Right Horizons Blog

Volatility in Global Forex Markets

2008-02-23T14:05:00.006+05:30

In the converging global economy, volatility has spread its tentacles beyond the equity markets to the Forex markets. Sophisticated forex market investors stumbled upon the fact of global volatility that got re-linked to various global factors like cross-country fund flows, exim trades, inflation rates, interest rates, industrial production growth rates and other socio-geographic factors that bear down forex co-movements.

Initially, the forex rate volatility was better contained within the G-3 economies-US, Japan and Germany, but later extended to G-10 countries whose currencies are traded most in the international exchanges. Exchange rate volatility not only affects the profit-seeking behaviors of currency traders, it also bows down on the productivity and profit margins of manufacturing enterprises that depend on export revenues. The macro-economic effects thus have far outreached in order to call in for monetary policy objectives from the regulators to extend support to those affected, in terms of export sops and duty cuts.

(Click Image)

It has been implicated that a sound domestic macroeconomic and monetary policy could diminish exchange rate volatility. However, market factors and capital flow dynamics drive exchange rate movements that may not be compromised in certain situations. Some of the recent forex misalignments are due to increased capital flow dynamics into the emerging markets and out of the developed markets, and fund flow thus triggers some factors of dynamic forex movements. $/¥ and $/€ have caught the glimpse of investors who foresee major gains in future spot prices and by also formulating the famous ‘carry trade’, where one borrow cheap (Japan) and invest in higher dollar ($) yielding assets.

The above chart depicts the forex movements of six countries tracking for a period of six months, from August 2007 till December end. Many questions remain unanswered and have become topics of great interest as to whether continued depreciation, as that happened in the case during the Asian Financial crisis 1997 leads to evolution of financial crisis, effect of exchange rate volatility on the economy, or does economic shocks always leads to a recession?

Sandy Chatterjee, Analyst
Right Horizons Research Desk

The Next Big Thing In the Market: e-Paper and e-books

2008-02-22T12:41:00.007+05:30

How about going to a beach enjoying the sun and the breeze with a virtual paper that downloads news data, novels or even articles via wireless network, yet small 'n flexible enough to fit into one's pocket?
It is there already in the markets thanks due to some miraculous breakthroughs in digital vision technology! PVI technologies and others like Sony are out in the market with the first of its kind- 'e-paper' or electronic paper based on active matrix display technology utilizing electrophoretic crystals or organic polymers (OLED) that is paper thin and could be read just as a newspaper. The concept is based on flexible e-paper display that produces bi-stable images with paper-like 180' degree glare free readability.

Bi-stable, meaning a device that draws power only if the image is refreshed, as opposed to the backlighting facility employed in LCD panels. Handheld e-reading devices have metamorphosed and evolved rapidly in the last decade from the first PDA's to the current e-papers. Organic light emmitting diode crystals are used to create full feature motion videos, high graphics-enable images with good resolution even under sunlight. These cousins of PDAs are both light, durable, unbreakable enabling digitization of conventional books.

E-paper can be used to read pages just like any other book, but without turning pages, with with future battery capabilities, each could survive about 7000 pages of readebility per charge. The technology behind e-paper is quite interesting and dates back to 1960's when Xerox took the first initiative to develope innovative display devices.

Technology Behind E-Paper:

Usually, electronic paper has two parts-electronic ink as a 'first plane' and ICs used to create patterns of texts and images as a 'backplane'. The older theory worked on the concept of ‘electro capillarity’ that works by moving colored liquids against a white background. Later, the term was changed to 'Electro wetting' as a widely applied theme. Organic TFT technology is implicated in this new version. E-paper structurally consists of thin sheets of plastic beads encapsulated in pockets of oil that are able to rotate freely within the plastic sheet when electricity is passed between them. In-turn, each hemispheres of a bead (ball) have a different color and charge assigned to them. When electric fields are applied by the backplane, beads rotate creating a two-colored pattern. Aggregations of thousands of similar beads are used to create simple texts or images based on electrical fields applied.

The limitations of these bi-chromal frontplane were that it lacked colors. As a result, electrophorectic front plane were developed to display multi-color texts and images. Millions of microcapsules of 100 microns (diameter of human hair) each filled with clear fluid (+ve white, and -ve black)were placed on the front plane and electric fields applied. When -ve field is applied, +ve white particles moved up to the top of the microcapsules appearing as white dots, while black particles settling down to remain hidden from view. Again, when +ve field is applied, black particles migrate upward to the top while white particles move to the bottom thus generating black text or picture. This same technology was somewhat modified to include colored crystals as Cholesteric Liquid Crystals (ChLCD), some spiral shaped liquid crystal molecules that can change orientations from horizontal to vertical positions and vice versa to produce multicolored effects when electricity is applied.

E-paper has a wide potential aplications within various domains for example, someday, we would be delivered e-newspapers instead of the one we have now, or e-displays and hoards up on the sky, or just wearable display screens on the front-back of our trousers or so! The Financial opportunity is huge considering the easiness and wide acceptability within the consumers domain.Commpanies like PVI, Taiwan, Sony, IBM, Phillips, Toshiba and Fuzitshu has already jumped into the business of Electronic paper R&D and marketability.

Sources: http://www.tfot.info/articles/1000/the-future-of-electronic-paper.html
http://64.202.120.86/upload/image/articles/2007/the-future-of-electronic-paper/cholesteric-liquid-crystal-.jpg
http://www.pvi.com.tw/index_en.php
Sandy Chatterjee, Analyst
Right Horizons Research Desk

2008-02-22T11:46:00.002+05:30

Pig shortage in China powers inflation -Telegraph .co.uk

By Mark Kleinman, in Hong Kong

A shortage of pigs and rising feed costs helped China's inflation index to its highest rate in more than a decade last month, raising the prospect of further interest rate hikes in the final quarter of the year.

Fore more, Read...

As previously last year we presented the acute food and pig shortages in China propelling the inflation level to a decade high, it seems that Beijing is fast exporting its inflation level outside China.

Read Our Analysis.....

Right Horizons Desk.

Dynamicity of the Capital Markets: Miracle Economies, Business Cycles and Others

2008-02-21T16:24:00.005+05:30

Investment Boom and Bust Cycles: The same old story!

On the backdrop of a robust economic growth driven by China and India’s powerful driving engine, Asia seems to have been the perfect ground boasting competitive yet broader economic reforms and thus have entered the phase of miracle economy. There have been an increased participation of foreign capitals as ‘private equity’ as well as from hedge funds who have brought in huge inflows into these markets. According to a recent IMF estimation, global growth have been forecasted around 4.8%-- from a 5.2% forecats earlier, and now down to 4.1% due to the ensuing slowdown in the US economy and the problems in the US housing markets.

The euro zone, with its 13 member nations are predicted to expand by 2.1% while the US could expand by only 1.9% instead of 2.8%. Where else, the Asian region is expected to grow by 6-6.5% on average taken for major Asian economies , i.e., China, India, Hong Kong, Taiwan, Korea, Thailand, Malaysia and Singapore.

The financial market turmoil has left the markets highly volatile and somewhat unstable. With the ‘Greenbacks’-(US $), further depreciating against the major currencies, particularly the euro, a rising euro and the Yuan pressure has caused a substantial widening of the US current account deficit to-6% of its GDP, above a 4% comfort zone.

Much of the causes of US current account deficit have been blamed on China due to its undervalued Yuan, which the country enjoy as an export incentive over other countries. China has recently increased its forex reserve to well above US $ 1 trillion, which resulted in trade
shortfall for the US.

Is the Dollar still dominating?

The US dollar’s dominant role as an international reserve currency seems to have been heading for a flack, as euro has recently emerged as a currency of choice among the forex markets due to its strong holding against the $. The Yuan (renminbi), has also gained critical importance due to its sustained pressure on the $ markets, the chief cause for calling China to revaluate its currency.

The euro appreciation, on the other hand has increased concern for the euro zone exporters, as exports have become costly relative to China, which means cheaper imports for the Chinese goods to the European markets and vice-versa. It is to be seen whether cheaper imports could contain the inflationary pressures in Europe, as well as a low interest rate scenario be possible in the near future. But the Yuan seems to have cast its spell on the euro zone besides the US, as such; one is likely to see if there could be any substantial trade deficits to follow from these regions too. Recent account points to this trade deficit as being 25% amounting to US $88 billion for the euro zone.

G-7 Summit and the Weforum 2008 On Global Economics and the Financial Markets

The G-7 Summit and the Weforum 2007 concentrated mainly on some of the problems and policy changes in the international capital markets. Among those were:

Soaring value of the euro
How to contain financial market turmoil
China’s revaluation of its Yuan (Renminbe)
China’s mounting trade surpluses
Yen appreciation and containing Japan’s deflationary phase
Risks in the international financial markets
Bank and financial institutions exposures to the current sub prime mortgage market collapse
How to contain further US $ depreciation
International Foreign exchange market stabilityCrude oil price shock and its global impact

How Much Strong is the US Dollar?

