Gold Prices shot up to Rs 14, 175

Gold prices shot up by Rs 435 per 10 grams to a new peak of Rs 14,175 on the bullion market in Mumbai on Thursday following renewed buying from stockists and investors on the back of firm trend in global markets.
Silver also moved up in line with gold prices as well as renewed industrial inquiries.
Volatility in other assets that forced investors to park their funds in precious metals as a safe investment also boosted the prices of these metals.
Gold strengthened more than two per cent in Europe to a three-month high, as investors preferred to invest in the metal from the current uncertain scenario.
According to market perception, China taking an interest in gold as an alternative to U S Treasuries, and of a European fund buying bullion, also influenced the prices. Spot gold climbed to a high of $926.10 an ounce and was quoted at $918.50/920.50 an ounce up from $906.75 in New York late on Thursday.
Gold futures rebounced in New York after two sessions to above $900 an ounce as gloomy economic news in the US triggered safe-haven buying.
Gold for February delivery ended up by $16.90 an ounce to $905.10 on the Comex division of the New York Mercantile Exchange. March silver also rose to $12.145 an ounce. Gold was rising as "economic malaise continues to batter the world", a dealer said.
Turning to the domestic market, standard gold (99.5 purity) shot up by Rs 435 per ten grams to Rs 14,175 from Thursday’s closing level of Rs 13,740. Pure gold (99.9 purity) also rose to Rs 14,240 from Rs 13,805.
Silver ready (.999 fineness) jumped by Rs 575 per kilo to Rs 19,795 from Rs 19,220 on Thursday.

source : NDTV PROFIT

Indian Pharma: A Dark Horse

Over the years pharmacy has grown in the form of pharmaceutical sciences through research and development processes. It is related to product as well as services. The various drugs discovered and developed are its products and healthcare it provides comes under category of services.
The Indian pharmaceutical industry is in the top rank of India’s science based industries with a vast array of capabilities in the complex field of drug manufacture and technology. This sector is categorized as highly organized sector registering turnover of $ 4.5 billion and growing at a rate of 8% to 9% annually. The Indian pharmaceutical industry is capable to meet country’s demand for any drug. The manufacturing units within the country are capable of meeting about 80% of the country’s drug requirement. There are about 20,000 production units in India with products sold at competitive lower prices than international drug prices. It ranks high in the third world in terms of technology, quality and range of medicines manufactured. From simple headache pills to complex antibiotics and complicated cardiac compounds, almost every type of medicine is made indigenously.

The Indian pharmaceutical sector is highly fragmented with more than 20,000 registered units. Drastic expansion has been witnessed in last 2 decades. The leading 250 companies control 70% of the market with market leader holding nearly 7% of the market share. It’s an extremely fragmented market with severe competition and government price controls.

Playing a key role in promoting and sustaining development in the vital field of medicines, Indian pharma industry boasts of quality producers and many units approved by regulatory authorities in UK and USA. International companies associated with this sector, have stimulated, assisted and spread head this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world.

India has 300 pharma companies of large and moderate size and another 10,000 small and tiny firms. But 70% of the production is by 100 larger companies. The industry manufactures around 440 of bulk drugs and almost entire range of formulations. About 1/3rd of India’s production – close to US $ 3.5 billion- is exported and exports are growing at 25% per annum. Exports to US fetch India about half billion dollars, while Germany, UK, Italy, Japan are among others. Large quantities of medicines are being exported from India to china, Brazil, Mexico and Nigeria.

PATENT REGIME
The signing of trade related intellectual property rights (TRIPS) agreement in 1995, which committed India to honor the WTO mandated product regime from 2005 marked the beginning of fresh chapter in industry’s evolution and India has finally transited into product patent regime from process patent. Process patent is the form of protection under which the process by which drug is manufactured is given protection. As there were many loopholes in this system companies very conveniently made very minor changes in the product and sold patented drugs at a lower price. Because of this MNC’s like Pfizer, Eli Lily was reluctant to launch their new molecules in Indian market. But under the product patent the molecule gets the protection and others cannot develop the similar molecule till the patent is valid.

POST 2005 SCENARIO
By issuing a patent ordinance, India met a WTO commitment to recognize foreign patents from January 2005, the culmination of 10 year process. In this new scenario, the Indian pharmaceutical manufactures won’t be able to manufacture patented drugs. To adapt to this new patent regime, the industry is exploring business models different from existing traditional ones.
New business models include:
1. Contract research ( drug discovery and clinical trials)
2. Contract manufacturing
3. Co-marketing alliances.

The focus of Indian pharma companies is also shifting from process improvisation to drug discovery and R &D. The Indian companies are setting up their own R &D setups and are also collaborating with research laboratories like CDRI, IICT etc.

CONTRACT RESEARCH
In 2002, the industry for clinical trials in India was $ 70 million. This market is growing at the rate of 20% per annum. According to experts, it will be industry worth anywhere between $ 500 million to $ 1.5 billion by 2010.
The global R&D is spending to the tune of $ 60 billion of which non-clinical segment accounts for $ 21 bn and clinical segment accounts for $ 39 bn. In terms of Indian prices this translates into ($ 7 bn at 1/3rd of US/EU costs) and ($ 7.8 bn of US / EU costs) respectively. This constitutes total potential for $ 14.8 billion for the Indian pharma companies.

CONTRACT MANUFACTURING
Many global pharmaceutical majors are looking to outsource manufacturing from Indian, companies which enjoy much lower costs both capital and recurring than their western counterparts. Many companies have made their plants CGMP compliant and India is having the largest number of USFDA approved plants outside USA.
The pharma companies are going for compliance with international regulatory agencies like USFDA, MCC etc for their manufacturing facilities.
Indian companies are proving to be better at developing API’s then their competitors from target markets and that too with non-infringing processes. Indian drugs are either entering into strategic alliances with large generic companies in the world of off-patent molecules or entering into contract manufacturing agreements with innovator companies for supplying complex under patent molecules.
Some of the companies like Dishman pharma, divis labs and matrix lab have been undertaking contract jobs for MNC’s in US and Europe. Even shasun chemicals, strides arcolabs, jubilant orgonosys and many other large Indian companies started undertaking contract manufacturing of API’s as apart of their additional revenue stream. The Boston consulting group estimated that contract manufacturing market for global companies in India would touch $ 900 million by 2010.


Growth Pattern of the Sector
The pharma industry has grown at 1.5-1.6 times the growth of the economy over the past couple of years. The industry has grown at a CAGR of 13 % from 2002-2007 and is expected to grow at a rate of CAGR of 16% over the period of 2007-2011. Accounting for the 2% of the world’s pharmaceutical market, the Indian pharmaceutical sector has market value of about US $ 8 billion. It ranks 4th in terms total global pharmaceutical production and 13th in terms of value. Over the last 2 years the sector’s market value has increased to about US $ 355 million because of launch of new products. According to an estimate 3900 new generic products have been launched in past 2 years. These have been by and large launched by big brands in the pharma sector. And in the year 2005 Indian pharmaceutical companies captured around 70% of the domestic market.
At present scenario only few people can afford costly drugs which have increased price sensitivity in the drug market. Now the companies are trying to capture the market by introducing high quality and low priced medicine and drugs. At present large number of Indian pharmaceuticals companies are looking for tie-ups with foreign firms for in license drugs. In 2005 6.2% of the disposable income was spent on healthcare as compare to 2.8% in 1995. Health insurance penetration is estimated at 10% in India and is expected to double in next five to seven years.

India is one of the top five manufactures of bulk drugs in the world and among the top 20 pharmaceutical exporters of the world. The value of the pharmaceutical output grew more than 10 fold from Rs 5000 crore in 1990 to over 65000 crore in 2006-07.india is now recognized a one of the leading global players in pharmaceutical industry. Europe accounts for highest share of Indian pharma exports followed by North America and Asia. The national pharmaceutical policy, aimed at ensuring availability of lifesaving drugs at reasonable prices is being finalized. Taking stock for the imperative requirement, the government has decided to set up six new institutes of pharmaceutical education and research (NIPERS) in different regions of the country. As anew initiative in pharmaceutical sector, the first pharmaceutical census of India is proposed to during 2007-08 to obtain robust database for the sector.

