits and then to 0.50 percent, about 400 billion rupees daily, in measures to tighten the supply of rupees and support its exchange rate.
"LAF is a liquidity management tool. But banks are using it to fund their loan book and they are not very actively mobilising deposits," said a second official familiar with the central bank's thinking.
Estimates are that banks now have to raise at least about 800 billion rupees each day outside of the LAF.
Some of that can be tapped via other central bank facilities, including an export refinance window where funds are borrowed at the repo rate, and the Marginal Standing Facility, emergency funding at a more punitive rate of 8.75 percent.
Banks can also raise funds from 7-day and 14-day term repurchase agreements (repos) that were launched in October. The first three auctions have attracted strong demand, and the RBI can eventually add more tenors to create a yield curve.
ADJUSTMENT
Having become accustomed to unlimited low-cost cash, the shift to market-based funding has led to some volatility as banks adjust to the new environment.
The Mumbai Inter-Bank Offer Rate, or MIBOR, an overnight rate that determines the pricing of short-term debt such as commercial paper, is moving in a range of about 100 basis points, compared with 10 to 20 basis points in mid-July.
Last week, MIBOR was at 8.80 percent, higher than even the 8.75 percent the RBI charges for emergency funding. But bankers acknowledge the long-term benefits of creating a yield curve.
"We are using the term repo facility. We are not facing any issues due to the repo cap. The RBI should gradually move to longer tenors to cover the duration till the 91-day T-bills. It will eventually help the development of an interbank term money market," said N. S. Venkatesh, treasurer at IDBI Bank.
It is not just a matter of commercial banks changing their practices. The Reserve Bank may also need to change some of its rules before the money markets can fully develop.
One of the major issues seen restricting the interbank term repo market is a set of regulations preventing collateral pledged in a repo being reused by the party providing the funds, a common feature in more developed markets.
"The RBI is trying to wean away banks from using the overnight window to support their balance-sheet activities," said R Sivakumar, head of fixed income at Axis Mutual Fund.
"The ultimate success will be if they can develop a term money market outside the central bank's window."
Psu banks: The real caged birds fm needs to free
Last Friday (15 November) at the annual Bankers' Conference (Bancon) in Mumbai, Finance Minister P Chidambaram called for more innovative business models in banking. As the man who controls more than 70 percent of the Indian banking system – the public sector banks – one would have thought he should be asking himself this question: why are public sector banks unable to innovate?
Chidambaram said: “I sincerely hope that when new bank licences are given out, they are given to people with innovative models. It will be a pity if the new banks are clones of existing banks...We need different kinds of banks to cater to different segments of Indian society."
He's right, of course, on this observation, but wrong is presuming that he has not contributed to this atrophying of innovation. The main reason why we have undifferentiated banking in India is the heavy hand of government. Combine that with regulatory over-caution, and you will only get clones of the same banking business model.
Before we discuss the issues raised by Chidambaram more fully, it is worth pointing out that banking models have indeed been innovated upon ever since the private sector was allowed in in the 1990s. Internet banking and seamless trading, any branch banking, and large scale retail banking are all innovations brought about with the entry of private competition. Today, thanks to technology, almost any financial or physical product can be bought or financed by the click of a mouse, and banks today are the biggest custodians of investor wealth, having seamlessly integrated banking, broking and demat accounts.
Chidambaram should be asking why his own public sector banks were so slow to adopt technology that private sector banks easily walked away with their best customers.
A related issue is how will the unbanked get banked, if all banks follow the same net margins-based model based on “class" banking? How is it that the public sector banks, once the pioneers in mass banking after nationalisation, are also aping the private banks?
The answer is simple: government ownership is the biggest barrier to innovation. It is impacting the pace of innovation even in private sector banks because competition is weak from public sector banks. Private sectors banks look super efficient primarily because public sector banks are so poorly run. The latter are racking up huge amounts of bad loans based on politically mandated lending to favoured sectors, with crony capitalists being indulged endlessly.
Public sector banks need high spreads between lending and borrowing rates to hide bad loans, and the private sector is happy to use this same spread to make super profits. When super profits can be earned in the shadow of inefficient public sector banking, why should private banks take risks with innovative business models?
Government ownership also comes with low levels of financial and managerial autonomy. Consider State Bank and HDFC Bank. Since its inception, HDFC Bank has had only one CEO, Aditya Puri – that's nearly 20 years at the helm. As against that, SBI has had around 10 chairmen weaving in and out since 1994, and, with one exception (OP Bhatt), they had tenures ranging from as little as two months to an average of two-three years. Which SBI Chairman will think of anything innovative if he (or she) has just a two-year entitlement to the chair? Forget innovation, even long-term vision will go out of the window.