One would wonder about the US strong dollar policy adopted by the federal treasury behind the dollar’s debacle in the global forex markets, as a falling dollar may not sound favorable to the monetary policy makers. These factors, combined with undervalued Yuan have already disrupted the global exchange rate management as some countries are finding it difficult to remain pegged to US dollar. We have noticed some major currencies appreciate against the ($) dollar, such as Yen (¥), Indian Rupee, Euro (€) and the Thai Baht, by at least 7-10%, except the Chinese Yuan (renminbi) which moved only 0.75% in the past six months. One of the causes behind the falling dollar is diminishing importance of the ‘Greenback’ due to shifting of investors target toward the high growth emerging markets, Asia-Pacific, where the global investors see potentially higher return on investments (RoI) compared to the US markets/assets.

Some Concern For India and South East Asia: Inflation, Market and Currency Volatility!

On the Indian perspective, though the country has been doing perfectly well in containing inflation well under 4% as well as managing capital inflows, recent rise in peak crude oil price touching $100/brl brought-in inflationary pressures within the RBI horizon. RBI’s weekly statistical supplement (WSS) reported that India’s forex reserve jumped from $256.7 billion till 20th October to $287 bn in January 2008 . India has also gained a fair share of the global forex turnover with around $34 billion on average turnover on daily basis —that’s 0.9 % of the total share. Singapore and Hong Kong are the leaders in Asia (ex-Japan), with each about $231 and $175 billion, that’s 5.8% for Singapore and 4.4% for Hong Kong respectively. This naturally shows how the strength of the Indian capital and the growing 'Forex' market is gaining continuous momentum from overseas investors and FII.

The data released by Bloomberg points out to the fact that India, along with China are absorbing foreign funds more quickly than the rest of the Asian countries. The Bloomberg report also notes that the investor activity of private equities and hedge funds have increased considerably till last year in the Asia-Pacific region due to prevailing strong Asian currencies, low volatility and less risk aversion. But the exported credit market crisis from the USA changed the scenario somewhat equally replaced by high uncertainty and volatility. Truly, the dynamicity of the Asian capital and the equity markets has increased beyond expectation with new emerging economies like Vietnam, Thailand, Malaysia and Indonesia contributing to the economic successes within this turbulent times.

Sources: Bloomberg.com, Thompson, Moneymorning, FEER, FT and Economic Times

Sandy Chatterjee, Analyst

Right Horizons' Research Desk.

Oil Price Moderation: When will that happen?

2008-02-20T10:36:00.004+05:30

The Asian markets continued the downtrend on the event of the crude oil crossing the $100 per barrel mark for the first time in 2008. Markets weighted heavily on the current uncertainties and volatilities involving crude oil prices. Even on the backdrop of an US recession when analysts predicted the easing of off crude oil prices due to a potential low demand from the US, oil seems ride high on the financial streets with no sign of moderation.

Is Global Recession to Ease Oil Demand?

Demand pressures on oil prices are here to stay and there is a little chance of oil price moderation which is still trading above $95/brl. And, with higher oil prices on the horizon, upside risk to inflation forecast in US and emerging markets would weigh down on Fed policies and interest rates which the markets expect to ease the ongoing credit squeeze. Funding constraints of ongoing projects due to a recession could well affect crude oil prices and production demand easing in the world’s largest economy, the US. China, being the third biggest importer and the largest exporter could feel the pinch if export demand comes down the line. But is it also expected that a strong emerging markets growth in investment and consumption is likely to keep up the demand for oil and petroleum-products in 2008.

Petroleum (Oil) Sector Outlook:

Oil Exploration, Production and Output: Demand vs. Supply Story “It is estimated that the world liquid fuel consumption will increase from 83mn barrels per day in 2004 to 97mn barrels/pd 118mn barrels/pd in 2030”. (IEO Report). World crude oil prices are estimated to fluctuate between $38 on the lowest and $157 on the highest, according to IEO estimates. By 2030, OPEC is expected to produce 57mn barrels per day as against non-OPEC countries that would be producing around 61mn barrels/pd. In 2004, OPEC produced some 41% of global oil, below its high of 53% in 1973.

A price shift for crude oil is on the line but one is to notice whether it will be a demand induced or supply driven. As of January 1, 2007, proved world oil reserves, as reported by IEO, were estimated at 1,317 billion barrels. With this ever expanding demand and supply constraints in the global petrochemical industry, China, India and other Asian countries shed a strong outlook for the coming 2-3 years despite a threat of impending US recession. The global petroleum
industry is valued around $ 3.4 trilllion, with an annual growth rate of 4%. BRICS nations are poised to play a dominant role in global expansion of the refining industry due to increase in demand from the related client industries.

Capacity expansion of petrochemical plants and new investments for exploration and production projects are to keep the spirit of the petro- energy sector in both China and other countries. Global giants like Chevron, ConocoPhilips, CNPC, Shell, BP, Exxon and others have taken initiatives for further expansion of oil and gas pipeline network, thus providing a strong outlook for the petroleum producing countries.

Sources: IEO, Bloomberg, FT
Right Horizons' Research Desk

Banks under Economic and Financial Stress:

2008-02-16T15:44:00.005+05:30

Global Risk Scenarios:

The trends entailing the recent emerging markets outlook on the back-drop of an US economic slowdown could have substantial impact

on the growth sustenance of fast moving sectors like IT , Financial and banking in countries like China and India, as discussed in the recently concluded weforum in Davos, Switzerland. Many issues were discussed regarding economic growth, financial market turmoil, banking risks, climate change, exchange rate risk, International Trade, etc. The IMF in its recent speech has trimmed the world economic growth rate this year to less than 4 %( 3.9%), from a 4.5% forecast earlier.

Housing market slowdown in the US could trigger an widespread financial crisis if not well contained, a well-discussed topic in Davos, while the 'Team Bernanke' , and other Central Banks acting as a lender of last resort to prevent contagious defaults, has put on every effort to contain the crisis by following market trends and financial strains of the banking and financial sectors, did well to respond promptly by cutting Fed interest rates along with liquidity infusion subsequently to ease the credit market seizures. Several banks like Citi Bank, Merrill and other have seen erosion of their banking capitals due to disproportionate capital write-downs of more than $ 11 billion, related to their subprime ABS exposures. The figure on the top left shows the total asset backed securities outstanding for each category like credit cards, home equity etc., for the year 2006 and more to follow in 2007-08.

Banking risks, Capitalization and Inefficiency: Where they stand?

Regulators have recently taken up the initiative to scrutinize and scan the banking operations and the rating agencies that grade credit-enhanced papers as tradable asset backed securities. Regulators may consider the compensation structures of banks that take too much risk in the market. Banking restructuring in the line of Three pillars of Basel II have also been revisited as banking risks on the event of a financial crisis are considered up as top priority. As one might ask, what are the risks that banks face in these scenarios?

Banking systems have different risk scenarios. For example, beside Systemic risks, they are prone to Economic risks like;

Interest rate shocks
Forex movements
Loan loss (credit risks and credit obligations)
Stock price movements
Run-on-the bank due to contagious effect

Others risk factors like operational risks, information risk (proprietary info about financial engineering, confidential client data loss risk), default risk, inter-bank and market risks, Liquidity risks (Liability risks), idiosyncratic risks and risks stemming from financial linkages between banks. Banks may also be affected by business cycle shocks that may impact on a macroeconomic scale.

Need for Speedy Regulations:

Banking regulators and supervisors are placing more stress on market risk exposures on banks, since market leverage among investors plays an important role when things go the other way. Monitoring inter-bank liabilities within the whole banking system could be a better way to study rather than isolated cases of insolvency crisis. Regulators are wary about backing inter-bank credits with equity capitals, since loss in equity capitals could hamper banks loan repayment obligations. Moreover, effects of financial and economic shocks on the banking systems are looked upon since investment banks have a higher level of risky investment portfolio than other banks.

Image Source : The Bond Market Association

Rating Unsecured Securities that Creates Crisis!

2008-02-15T10:03:00.006+05:30

Global stock markets have become volatile since last year and the emerging markets are no such exceptions. Wide fluctuations in scrip’s prices and indices across the globe have created tough times for retail investors who find it difficult to 'time the markets' properly, carrying-in some huge losses on their part. Weak technical factors weighing heavily on the markets as indices saw their benchmarks battered below their support levels leaving investors in panic.

