New Bank Licenses
RBI Draft Guidelines
Rama Krishna Vadlamudi, HYDERABAD 29 August 2011
Reserve Bank of India has issued its Draft Guidelines for issue of new bank licenses in India in the private sector. In a circular issued on 29 August 2011, RBI has invited comments from various stakeholders. Final guidelines will be issued after receiving feedback from the public and subject to some amendments to the Banking Regulation Act.
RBI has been moving very cautiously with regard to issuing new bank licenses. In the last two decades, RBI has issued only 12 new bank licenses. It is of the opinion that its experience with the promoters of new private sector banks is not up to the mark. Another issue that is bothering the RBI is the corporate structure of the new banks as well as the existing banks. Now, banks have become financial conglomerates offering a bouquet of financial services, like, banking, insurance and broking – all under one roof. These services are coming under different regulators, like, SEBI, IRDA, stock exchanges, and PFRDA. The challenge for the RBI is to have a full regulatory control over these financial conglomerates and to sort our any differences among the regulators backed by strong legislation.
What are the salient features of the RBI’s Draft Guidelines?
Initial Capital: The minimum initial capital shall be Rs 500 crore
Eligible Promoters: Promoters should be resident Indians with a minimum successful track record of 10 years. Ownership and management should be different in the promoter group that owns the new bank. However, promoter groups which have 10 per cent or more income from real estate, construction or broking will not be eligible for the new bank license.
NBFCs: Existing Non-Banking Finance Companies can convert themselves into banks or apply for a new banking license
Corporate Structure: Promoters have to set up a wholly-owned non-operative holding company (NOHC). This NOHC will hold the new bank as well as other financial services companies, like, life insurance, general insurance and others.
Foreign holding: Total foreign holding from FDI, FIIs and NRIs cannot exceed 49 per cent of the total stake for the first five years. Currently, the total foreign shareholding in private sector banks cannot exceed 74 per cent of the paid-up capital.
Fifty per cent of directors in the bank’s board shall be independent
All applicants shall submit their business model to RBI while forwarding their applications
The new bank shall get itself listed on a stock exchange within two years
Minimum capital adequacy is 12 per cent for a minimum period of three years
The bank shall open at least 25 per cent branches in unbanked rural centres
How many licenses may be issued by RBI?
Many entities have been waiting in the wings for a banking license. However, RBI may issue a maximum of only five to ten licenses.
Who are the likely aspirants for the licenses?
The following entities/promoters may seek new bank licenses:
Tata group
Aditya Birla group (Kumar Mangalam Birla)
Bajaj Finserv (of Baja Auto)
Reliance Capital (of Anil Ambani)
L&T Finance Holdings (of Larsen & Toubro)
Mahindra & Mahindra
Sundaram Finance
IFCI Limited
SREI Finance
However, groups, like, Religare and IndiaBulls may not be eligible for the new bank license as RBI is not in favour of issuing bank licenses to promoter groups connected with construction, real estate or broking activities.
When are the new bank licenses likely to be issued by RBI?
RBI has issued only draft guidelines now and it will take another five to six months to issue final guidelines. Overall, it may take another one year from now for RBI to actually issue any new bank license.
What are the amendments needed for the Banking Regulation Act?
Before issuance of new bank licenses, RBI has stated that the following amendments, inter alia, are required before issuing any new bank license:
Removal of restriction of voting rights
Empowering RBI to supersede the Board of Directors of a bank so as to protect depositors’ interest; and
Facilitating consolidated supervision.
Who will benefit once new bank licenses are issued?
Banking is yet to see its full potential in India. New bank licenses will increase the reach of the banking in India. Banking services will increase in depth and variety. This may ultimately benefit the existing as well as new customers. Banking services play a pivotal role in a developing economy and may strengthen the financial services sector in India and thus increasing India’s national income.
What is the Background?
The Finance Minister made an announcement of issuing new bank licenses in his Union Budget speech in February 2010. Following the FM’s announcement, RBI released, on 11th August 2010, a discussion paper for issuing new bank licenses. These Draft Guidelines have now been issued after receiving various comments and suggestions from various parties and consultations with the Government of India.
Licenses for ten private sector banks were issued based on the RBI Guidelines of 1993. These banks, include, ICICI Bank, IDBI Bank (merged with IDBI Limited in 2005), HDFC Bank, IndusInd Bank, UTI Bank (now Axis Bank), Times Bank (merged with HDFC Bank in 2000), Global Trust Bank (merged with Oriental Bank of Commerce in 2004), and Centurion Bank (merged with HDFC Bank in 2008).