Pharma to emerge as Dark Horse in slowdown

In these tough times of recession [Indian] pharma sector has shown comparative resilience and has been relatively less impacted. There are two reasons for this: the domestic pharma market continues to experience healthy growth and the demand for generic (a biological equivalent of an originator pharmaceutical product) medicines is on the rise in international market.

Pharma is not completely immune to the slowdown and global economic crisis, but the impact is less severe. Over the past two years, the $8 billion domestic pharma industry has grown at a rate of more than 12%.
It is likely to see high single digit growth in 2009. The growing incidence of lifestyle diseases, rising disposable incomes, greater penetration of health insurance and expanding medical infrastructure will continue to foster growth in the domestic market. The fact is that however bad the economic environment, demand for medicines is relatively inelastic.

They will remain a hot centre for opportunity. There is also growing excitement as drugs worth $60 billion are expected to come off patent in the US in next few years. These positive trends signal a huge market opportunity for Indian pharma companies, who have over the years carved a niche for themselves, in most global markets

Investment scenario in India

Being the fourth largest economy in the world and has second largest GDP among developing countries , in purchasing power terms , India is poised for growth with macro –economic stability and by 2025 Indian economy is projected to be about 60% in size of the US economy.
Investment is the key element which has taken India on high growth trajectory. In this post we try to analyze current scenario of investment in 3 core sectors: infrastructure, education and security.
Infrastructure investment
India has emerged as land of opportunities for infrastructure sector. The potential is exorbitant as many sectors have opened up for participation and private investment. In the last few years a number of Road Projects have been taken up under ambitious National Highway Development Programme costing about US$ 12 billion, in which large number of foreign construction companies are participating. The telecom sector has moved forward at a brisk pace and power reforms have gained momentum while the disinvestments process has got underway in the Telecom and Oil and Gas sector. In order to have an integrated development of Transport system, National Rail Development Programme has also been launched in Dec. 2002 envisaging an investment of about US $3.5 billion.
India has been prominent in attracting most of the infrastructure projects with private participation in the region. For instance an important role behind the extensive growth of Indian IT sector and BPO’s is played by availability of robust infrastructure (telecom, power and roads) in the country. Relevant telecom facilities are an important prerequisite for the success of the software industry and over the years, the Government has taken steps to ensure that telecom remains a priority area.
Similarly, regular, reliable, uninterrupted power, a major necessity for running IT software and services businesses, has also received substantial attention from the Government. Recent steps to privatize the distribution of power and bring in greater efficiencies and customer centricity in the market have been welcomed by the ICT industry.
The overall roads and highways scenario in India has also witnessed major improvements over the last few years. Most cities and first and second tier towns are connected and interlinked to each other. Major investments have gone into the development of highways, both on the side of the central and state Governments. Clearly, the Indian Government has understood the importance of infrastructure to industries such as IT and created a conducive environment for its development and expansion.
Present meltdown
In the present economic crisis when all sectors are facing the heat of downturn, infrastructure sector comes with no exceptions. The major hindrance coming in way of growth of this sector is scarcity of funds. This holds true especially in the case of large scale, complex projects, as in case of hydro power projects, which have long gestation periods. The Government needs to consider introducing mechanisms/ instruments that allow efficient long-term funding of projects. In addition, limits on external commercial borrowings for such infrastructure projects should be removed.
In recently announced fiscal package by government, in order to boost investment in the infrastructure sector, the government authorized the state-run India Infrastructure Finance Co. Ltd (IIFCL) to raise Rs.100 billion through tax-free bonds by next March. Announcing a Rs.3,000-billion ($60-billion) stimulus package to pump prime the economy, a government statement said IIFCL, set up to finance infrastructure projects in the country, could use the fund to refinance port, highway and power projects, being developed under the public-private partnership model.

Scenario of investment in private education
Indian education system has witnessed an impressive growth path since independence. From just 0.1 Million in 1947, enrollments in the country have grown to more than 11 Million in 2005-06. The education system in the country saw a revolution with the emergence of a whole new class of education providers, including private institutes, distance education providers, self-financing courses in public institutions and foreign education providers.
Despite the fact of rising enrolment figures, the cumulative expenditure of states on educational services as a % of total expenditure has shown a decline of 18% in 2007-08. Inter-state differences in per capita education spending across states are widening. While per capita fund flow to education in 2005-06 was Rs 483 in Uttar Pradesh and Rs 487 in Bihar. It was Rs 1034 in Maharashtra and Kerala and Rs 1777 in Himachal Pradesh. A slowdown in government spending in key areas of education infrastructure in many of these states has happened despite a marked improvement in the fiscal performance of most of these states. This is in sharp contrast to the post -1997 periods when a fall in education spending could be attributed to shortage in government finances due to deteriorating fiscal health of states.

Aftermath of terrorism on India Inc
Recent terror attacks in financial of the country Mumbai will post short term impact on Indian economy according to many economist and analyst. Being the home of Asia’s oldest stock exchange, country’s central bank, capital markets regulator (SEBI) and India’s biggest corporate houses- Tata’s , Birla’s , Ambani’s , accounts for country ‘s $ 1 trillion (Rs 49.9 trillion) economy and contributes one third of its direct taxes. According to various economists though these attacks will affect country’s economy but deeper impacts will come from global slowdown.
National security is a critical factor that determines the level of investment — both domestic and foreign — along with conducive business environment, positive policy matrix and return on investment. Global investors apply these parameters diligently while making their decision on investment destinations.
In tough times like we are in currently, the portfolio investment and allocation decisions by certain global funds could be affected. However, investment decisions by various multinationals to enter a market for strategic reasons tend to be made with a longer term and global view in mind and should not get impacted, unless these attacks continue for prolonged period. While overall FDI flows at $17 bn were 137% higher in the first half of this fiscal year, the second quarter ended September 2008 has seen a slowdown of 30% in FDI flows compared to the June quarter. On the other hand, portfolio flows into India (FII) have already seen a massive outflow this fiscal year of over $9 bn through end of October, while FIIs had invested over $13 billion in the Indian markets last fiscal year.
The business confidence which was weakening due to current global turmoil will now bear the heat of this terror attack, with sentiments further going weak. The hardest hit industries will be hospitality, travel and tourism and luxury retail business. Already tourism sector is struggling to beat economic slowdown, now these terror attacks have added to their struggle with hoteliers are expecting large scale cancellation of bookings mostly from overseas visitors. This will in turn affect the aviation business which is already in battle with the slowdown. Another immediate victim of this attack would be luxury retail business. The Taj and Trident are home to around a dozen of luxury retailers including Gucci, Ferragamo, Jimmy Choo, Estee Lauder, Louis Vuitton and Fendi. Business would be impacted not only due to space but also sales because lot of sales comes from in-house guests. Most luxury brands prefer to operate out of five star hotels because India doesn’t have high quality luxury retail space.

Boom time for security industry
In the times when Indian industries are battling with wicked effects of global slowdown and recent terror attacks on Mumbai, the only industry poised to book high profits in future is Indian security industry. Private security in India will become a Rs 50,000 crore (Rs 500 billion) industry in four years as corporate have increased their spending on safeguards after the Mumbai terror strikes. The private security business, a Rs 22,000 crore (Rs 220 billion) industry now, would touch Rs 50,000 crore as security all of a sudden has become top priority for Indian Inc.
Terrorism now is a universal phenomenon and most countries are facing it. It is the other overwhelming factors that will affect investments. Yet, it’s imperative that we put in place a foolproof security system that can sense and eliminate these terrorist attacks. We also need to improve risk management systems and disaster recovery plans.
India’s position in the emerging financial and economic architecture is going to be substantial. Stakeholders of the growth are not Indians alone but the world community. That calls for a joint action against terrorism.