Institutional selling on emerging markets equities continued for the sixth week unabated, and FII's are reeling under domestic redemption pressures to cough up whatever profit they could make. Investors in US and other EU countries have left out their home bias in investment strategies and sought better asset classes outside their domains in the emerging markets. It is estimated that only 5% of US investors invested in emerging market equities, though emerging market returns outperformed their home benchmarks for the last ten years or so.

Where are the Risks: US or EMs?

But with these prospective returns comes the risk of emerging markets volatility since EMs are now much integrated with the developed stock markets and events originating in the US markets are easily spilled over to the emerging markets through contagion effects. And the same did happen on the aftermath of the 'subprime fiasco' with investment banks who earlier banked on these risky mortgage backed CDOs (collateralized debt obligations) have been 'writing down' these bad debts and facing huge losses, the event bearing down substantial effect on the stock exchanges across the platform.

Investors are up-in-arms with the rating agencies that grade securities and critics have called in for stricter regulatory norms and limiting roles of these rating agencies in pricing certain risky bonds and securities. The bull market run has been, according to some analysts, spoiled by the subprime debacle since it started defaulting in the US, and the following market volatility took over as news about mortgage defaults that have become the centre of this whole mess. It has been further reviewed that nearly $450 billion of bad debts are to be written-off this year, most of these by many big international investment banks.

Consumers in debt, Economies in strain

2008-02-04T12:59:00.001+05:30

Critical issues in global financial markets and the overall macroeconomics have been discussed in the ongoing WEFORUM in Davos, this year. Top policy makers and experts gathered at the forum to find solutions for the ailing US economy which is into a major recession since the housing trouble propped up last August, 2007. The Federal Reserve is trying its best to avert a major slowdown in the US economy by large cuts in short-term interest rates periodically, only to boost business and consumer confidence.

Knowing the potential impact of US recession on the global economy, particularly the major export dependent countries like China, India, Thailand, Japan and others, Fed's policy response are targeted to buffer the global economies in the event that the economy does not face a severe credit crunch. Severely stressed banking system in the US are prone to capital squeeze as the mortgage crisis revealed some major investment banks like Citi and Merrill Lynch 'writing off' subprime defaults from their balance sheets and downgrading value of assets.

Inflation Issue in Emerging Economies:

Issues revolving around high crude oil prices and inflationary threats of higher commodity prices have been the topics for much debate. Also, analysis of a threat to Chinese growth in the light of a global recession and ongoing inflationary pressure across the emerging markets are looked into. Managing food inflation in China, which rose to 9.1%, and in Vietnam-9% remains some challenging issues for Beijing and Hanoi? According to Bloomberg, consumer confidence in the US are down somewhat and unemployment rate hit the decade high 0f 6%. With recession shadowing on the streets, corporate sectors are worried about a possible impact on their profits.

How China can drive up Inflation globally?

It has been assumed by some analysts that, China might be exporting inflation outside and pass off the higher export costs onto the consumers, due to rising manufacturing costs, high food prices and higher attrition levels in China. With an ever increasing demand of commodities and fuels from China, raw commodity prices have started increasing substantially and meeting the demand seems to be the key factor presently. Companies are passing off this higher cost of production to the consumers, and the resultant increase in Chinese export prices could propel inflation further outside its domain.

A look into financing the US consumption:

US is still financing its consumption by credit, while savings are negative. It may be the likely option for US consumers whether to finance their consumption through credit or by income, since this would make the situation still worst. The Bush administration have considered lowering taxes to boost investments and cutting down government spending, but a recent announcement by Bush administration signalled a US$3 trillion spending plan, that may further deteriorate US budged deficit.( Yahoo news)

The Housing Trouble:

With falling housing prices and oversupply of homes and condos, commercial and residential property outlook face a grim situation. ‘Subprime fiasco' has resulted in increased defaults on US high-yield bonds and banks who have invested in these junks are facing the fire. The situation has be summed up somewhat like this:

"Homeowners defaulting on ARM repayment schedules (amortization), selling their remaining home equities, causing oversupply of houses and condos, falling demand in property and asset prices, slowdown in residential and commercial constructions, workers being laid down, and those workers stop spending, downgrading consumption sentiment paving the path to a full blown recession", The Moneyweek (adapted).

Impact of Consumption squeeze:

The consumption squeeze by laid-off workers could have severe impact on corporate sales and profit. And compounded with falling dollar driving up import costs, Americans and Europeans both are likely to cut down their 'Chinese shopping spree', since the dual effect of higher Chinese export prices and increasing import costs might strain the purse of consumers. It is likely to be seen how the systemic effects of Fed's monetary policy easing could anaesthetize the painful economy already battered by multitude of problems.

Sources: Moneyweek.com, Bloomberg.com, weforum.com(Davos)

Right Horizons Desk

Fed Trying to Hedge a Recession through Rate Cuts: Is India Well Balanced?

2008-01-30T16:58:00.000+05:30

'The pide-piper of the bull market'

Not all is well on the western frontier. The bull has turned its back on the event of a global contagion effect that spread from the valleys of the US to the plains of this part of the world. Countries reaped the harvest and the ‘bull’ season seams to be over. The fear of a US recession looms high on the eastern horizon that depends much on the US consumer markets has cast a ‘Halloween spell’ on the evolving economies on this hemisphere. While the US economy is heading toward a recession, the Fed is trying to hedge the same by simultaneous rate cuts to ease the credit squeeze and boost the economy and corporate sentiments. In this hour, how is India affected by these macro changes? What challenges does India face in the event of a full blown recession in the US? Could India insulate against one such?

At the recently concluded summit in Davos, at the World Economic Forum 2008, Union Commerce and Industry minister Mr. Kamal Nath quoted it is really difficult for India to decouple from the US economy, though we are not likely to face the heat on the same if there is true recession. Backed-up by strong economic growth and a booming domestic market and good fundamentals which is growing by 8-9% on average, India seems to be a little far from the downside risks to its economy. It should however be kept in mind that India is less export-dependent economy than its peers China, Japan and other who are likely to face the blunt if things go wrong. Domestic fundamentals and macro-economic indicators are quite strong to face-off a downturn. India has already positioned itself as one of the largest economy with a GDP of $1 trillion and as the fourth largest consumer market in the world, behind US, Japan and China. Development on every frontier is the cornerstone of this economic sustenance that India is likely to keep up.

How is India in a better position than others?

Interest rate seems to be driving the speed of the economy in every country as investors and corporate are more inclined to take cover under the central banks’ umbrella. Looking at China, whose economy is already overheated and risks burst, Beijing is trying its best to cool its overheated economy by subsequent rate hikes, the opposite trend US and other developed countries are following. The Bank of China (BoC) hiked bank lending rates and CRR seven times last year to cool off, without much affect. It is assumed that if the interest rate hikes are too fast, bubble will burst eventually eying a slowdown. And if the economic heat is not contained, bubble will burst leading to a huge stock market crash. It seems China is facing a double situation and a tough challenge where it needs to balance the growth without dampening it. India seems to be in a much favorable position as lending rates in India are quite high and it is time for RBI to follow the Fed footsteps to cut lending rates to ensure more investments and smoothen out credit channels.

Who is Chasing the Liquidity?

A question comes to our mind; is there too much liquidity chasing China, and somewhat less in India? Not really. According to EPFR, which tracks emerging market fund flow, India is still and likely to be the top destination for global investors, though FII's pulled out nearly $10.8bn from the EMs, money is going flow back once the valuations comes clear. It’s no doubt that India’s economy is overheated too, well destined to do best and but inflation indicators is well contained also. WPI is 5.38%, but with rising crude oil price is a cause of major inflationary pressure on the economy, and India likely to tide about the same. India also have a good savings rate, 32% one of the highest among the emerging markets, compared to negative savings rate in US and much less in China. Some part of this disposable income will eventually flow to the domestic markets either as investments or consumer spending. That makes sense there is no credit problem in India, in-fact, there is increase in credit demand according to RBI statistics.

India also do not have a subprime lending sector like the one in US that spelled trouble due to lax and easy lending procedures creating a housing bubble that burst in 2007 along with the ABS markets, engorging trouble for the global credit markets. Lending procedures are much stringent in India and as such, we are not going to face such a ‘prime’ trouble in our economy. But banks and financial institution, along with the RBI should be more careful about lending reforms and the interest rate, as low interest will boost borrowing in the real estate sector though the cost of borrowing will come down for the corporate sector.

It comes to one’s mind, what have they learned and how they have reacted to the financial downtrends that swept the globe. In the same breath, ironically, the economies and investment theories holed ground instantaneously once the markets crashed. The economic sustenance though, may not depend solely on the market performances, but they are closely linked to the overall health of the economy. And when the policies, ideas and implications go wrong, every economy has to pay a heavy burden on their growth fundamentals.

US Spending too much while saving none! Where is the balance?