To make matters worse, Chidambaram himself has been making arbitrary announcements and decisions that make nonsense out of bankers' autonomy.
For example, a new form of inclusive banking took hold when non-bank finance companies started lending against gold. The Reserve Bank and Chidambaram banned banks from selling gold and curtailed lending against it, killing off growth in this business. Is it the FM's business to decide which businesses banks should do or not do?
In his last budget, Chidambaram announced the creation of a women's bank – without any thinking on why women need a separate bank.
Chidambaram has also been pressuring banks to cut lending rates at a time when inflation is still high. Is it his business to tell banks what to do?
If banks are told how much to lend and to whom, at what rate to lend and for what tenures, where is the scope for innovation? The only way to ensure innovative banks is to do the following.
One, start reducing government holdings in banks to below 51 percent. At 51 percent, public sector banks will always be under the thumb of the finance ministry – and hence will be unable to innovate. The Bank Nationalisation Act has to be amended to privatise government banks one by one.
Two, we need sharp, but differentiated, regulation. If we need different kinds of banks with different models, we need differential regulation too. India already has a large variety of banks – from commercial banks to cooperative banks to regional rural banks to urban banks – but regulation is either the same or diffused. We need wide banks (that do everything) and narrow banks (that only collect deposits), we need urban banks and rural banks, we need wholesale banks and retail banks, and we need non-bank financial institutions – the works. We also need a path of migration from one form of banking to another – and back.
Three, the new banks to be created in the public sector – the women's bank and the Post Bank of India – can be used to create innovative models. For example, why can't the Post Bank, instead of trying to be a full-fledged bank be a narrow banks that merely collects deposits and sells financial products? It can then lend wholesale money to those who need it. Why can't the women's bank be a focused lender to women's self-help groups and women entrepreneurs? Women even today no problem in saving money with banks; it is in receiving loans they may be discriminated against – if at all.
Many ideas are possible, but innovative thinking must start at the finance ministry – which has been unwilling to let go of its control of banks.
Chidambaram himself may be happy to privatise a few public sector banks, but his government is a dyed-in-the-wool believer in public ownership. Like the CBI, our public sector banks are “caged parrots" answerable to different masters – politicians, the RBI, investors, and North Block, among others. Little wonder, there is little innovation.
Not silver Copper May be the new bullet for markets
So, how are copper prices doing? Why just copper you would ask. Simply because historically, there hasn't been a better barometer of the economic health than the price of copper. If copper prices are inching upwards, chances are the economy is doing well and vice versa. In fact, it is this attribute of copper that has won it the title of a Doctor. So, whenever you need to look into the health of an economy, the movement of copper prices could help you arrive at the right answer. And how's copper doing these days. As per marketwatch.com, the basic industrial metal has been making lower highs and lower lows for quite some time now.
What is shocking though is that this has coincided with the S&P 500 making new highs. Therefore, if the old relationship still holds good, either copper or the S&P is set for a huge reversal. Now given how the US equity market is being supported by cheap liquidity with very little economic improvement on the ground, we believe a huge equity market correction awaits us. So rather than copper prices inching up, a bear market in equities looks like a greater possibility. What do you think?
What is shocking though is that this has coincided with the S&P 500 making new highs. Therefore, if the old relationship still holds good, either copper or the S&P is set for a huge reversal. Now given how the US equity market is being supported by cheap liquidity with very little economic improvement on the ground, we believe a huge equity market correction awaits us. So rather than copper prices inching up, a bear market in equities looks like a greater possibility. What do you think?
Eurozone Update
The Eurozone has been struggling for a stronger foothold since the crisis broke out nearly 5 years ago. Things did seem to be looking better a few months back when the zone reported a growth of 0.3%. This came as a relief for the 17 member bloc which had seen a de-growth for the previous six quarters in a row. Everyone thought that this was a sign that things would be on the mend thereon. But the latest numbers from the region have cut short the celebration. The growth this quarter is estimated to be just 0.1%. Though the number is not strictly comparable to previous quarter's numbers as there is a seasonal one-off related to Germany; however there was a considerable slowdown seen in other countries as well. This brings back the question as to whether the Eurozone's recovery is sustainable or not.