Fiscal stimulus package

In order to elevate the various sectors of Indian economy from global turmoil, government has finally uncovered its fiscal stimulus package, which gives 4% cut in CENVAT , in order to bring down prices of cars, cement textiles and other products.

The package which sought to lower down the impact of global slowdown on various sectors, with entailing a loss of Rs 8700 crore , in the remaining four months of 2008-09 , aims to revive sectors like housing, exports, automobile, textiles and small and medium enterprises (SMEs).
The key highlights of the package are as follows:
· Package includes, the CENVAT on all products – except non petroleum goods – have been reduced from 14, 12, and 8 % to 10, 8 and 4% for various categories.
Full exemption from basic customs duty has been effected on naphtha to provide relief to the power sector.
· With the implementation of the package the export duty on iron ore fines has been withdrawn, the levy on export of iron lumps has been cut from 15 to 5 per cent.
· Government seeks to provide relief to the dooming housing sector with public sector banks will shortly announce a package for borrowers of home loans in two categories: up to 500,000 rupees and 500,000 rupees to 2 million rupees.
· For small and micro enterprises, the limits under the credit guarantee scheme have been doubled to 10 million rupees. The lock-in period for loans covered under the existing credit guarantee scheme is also being reduced from 24 to 18 months to encourage banks to extend more loans under the scheme.
· In an incentive for the automobile sector, government departments are also being allowed to replace older vehicles within the allowed budget, in relaxation of extant economy instructions.
The Planning Commission deputy chairman, Montek Singh Ahluwalia, said the package will “minimise the impact of weak global economy on the Indian economy” and help achieve a seven per cent growth rate.
Announcement of package turned out to be a sigh of relief for realty sector majors like DLF and UNITECH, particularly in the non-metros by way of a demand-boost for houses, but felt that the package for home loans by banks should have been for borrowings up to Rs 50 lakh instead of the prescribed limit of Rs 20 lakh.
However some reactions were anticipating a fiscal package of Rs 70,000 crore, how ever now how will this package will lead to bounce back of growth of Indian economy on previous high trajectory path? For that we need to wait and watch!!!!!!!!!!!!!! Please put your valuable opinion on what do you think of this package, how this will impact Indian economy.

Foreign currency convertible bonds

While I was searching for this impact of US crisis on India and depreciation rupee I came across this term FCCB (foreign currency convertible bond).and I came to know this plays important role in Indian capital market.
Let’s see how it works
An instrument in debt market where in which convertible bond is issued in a currency which is different than issuer’s domestic currency. For e.g. reliance industries issues a convertible bond which is denominated in terms of dollars and not rupees. This is the mode of raising money by issuing company in terms of foreign currency. As the name suggests it’s a convertible bond, means bondholder has an option of converting it into stock. Therefore convertible bond is a mix between equity and debt instrument.

FCCB policy in India
MinistryFinancegovernmentofIndiadefinesFCCB.Accordingit:"Foreign Currency Convertible Bonds" means bonds issued in accordance with this scheme and subscribed by a non- resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments; "


We all know that 2-3 years back Indian and emerging markets were on high growth trajectory path and were giving high returns. At that time FCCB became the popular tool for raising funds from overseas market. Aggressive companies went for the FCCB route to fund their expansion/acquisition plans because of the shorter lead times associated with the process as well as for the fact that the company gains exposure in to a global investor base.

The reasons behing for fccb becoming so popular and companies opting for it aggressively were following:
· Being hybrid instruments, the coupon rates on fccb are particularly lower than pure debt or zero, thereby reducing the debt financing cost.
· Fccb are book value accretive on conversion.
· Saves the risk of immediate equity dilution as in the case of public shares.
Lucrative offer for investors
Investors can also book profits through fccb route:
· Assured returns to investors on bond in the form of fixed coupon rate payments.
· Ability to take advantage of price appreciation in the stock by means of warrants attached to the bonds, which are activated when price of a stock reaches a certain point.
· Significant yield to maturity (YTM) is guaranteed at maturity.
· Lower tax liability as compare to pure debt instruments due to lower coupon rates.

In May 2007, at least 10 companies converted FCCBs into equity at a price decided when the bonds were issued to respective investors. The list includes NIIT, Bharti Airtel, Sun Pharma, Glenmark Pharma, Amtek India, Jain Irrigation Systems and Maharashtra Seamless. FCCB holders have witnessed a significant rise in value of their investments in these companies on the back of a sharp rise in share prices since allotment of the bonds.

Present day situation
Indian companies that had raised money through fccb’s during Bull Run to finance their growth and acquisition plans are currently in situation of doom. With demise of Indian stock markets the conversion price of these fccb’s has gone several times higher than their current market price.
Various estimates show that India Inc has issued close to $20 billion of FCCB’s in the past few years. Now the investor will only exercise its option to convert his bond into fixed number of shares at predetermined price if conversion price is lower than the market price. Now in this scenario of dooming stock markets conversion price in most of the fccb issues is several times above the market price. Therefore in such a scenario investors won’t be interested in converting their bonds into equity.
Let’s explore now in this situation what options are left with the companies who have issued these bonds.
· Issuing companies will now have to search for resources to repay the debt along with redemption period whenever it matures. For this companies will seek to fresh borrowings, with high interest rates, which in turn would impact their profitability.
· Another option which companies have is to reset the conversion clause, to bring it closer to reality.

No doubt lender will get back his money, but this will create big pain for ordinary shareholder. With the current state of the stock markets, most of them will have to buy foreign exchange from the markets to get rid of their liability. But this will depreciation of rupee and create more volatility in forex market.
By looking at the below link you can check out data for companies which have raised money through FCCB and where they stand today.
http://www.business-standard.com/india/storypage.php?autono=336251

References:
Economic times
Business standard

IIP NUMBERS: INDIA INC IN TROUBLE

Well here is a breaking news…..as given by all news channel………I don’t know how much you follow this number…..but INDEX OF INDUSTRIAL PRODUCTION IS OUT and its 1.3% for august 2008 in comparison to 10.9% in same period last year.

In India, the Central Statistical Organization (CSO) is responsible for compilation and release of the Index of Industrial Production (IIP). This is a monthly index and is intended to measure changes over time in the volume of industrial production. The base year of the current series of IIP in India is 1993-94 which being revised to 1999-2000 is. The current series of IIP with base 1993-94 is based on 538individual items clubbed into 283 groups of items. The distribution of these items (item groups) and weights (100) among the three sectors covered by the index is as under

Sector NO.Of items (item group) Weight
Mining 64(1) 10.47
Manufacturing 473 ( 281 ) 79.36
Electricity 1 (1) 10.17
TOTAL 538 (283) 100.00

The index is a simple weighted arithmetic mean of production relatives calculated by using Laspeyre’s formula
I=Σ(Wi*Ri)/ΣWi,

Where I is the Index, Ri is the production relative of the i-th item for the month in question and Wi is the weight allotted to it based on Gross Output. The item-wise indices are vertically aggregated at 2-digit of industrial classification based on weighted average, weights are proportionate to Gross Value Added.

The August 2008 Index of Industrial Production (IIP) stood at 1.3% as against 10.9% in same period of last year.
· Capital Goods growth was at 2.3% versus 30.8%.
· Mining growth declined at 4% from 14.7%.
· manufacturing growth declined at 1.1% versus 10.7%
· Consumer Durables growth declined at 5.1% from 6.2%.
The market which opened weak with all stocks in red, with this news tumbled more with sensex at 10,257 falling by 1070 points and the Nifty fell 298 points to 3,215, at 12:38 pm. BSE Midcap and Small Cap indices lost 7-9%. The two exchanges will halt trading if the Sensex falls 1275 points or the Nifty loses 390 points, which is 10% circuit.
With coming of these numbers lot of uncertainty about GDP growth rate has been generated. Many economists including MOF have said this to be an “industrial recession”. And have revised their estimates for GDP growth rate 6%.
It’s a bad time for world economies. But even with this finance minister quoting 7-8% growth rate for India and with this IIP numbers sounds doubtful.
This is a major concern for our economy and if you read this I would like to know from you what your expected growth rate for Indian economy is. Where India is headed.
Please post your valuable comments

Plague of US sub –prime crisis

Nowadays common topic of discussion among employees, students & all is subprime crisis, fall of Lehman brother, US economy & impact on India. I also had this question surrounded by my mind what exactly happened which led to such financial crisis in world’s strongest and powerful country.
I have seen many posts on this and from searching materials from various places, I have tried to explain, how this whole cycle of sub prime began and made whole world dancing on its tunes.