Overspending that resulted people in the US end up in debt is neither acceptable, since it brings down inherent risks of being in debt. Today, an average American has more debt outstanding than what he is able to pay back, and most even have 12-13 credit obligations pending. And the US Fed ‘fed’ their appetites with more cheap credits with virtually no underwritings!

Conversely, Indians are more realistic when it comes to savings and spending. They usually save more than what they spend, and thus the Indian savings rate of 32% are among the highest in the emerging nations. China has a much less savings and US the least. In fact, US have negative savings rate that buried down for their being too much consumptive nature. Too much savings cut down spending and bring down consumption level, which may be detrimental for the economy. Low spending decreases expected revenues from sales and lowered sales make business to cut back production which decreases the total income earned by economy.

India is trying to push spending to boost the economy, but they tend to be more careful in maintaining the balance between savings and spending. Interest rate do affect the savings propensity as a very low interest rate as in Japan (0.50%) discourage savings as bank deposits on fixed-income instruments yield very low.

Dollar still falling;

The US assets have lost much of their shine. And with it, the $ followed the trend. The reigning dollar, though down but not out, eagerly waits to see if any (Euro or Yuan) that could replace it, holding more intrinsic value, to be fed by global demand.

Where is the Fiscal Prudence For US?

While the IMF went preaching to developing countries about fiscal prudence, it missed giving the same advice to the US Government. At hindsight, the pressure IMF put on the Indian Economy helped us pull up our socks and kept us conscious about Fiscal Prudence.

Trade Mismatch-Where and When it went wrong?

US is also facing a huge balance of payments crisis and trade deficits with virtually every emerging nations. US has been continuously running a trade deficit with China from 1985 onwards and the same deficit hit a record high of 763.6 billion US$ dollars in 2006, up from 716.7 billion in 2006.This might create a long-term problem for the US economy and this can already be seen with the depreciation in the $ (dollar). Continuing focus on spending without keeping a check on the Fiscal Deficit would create greater problems for the US economy in the future as they are likely to learn.

Happy Lending: Need to Pay-back?

Lending without financial underwritings played off heavily for the lender, mortgage lenders and financial institutions in the US. The Subprime lending category to less creditworthy borrowers led to the mortgage crisis when borrowers started defaulting on their loans when the interest rate adjusted. The loans were given on I/O and ARM basis that asked for very little credential and collaterals to hold against those loans. These ‘happy lending’ turned out to be soar when things went wrong.

Sometimes, Traditional Reforms Helps!

India, being more conservative on lending practices, have strict norms on commercial and personal borrowings, as thus would not face a situation like one in US. Hence, India will not be impacted in a major way. That said, the Central Banks and RBI are in close monitor to ascertain the credit demand, market liquidity, Inflation and interest rates, and the lending reforms that suits India's demand, and not to let go the things right out of the hand that fuelled subprime debacle in the US.

Right Horizons Research Desk

The Anatomy of the market crash!

2008-01-24T17:27:00.000+05:30

"Fed has given cover again."

Well, it was anticipated. Ben Bernanke did his best! But US is still on the 'Recession line': Markets falling heavily. The causes ? Manifold:

Fed's emergency surprised rate cut to cool the crying market was both welcomed yet remains an issue of much debate. It's like bailing out the troubled one's each time they got into one. But how long can the Fed really cushion the crumbling economy that foretells recession every moment? Asian markets were never immune to any such downturns neither did it decouple with the US economy. If there are others factors that triggered the crash and one needs to 'cut' deep into the grave to find the stones that turned the great wall of the Bull.

So what triggered market crash in India? Was it only a subprime? It's true that markets have re-coupled in recent times rather than decoupling-and economies have become much more bonded together. If subprime fall-out was there in US, unwinding of high-leveraged positions and clients failing to meet the margin calls proved to be a catalyst in the market fall in India. And there were those cunning FII's that actually started the sell-off. Well, it’s not the FII's fault nor are they running some charities here. They are to book some profits on their investments and that's all. It's also important to note that how a small sell-off (0.8%) of the total FII investments could trigger a huge crash the ones' we noticed on January 21 and 22nd.

BSE Sensex almost lost almost 30% of its market cap , that's around Rs.75 lakh crore got wiped out of the equity markets in last few trailing sessions. Current market fall eroded investor’s wealth, health and confidence too. Retail investor's suffered most as they could not bear the magnitude of the stock market crashes. Domestic Institutional Investors like MFs, PFs, and Insurance companies may have bought some, but they could not avert the waterfall. And now it seems that those companies raising funds through IPO issues getting dampened since before the crash, many IPO's actually saw huge oversubscriptions, but it might be really difficult for them to get a few times subscriptions behest they need to wait and revise expectations on their valuations. Corporate sector usually raise funds through equities, debts, rights or a combination of all.

A big market crash usually brings with it the wind of bearish telltale, a symptom of an economic slowdown or Banking liquidity crisis, the one we experienced during the last Asian Financial Crisis of 1997. But, considering the strong fundamentals of Indian companies and equally sustained growth story, the Indian economy which has a long way to go, analysts feel long-term investors need not worry about a recession in the US to hamper India's overall growth. Recent data from the RBI show there has been a strong credit demand and good corporate performances across the sector except the software which is down by 33% from last year. Many Indian companies may not imply GAAP procedure, yet it looks like that companies and Banks in India are in better shape than their peer ones in US, since we do not have subprime loan category in our portfolio as yet.

It time to ask: Should the US decouple itself from the emerging markets to avert a major recession? But it's neither acceptable nor desired since Asian economies (exports) are very much dependent on the US: the US consumers on the 'Cheaper imports". Yet US run trade deficits with all the major Asian economies, China being the largest. The debate will continue whether Greenspan's lose monetary policy may have seeded subprime plantations when the interest rate grounded. It is to be remembered that Greenspan actually pulled out the US economy out of the dot.com burst that went havoc.

And for sure, India and other emerging economies should also learn the lessons from the events to avert a ‘prime’ crisis in near future.

Subprime Ruling the Markets! Some Correlations between Hang Seng and BSE Sensex

2008-01-22T12:08:00.000+05:30

The markets continued their worst trends in recent times when the BSE plunged again by 10% after which trade was halted for 1 hr. The stock market bloodbath continued throughout Asia-pacific markets on global financial crisis and concerns of a severe credit crunch should the Fed and other Central banks come up with rescue efforts. In BSE, 10% market wide circuit filters were applied and trading halted temporarily.

Should the market bounce from here, one could expect a rise of 1200 points or more to make up for the investors loss on two accounts of subsequent tumbling. Volatility has taken control absolutely in the markets and overvaluation in the Indian equity market paid off, similar to other emerging markets like Hang Seng(Hong Kong). Hang Seng (lost 5.5%) and BSE (lost 7%) as both saw the worst times and both were down nearly by similar points, showing how correlations took part in these markets.

Both the markets have a high market cap/GDP ratio, and anything above 100% is a sign that the particular market might be overvalued. India's BSE m-cap/GDP ratio touched 173% in Dec 2007, well above comfort zone of 100%, according to Economic Times, and the prevailing recent events have brought down the overall market capitalization to Rs. 58, 73,000. Markets like Hong Kong, Singapore have ratios well over 200%, considered to be too overvalued.

It was during the dot.com era that US markets had a ratio of more than 150%, well above its average of 50%, and the same got corrected in 2001 dot.com burst that brought down the m-cap/GDP ratio by 63%, according to Economics Times Research. So, it might be concluded that this particular ratio might have played some roles in market corrections.

In BSE, the downfall was aggravated when margin calls were triggered. There was heavy distress selling on part of some brokers to cover off the positions. According to Duetshe bank, 'liquidity shortage and oversupply of stocks in some sectors' might have been the catalytic factor, besides the US economic slowdown.

FII's and retail investors lost around 16% in BSE and liquidity crisis, panic selling and FII pullouts replaced the once calm and most profiting exchange that saw a bull run for the last 4 months. In October 2007, the market fell 10% and trading was halted due to the participatory notes effect, and in May 2006, the marked dipped by more than 10%.

It seems that BSE Sensex is having a correction every year since 2006 till present. On the three above occasions, markets plummeted by 10% causing a trading halt. It seems that the volatility has increased in recent times and international markets have become more correlated, and a chance of decoupling effect seems to be remote.

Right Horizons Desk

For More, visit .........

A Total Bloodshed in the Global Stock Markets!

2008-01-21T14:43:00.000+05:30

We are already in the very late stages of a historic bull market! The decouple story has ended as markets globally followed bit and bytes of US subprime market collapse that reverberated in the financial markets.