The zone still has countries laden with debt that have been handed out bailouts after bailouts. Though they have enacted austerity measures in lines with the bailout requirements, however even then their financial situation is precarious. Add to this the high levels of unemployment weak investments and tight credit conditions. As per CNNMoney, the European Central Bank (ECB) has stated that it would take measures including further interest rate cuts to help revive the situation. This means that the money printing exercise of ECB will most likely continue. However if the ECB and the Eurozone takes a cue from US, they would realize that money printing just postpones crisis. It does not resolve i
The zone still has countries laden with debt that have been handed out bailouts after bailouts. Though they have enacted austerity measures in lines with the bailout requirements, however even then their financial situation is precarious. Add to this the high levels of unemployment weak investments and tight credit conditions. As per CNNMoney, the European Central Bank (ECB) has stated that it would take measures including further interest rate cuts to help revive the situation. This means that the money printing exercise of ECB will most likely continue. However if the ECB and the Eurozone takes a cue from US, they would realize that money printing just postpones crisis. It does not resolve i
Quick byte: PCR
Indian banks have witnessed a significant jump in bad loans over the last few years. The profitability of the banking sector, particularly public sector banks, has been adversely impacted. This has resulted in lowerprovision coverage ratio (PCR).
First, let's try and understand what PCR means. PCR is a measure that indicates the extent to which the bank has provided against the potentially non recoverable loans (NPAs). A high ratio suggests that additional provisions to be made by the bank in the coming years would be relatively low (if gross non-performing assets do not rise at a faster clip). The RBI wants banks to increase provisions for bad loans. Internationally, provisioning is 70-80% which is far higher than 30-40% in India. The RBI is also planning to frame new rules that would incentivize banks that were proactive in early detection and resolution of NPAs.
First, let's try and understand what PCR means. PCR is a measure that indicates the extent to which the bank has provided against the potentially non recoverable loans (NPAs). A high ratio suggests that additional provisions to be made by the bank in the coming years would be relatively low (if gross non-performing assets do not rise at a faster clip). The RBI wants banks to increase provisions for bad loans. Internationally, provisioning is 70-80% which is far higher than 30-40% in India. The RBI is also planning to frame new rules that would incentivize banks that were proactive in early detection and resolution of NPAs.
Tension: No relief from Inflation.........................................
If you do your own grocery shopping, you will notice that the prices of food items keep going up. Retail inflation as measured by Consumer Price Index (CPI) rose an annual 10.09% in October. The main reason for this was the sharp increase in vegetable prices which shot up 45.67% year-on-year. It is this sharp increase in food prices which pinches aam admi the most. It is this increase which leads to the erosion of savings of a retired person, since it is a necessary expense and can't be postponed. The increase in the retail inflation is quite a disturbing trend. What is even more disturbing is that the expectations of prices coming down because of good monsoon seem to have faded away. But more bad news seems to follow. The RBI has said that the retail inflation is likely to remain around or even above 9% in the months ahead. The government on its part has given up the fight. It seems they are waiting to pass this burden to the next government after the general elections.
So how can a common man insulate himself from double digit inflation? Well, there are no quick fix solutions to this. There are hardly any short term financial instruments available to hedge the risk of inflation. Even gold, despite its inflation hedging properties, cannot be relied upon to offer commensurate returns in very short term. More importantly it may not be wise to have a disproportionately high exposure to gold.
The RBI is planning to introduce bonds linked to consumer price inflation for retail investors. The rate of interest on these securities would comprise a fixed rate plus inflation. Interest would be compounded half-yearly and paid cumulatively at redemption. But there is no guarantee whether these bonds will succeed? The RBI had earlier this year launched 10-year inflation-indexed bonds, which were linked toWholesale Price Index (WPI). But it had failed to attract much interest from investors.
High inflation spells bad news since it means the RBI will hesitate to cut interest rates, a step needed to boost economic growth. Consumers will have to keep paying large chunks of their income every month towards repaying housing loans, even as the cost of food and petrol rises and the prospect of decent salary hikes recede because the economy is struggling. Inflation is also really bad for your retirement planning because your target has to keep getting higher and higher to pay for the same quality of life. In other words, your savings will buy less.
Thus unless the government undertakes bold reforms and solves supply side issues, India might be stuck with high inflation for a significant amount of time. Meanwhile investors may have no tangible solution to park their short term funds in safe, inflation hedging instruments.
Has double digit food inflation burned a hole in your pocket? Let me know your comments
So how can a common man insulate himself from double digit inflation? Well, there are no quick fix solutions to this. There are hardly any short term financial instruments available to hedge the risk of inflation. Even gold, despite its inflation hedging properties, cannot be relied upon to offer commensurate returns in very short term. More importantly it may not be wise to have a disproportionately high exposure to gold.