Let’s begin with
What are Sub Prime loans?
The sub-prime loans are loans which are given to borrowers with low credit scores. These are the loans which are granted at interest rates above the prime lending rate. These borrowers are subject to sub prime lending on their defaults in credit card payments or any other type of credit default or delays.
According to US standards these are people who have FICO score < 620.
Now you might be wondering what is this FICO score, what I get to know of this was:
A FICO score is a credit score developed by Fao Isaac & Co. credit scoring method of determining the likelihood that credit users will pay the bills.
Credit scores analyze a borrower’s credit history considering number of factors such as:
· Late payments
· The amount of time credit has been established.
· The amount of credit used Vs amount of credit available.
· Length of time at present residence.
· Nature of credit information such as bankrupts, charge offs etc.

There are 3 FICO scores to be computed by data provided by each of the 3 bureaus- explain, Trans union and Equifax. Some lenders use one of these 3 scores, while other lenders may use middle score.

How this sub –prime loans came into being?
If we rewind ourselves to period of 2000, it is to be noticed that after the tech bubble burst and fears of 9/11 attack in 2001 , federal reserve began to cut rates drastically and federal funds rate reached at 1% in 2003 , which in central banking idiom is essentially zero. The overall idea of federal behind these rates cut was to prevent economy going into depression and to increase money supply to encourage borrowing, which would spur investment and spending. This led to aggressive lending by banking and financial institutions. However there was a good proportion of demand was from sub prime borrowers, so naturally when banks lend to them, it was with the pleasing knowledge that interest rates would be higher for this class of loans.
Every individual aspires a dream of having his own house. Americans were no exception to this. These low interest rates and increased liquidity increased demand for housing, which led to continuous growth in the market value of these assets (i.e. Real Estate), which was the collateral for the debt. Another angle is that the average American is highly debt-oriented, and resultantly, refinance is fairly commonplace in the US. In order to capture the market, banks began to value these assets higher and higher, as a higher valuation meant a higher loan amount which could enable them to win a deal over competition. This higher valuation also had an impact on the real money-value of the asset.
What was the role of investment banks?
First let me here clarify here what is investment banking & how it is different from commercial banking:

Investment banking is a field of banking that aids companies in acquiring funds. In addition to the acquisition of new funds, investment banking also offers advice for a wide range of transactions a company might engage in. A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.

Now let’s see how this whole cycle worked:
Our story begins with an American, who like evrybody else has a dream to own a house. Now in order to fulfill his dream he seeks for a home loan. However his credit history is poor. But things become easy for this American with the advent of subprine loans (explained above).

· A subprime borrower (in our story American) takes a mortgage from institution like Well Fargo Home mortgage at 2/28 ARM terms.
· As soon as deal is signed these instructions package these mortgages into MBS (mortgage backed securities) and sell them off to other financial institutions like investment banks (Lehman brother, Morgan Stanley, etc).
· The banks then proceed to securitize these loans, chop them up, and package them into products called CDOs or Collateralized Debt Obligations which entitle the holders to the cash flows from the underlying mortgages.
· These CDOs are then sold to other market participants like hedge funds, pension funds, other banks and insurance companies based all over the world.
· The CDOs may then be traded like any financial security and thus ended up being held by banks and other market participants all over the world.

The question revolving in your mind now would be why financial institutions would buy loans of sub-prime borrowers here comes the role of rating agencies:
A lot of criticism has been directed at the rating agencies and underwriters of the CDOs and other mortgage-backed securities that included subprime loans in their mortgage pools. Some argue that the rating agencies should have foreseen the high default rates for subprime borrowers, and they should have given these CDOs much lower ratings than the 'AAA' rating given to the higher quality tranches. If the ratings had been more accurate, fewer investors would have bought into these securities, and the losses may not have been as bad. The argument is that rating agencies were enticed to give better ratings in order to continue receiving service fees, or they run the risk of the underwriter going to different rating agencies. However the flip side is that it’s hard to sell a security if it’s not rated.

How this situation led to financial fiasco?
With the coming of these sub-prime loans for few years things went pretty well, as with low interest rates, economy started to surge upwards, with value of real estates assets touching the sky. This situation made it easy for borrowers to make payments, in case they did run into troubled waters they could top-up their loans, or re-finance their loans at more favorable terms. So this was kind of happy –go lucky times for financial institutions.
However as in case of every bollyood movies good times are snatched away by villains, something like this happened in US financial markets. The slowdown began in late 2006 and early 2007. With fast growing economy, money started to flow in to equities and money supply reduced. Following such a scenario FED started to increase interest rates. This situation made re-financing of loans by borrowers difficult. As loans became more expensive, the demand for housing reduced, leading to a reduction in the value of the asset. Now this led to a chaotic situation, where borrowers began to default on their loans at an alarming rate. The investing institutions who held the securities backed by this debt stood to loose.

These financial crises plagued like anything all over the economy. In this hue and cry banks stopped lending to each other. Most investment banks and hedge funds had to write down the value of their holdings or liquidate other investments to meet redemptions. With CDO prices at rock bottom levels, market players were forced to borrow heavily.

This led to a huge liquidity crunch in the global markets and subsequently runs on and the collapse of a few banks in Europe. With nobody ready to lend money, overnight rates in the money markets skyrocketed setting the stage for further runs on banks and even the freezing or possible collapse of the entire banking system.
Coming to Indian scenario, how all this is impacting India, will be covered in my next post……..till then enjoy reading!
References:
www.economictimes.com
www.investopedia.com
Financial blogs

Boom & Bust of Indian Real Estate Sector

Engulfing the period of stagnation, the evolution of Indian real estate sector has been phenomenal, impelled by, growing economy, conducive demographics and liberalized foreign direct investment regime. However, now this unceasing phenomenon of real estate sector has started to exhibit the signs of contraction.
What can be the reasons of such a trend in this sector and what future course it will take? This article tries to find answers to these questions….

Overview of Indian real estate sector
Since 2004-05 Indian reality sector has tremendous growth. Registering a growth rate of, 35 per cent the realty sector is estimated to be worth US$ 15 billion and anticipated to grow at the rate of 30 per cent annually over the next decade, attracting foreign investments worth US$ 30 billion, with a number of IT parks and residential townships being constructed across-India. However current economic crises in India have made buying a home a far fetched dream for many.
The term real estate covers residential housing, commercial offices and trading spaces such as theaters, hotels and restaurants, retail outlets, industrial buildings such as factories and government buildings. Real estate involves purchase sale and development of land, residential and non-residential buildings. The activities of real estate sector embrace the hosing and construction sector also.

The sector accounts for major source of employment generation in the country, being the second largest employer, next to agriculture. The sector has backward and forward linkages with about 250 ancillary industries such as cement, brick, steel, building material etc.
Therefore a unit increase in expenditure of this sector has multiplier effect and capacity to generate income as high as five times.

Path set by the government
The sector gained momentum after going through a decade of stagnation due to initiatives taken by Indian government. The government has introduced many progressive reform measures to unveil the potential of the sector and also to meet increasing demand levels.
· 100% FDI permitted in all reality projects through automatic route.
· In case of integrated townships, the minimum area to be developed has been brought down to 25 acres from 100 acres.
· Urban land ceiling and regulation act has been abolished by large number of states.
· Legislation of special economic zones act.
· Full repatriation of original investment after 3 years.
· 51% FDI allowed in single brand retail outlets and 100 % in cash and carry through the automatic route.