The markets all over the world fell on account of the subprime mortgage market collapse that trigged the near end of 5 years 'Bull Run' in the global equity markets. Financial markets today have become more consumer driven as like US, and weathering an US slowdown now remains a big challenge for the global, particularly export dependent Asian economies.

Subprime has removed the stains out of the financial markets and the color is now more visible. Valuations will tend to matter more as some markets might see near 10% or more severe corrections this year. Though the consumer growth might have shifted from US to China, but US still remains the largest consumer driven financial market.

With stock markets tumbling and Wall Street in hay day, investors are left out in dismay about the true future risk/return of equity investments outlook in 2008. Analysts are up in action to find the cue and a safe haven for the investor communities to bring back their sentiments in the financial markets. It seems that their might be some damage control to repair Wall Street from the subprime effects in the coming.

Markets Crashed on the Financial Highway!

The Hang Seng fell about 1383 points, the BSE Sensex saw a 2000 points intra-day drop, a total bloodshed in the markets with the single largest ever fall in a day. Major loss of investor's wealth (more than US$100 billion in a single day)occurred in BSE Sensex 30, the highest since it started trading nearly two decades ago. BSE Sensex closed 1408 points (8% )down to 17605.37 points. Indian investors are nearly in total shock as it has been touted as one of the worst dip in BSE's trading history. At this moment, investors might have thought of real estates as their portfolio as a better option than equities! But the odds again speak. Its' the housing market trouble in the US that has brought global investors down to their knees. The question remains, will the market go down further or the clear valuation levels are out? Are emerging markets free of an impending global credit squeeze?

Stock markets globally are also reeling under the subprime spillover effects, as most markets continued their downtrends amidst corrections (Shanghai SCI 300 saw a big fall-266 points down) after US has unofficially slipped into a recession. The world's largest economy and the Wall Street are down with bears hunting the bulls at major exchanges in Asia-Pacific, Europe, and China and in the US. The drop has been quite a dramatic in some markets like Nikkie 225 that already lost 11% in 2007, and Hang Seng, BSE Sensex among the major losers today.

Consumer driven global financial markets are under severe correction which might have been overdue. The last global financial crisis was triggered in Asia, Thailand known to be as one of the worst crisis ever to have happened in the financial markets. Asian financial crisis in 1997 was mainly confined to Asian economies, and that too, among Thailand, Singapore, Malaysia, Indonesia, Korea and Hong Kong.

Exactly after ten years on, we face a similar crisis, but this event have its root in the US. In the last decade or so, Asian economies emerged as tigers with unprecedented growth in India, China and other Asia-Pacific countries. It seems that the consumer growth has shifted its base from the US to other countries, particularly China and India, the two fastest economies in the world.

What To look For as a Safe Haven? Why not go for the Alternatives?

Oil, Energy, tangible energy resources, Gold, Alternative energy resources, investments in energy efficiency projects, Clean technologies are the options left out mostly for a risk averse and savvy investors, and some of these companies are having strong fundamentals and long term goals.

Some Options for Investors:

Power and Natural Resources
Water Usage efficiency projects
Alternative Energy Technology
Natural Resources
Agri- products
Clean & Renewable Technology
Solar panel industry
Commodities & Uranium

It should be remembered that market prices tends to be volatile to news, as investor's risk appetites have also increased in recent times. Investors too, will be more defensive rather than aggressive on account of uncertainties surrounding the subprime debacle clouting the global stock markets.

To learn more about how to invest in real uncertainty, visit righthorizons.com

Right Horizons Research Desk

Subprime after-impact:Bumpy Ride Ahead?

2008-01-19T12:00:00.000+05:30

USA has ended the year 2007 with lot of uncertainties and on a negative note. It may not have been the best of the times for investors, but the market downturns have been cushioned by an equally good year in Asia. Year 2007 has been nightmare on account of the subprime breakdown and is touted to be the worst times for US financial institutions. Though 2007 earnings for the US were variable, when the subprime blew off in the summer of ’07, markets started to tumble and take the heat on. The subprime provided a perfect catalyst for an US recession to set in with global analysts sitting with fingers crisscrossed. It has been observed that there have been a consistent slowdown in US earnings growth since 2004, though the S&P 500 forward P/E ratio remained at 17x last year. US investor sentiments have been hit hard due to the subprime spill over as housing is already under recession and home prices are slated to remain weak this year. USA is still the largest economy in the world and consumers make up about 70% of the US GDP.

Subprime has revealed that there are some better out there!

Earnings growth in US financial sector was down by about -44% in the fourth quarter of 2007. Bigger financial institutions like Citi bank and Merrill Lynch have been writing off huge subprime backed losses as did Bear Sterns and others last year. Their balance sheets look poorer on account of their risky investments that they made in subprime backed bonds and assets. Overall, the year 2008 has started on a weak note and high volatility in the equity markets. Out of this chaos, Asian emerging markets like India and China have come out as most attractive investment destinations in the regional markets in 2007-08.

It is a natural phenomenon that markets usually overreacts to news. Market price movements are also correlated to their long term fundamentals and as such, bad news spilling over the markets usually creates volatility price movements. The impact of subprime has been one such catalyst to bring in price swings in stock markets across the globe. When we track the performances of regional equity markets in 2007, it reveals that MSCI Asia ex-Japan returned 60.9% from 2003-2006, and 29% in 2007. Overall, MSCI ex-Japan returned 107.6% from 2004-07 while US S&P 500 returned 13.3% overall, and -1.6% in 2007. These shows off the potent rippling effect that subprime can spell over the global equity markets, and how investors should take a more defensive positions in equity investments.

Market Evaluation after Subprime Fall-out:

Europe remains the cheap out of most equity markets with a P/E ratio of 15x. ECB(European Central Bank) forecast a GDP growth of 2% in 2008 as a cautious note to a possible subprime impact and US recession in 2008. The headline Inflation returned to 2.5% and there are certain possibilities that the Euro zone could face the heat of subprime and the cold of US meltdown. Challenges in Euro zone are mainly due to € appreciation (strengthening of euro) causing exports to become more expensive. Another factor is the rising food and oil prices putting up inflationary pressures on the Euro zone economies.

Moving to the mid-east, lower production by the OPEC, strong demand from India and China combined with supply constraint has pushed the price of oil higher up to nearly US$100/brl. Analysts expect to see a tighter oil market in 2008 on account of uncertainties revolving the oil market and crude oil productions growth rate. The mid east economies have been diversifying fast into other non-oil based industries, like infrastructure, Banking and Finance, entertainment cum logistics and aviation hub.

Developing Asian equities are stated to have P/E ratios of 15.2x and 13.8x in 2008-09. As half of the emerging markets are developing Asian economies, global investors tend to diversify into these markets. On earnings outlook, Asia-ex Japan equity funds having a P/E ratio of 16.7x is expected to grow by 15.7% and 11% in 2008-09 respectively. But, with appreciation of Asian currencies like SGD, Indian Rupee and Thai baht, it is hurting the export competitiveness of these countries. The good point to note is that these countries have stronger balance sheet and healthy forex reserves in contrast to the last Asian Financial Crisis in 1997-98. Economies that are heavy producers of electronics products, for example, Korea, Taiwan, China, Singapore, Thailand and Hong Kong that produce semiconductor chips and digital appliances are likely to be hit by a US slowdown. On event of the subprime impact, the ‘4 Asian Tigers’ are expected to slow down by 4.5 % in 2008, although Emerging Asia is likely to grow by 9.2% and 8.3% in 2008-08. Domestic spending, infrastructure boom and intra-Asian trade is expected to keep up the pace of economic expansion in the event of a more volatile and bumpy year for investors.

Sources:
Fundsupermart.com, Bloomberg.com, Investopedia.com

Right Horizons Research Desk

What 10 Things to look out for in 2008?

2008-01-17T10:29:00.000+05:30

Year 2007 had a lot of upswings and downturns that will go down the history. In a best effort to look forward, we seek 10 things to look for in 2008. Predictions are not easy to make, and our views might change with situations. One need not take it seriously just for the sake of predictions and how the financial markets will perform or events that might be in place in 2008, we provide our 10 best predictions to happen in 2008. We did not include political events and others into consideration:

1) Fed will cut more rate to cushion the markets from a liquidity pressure, interest rates may be down to 3.25%. With this, Central banks globally will follow the trend and will cut rates

2)Gold and its cousin silver to see the uptrend. For the first time in history, gold to reach quadruple figure of $1000 and above, and will remain volatile with swinging as wide as $50 intraday

3)After Subprime, it time for the credit card along with consumer bubble to burst that would have a far reaching impact on the financial systems. Emerging markets will probably see the opposite trend- credit and consumer boom

4)Higher energy cost will bear down on household income. Oil to touch $100 and higher sometime in 2008

5)Citigroup to be in more trouble, with its stock price to be affected and more subprime write-downs in the line. Banking and retail sectors to remain under pressure. Rebound in the financial sectors is likely late Q'08

6)More Banking defaults, lawsuits and bailouts to come around since more subprime loans to be written down, and one is still not clear how much exposures do these banks have.

