This is a time when the economic crisis had not yet hit the Russian economy fully and the world was yet to face the collapse Lehman and other large US institutions.  Commercial activities,  capital markets and trade were all chugging along. Clearly hope and change for a better future was writ large on the horizon.Then came the world financial crisis and great drop in oil prices.  Russian markets went into a major down ward spiral  impacting  the economy and also the hope for the future.

The recovery of 2009 particularly in the World capital markets to a great extent by-passed Russia and somehow even now this market is viewed with a significant amount of caution. Russia has tremendous growth potential, as penetration levels for most goods and services are well under half those in western Europe; mortgage penetration for example is 3 per cent of GDP and only 20 per cent of people have cars.

For those companies that have been able to seize the opportunity, the rewards have proven tremendous, and Russia now boasts the largest markets in Europe for mobile subscribers, beer and white goods. Meanwhile Russia is the world’s greatest repository of natural resources, and Russian companies are blessed with colossal amounts of commodities, valued at a fraction of their global peers.Lacking as it is in capital, Russia is a high return market, with returns on equity (ROE) before the crisis of nearly 20 per cent.

This has been one of the foundations for the superb performance over the last decade, when the Russian market was up eightfold, the best performer among major markets.Contrary to the various scare stories we have heard during the crisis, debt levels are low in Russia. Government debt and household debt are both under 10 per cent of GDP, bank loans to GDP are 39 per cent, and in the recent McKinsey study of the global credit bubble, Russia stands out for its extremely low level of total debt to GDP (71 per cent), half that of China and a quarter that of developed markets.

Consequently, Russia will not be held back by the deleveraging facing other markets.And into this relatively benign mix comes a catalyst that we believe will electrify the story in 2010 - disinflation. For the first time since the end of the Soviet Union, inflation has now fallen into single digits for an extended period. From 13 per cent in 2008, inflation fell to 9 per cent in 2009 and is currently running at about 6 per cent, where we think it will end the year.

The government will thus be able to continue to cut the cost of money, and we anticipate a further 150 basis points of rate cuts this year. All of this leads to growth: in 2010, GDP growth of at least 5 per cent is expected.The usual counter to a positive stance on Russia is to cite transparency, corporate governance, and corruption. On transparency, the environment has changed radically in the last few years, with Russian companies adopting international accounting standards and disclosure.

On corporate governance, a number of high-profile cases such as Mechel, Vimpelcom or Uralkali were favourably resolved over the last year; in a world of Madoffs and Enrons, Russia is perhaps no worse than its peers. Corruption remains a problem and a drag on growth, albeit an issue that the government is seeking to address.

Fears of a new cold war were always far-fetched given Russia’s new capitalist direction, and we are likely to see much less concern about this given a new government in Ukraine and more accommodating US policy.The main issue that should concern investors is the oil price, given that the rouble, government finances, and profits are heavily dependent upon this. Below $60 a barrel the market gets nervous, and more than $30 a barrel the whole macroeconomic framework looks fragile. This is the main tail risk.

They also have to be big enough to ensure that the government meets its commitment to cut the budget deficit from 12.7 per cent of gross domestic product to 2.8 per cent by the end of 2012. But even at the end of the adjustment period the debt to GDP ratio will still stand at 113 per cent, which is no smaller than it was in 2009. To bring the debt to GDP ratio level below 100 per cent, not to mention the 60 per cent level required by the Maastricht treaty, will require further adjustment over the coming decade. So the reform process that starts in 2010 should be sufficiently robust to ensure that Greece also reduces its debt burden substantially.

Today’s opportunity to transform the economy for good should not be missed as the country may not have another chance.To speed up and enhance the content of the reforms in the stability plan, there needs to be a bold new privatisation programme to unleash the economy’s potential. Much could be gained from further privatising an economy that is probably the last “Soviet style” economy in the developed world.The Greek state not only runs hospitals, universities and churches but also casinos, lotteries, hotels, marinas, ski resorts, trade fairs, exposition centres, ports, airports, water, electricity and natural gas companies, oil refineries, postal services, transport, banks, and insurance companies.