There fore all the above factors can be attributed towards such a phenomenal growth of this sector. With significant growing and investment opportunities emerging in this industry, Indian reality sector turned out to be a potential goldmine for many international investors. Currently, foreign direct investment (FDI) inflows into the sector are estimated to be between US$ 5 billion and US$ 5.50 billion.

MAJOR INVESTORS
· Emmar properties, of Dubai one of the largest listed real estate developers in the world has tied up with Delhi based MGF developments to for largest FDI investment in Indian reality sector for mall and other facilities in Gurgaon.
· Dlf India’s leading real-estate developer and UK‘s famous Laing O Rourke (LOR) has joined hands for participation in airport modernization and infrastructure projects.
· A huge investment was made by Vancouver based Royal Indian raj international cooperation in a single real estate project named royal garden city in Bangalore over period of 10 years. The retail value of project was estimated to be around $ 8.9 billion.
· India bulls real estate development has entered into agreement with dev property development, a company incorporated in Isle of Man, whereby dev got subscription to new shares and also minority shareholding the company. But in recent developments indiabulls have acquired entire stake in dev property development in a 138 million-pound sterling (10.9 billion rupees) share-swap deal.
· Apart from this real estate developments opens up opportunity for associated fields like home loans and insurance. A number of global have shown interest in this sector. This include companies like Cesma International from Singapore, American International Group Inc (AIG), High Point Rendell of the UK, Colony Capital and Brack Capital of the US, and Lee Kim Tah Holdings to name a few.

Simultaneously many Indian retailers are entering into international markets through significant investments in foreign markets.
· Embassy group has signed a deal with Serbian government to construct US $ 600 million IT park in Serbia.
· Parsvanath developers is doing a project in Al – Hasan group in Oman
· Puravankara developers are associated with project in Srilanka- a high end residential complex, comprising 100 villas.
· Ansals API tied up with Malaysia’s UEM group to form a joint venture company, Ansal-API UEM contracts pvt ltd, which plans to bid for government contracts in Malaysia.
· Kolkata’s south city project is working on two projects in Dubai.
On the eve of liberalization as India opens up market to foreign players there is tend to be competitive edge to give quality based performance for costumer satisfaction which will consequently bring in quality technology and transparency in the sector and ultimate winners are buyers of this situation.
However this never ending growth phase of reality sector has been hard hit by the global scenario from the beginning of 2008. Analyst say situation will prevail in near future, and latest buzz for the sector comes as a “slowdown”.

Sliding phase of the reality sector

In this present scenario of global slowdown, where stock markets are plunging, interest rates and prices are mounting, the aftermath of this can now also be felt on Indian real estate sector. Overall slowdown in demand can be witnessed all across India which is causing trouble for the major industry players. Correcting property prices and rentals are eroding away the market capitalization of many listed companies like dlf and unitech

Reality deals in major cities like Delhi, Mumbai, Bangalore, Chennai and Hyderabad have shown enormous downfall from October 2007 – March 2008. The downfall had been cushioned by fall in stock markets as it put a stop for wealth creation, which leads to shortage of capital among investors to invest in real estate activities. Apart from this in order to offset their share losses many investors have no choice, but sell their real estate properties.
Other factors which have contributed to this slowdown are raising interest rates leading to higher costs. Due to this almost all the developers are facing serious liquidity crunch and facing difficulties in completing their ongoing projects. Situation seems to be so disastrous that most of the companies have reported 50-70% cash shortfall. The grade A developers which are facing cash crunch include DLF ,MGF , Emmar , Shobha developers , Unitech , Omaxe , Parsvnath Developers, Hiranandani Group, Ansal API, BPTP Developers and TDI Group. As a outcome of this liquidity crunch many developers have started slowing down or even stopped construction of projects which are either in their initial stages of development or which would not effect their bottom-line in near future.
Also with increasing input costs of steel iron and building material it has become it has become unviable for builders to construct properties at agreed prices. As a result there may be delays in completion of the project leading fincial constraints.
At the same time IT industry which accounts for 70% of the total commercial is facing a slowdown. Many residential buyers are waiting for price correction before buying any property, which can affect development plans of the builder.


Aftermath of reality shock to other sectors
Cement industry hitted by reality slowdown
The turbulence in the real estate sectors is passing on pains in cement industry also. It is being projected that growth rate of cement industry will drop down to 10% in current fiscal. The reasons behind such a contingency are higher input costs, low market valuations and scaled up capacity which are in turn leading to reduced demand in the industry. High inflation and mounting home loan rates have slowed down the growth flight of real estate sector which accounts for 60% of the total cement demand. The major expansion plans announced by major industries will further add to their misery as low market demand will significantly reduced their capacity utilization.
Setting up new facilities will impart additional capacities of 34 million tone and 45 million tone respectively in 2008-09 & 2009-10. This is likely to bring down capacity utilization in the industry down from current 101% to 82%. Even as it loses power to dictate prices, increased cost of power, fuel and freight will add pressure on input costs.
Ambuja Cements too is trading at a higher discount than previous down cycle, suggesting bottom valuations. However, replacement valuations for Madras Cements and India Cements indicate scope for further downslide when compared to their previous down cycle valuations.
All this has added to stagnation of the cement industry.

Dying reality advertising
The heat of reality ebb is also being felt by the advertising industry. It is being estimated that all major developers such as DLF, omaxe, ansals & parsvnath have decided to cut down on their advertising budget by around 5%. The advertising industry in India is estimated to be around 10,000 crore. This trend can be witnessed due to weakening spirits of potential buyers and real estate companies call it a reality check on their advertising budgets. A report from Adex India, a division of TAM Media Research, shows that the share of real estate advertisements in print media saw a drop of 2 percent during 2007 compared to 2006. According to Adex, the share of real estate advertisement in overall print and TV advertising last year was 4 percent and 1 percent, respectively. It’s a known fact that infrastructure and real estate companies are responsible for advertising industry maintain double digit growth rate. Therefore it’s understood that a recent slowdown in Indian reality sector has made things worse for advertising industry. The Adex report indicates that the top 10 advertisers shared an aggregate of 16 percent of overall ad volumes of real estate advertising in print during 2007. The list includes names such as DLF Group, Parsvnath, Sahara, HDIL and Omaxe group. However, the real estate had maximum share in South India publications followed by North and West publications with 32% and 26% share, respectively, during 2007.
According to many advertising agencies consultants, this phenomenon is taking a toll as all real estate companies want a national foot print and also these companies are turning into professionals. Therefore they are setting standards when it comes to advertising to sales ratio.

Falling stock markets knock down reality stocks
Reality stocks have been hard hit by uncertainties prevailing in the stock market. The BSE reality index is the worst performer having shed 51% of its 52-week peak reached in reality. The BSE benchmark index has shed 24% since January. The country’s largest real estate firm DLF scrip lost 54% while unitech lost 64% from its peak. The scrips of Delhi bases parsvnath and omaxe have lost 68% each since January.
The sector is facing a major downfall in sales volume in most markets of the country. The speculators have exit the market and Mumbai and NCR, the biggest real estate markets in markets are cladding subdued sales. In Gurgaon and Noida, which had seen prices almost treble in four years, sales are down 70%, leading to a price correction of 10-20%.

Lets us have a look how major cities are afftected by reality downfall
Top 4 metros taking the lead – in slowdown
Delhi &NCR
While bears are ruling the stock market, the real estate sector in Delhi & NCR region has started facing departure of speculative investors from the market. According to these developers based in region the selling of flats has become very complicated at the launch stage due to lack of interest from the speculators. Developers attribute this to stability in prices against the past where prices were up surging on monthly basis. The scenario has changed so much in the present year that developers are now facing difficulty in booking flats which may delay their projects and reduce their pricing power for instance a year ago, if 100 flats were being sold in month at launch stage now it has come down 30-40 per month. Till mid 2007 speculators made quick money by booking multiple flats at launch of the project and exiting within few weeks or months. But now due to the stabilization of the property prices little scope is left for speculators to make money in short term. Therefore outcome is their retreat from the sector.