7)Inflation will be a concern in both the emerging markets and the US, particularly in China, Vietnam, India, Brazil

8)Commodities to ride high and one is to look for corn, wheat, maize, potato and soybean. Wheat, having multiple utilities is the best gauze for inflation, and demand for bio fuels will shoot up prices of corn which is one of the ingredients. China will reign as the largest producer of potato. Meat prices likely to go up in purview of shortages

9)Markets to remain highly volatile. Severe corrections are overdue in Emerging markets, but markets to produce above historical average despite some big corrections. One should target better alphas and mitigate Beta risks as far as possible-more diversification. Valuations will matter and P/E ratios could be the key. China bubble to burst after the Olympics, but will rebound

10)US to taste a recession and the dollar after a short rebound to go down further and depreciate 9% more, as also housing to roll down and reach the bottom line.

Right Horizons Desk.

Excerpts and adapted from '10 best of 2008', Seeking Alpha.com

Global Markets Asset Returns-Don't let the volatility overshoot you!

2008-01-16T10:17:00.000+05:30

Analysis on the emerging market asset returns shows off sparkling figures and interesting features for the last 5-6 years. We all know how commodities are having a Spanish bull run for the last 5 consecutive years at a stretch, and how oil prices skyrocketed within a span of a year. And that's what odds for a surprise last year when the Subprime hit the market. The kind of hype subprime got, it seems like something's new has hit the markets, and most analysts were wary about how the subprime is performing! It has been a better within a worst last here, as many things are to be remembered, lest the subprime woes which investors do no like to face again this year. But odds may always win!

REIT's have defied the gravity for seven years till 2006 and lost -17% in 2007. Emerging markets assets performed better than the developed ones in terms of return, but have been more volatile however. Analysts have a view that bond markets will do better this year as investors are more concerned about the performances of high beta-asset classes-the emerging markets. But there are some structural long-term reasons for emerging market bullishness since developed market assets tends to be less attractive to international investors. The data shows how each of the asset classes performed within the last six years or so, and some correlations could be drawn on that bases. Emerging markets bond returns were highest in 2000, 'o3 and '06 when it gave 12.8%, 24.3% and 24.7% respectively. Emerging markets bond returned less in 2002 and '07 with 8.8% and 6.3%. US stocks returned a hopping 31.1% in 2003 after recovering from the dot com bubble bust, as they performed negative in 2000, '01 and '02. In contrast, emerging market stock returns were 51.6% in 2003, the highest till now, and subsequently gave 22.5% in '04, 30.5% in '05, 29.2% in '06 and 36.5% last year, according to Bloomberg. We notice that EM stocks performed remarkably for the last six years subsequently.

US bonds did better during the dot.com bust, with a return of 11.6% in 2000, 8.4% in'01, 10.3% in '02, that's 10% on average for three cumulative years. Data published by Bloomberg shows yields started falling from 2003, when it returned 4.1%, and 4.3% in '04, 2.5% in '05, 4.3% in '06 and rebounded to 7% in 2007. The only asset class that gave consistent returns along with EM stocks and commodities is the REIT sector, till it lost 17% in 2007. From this analysis and keeping in mind the subprime spill over, we can expect US stocks returns to rebound in 2008 at around 10-14% and commodities 14-18% as expected. REIT returns for the last 8 years have been around 20%, and we hope a re-bound in the REIT's sector this year. It is also true that assets that have performed their best till date are sometimes seen to lag in future. But the fear of a credit slowdown and US economic recession looms high on the horizons as analysts predict high volatility and uncertainty in 2008. Those who can hold their nerve and take a patient approach are likely to benefit, and there may be very few out there to reap out some real profit from this falling markets. The question of question is, where is the next best asset class? Where to diversify and mitigate market risks? And how fixed income is going to perform this year and should US slip into a recession, how the markets would react?

Continued next post....

Right Horizons Desk

Sources:Bloomberg, Thompsons

Dollar a big faller; Oil to roil and boil! And US & Japan ‘Submerging markets??’

2008-01-15T09:58:00.000+05:30

Source:Bloomberg & Moneyweek

Equity markets globally have turned highly volatile due to various factors that are often causing panic selling among investors. Falling dollar, volatile oil and bullion markets and surge in commodities prices have created opportunistic trading options for the investors, but in-turn might have increased market volatility. Alternate bouts of buying and selling have seen some indexes shooting high and crashing low in recent episodes. With fears of a US recession and continuous credit market worries, we have seen an upfront in risk aversion entailing demand in risk mitigation products. Emerging markets are trying their best to insulate themselves from a likely possible US downturn and the ongoing turmoil in the US economy fueled by subprime have affected domestic proceedings in some emerging markets, like India, China. And even after some market swinging, fundamental valuations do not appear to be cheap where investors might take some shelter. Year 2007 has seen the triumph of emerging markets over developed markets. In other words, we can say developed markets have nearly 'submerged' under the EM performances in the last few years. One data (above pic) from Bloomberg compiled by moneyweek.com shows the EM performances in 2007; In this scenario, one would ask ‘How well the emerging markets perform?’ Is it an indication of submerging economies bowing to high growth emerging markets? Do US investors need more international diversifications of their assets? What asset classes are the market gems? Where will the oil go and how about the commodities?

Commodities.

Gold. Yes, it’s a ‘gold rush’ again, but not in California this time. It’s a financial instrument based on bullion markets, the Gold exchange traded fund. With gold prices expected to touch US$950-1000/ounce this year due to falling US dollar, it’s a rush hour again for gold. One can invest in gold funds, G-ETFs, or simply buy gold. Gold is considered as a ‘safe haven’ for investors due to the weakening US economy and world currency (US$). Bullish trend is likely to continue this year on the back-drop of a weakening US$ and some investors see it as a good hedging instrument. The same story goes for Silver too, where ongoing weakness, high oil prices and fear of US slowdown is pushing silver prices higher. Platinum is also expected to do well within this parameter’s. Thus, one can interpret that gold and its cousin, Silver is moving on the unit track.

In the Indian scenario the Sebi has come up with liberalized platform for developing the onshore derivatives market in line with the increasing liquidity chasing the stock markets. Mini- contracts on the equity indexes and short-selling in mutual funds are likely to get a nod from the Sebi this year. Also, options on futures and bond indices, volatility trading, forex F&O and ETF products are already in the line. And with the REIT s to hit the market, may be next year or so, their will be more diversification options and financial instruments to trade upon. While FII’s are awaiting more clarifications from Sebi on PN notes and avenues to invest in India growth story, its likely that more money will be chasing the Indian hot stocks which the companies have good dividend payment track records, high growth story and better fundamentals. Indian markets are among few other emerging markets which are trading at a premium. Though till Nov.23, FII’s were the net sellers of Indian equities-Rs.173.40 crore, we saw buying spree by the domestic mutual funds and fund houses who, apart from their domestic exposure are looking for tie-ups with their foreign peers for raising offshore funds In 2007, sectors that performed well are the FMCG, Oil & Gas, PSU stocks among few. There is a tremendous growth prospect for the Indian banking industry which has been foraying for overseas expansion. Strategic planning of Indian banks to expand overseas and get business out of there is likely to drive in for some consolidations in the banking industry.

Japan has been a dismal performer in terms of equity market returns, with Nikkie-225 falling 11% in 2007, as against 5 year bull run. Sustaining deflation and Yen appreciation with falling asset prices and real estate dry-up did match the US subprime debacle and fear of a recession, as US economy might really face one such stagflation situation same as what Japan has been through. Though US and Japan, being the world's largest and second largest economy might see some rebound as market downturns can bring down valuation levels within purview, according to some analysts.

With growing demand for Brent and crude oil from China, India, Brazil and other fast growing economies, it seems that oil will boil and roil the markets, and any supply constraint could see the oil spiraling above US$110-120 in 2008, if oil price fails to moderate early this year, or if the dollar weakens further, say by another 5-7%.

Bull Market Run up- Go for International Diversification

2008-01-14T11:47:00.001+05:30

An average bull run usually lasts for about 3.5 yrs, which has been the trend in the global financial markets for the last five decades, only breaching this time when it crossed the 4th year mark, according to Investech Research. The breaking of this trend might give unusual opportunities to investors hitherto unknown, since last year was marred by subprime crisis pulling down markets globally. Investors, now more savvy and risk averse are looking for further diversifications to mitigate investment risks while targeting more returns out of their investments. According to some experts, the US stocks could rise 20-25% on the sixth year, as already battered stocks could reveal lower valuation levels due to their prolong exposure to subprime effect.