The RBI is planning to introduce bonds linked to consumer price inflation for retail investors. The rate of interest on these securities would comprise a fixed rate plus inflation. Interest would be compounded half-yearly and paid cumulatively at redemption. But there is no guarantee whether these bonds will succeed? The RBI had earlier this year launched 10-year inflation-indexed bonds, which were linked toWholesale Price Index (WPI). But it had failed to attract much interest from investors.
High inflation spells bad news since it means the RBI will hesitate to cut interest rates, a step needed to boost economic growth. Consumers will have to keep paying large chunks of their income every month towards repaying housing loans, even as the cost of food and petrol rises and the prospect of decent salary hikes recede because the economy is struggling. Inflation is also really bad for your retirement planning because your target has to keep getting higher and higher to pay for the same quality of life. In other words, your savings will buy less.
Thus unless the government undertakes bold reforms and solves supply side issues, India might be stuck with high inflation for a significant amount of time. Meanwhile investors may have no tangible solution to park their short term funds in safe, inflation hedging instruments.
Has double digit food inflation burned a hole in your pocket? Let me know your comments
Saturday, November 16, 2013
Wallstreet, QE , Bailouts and etc(Taxpayers Money)
From day one, its been opined by some research papers that quantitative easing is a disaster for the US economy. That it has one chance in thousand to create meaningful jobs in the economy. Instead, all it will end up doing is further increase the rich-poor disparity. Looks like an insider in the US Fed also thinks the same way. And this insider is a gentleman named Andrew Huszar. Turns out from 2009 to 2010, Huszar was responsible for managing the Fed's purchase of more than US$ 1 trillion worth of mortgage-backed securities. And what does Huszar think of this move? Well, the quantitative easing, he argues, 'has been the greatest backdoor Wall Street bailout of all time'.
Of course it can't be anything else. Anyone who has a good understanding of the crisis knows that most Wall Street firms should have been wiped out by now given the losses they had racked up. What has transpired though is the total opposite. The US Fed opened the floodgates like never before, making the same Wall Street banks that were teetering on the brink of a collapse, one of the most profitable entities in the world. And the sad part is the US Fed seems far from done. It seems hell bent on rolling out one QE after another, ignorant of the pain it would eventually cause.
Once considered too-big-to-fail, the big US banks have been given a dose of reality by the renowned rating agency Moody's. In its latest report, the agency has downgraded the rating four big banks by one notch. So what has prompted the change in the stance? One of the triggers is that unlike in the past, the future bailouts of such banks by the Government using tax payers' money are less likely. The agency believes that this time things might be different, thanks to the new US banking regulations. The agency expects that if a crisis strikes a bank, instead of public funds, bank holding company creditors will be bailed-in and will share much of the burden to recapitalize the failing bank. As such, next time if a crisis hits, bank's creditors should be bearing the worst consequences.
However, an assumption that new regulations can handle big bank failures seems to be naive. The rot has set in too deep to limit risks at this stage. Banks have been given unrestricted power in the past. There are huge systemic risks associated with the failure of one big bank that can threaten the entire economy. It is not difficult to imagine the disaster after already having witnessed the collapse of Lehman Brothers. Hence, steps should be taken to ensure that banks don't take unwarranted risks and remain less likely to fail in the first place.
Of course it can't be anything else. Anyone who has a good understanding of the crisis knows that most Wall Street firms should have been wiped out by now given the losses they had racked up. What has transpired though is the total opposite. The US Fed opened the floodgates like never before, making the same Wall Street banks that were teetering on the brink of a collapse, one of the most profitable entities in the world. And the sad part is the US Fed seems far from done. It seems hell bent on rolling out one QE after another, ignorant of the pain it would eventually cause.
Once considered too-big-to-fail, the big US banks have been given a dose of reality by the renowned rating agency Moody's. In its latest report, the agency has downgraded the rating four big banks by one notch. So what has prompted the change in the stance? One of the triggers is that unlike in the past, the future bailouts of such banks by the Government using tax payers' money are less likely. The agency believes that this time things might be different, thanks to the new US banking regulations. The agency expects that if a crisis strikes a bank, instead of public funds, bank holding company creditors will be bailed-in and will share much of the burden to recapitalize the failing bank. As such, next time if a crisis hits, bank's creditors should be bearing the worst consequences.
However, an assumption that new regulations can handle big bank failures seems to be naive. The rot has set in too deep to limit risks at this stage. Banks have been given unrestricted power in the past. There are huge systemic risks associated with the failure of one big bank that can threaten the entire economy. It is not difficult to imagine the disaster after already having witnessed the collapse of Lehman Brothers. Hence, steps should be taken to ensure that banks don't take unwarranted risks and remain less likely to fail in the first place.
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