Mumbai
Mumbai real estate market, which witnessed huge increase in prices in recent years, which made the city to enter in the league of world’s most expensive cities, is now feeling the heat of slowdown. Property sales that have been growing at a clank of around 20% every year have been plumped by 17% in 2007-08.
Though slowdown news of property market in country’s financial capital has been much talked about, but it was first time that figures proved the extent of slowdown. Information about residential and commercial property sales from the stamp duty registration office show almost 12,000 fewer transactions during the last financial year compared to the year before. From April 2007 to March 2008, 62,595 flats were purchased in Mumbai as against 74,555 in 2006-07.
According to reality analyst sales volume can die out further in south as developers persist on holding to their steep prices and buyers anticipate a further fall with current rates beyond reach. They further add that market is on a corrective mode and downward trend is anticipated for another 12 months.
Between 1992-96, the market ran up the same way it did during 2003-07. Post-’96, the volumes dropped by 50%. This time again it is expected to drop substantially though not so steeply. The demand is now extremely sluggish and customers do not want to stick out their necks and transact at prevailing rates.
Chennai
in past few years we witnessed reality index gaining huge heights on BSE and it also impact could be felt allover India. Amongst them Chennai was no exception. With IT boom in past few years and pumping of money by NRI’s have led to prices touching skies. Chennai also witnessed a huge boom property prices over the last few years. However in past few months it has been facing slowdown in growth rate.
Following factors can be attributed to this:
· This is one of the common factor prevailing all over India- rise in home loan interest rates , which has made it extremely difficult for a normal salaried person to be able to afford a house.
· Depreciation of US dollar , which means NRI’s who were earlier pumping money into the real estate are now able to get less number of rupees per dollar they earn in US. Therefore many of them have altered their plans for buying house in India.
· The Chennai Metropolitan Development Authority (CMDA) has imposed stricter norms for apartment construction and penalties for violations are more severe than before.
· Failure of the legal system of chennai to prevent intrusion , forged documentsand illelgal contstruction has added to the problem as many NRI’S are hesitating to buy plots in chennai.
· Apart from this tsunami of 2004 has shaken the confidence of many investors to invest in real estate.
However many analyst are quite bullish about this region. Especially in areas like old mahabalipuram, south Chennai etc because of numerous IT/ITES/ electronics/automobile companies are expected to set up their centers in these areas. Once these projects are complete and companies begin operations their, many people would like to live near to such areas and outcome will be boom in residential sector.
Bangalore
As discussed for above cities Bangalore is also dwindling between the similar scenarios. Bangalore seems to be in midst of low demand and supply. This trend is due to myopic developers , due to sudden growth in Bangalore in last few years , lot of builders have catched the opportunity of building residential houses thinking their will be lot of employment , increase in salaries and hence demand for housing. Past few years have been jovial for Bangalore as IT industry was doing well and banking and retail sectors were expanding.
However with this sudden economic slowdown, due to which Indian stocks markets are trembling, interest rates are high, jobs and recruitment put on freeze have led to cessation of investment in local property markets.
According to the developers real-estate industry of Bangalore has experienced a drop of about 15- 20% in transaction volumes. Adding to it grade A developers have faced a dropdown of 50% on monthly levels of booking compared to what they enjoyed in December 2007.

Future outlook
Indian realty sector is struggling with worst crisis in recent years with most of the companies’ balance sheets showing losses after riding on a boom in last couple of years. The impact on Indian realty turns out to be so severe that realty index on Bombay Stock Exchange, an indicator of investor mood for industry has fallen by 25% in October 2008 and 75% in the past year. According to analysts this is just an indication of long term crisis as developers went aggressive on land acquisition without paying attention to the delivery of projects.
The story of crisis also started to be reflected in second quarter results of realty sector, where company after company reported of huge losses in their balance sheets.
· Realty major DLF , which had long ago raised Rs .100 billion over ($ 2 billion) in what was then the largest ever initial public offering in India , reported of 4% drop in consolidated net profits for the July-quarter.
· In similar to this was unitech, which reported a 12% profit decline in net profit.
· Parsvnath Developers, it was a second straight quarter of decline with a dip of 78.6% in July – September period.
· Another Delhi-based realty firm, Omaxe, which is also facing turbulent times for the second straight quarter, reported an 87.3-percent decline.

However in the current scenario Indian real estate market is going through a phase of correction in prices and there are exaggerated possibilities that these increased prices are likely to come down.

In this scenario what will be the future course of this sector?
Many analysts are of view that tightening of India’s monetary policy, falling demand and growing liquidity concerns could have negative impact on profiles of real estate companies. Slowing down would also aid in the process of exit of some of the weaker entities from the market and increasing the strength of some of the established developers. A prolonged slowdown could also reduce the appetite of private equity.
Its also been projected that large development plans and aggressive land purchases have led to a considerable increase in the financial leverage (debt/EBITDA) of most developers, with the smaller players now being exposed to liquidity pressures for project execution as well as a general slowdown in property sales. Property developers hit by falling sales and liquidity issues would need to reduce list prices to enhance demand, but many still seem to be holding on to the asking price - which, would delay the process of recovering demand and increase the risk of liquidity pressures.It was being witnessed that before the slowdown phase the projects were being sold without any hook at an extravagant rate. But at ppresent negative impact is highly visible as lots of high end projects are still lying unsold. In such a scenario , there may be blessing in disguise as high profile speculators will be out making way for the actual users.
But here also sector faces trouble as correction in prices has been accompanied by increase in home loan rates by the banks which have led to erosion of purchasing power of middle and upper middle class majority of whom are covered in the category of end users or actual users.
Therefore for future of real estate sector analyst call for a wait and watch method to grab the best opportunity with the hope of reduction in loan rates.

Banks to face High NPA’s in 2009

With the commencing of 2009, Indian banks enjoying high profits, with stable credit growth and non interest income, will now have to face challenging times.
Though banks are showing high profits in their balance sheet, but main figure to impact in coming quarters will be of NPA’s (non-performing assets).

NPA’s are also called non-performing loans, are loans, made by a bank or finance company, on which repayments or interest payments are not being made on time.
In the current scenario of global meltdown, these are the real testing time for banks in terms of asset quality of their portfolio and for any new venture they are willing to undertake. The asset quality of Indian banks has shown substantial improvement in recent years—median Net NPA improved 0.73 per cent as against 0.83 per cent in ’07. However, 2008-09 and 2009-10 has the potential to reverse this trend.

As India witness slowdown in economic activity, banks will face a lower demand for loans. NPA’s will also increase on account of borrowers finding it difficult to repay loans. Credit growth is expected to fall to 14% in 2009-10 , in comparison to 22% of last financial year. Rise in NPA’s would mainly be attributed to export oriented small and medium enterprises(SME’s)which are hard hit due surging costs. The growth in credit in the industry in 2008 was in the range of 25-29 per cent on account of working capital requirements of small-, mid- and large-size industries, and the bankers expect an average 25 per cent rise in their credit in 2009. While state-owned banks were quick to respond to the recent signals from policy-makers by reducing interest rates periodically, many Private Sector Banks (PSB) are yet to follow the suit, mainly owing to pressure on their margins.

In this challenging period banks need to prevent exacerbation in their NPA’s. The challenges include: rapid shrinkage in corporate balance sheets, specifically those exposed to commodities and metals; funding of expansion and acquisition plans by highly-leveraged corporate; export-oriented firms facing a slowdown in business due to weak global demand; and volatile currency movements impacting corporate cash flows.

Fresh NPA accumulation could rise to 3.5% of total loans (on 2-year lag), which though lower than the 4.5-5% levels seen in the previous cycle (in the late 90s), may still result in a 2-3 fold jump. Defaults are expected from retail segment like auto loans.

The worst-case scenario for India, which assumes GDP growth will reduce to 6 per cent over the next few years, is likely to create a major challenge for Indian banks. Should they be focusing on growth or should they focus on keeping NPAs under control? Banks may then have to extensively rely on refurbished and dynamic credit scoring models, de-centralized decision-making based on ground level relationship assessment and increasing use of tracking MIS to control their portfolio in these uncertain times.
In comparison to global banks, Indian banks turn out quite strong from asset quality, diversified risk portfolio and low cost deposit base perspective. This is due to their effective management of the business and partly due to the conservative nature of our bankers and the regulator. The key question now facing the industry is:” Is the Indian banking system safe and sound to fight this financial meltdown”.