It was revealed that performances of dividend paying stocks fared better from their counterparts, the non-dividend paying ones for the last 10 years. And these dividend paying stocks are from companies which have a strong growth prospect, are already market leaders, and do counteract worst downturns in the stock markets. Investors in the US have already started diversifying their investment options into these emerging markets stocks and elsewhere the opportunities leveraged for. Year 2007 was been indeed a tough year for homebuilders, mortgage lenders and bankers in the US. And with falling US dollars and rising oil prices, it has made the situation worst. If one is to apportion her allocation out of a bundle of investment theories, she needs to look down the lane what happened last year, and what would be it like this year. Gold has been one such example, and with chance of dollar falling further, bullion markets may ride high, with gold price expected to touch US$1000/ounce (28.9 gms) in 2008.

International diversification of stocks is a better option in purview that the global infrastructure boom have already molded in shape, and is likely to be around a US$100 trillion industry, with modernizing world's waterpower resources and transportation to cost around US$40 trillion alone. Thus, there might be some profits from this infrastructure boom too. China, India and Africa are in the hotbed of infrastructure development, with other countries following the track. Global steel prices rose on this backdrop, and are likely to peak up in 2008 due to demand supply constraint. And, not to forget the natural resources industry that has already shown promising returns and a good prospect. The other one to look for is the non-cyclical industry that has consistently performed well in 2007 and is likely to do well this year, particularly in China and India.

Right Horizons Desk

Rising oil price taking Commodities for a ride!

2008-01-11T14:44:00.000+05:30

Rising oil price creating a global oil shock which is trading near $100/brl has been a much concern to the policy makers as benchmark prices for oil rose in all the major exchanges-West Texas Intermediate and the Nymex. Depreciating US$ has been much implicated as the cause of rising oil price besides other factors. High oil prices is also said to be affecting trade balances of some economies. The likely events driving oil price high are:

supply constraints
decreasing inventories in the US and elsewhere
lower OPEC's spare oil production capacity
Oil production shutdowns in some refineries due to bad weather conditions, hurricanes, typhoons
Middle-east crisis
Rising demand from EM's like China, India and non-co adjustability with effective supply trend(supply-shock)
Decrease in Global oil exploration activities
Lower output growth in oil producing countries

With decreasing inventories of oil in OECD countries and increased demand has created supply-demand imbalances in the oil sector. And with rising oil prices there have been a surge in non-fuel commodities prices since last year. Falling dollar contributed further to the problem as import costs rose considerably increasing the import bill. We have seen volatility in food and energy prices that contributed substantially to the equity market volatility in the EMs. Though there has not been any major effect of rising oil prices on the emerging economies till now, a continuous trend might prove otherwise in 2008. It is assumed that low-income oil importing countries and other small emerging nations might face the brunt with higher fuel costs affecting household budget.

Along with oil, we have seen commodities price bubble in 2007 which is not likely to moderate till Q2'08. Metal prices have also increased with Gold being one such, touching $850/ounce last year on the backdrop of a falling dollar. Other metals like lead and nickel have increased and steel prices touched new high in 2007. Growing food shortages in China propelled inflation to a record high of 7.1%, as pig meat shortages have been implicated as a cause of food price inflation. Wheat, Soya bean, milk and palm oil also rose with other food items like meat. As a result, this commodity price boom now has been favored as an alternative investment option or an alternative investment asset class.

Sources:Bloomberg, IMF, Rueters.

Financial Independence for Women:"How women stand out today in respect to Financial & Investment Planning?

2008-01-08T12:16:00.000+05:30

Women today plays a greater and ever increasing role in the society, be it within a family, or as an executive, a business women, working professional, a mother or a wife. With these, they also face a multitude of risks, whether financial or emotional. The need for being a financially more independent is the call of the day, and one cannot ignore the financial contingencies that women faces today in a more dynamically challenged society. And with this comes the requirements of sound financial planning taking into account the various risks that a women faces and hence, starting a step by step investment and financial planning is an absolute necessity. India, now shedding her age old traditions due to more economic and social liberalizations is going through fast transition into a more developed and responsible society.

The question is-How women stand out today? What are their needs and monetary requirements? How secure are they financially and emotionally and what are the financial risks they face?

In India, usually a daughter's marriage costs more than that of a son, and even after a successful marriage, there remains a chance of the marriage breaking up in the early years. The partially separated or divorced woman has to face serious financial contingencies if the back-up support is not adequate, or the family derived assets are not enough to meet the requirements. It even becomes more complex if the women have a child, and still wants to stay independent from her family, father, brother or her maiden house. It is on this context that a sound financial planning to become independent is required.

The Risks that women face in India are multitude:

Financial and social insecurity
Emotional risks due to lack of properly financing the cost of bieng independent, if not employed
Family squabble and separation
Medical & Health Risks
Child Support and Child education
Unequal Asset/Wealth Distribution
Lack of proper Insurance support
Asset Imbalance
Old age support

So what would a woman do to mitigate these risks? Simply start thinking about owning more and knowing what to do with her assets, money and other wealth, whether derived or earned and also 'Understanding' how to create wealth and increase her own financial strength. Women are playing more dynamic role in the society by taking brave, independent decisions to support their plans. But it is also true that they are less aware of increasing their wealth through various options available to men, like trading and market participation, as depicted by Mr. Anil Rego, CEO, Right Horizons. It’s unfortunate that dependent women, even today needs approvals for any proposed expenses that they might have planned for. And to fulfill these monetary or other requirements, every woman needs to have a safe-haven of 'wealth-basket'. Working women have become more independent in their choice of living standard and family planning, but how they fare in financial planning? Do they still rely on their spouse for investment decisions? Certainly, they have every right to ask 'what their money is doing and how much did it do?'

It seems they still follow the same age old traditional methods of saving into fixed-income low-yielding instruments. But there are various instruments that yield high dividends and have higher earnings possibility out there, like corporate bonds and others. So why not take a break? Do you know that owning a real estate can mitigate, empower and strengthen mental and financial security more than anything else? But real estates, though appreciates in value, are highly illiquid, and so, in time of urgent need, one needs to have more money in hand and into highly liquid assets like liquid mutual funds, FDs/CDs, gold or gold funds and even securities investments that are somewhat liquid and of course, some cash.

To see out that works out and the asset allocations read more of this……..below

Mumbai Dreams for a Shanghai Ride!

2008-01-07T11:56:00.000+05:30

Mumbai is a safer city for women to live in !
Behold, one single incident cannot be derived to say that Mumbai is not safe. The ugly face of Mumbai’s social morality toward women has taken shape when two NRI girls were molested by a mob on New Year’s Eve. Policy makers long boasted the idea of developing Mumbai as a Financial Center on the lines of Shanghai, lest the dark side that Mumbai they brought out. Shanghai has been considered a model to follow the footsteps of Chinese capitalism by Indian policy makers who think that one day, Mumbai will look very much like what Shanghai looks today. Indeed Mumbai is the financial center in India and it needs rapid infrastructure developments and civic ammenities to boost its image as an IFC in the South Asian Region. But being forefront of molestation is not the agenda for a better Mumbai! Most of the financial houses and the wealth of India are concentrated in Mumbai, but the crumbling infrastructure the recent incidents have marred the image yet again what Mumbaikar’s would have expected to compete somewhere near with Shanghai.

Shanghai
Mumbai
Shanghai
Shanghai Maglev

It is true that Shanghai scores better in every respect than Mumbai except the film industry. Shanghai also has the world’s first commercial Maglev operation, running nearly at a speed of 450km/hr on a 21 km stretch connecting the Pudong airport to the city. Recent developments in Shanghai have been tremendous with Pudong BD and commercial district being carved out off land reclamed from the sea. The Pudong skyline by Whangpou river is also one of the most beautiful glittering night views dazzling on the bund constantly competing with Hong Kong to reign as the Global Financial Center. Shanghai is also the world's busiest port. But Shanghai’s attitude to foreigner’s and desis have been remarkable, friendly and warm, in contrast to what we have noticed in Mumbai. But inspite of all these, Mumbai is a lovable city to live, enjoy the life and the breeze, the glamour world of Bollywood and much more. Mumbai is the commercial and entertainment capital of Asia, an is also one of the world's top 10 centers of commerce in terms of global financial flow, according to wikepedia. But all this efforts needs to be backed up by effective administration, good morality and sensibility. There were in fact some people who even tried to help the NRI girls from within the rowdy mob , showing off a contrasting humanitarian mindset amidst the shameful and barbarian act.

Some Facts comparing Mumbai to Shanghai:

Mumbai --
Pop. 19 million Area 603 sqkm Market Cap US$1.6 trillion (10th largest)
Transport - Suburban Rail, Bus, Auto,
Taxi etc.