The state’s stake in listed companies on the Athens Stock Exchange is worth more than €9bn ($12.3bn). Real estate holdings in major state property-management companies are conservatively valued at more than €300bn and yet yield next to nothing.Privatisations, therefore, represent a huge untapped opportunity to re-establish discipline in public finances while, potentially, reducing public debt to more manageable levels.

The stability programme refers to privatisations as a potential source of funds of €2.5bn or 1 per cent of GDP in 2010, while doubling that amount over the period 2010-2012. Clearly, given the magnitude of state control in the economy, these figures are suboptimal and would mainly be achieved by selling government stakes in state enterprises through the stock exchange.However, what is required is a complete severing of the umbilical cord between the state and the economy.

If a wider privatisation programme was carried out, it has been estimated that the total raised could amount to as much as 10 percentage points of GDP - in other words equivalent to the amount by which the budget deficit needs to be cut between now and the end of 2012.Socialist governments in Greece have been credited in the past with the success of major stabilisation efforts.The current government has to outdo its predecessors because conditions are vastly different. The potential for success is clearly there. The task is Herculean for a government in a country with very low credibility.

The way out therefore is to opt for market-orientated additional reforms so that stabilisation comes with improved growth potential that will make implementing the three-year stabilisation programme fail-proof. It is not just about fiscal consolidation. It is about far-reaching reforms that will guarantee beyond doubt that the stability plan is implemented in a way that is credible for markets.

2)    Finance Ministry and the government, in general, did get adequate time to ponder over the economic and structural issues.

3)    The recently revealed GDP numbers indicate that economic growth is back on track.

4)    Post world economic crisis, India is in a unique position to move ahead at a rapid pace by removing the residual structural bottle-necks.

With the above backdrop in mind, we expect the following from the Budget :

1)    Calibrated and well thought measures for controlling inflation without affecting growth and the roadmap for gradual withdrawal of the stimulus package spread over the next 12 to 18 months period.

2)    Introduction of effective short term and long term measures to facilitate significant additional infrastructural investment by both domestic and foreign investors.

3)    Schemes for mobilization of domestic savings through appropriate PSUs for deployment in infrastructure.

4)    Concrete steps for taking agricultural growth to its next level, thereby providing necessary impetus for double digit GDP growth.

5)    Roadmap for completing the structural reform process through enactment / amendment of pension and insurance regulations.

6)    Roadmap for carrying out necessary reforms in the Labor Laws, Commodity Market Regulations (FCRA) etc.

7)    Clear roadmap for introduction of GST.

50% to 60% of total daily Indian equity exchange turnover comprises of trading in Nifty.  Singapore Exchange (SGX) also trades in Nifty and trading at Singapore starts much before the Indian capital markets open.  Foreign investors having access to SGX , take advantage of this early start and position themselves accordingly much before the Indian markets open.  Apart from this disadvantage for the domestic investors, the Indian capital markets lose this Nifty turnover which happens at SGX.  We need to harmonise the trading timings and remove this apparent handicap for the domestic investors.

International linkage and consequent price movements create both opportunity as well as risk which need to be managed on a 24×7 basis.  Indian markets close at 3.30 pm local time when the European markets are at full swing and US markets are yet to open.  The entire development in US and significant development during the day in Europe are not captured by the Indian markets.  These get factored in when Singapore markets open for trading.  Thus very frequently we find Indian markets opening with a significant gap which create huge risk management complication for domestic market participants.  Increasing trade timing both at the beginning and towards the end will enable Indian players to better manage their risk and not get caught unaware.

Domestic infrastructures in terms of banking systems are well equipped to handle incremental trading hours particularly an early start. There is no apparent fund transfer bottle-neck for starting early trading.  The infrastructure is already in place.  Its only a question of getting used to operating in global environment.  Sooner we do the same the better it is.

Return of the foreign investors was the most significant development in Indian capital market in 2009.  Post the significant withdrawal of funds by FIIs in 2008, they poured money in Indian markets once again in 2009.  Realisation that India is amongst the very few market in the world which offers significant growth opportunities in the near future, has made the FIIs re-look at India.   Relative positioning of India amongst other global markets as an investment destination has significantly improved.