GREAT DEPRESSION 1929 Vs CURRENT CRISIS

1929-33 was a period when universal banks were ruptured into separate commercial and investment banks, which led to ascension of big giants like Goldman Sachs, Morgan Stanley and more. However current global turmoil has taken a reverse gear where many of these investment banks are again turned into large commercial banks.
This article intends to seek out differences and similarities between great depression of 1928 and current global fiasco.
But before going in to details let’s go back and brush ourselves on what exactly was great depression.

Great depression
The great depression which originated in 1929 in US and spread world over by 1930’s was characterized by barren business and huge unemployment. The main cause of this depression which took all the nations in its web was crashing of the stock markets in 1929. Thousands of investors lost their money in stock markets, leading to a longest recession which comprised huge lay offs, unemployment , wiping out of business activities , which left million of people to depend on government or charity for food.
By 1930’s this depression became a worldwide phenomenon, taking all countries into its grip. This lead to vast downfall in global trade as each country tried to protect its own industries by imposing high tariffs on imported goods.

Causes of great depression
· Stock market crash: As mentioned above one of the factors which triggered off this depression was failure of stock markets on October 29, 1929, which led to loss of about 40 billion dollars to stakeholders. Though stock markets after that started to regain on the path of recovery, by end of 1930, but some other factors at work impelled America to do into deep recession.
· Bank failures: During the period of 1930’s 9000 banks filed for bankcruptcy.Bank deposits were not insured and thus as banks failed people lost their savings. The banks which survived in this turmoil, due to gloomy economic conditions and to survive in these conditions stopped creating new loans, which in turn led to slowdown in business activities and less expenditure.
· Cut-back in purchasing power: with the failure of stock markets and fears of further financial fiasco, led to cut – back in purchasing of items from all individual classes. This in turn led to piling up of inventories, which stimulated a cut down in production, leading to layoff of employees. Unemployment reached to a level of 25%, leading to lowering the purchasing power of individuals.
· Hawley –Smoot Tariff: as businesses were slowing down, to protect its own industries American government created a Hawley-Smoot tariff in 1930, which meant to charge high import tariffs on imports, this led to deterioration in global trade leading to economic retaliation

Current scenario
Before doing comparisons lets see what current global turmoil looks like: As it’s said truth is bitter, the fact is we are going through a most severe global turmoil since the days of great depression. The similarity between both the crises is that they both originated from USA and now worldwide nations are facing its spillover effects. This financial global turmoil is a combined result of some intermingled financial mistakes. There are some fundamental causes at roots of this depression.
· Firstly are the conceited norms in USA. USA has always been relishing sustainable economic development, buffered with low inflation rates in last two decades. This led to complete ignorance of business cycle of economy. The signs of this were reflected 20 months ago, when America was combating excess liquidity in the market. That was the plenteous sign of coming of real estate bubble and asset price inflation.
· Secondly is the protection enjoyed by these private and investment banks. Booming economic conditions craved these banks to take higher risks, among which most of the deals of these banks were highly leveraged transactions. However these risks turn out to be evil for these high flying banks as they didn’t get enough capital in support of their high risk investments.
· Last but not the least reason which I think would be failure of top tier management to provide guidance to their deal makers. Greed took over and rest is history.

Though today symptoms of current events are similar to that of great depression, but according many economists making their comparison is misleading. Though current time hold similarities with great depression of 1929-33, but outshined by certain differences.
For instance in 1930, Hawley Smoot act came along in decade of restrictive tariffs and international disharmony. However today global turmoil is characterized by prominent degree of free trade and global cooperation. The era of 1929-33 was the one saw the absence of shock absorbers like such as social security and deposit insurance which could safeguard people from economic crises.

In the 1930s, some of the world's largest economies—Germany, the Soviet Union, Japan, and Italy—were run by leaders hostile to the very notion of market capitalism. Today, U.S.-style market capitalism is under assault from self-inflicted wounds, and Germany, Italy, and Japan (Russia, not so much) are working with the United States to cope with a common problem.
Apart from this the policies of Federal Reserve differ in both the periods. 1930’s policy was “downturn as a force for good”. Liquididate labor, stocks, farmers, so that people will work harder and live more moral lives. However in today’s crisis Federal Reserve is making full efforts to increase liquidity in stocks, to farmers and real estate.

It’s true that current crisis are nowhere in comparison to great depression, but still we need to put a full stop over these ongoing crises, which is hard-hitting the nations worldwide. The another difference which can be drawn over these two crisis is that in present day we have president Barack Obama who promises to solve the crisis . The methods which he plans to initiate are to follow policy of creation of jobs and more spending by American people. Apart from this we have seen bailout packages already becoming the breaking news. Therefore it can be said roots of current crisis are same but nature is totally different. We can hope to see a better future in near term.

As economies continue to struggle with global financial turmoil, a question which has gained heap among investors is “will current crisis halt the growth of emerging markets”?
Decoupling has been one of the most common and optimistic words used since the onset of the current recession. But before going into further discussions, lets look on to what exactly decoupling theory means;

Decoupling holds that European and Asian economies, especially emerging ones, have broadened and deepened to the point that they no longer depend on the United States for growth, leaving them insulated from a severe slowdown there, even a fully fledged recession

This however does not conclude that global economic slowdown will have no impact on developing economies. Emerging markets have become more integrated with world economy (their exports have increased from just over 25% of their GDP in 1990 to almost 50% today). However the effect of American downturn on GDP Growth of emerging markets will be less in comparison to previous downturns.
Decoupling has been one of the hottest issues of debate among economists. If we look at the growth rates of India and China over the last year gives us enough reason to believe that Asian economies will decouple from world economy. Impressive improvement in its macro foundations of growth – especially in saving, infrastructure, and foreign direct investment. Chinese industrial output growth reaccelerated to an 18.5% over the Jan-Feb period – up from 15% in final period of 2006. India, not as brisk as China, has a 10% y-o-y pace in early 2007 which was well above 7.25% in late 2005 and early 2006 when there was no recession in US. There is a 5.5% of annualized increase in Japanese economy.

Decoupling is also evident from fact that though exports to America have lurched, but to other emerging economies have surged. For instance China’s growth in exports to America slowed to only 5% (in dollar terms) in 2007. However this slowdown was offset by increase in exports to countries like India, Brazil & Russia by 60% and to oil exporters by 45%.Likewise, South Korea's exports to the United States tumbled by 20% in the year to February, but its total exports rose by 20%, thanks to trade with other developing nations.
Reasons for Decoupling

A study by IMF shows that decoupling and globalization can go hand in hand. According to IMF methodology they divide 106 countries into 3 groups – developed, emerging and low income developing countries. And then measure how the correlation between economies has changed over time as cross border flows have expanded.

Outcome of their study shows that growth has become contemporize in both developed and emerging economies. But economic activity in emerging economies has surprisingly decoupled from that of developed economies in past two decades, since technology bubble burst. Exports of consumer goods to United States declined to 6% of total Asian exports in 2006 from 8% in 2001. Emerging economies have now started trading with each other, which accounts for half of their total exports.

Another reason that can be attributed for decoupling and globalization going together is that opening up of economies have not only boosted poor countries trade, but also has stimulated their productivity growth and in turn boosted domestic income and spending. In 2007 emerging economies' real domestic demand grew by an average of 8%, almost four times as fast as in the developed world.

U-Turn of Decoupling
In the year of 2008, India and China have shown the signs of overheating due to current global meltdown. Many economist are of view that boom in emerging economies was largely driven by exports to American consumers, easy access to cheap capital and high commodity prices. All these tools have now dried up. In particular, as America’s housing bust causes households to save more, they will import less over the coming years. This could reduce emerging economies’ future growth rates. However dependence on exports to American markets is always exaggerated. No doubt that emerging economies won’t be able to record higher growth rates of 2007. But at the same time it is wrong to presume that emerging markets will not recover until America rebounds.
There are enough reasons to believe that emerging markets share of world growth will continue to surge.