Shanghai-- Pop. 16.7 million Area 6119 sqkm (Market Cap) US$2.38 trillion (5th Largest)
Transport-Bus lines,(One of the largest in the world with 1000 lines, Maglev, taxi, Metro .
Source-Wikipedia

In some ways, Shanghai is far ahead of Mumbai and in reality, it might be a difficult target for Mumbai to catch up or even compare itself with a city like Shenzhen or Singapore, lest not Shanghai or Hong Kong. Mumbai needs to score much better in terms of its urban infrastructure, public transport, civic utilities and moral ethics to come in line with Shanghai.

For More about Mumbai Molestation, Read.....

More about Shanghai...........

FII Investments to India- Indian Demand Story!

2008-01-07T11:26:00.000+05:30

With an ever increasing demand for Indian securities, investments through FII’s and sub brokers in Indian equity markets have led to the demand story for investments. India offers better returns than other emerging markets, the Sensex performing well even in the light of high volatility, climbing 57% in 2007. Due to sustained liberalization on the domestic frontier, foreign investors have found Indian markets as favorable choice of their investment destinations, besides China. The number of registered FII’s in India amount to 1,168 and their registered sub accounts around 3,500. Non-debt creating investments have increased which now constitute most of the private capital and FII investments in India, in contrast to debt creating investments in the early 90’s. FII’s have been investing through various overseas derivatives instruments and one such option has been Participatory Notes (PN), which have been under much review by market regulator Sebi. 2008 might see more liberalization of the capital account as an FII policy since more investors have turned to India for better performances, stability and a more mature capital market to invest.

Right Horizons' Desk
Source-Nj Funds

Inflation- A concern for Vietnam!

2008-01-03T11:26:00.000+05:30

Vietnam is one of the fastest growing economies in the Asia-Pacific region, with real GDP growing by 7.5% on average and a 8.5% growth in 2007. After the (CVP) Communist Party of Vietnam’s continuous economic and social reform programs that helped Vietnam to alleviate the poverty level in the country, the official poverty rate fell from 58% to less than 20% within a very short span. After Vietnams’ accession into the WTO and full restoration of diplomatic relation with the US back in 1995, Vietnam has become one of the trading partners of USA. The Vietnamese exports to the US are booming recently and this is a strong indication to the direction Vietnam is moving toward. Rapid rise of Inflation in 2007 hovering around 9% is a troublesome for this new economy which is valued around US$69 bn. Sustained inflation and rising oil prices are a big challenge to Vietnam’s economy, though now more effectively handled by the Vietnamese policy makers. The rising inflation in the emerging nations have been somewhat attributed to three factors besides other, globally-

· Rising food prices
· Crude oil price rise to USD100/brl
· Rise of Steel price globally

It is on this context that Vietnam risks economic sustenance, but analysts are positive about the continuous reforms that the Vietnamese CPV has undertaken. Recent fall in C/A deficit is an welcome sign as well as the growing forex reserves of around US$23 bn (IMF Estimates). The Vietnam Dong is trading around US$/16100 till now. Though the indicators look much positive, yet some factors like the bureaucracy and widespread rampant corruption has beleaguered Vietnam’s political parties image. The corruption perception index scored 2.6 for Vietnam, much less than the Asian average of 4.6, as measured by Transparency International.

Key Risks to the Vietnam Economy:

· US Economic slowdown
· High Inflation rate
· Rampant Bureaucracy and Corruption
· Strong Inflationary Pressure due to High Crude oil price
· Strong Competition from China
· Avian Flu

Key Positive Indicators

· Good Social and Economic Reforms undertaken by CPV
· Strong export growth
· Building of a logistics hub already underway
· No political risks
· Booming Exports
· Fall in C/A deficit
· Lowering down poverty rate
· Access to FTA

From Right Horizons' Desk

For More Read..............

Are We Facing a Recession?

2008-01-02T16:23:00.000+05:30

Global GDP Rate Year 2007 have seen economic expansions globally within all parameters like technology, financial services, IT revolutionand emergence of new smaller economies alongside one of the worst financial crisis to hit the sector, the US led subprime mortgage market collapse.

The New Year 2008 has arrived with new hopes and investment return goals amongst investors who have faced much challenges in the previous year confronted with market volatility and subprime related downturns eroding some of their investment returns. The performances of the global equity markets have been variable among the emerging markets and the US markets. The year 2007 has been marked by financial turmoil’s affecting stock markets globally, reducing returns, increase in interest rates and reserve ratio for banks, crude oil price shock, commodity and inflationary pressures, higher energy costs propelling inflation in China, Vietnam and elsewhere. A look at the global GDP trend gives an idea how economies grew in the last year.

Balancing higher food costs and meat shortage has been quite challenging for the Chinese central bank which raised interest rate thrice last year. In fact, according to Bloomberg,in China, inflation outstripped returns on bank savings prompting people to diversify into stock markets that created bubble and fuelled inflation and asset price rise further with the SCI-300 climbing 133% last year. China also became the largest contributor to global growth (15.6%) surpassing US (15.4%). But it also left Asian markets more vulnerable and prone to a global exports slowdown should the US face one such this year. Analysts have their fingers crossed and thoughts swinging whether we will face a global economic recession exported from the US, or a pseudo-slowdown that would brush close through the coastline. It seems to be that the markets will tend to be more volatile this year as widening credit market losses could swing the balance one way other. Asset allocation and portfolio diversification is going to gain much importance in lieu of market volatility. According to data published, average annual compounded return of American stock markets from 1926-2006 has been around 10%, and it’s the emerging markets that provided much gain and momentum to returns in the last two decades.

Recent account in Bloomberg about manufacturing growth slowing down in the Eurozone suggests that there has been some real concern about a global recession.

Right Horizons Desk.

Singapore's Economy showing signs of weakness

2008-01-02T16:12:00.000+05:30

Singapore’s economy grew by 6.1% in 2nd Q’07 on account of strong manufacturing sector performance and good external demand for semiconductor and hardware equipments. The recent efforts by the Singapore government to restructure Singapore’s economy into a more service driven sector has seen a lot of mega projects going underway, such as the Mega Integrated Entertainment Complex cum resort at the marina bay which will host some casinos and gaming resorts. Analysts forecast a five year GDP growth rate around 4.9- 5% based on external demand for electronics components, low inflation and a strong performing financial sector. Singapore $ has seen a modest appreciation which is trading around 1.52/US$, as against an 8% appreciation the previous year. Singapore’s rapid growth led by strong export and financial sector performance buffered the weaknesses in the electronics sector somewhat diversifying from the core component business activities. FDI flow to Singapore accounted for USD 20 billion in 2005 according to UNCTAD, compared to US$14.8 billion inflows in 2004.

Singapore has no natural resources and the whole city state is highly urbanized with one of the largest industrial base in Asia, the Jurong Industrial hub boasting around more than 3,000 companies and industries in the South East Asian belt. According to one recent poll by the WB and the IFC, Singapore has been voted as the most business friendly economy in the world. The government’ effort to promote the city-state as one of largest financial hub in Asia has met with success and there has a tremendous competition with its peer, Hong Kong, the largest financial hub in Asia ex-Japan. The service sector growth has been impressive with 8.4% y-o-y Q2’07 from 7.3% in last year. Singapore is the world’s 4th largest currency trading center. Singapore’s industrial production rate slowed down a little in electronics manufacturing sector, and effects of a moderating US economy could hurt the export sector further. One of the world’s largest oil refining and logistics centre and the second largest aviation hub in the world, Singapore is trying hard to counteract the global inflationary pressure that affected the city-state’s consumer price index. The electronics sector mainly thrives due to the North American/European orders of chip equipments and semiconductor related components. The government of Singapore has recently announced some tax-relief packages, which some analysts believe would turn government’s budget surplus into a deficit.
There has also been a rise in housing costs in Singapore after a prolonged housing price decline.

Key Risks to Singapore’s Economy:

· Global and US recession could slow down the export demand
· Rising Housing costs
· Inflationary Pressures
· Exchange rate fluctuation
· Weakening Electronics sector
· Lack of natural resources
· Strong competition from neighboring Malaysia and Hong Kong
· Avian Flu

Positive Indicators:

· Strong financial sector performance
· Strategic Location
· Economic diversification
· Sound and corruption free business environment
· Low Inflation
· Improving services sector growth
· Dominating Logistics hub

No entry load for direct MF investment, says Sebi

2008-01-02T15:57:00.000+05:30

Usually, when an investor invests in a MF scheme, a small percentage of the total money invested (called entry load) is deducted by the fund house. This goes into paying the distributor, agent or broker who got the investor into the scheme. Fund houses charge this entry load even if an investor comes into its schemes directly

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