For an investor with medium and long term outlook, the investment idea for 2010 will definitely be equity.  In this space the investor should buy fundamentally strong companies which are aligned with domestic economic development.

2009 has been year of significant turmoil in the international and domestic markets.  Indian Stock Market  Markets going down to 7000 – 8000 level (BSE index) and coming back from there to 16000 – 17000 level (BSE index) during the year has highlighted the need for patience and value investing.  Price of acquisition has become the topic of discussion.  This trait is very clearly visible during the recent IPOs where the investors refused to participate in over priced / fully priced issuances.

While studying the companies, investors started to look at cost efficiencies which is again a significant change from the earlier perspective. Indian Markets will continue to enjoy significant liquidity during the year 2010. Propelled by increasing domestic demand and incremental infrastructure spend will take the growth of GDP to double digits.  The Indian corporates focussed on meeting domestic demand, will prosper and will get re-rated. All these will lead to significant improvement in the capital market index levels.  The Indian capital market will cross the previous peak and scale newer heights.

Confused investors are seeking answers and searching for  appropriate asset classes for investment .  They are clinging on to gold.  With looming inflation in the horizon I don’t see any fault in this logic of buying or holding on to gold except the fact that the appreciation in gold may not be significant  in the near term considering the fact that it is already at record high.  But for long-term purposes gold will continue to remain an attractive investment avenue. Jim Rogers the renowned commodity bull recently mentioned ” I can’t say what will happen to Gold tomorrow..but if you ask me whether Gold will go up in the long term…I would say yes .”

Oil as an investment avenue is a bit complicated and at present avoidable  for the general investors. Inside every Oil bull beats the heart of a brooding pessimist. Crisis , turbulence & disasters enable Oil prices to shoot up.  Apart from demand/supply dynamics, geopolitical issues play a significant role in determining the price of oil. Geopolitical tensions around the world are currently showing signs of cooling down with more mature US policy response to the various issues. While the economies  of China, India and few other developing countries are on their recovery path, the same is not true for the European and US economies.  Subdued global economic activity depresses demand for oil and consequently  its prices. Popular belief that holding  oil as investment can act as a hedge against forthcoming increasing inflation will not hold true  unless & until economic activity around the world significantly picks up.

Thus, in spite of nervousness around the world regarding sharp rise in prices of Equity Shares over the last six months, investing in stocks will continue to remain attractive.This is specially true in case of India. During the boom of 2007, the rate differential  between the GDP growth of US, Western Europe and India was around 3-4 per cent, as India was growing at around 8 per cent, whereas these economies were growing at around 4-5 per cent. Conservatively India is expected to grow at around 6 -7 per cent during the next few years, whereas US and Western Europe will either show de-growth or grow marginally.  Thus the GDP rate differential  has only moved up to 6 per cent, making India more attractive as an investment destination.  India will continue to attract significant long-term FII fund inflows ensuring that there is ample liquidity in the market. Domestic savings will also continue to get channelised indirectly through the Mutual Funds & Insurance companies. The trick would be to identify the right sector and right company in these sectors.  With the economy growing at 6 – 7 per cent, and expected inflation of around 4-5 per cent, the nominal growth will be 10-11 per cent.  In such a scenario, the performing Indian companies will definitely provide a CAGR of around 15 per cent over the next 5 years.

It is also very important to remember the cardinal principle of investment…don’t try to time the market..be in the market for a time. Today’s stock market levels are much closer to the 2007-08 peak than the bottom of 2008-09 & in the short term market movements will be volatile &choppy. The world economic scenario is still not very rosy & liquidity levels may fluctuate wildly based on entry or exit of FIIs. However the medium to long term projection for Indian equity markets are very encouraging & Investors with similar time horizon should definitely look at equity investments for building their wealth.