Economists argue that most emerging economies are not victims of America’s obscure structural problem, such as of swelling debt, which could pinch growth for several years. Though 2009 will be a painful year for poor countries, but those with high savings and modest debt could recover quickly. On account of measures such as government and external balances emerging economies are sounder than developed ones.
Let’s have a brief overview of these emerging economies:
· Russia: has been badly hit by current crisis, by outflow of capital and credit squeeze, despite of running current account surpluses for many years. It has become excessively difficult for banks and companies to pay off their foreign debts; due to this it has lost its shareholders trust. Official reserves have fallen by $160 billion or 25% since August. As a result of lower oil prices, Russia is likely to run its current -account and budget deficits in a decade and its economy may well contract in 2009.
· China: 2009 will prove out to be more severe to China than 2008, with GDP growth rate slowing down to 7%. According to many economists China will follow a “007 pattern”; 0% world financial growth; 0% interest rate world wide and 7% growth in China. In China property and export sectors are ones which are in enormous trouble, the government might introduce another round of interest rate cuts on a large scale in the first half of 2009. In the summer, the one-year deposit interest rate might drop to as low as 1 percent from its current 2.25 percent. Apart from this China has the fiscal room to expand spending and cut taxes, which should be an effective stimulus. It may take a few months for the package to have a big effect, and that is why the first part of 2009 looks particularly difficult. But the infrastructure projects in the package will stimulate demand for steel, cement and construction. That in turn should have a positive spillover effect on the rest of the economy.
· India: is not an export driven economy, therefore it is not as susceptible to global meltdown as China is. World Bank forecasts India’s growth rate at 5.6% in 2009, followed by a bounce back of 7.7% in 2010. The reasons for such a slow growth can be accounted to the fact that main drivers behind explicit growth had been overseas borrowings and new equity issuance. Both of which have dried up now. Therefore picture for 2009 is gloomy. India will need capital for growth while global capital will remain in short supply. Corporate India, which has led the investment boom from the front in the last four years, will also be shy of putting more capacities into place due to falling demand. Even those who want to precede with their capex plans may find it difficult to raise money even from the domestic markets.
· Latin America: Global financial turmoil is ending a half-decade of more than 5 percent growth in Latin America, as prices for its commodity exports sink and foreign investors sell off assets to cover losses at home. The global downturn has slashed demand for oil, copper, iron ore, grains and other regional exports, narrowing trade surpluses, while credit for farmers and small businessmen has tightened amid the global crunch, boosting unemployment and poverty. Economic growth could slow to 2 percent across the region in 2009, its lowest level in years. Latin America's two largest economies, Brazil and Mexico, have seen growth forecasts more than halved, while analysts worry that Argentina, one of the world's top-five exporters of wheat, corn, soy and beef won't be able to service payments on $20 billion in debt next year as income from export taxes stalls.
In past five years emerging economies have boomed, but not completely busted. In order to safeguard themselves from this ongoing recession these economies need to be high savers and able to stimulate their own economies. These economies are likely to face major headwinds in 2009 and negative earnings revisions for emerging market companies are likely to increase in the next six months.
However if we analyze MSCI EM index (An index created by Morgan Stanley Capital International that is designed to measure equity market performance in global emerging markets.The Emerging Markets Index is a float-adjusted market capitalization index. As of May 2005, it consisted of indices in 26 emerging economies: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela) , which have fallen by 57% in the first 11 months of 2008 , have outperformed the MSCI World IndexSM (A market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI) and designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. The MSCI All Country World Index Ex-U.S. includes both developed and emerging markets)by 10.3% per annum for the seven years ending 30/11/2008. In fact, over very long time periods, the performance of emerging market equities has tended to confirm the widely-held view that high rates of economic growth in emerging markets offer the potential for returns superior to developed markets. Thus, for the 18 years ending 9/30/2008, the MSCI EM Index has outperformed the S&P 500® by more than 76 basis points per annum.

But many uncertainties still exists in emerging markets these include the magnitude and severity of the global recession, bank regulation and/or recapitalization (with many commentators suggesting that several US banks will be nationalized), credit availability, and the ability of China to avoid a "hard landing." And the recent tragic terrorist attacks in Mumbai remind investors that specific political risks in some emerging markets remain high. And now icing on the cake would be recent Sataym fraud which have raised issue on corporate governance practices, will also affect investor’s sentiments in time to come.
In summing up, long term prospects for emerging markets remain good, thanks to structural reforms and better macroeconomic policies over the past decade. In December the World Bank forecast that GDP per head in poorer countries would rise at an annual pace of 4.6% during 2010–15, similar to that during the past decade, and more than twice as fast as in the 1990s. Though investors have lost their sense of perspective on these markets but economic fundamentals of these economies are stronger and will be able to survive the global financial meltdown. Therefore there might be some recoup ling will be there in short term, but in longer term decoupling will bounce back.

Affinity between stock markets & GDP

Sensex reached a peak of 20,000 and felled like a pack of cards to 10,000. What do these numbers suggest about macroeconomic growth of a country? Whenever there is news regarding some inflation numbers, IIP numbers markets react, but does this really matter, is there any evidence to it? Let’s find out:

Keynesian thesis states that “stock market is a casino”. However he also agnize that stock markets enable people with money to invest together with people who can put that investment to productive use.

This is one of the ongoing debates, on relationship between stock markets and macroeconomic growth, which has led to many studies done by various economist, analyst and financial policymakers but still not much is concluded.
I can’t mention various studies done on this issue but ill be here putting up a brief summary, on core theme of this debate.

If we trace the period between 1995 -2004, the CAGR (compounded annual growth rate) of real GDP and the BSE sensex shows a high degree of correlation, while real GDP has grown at 6.1%, sensex has also posted similar gains. However if we analyze the data more deeply, year on year examination gives a different picture. The outcome of this examination shows that, though Real GDP has shown a steady growth under the period of study, BSE sensex has been very volatile during the entire period. On year –on- year basis there seems to be no sync between the 2 factors.

However if one tends to consider growth in nominal GDP and corporate performance at the top-level, there it seems to be high degree of correlation. This is on account of the fact that GDP is aggregate of output of agriculture, industrial and services sector.

If we look at the trend stock markets are not always guided by fundamentals but also by sentiments. For instance, lowering of interest rates by the RBI (like until 2004) typically has an impact on the economy with a lag. But the signal that the RBI is reducing interest rates may prop up stock markets immediately and stock prices may react much faster.

However in present period there is a bit change in the trend, this due to the fact that Indian Economy is now more integrated with global world than before. At worldwide level capital markets evince attributes of perfect market with no or acceptable entry barriers, large number of buyers and sellers, absence of, or very low, transaction costs, tax parity, and free trading.
To attract international investments, countries compete with each other and promote their capital markets with savvy sops and policy announcements. It is in fact a reality that no modern economy can exist without an efficient capital market. This is what have attracted international investors and in recent years have made India their favorite destination. Since our markets globally integrated if we look in recent time trends, for instance when November IIP numbers came positive, were unable to pick up the markets, however most of the times we get to hear that markets are beaten due to weak global cues , or any uncertain event at international level have an effect on our markets.

The crux of the issue is that economy goes through business cycles of recovery, boom, slowdown and recession. Stock market also moves on the similar pattern. For instance if India GDP grows at 10% in one year, the sensex may not gain similar percentage during the same year. However, the relationship may hold true over the longer-term. It may be stated that the state of the economy has a bearing on the share prices but the health of the stock market in the sense of a rising share price index is not reflective of an improvement in the health of the economy.
In summing up the basic purpose of all studies done is to find out relation between economic growth and stock markets. Though it can’t be neglected that stock market directions are based on fundamentals in long term, however these assumption may turn out to be dangerous for investors in short term. Therefore all analyst advice to go for investment in stocks with a long term view.