( ** this is the transcript of the weekly column I write for Economic Times )

He had only a few hours to complete the formalities within the deadline. They made a few phone calls to his uncle in London and within 15 minutes they collected the money from the neighborhood Western Union outlet after the uncle remitted money from Britain to our small town in the outskirts of Kolkata.

Another shocking and quite different incident took place recently. My driver in Mumbai wanted to urgently send money to his wife in his native village in Bihar for some immediate need. The poor guy was running from pillar to post trying to figure out how to ensure that the funds reached his wife within 24 hours. Unfortunately, he cannot use money transfer agents as they cannot be used for domestic remittance.

Since his illiterate wife doesn’t have a bank account and the village where his family stays, in any case, doesn’t have a bank branch within 10 kilometers, he had no other option but to ask his family to borrow money from his village money lender at an exorbitant interest rate for a week. Ultimately, he remitted money through a postal money order and he is hoping that his money reaches his wife within seven days.

Financial inclusion is one of the main planks of India’s drive to wipe out poverty – equal to the efforts put in to build physical infrastructure. Government experts define the policy as the “delivery of financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups.” Officials estimate that more than half of Indian rural households - about 46 million homes – do not have access to credit.

“Inclusive growth demands providing financial services to this un-banked population.””

Two thirds of the country’s population doesn’t have a bank account and this situation is not expected to change dramatically in the near future. Inclusive growth demands providing financial services to this un-banked population.

The attempt by the government is now rightly moving towards using alternate non-banking channels to route financial services into the interiors of the country. As a part of this process it would be only appropriate if the domestic remittance market is opened to recognized money transfer agents who already are authorized to receive inward remittance from abroad.

In fact, it is quite paradoxical that a person sitting in India can receive remittance from anywhere else in the world but not from other locations in India. So a person in London can remit money to a person sitting in a remote village in Bihar by using the services of Reserve Bank of India-approved, private money transfer players, while a person sitting in Mumbai cannot do the same. The only option open to him is to use the postal department’s money order service and borrow in the meantime if necessary.

The problems in India’s rural sector are well documented and the lack of remittance services is but one of the many inequities that plague this part of the country and keep its inhabitants outside of mainstream finance

Consider some of the others.

About 72% of the country’s 1.14 billion people live in rural areas, yet agriculture produces only about 21% of gross domestic product, according to the World Bank. That leaves the majority of the population living off a small chunk of the economic pie. While the government has claimed it can end poverty by 2040, at present, more than 250 million Indians live on less than $1 a day.

Small and marginal farmers, with two hectares (five acres) of land or less, comprise three quarters of the nation’s farming households but own less than one quarter of its farmland. In the poorest states, such as Bihar, small and marginal farmers comprise about 96% of those working the land, according to industry experts.

A lack of transport and other infrastructure forces these farmers to sell their produce to village “aggregators,” the middlemen, at less than market value. With a better knowledge of prices than many of their poorly educated clientele, the middlemen dupe farmers into steep discounts. They also double up as money lenders, providing farmers with credit for seeds and equipment, often at crippling interest rates.

This is where micro-finance and non-bank financial companies can play a huge role so that financial inclusion reaches the remotest levels of the country and India can truly progress.

**** This article was originally published in The Wall Street Journal. http://online.wsj.com/article/SB125549894649484331.html

Confused investors are seeking answers and searching for  appropriate asset classes for investment .  They are clinging on to gold.  With looming inflation in the horizon I don’t see any fault in this logic of buying or holding on to gold except the fact that the appreciation in gold may not be significant  in the near term considering the fact that it is already at record high.  But for long-term purposes gold will continue to remain an attractive investment avenue. Jim Rogers the renowned commodity bull recently mentioned ” I can’t say what will happen to Gold tommorow..but if you ask me whether Gold will go up in the long term…I would say yes .”

Oil as an investment avenue is a bit complicated and at present avoidable for the general investors. Inside every Oil bull beats the heart of a brooding pessimist.Crisis , turbulence & disasters enable Oil prices to shoot up.  Apart from demand/supply dynamics, geopolitical issues play a significant role in determining the price of oil. Geopolitical tensions around the world are currently showing signs of cooling down with more mature US policy response to the various issues. While the economies  of China, India and few other developing countries are on their recovery path , the same is not true for the European and US economies.  Subdued global economic activity depresses demand for oil and consequently  its prices.  Popular belief that holding  oil as investment can act as a hedge against forthcoming increasing inflation will not hold true  unless & until economic activity around the world significantly picks up.

Thus, in spite of nervousness around the world regarding sharp rise in prices of Equity Shares over the last six months, investing in stocks will continue to remain attractive.This is specially true in case of India.  During the boom of 2007, the rate differential  between the GDP growth of US,Western Europe and India was around 3-4 per cent, as India was growing at around 8 per cent, whereas these economies were growing at around 4-5 per cent. Conservatively India is expected to grow at around 6 -7 per cent during the next few years, whereas US and Western Europe will either show de-growth or grow marginally.  Thus the GDP rate differential  has only moved up to 6 per cent, making India more attractive as an investment destination.  India will continue to attract significant long-term FII fund inflows ensuring that there is ample liquidity in the market. Domestic savings will also continue to get channelised indirectly through the Mutual Funds & Insurance companies. The trick would be to identify the right sector and right company in these sectors.  With the economy growing at 6 – 7 per cent, and expected inflation of around 4-5 per cent, the nominal growth will be 10-11 per cent.  In such a scenario, the performing Indian companies will definitely provide a CAGR of around 15 per cent over the next 5 years.

It is also very important to remember the cardinal principle of investment…don’t try to time the market..be in the market for a time. Today’s stock market levels are much closer to the 2007-08 peak than the bottom of 2008-09 & in the short term market movements will be volatile & choppy. The world economic scenario is still not very rosy & liquidity levels may fluctuate wildly based on entry or exit of FIIs. However the medium to long term projection for Indian eqity markets are very encouraging & Investors with similar time horizon should definitely look at equity investments for building their wealth.

Two third of the country’s population doesn’t have a Bank account and this situation is not expected to change dramatically in the near future.  Inclusive growth demands providing financial services to this un-banked population.  The attempt of the government is now rightly moving towards using alternate non-banking channels to route financial services into the interiors of the country.  As a part of this process it would be only appropriate if the domestic remittance market is opened to the recognised money transfer agents who in any case are authorised to receive inward remittance from abroad.  In fact it is quite paradoxical that a person sitting in India can receive remittance from anywhere else in the world but from other locations in India through this RBI approved private Money Transfer Agents.  So a person in London can remit money to a person sitting in a remote village in Bihar by using the services of private Money Transfer players, whereas a person sitting in Bombay cannot do the same and the only option open to him is to use the postal department’s Money Order service.

The government has claimed it can end poverty by 2040.  Presently, more than 250m Indians live on less than $1 a day. The problems in India’s rural sector are well documented.  About 72 per cent of the country’s 1.14bn people live in rural areas, yet agriculture produces only about 21 per cent of gross domestic product, according to the World Bank.  That leaves the majority of the population living off a small chunk of the economic pie. Small and marginal farmers, those with two hectares (five acres) of land or less, comprise three quarters of the nation’s farming households but own less than one-quarter of its farmland.  In the poorest states, such as Bihar, small and marginal farmers comprise about  96 per cent of those working the land, industry experts say. A lack of transport and other infrastructure forces farmers to sell their produce to village “aggregators”, the middlemen who take it to markets in nearby towns.  With a better knowledge of prices than many of their poorly educated clientele, the middlemen can dupe farmers into a steep discount.  They double up as money lenders, providing farmers with credit for seeds and equipment, often at crippling interest rates. Micro finance and NBFCs can play a huge role in this space. Of course a fully developed & integrated commodity market can also bring in all  the related services including collateral management , warehouse receipt financing etc to remove the funding bottlenecks.

1.        Are owned directly by a sovereign government.
2.        Are managed independently of other state financial institutions.
3.        Do not have predominant explicit pension obligations.
4.        Invest in a diverse set of financial asset classes in pursuit of economic returns.
5.        Have made a significant proportion of their investments internationally.

This definition would exclude Saudi Arabian Investment Authority (SAMA) for example, as it is a central bank.  However, many analysts do include SAMA among the SWFs because its foreign assets are invested in a much more diverse portfolio than most central banks.  The Norwegian Government Pension Fund – Global is also included in the SWF group despite the name, because it functions as an endowment fund, and has no explicit pension liability stream. The issue becomes even thornier when government funds start to raise external debt to finance acquisitions, as in the case of Mubadala  and a few other UAE-based funds, as in this case it is not just ‘sovereign’ wealth that is being invested.  A distinction also has to be made between funds that invest the nation’s wealth, such as Abu Dhabi Investment Authority, and those that invest the wealth of the ruler, such as Dubai International Capital.  The latter is not usually described as a SWF.

Although sovereign wealth funds (SWF) pursue higher risk-adjusted returns than traditional central banks, through a diversified portfolio of assets, their appetite for risk does vary.  More conservative funds include Saudi Arabian Investment Authority (SAMA), the Russian funds, and Kuwait’s General Reserve Fund.  These tend to focus on fixed income securities and deposits, with a relatively small equity exposure.  Most of the larger SWFs, including Abu Dhabi Investment Authority (ADIA), Norway’s Government Pension Fund – Global and Government of Singapore Investment Corporation are largely passive investors, managing diversified portfolio seeking higher returns than the conservative funds.  Their portfolios include a substantial proportion of equities, as well as exposure to private equity and other asset classes, such as real estate. Finally, strategic investors take more active stakes in companies they invest in than either of the above two groups.  These SWFs are typically quite small.  Dubai’s Istithmar, Abu Dhabi’s Mubadala, and Singapore’s Temasek Holding fall into this category.

During the last few years there has been huge concern & skepticism over investments by SWFs in foreign assets.Although the US has moderated its stance on acquisitions by Middle Eastern Investors and sovereign  wealth funds (SWF) post-financial crisis, some European countries, including France and Germany, remain wary of foreign SWFs buying stakes in what are seen to be ‘strategic’ assets and sectors of the economy.  Late last year, France announced the creation of its own state-owned fund to support companies of national strategic  importance, and Germany passed legislation allowing the government to review an prohibit a non-European Union company from acquiring more than 25 per cent of the voting rights in a German company.

To a large extent, this simply reflects the lack of information about how these funds are managed and what their investment objectives and strategies are.  Since the furore over the DP World deal in 2006, SWFs have made efforts to improve their transparency, disclosure and general public relations efforts.  At a meeting hosted by the International Monetary Fund (IMF) in May 2008, SWFs clarified that they have always invested “on the basis of economic and financial risk and return related considerations”, allaying fears of political motivations behind SWF acquisitions in the West.  An International Working Group of SWFs, led by Abu Dhabi Investment Authority (ADIA) and the IMF, was also established to put in writing a series of ‘best practices and principles’ that SWFs would strive to adopt voluntarily to improve their transparency and governance.  This code of conduct was published later last year and is known as the Santiago Principles.  Essentially, the Santiago address the need for greater accountability and disclosure of objective and fund strategies; a sound legal framework for the funds to operate within; improved governance structures and processes to ensure risk management and accountability; and prudent investment practices based on financial and economic risk and return.

Although increased transparency has benefits both for the SWFs and the recipient countries, there can be a cost in terms of the fund’s flexibility, which could compromise the SWFs returns – Norway’s oil fund, one of the most transparent, has on average achieved an annual return about 4 per cent since it was established, compared with an estimated average annual return of about 10 per cent for ADIA.  Nevertheless, there is evidence that many funds are making efforts to implement the Santiago Principles, particularly those relating to disclosure of investment objectives and strategies. Temasek recently revised its charter, downplaying its links to government policy or strategic interests, while China Investment Corporation published its first annual report in July 2009.  SWFs are also becoming involved in joint ventures, both with each other and with third parties, allaying fears in recipient countries of political motivation in investment decisions transaction.