Licenses for another two private sector banks – Kotak Mahindra Bank and Yes Bank – were issued in 2003/2004 based on the RBI Guidelines of 2001.
Abbreviations: SEBI – Securities and Exchange Board of India, IRDA – Insurance Regulatory and Development Authority, PFRDA – Pension Fund Regulatory and Development Authority, FDI – Foreign Direct Investment, FII – Foreign Institutional Investor, and NRI – Non-Resident Indian.
Sources: RBI website
Disclaimer: The author’s views are personal. His views should not be construed as investment recommendation. Investors need to consult their certified financial adviser before making any investment decisions
For author’s articles on financial markets, just click:
www.scribd.com/vrk100
Monday 29 August 2011
Sunday 21 August 2011
Fact Is Stranger Than Fiction!-VRK100-21Aug2011
Follow @vrk100
The Terminal (2004)in an interesting movie directed by Steven Spielberg featuring Tom Hanks and Cahtherine Zeta-Jones in the lead roles. Tom Hanks finds himself stranded at the JFK International Airport, New York. He is not allowed into New York city by the airport security manager. The security manager tries every trick up his sleeve to send Tom Hanks back to his country. For every trick, Tom Hanks would respond by saying ‘I Wait,’ and refuses to go back home without visiting New York city. Investors seem to be in a similar mood and following his mantra:
“I Wait”
Of course, Tom Hanks’ long- wait would be fruitful at the end. I doubt whether equity investors would be benefited from their “waiting & watching” mode to buy good quality stocks. Investors who take more risk during the highly uncertain times are rewarded the best in markets. And we are going thro uncertain times now.
Global Investors are afraid of recession in the US and Europe. The same sentiment is echoed in India too with benchmark Sensex losing about four per cent for the week ended August 19. However, the benchmark indices do not truly represent the kind of pessimism and negativism that exists in the minds of Indian equity investors. Till a few weeks back, experts treated rising inflation as problem number one for India. However, fast changing developments have taken place and now people seem to be less worried about inflation. Our mindspace is now fully occupied by political controversies surrounding the ways of tackling India’s corruption. This means to say that corruption has now become India’s number one issue confronting the nation.
Business media loves stock market crashes. Newspaper editors seem to be fast running out of adjectives/epithets to use for headlines. In the last two weeks, they have already used up their repertoire of words – bloodbath, mayhem, massacre, butchery, carnage, slaughter, sea of red, stocks bludgeoned, distress sale, etc. What words will they use if markets fall further next week? It’s strange that the more educated we are the more we use primitive and tribal words signifying that ‘homo sapiens’ has not yet come out of the cave world!
Global cues
Some European nations and the US seem to be hurtling toward recession. There are concerns that the US is going the way of Japan – long-term decline. While the stock markets are going down the world over, the government bond prices are moving in the opposite direction. The price of the benchmark 10-year US Treasury security had gone up with its yield going down below 2 per cent for a brief period last week. This is the lowest yield for the benchmark 10-year US Treasury since the World War II. (Bond prices and yields move in opposite direction.). Standard & Poor’s has tried to calm the markets by telling that it is confident of France maintaining its AAA rating. Stocks are falling while gold and silver are going through the roof.
Gold price is the ultimate Fear Index
Gold price (in dollar terms) has gone up by around six per cent, while Sensex and Dow Jones have gone down by more than four per cent for the week ended August 19. World gold price is quoting at $1,850 per ounce while in India it is quoting at about Rs 28,000 per 10 gram. Gold seems to be the ultimate Fear Index. Investors are scared that paper currencies are in danger of becoming toilet paper! The high government debt in the US and eurozone is threatening the growth prospects of economic growth in the developed world. However, Indian investors may start selling their gold partially and switch their money to good quality Indian stocks gradually as part of risk management. Let us assume gold touches $2,500 per ounce and then it starts to fall. When everybody starts selling gold there will not be anyone left to buy your gold except Chinese central bank. Remember Tulip mania of 1600s?
Corruption and hypocrisy
We Indians are hypocritical about tackling corruption. Indira Gandhi famously (one can say notoriously) said, “Corruption is a global phenomenon.” It would be no exaggeration to say that corruption has touched every nook and corner of India. Corruption is entrenched in our minds. Everybody is affected by it. Some are positively, but the poor highly adversely. Strangely, the most corrupt in India keep their ill-gotten in gold and real estate! There are several businessmen and middle classes who love corruption. But, outwardly they maintain a façade of honesty. I think it’s time we admitted that we are corrupt. If we realize that we are corrupt, we can take up the cudgels against corruption sincerely and effectively. Realisation is the first thing in solving the problem. One fervently hopes that our lawmakers would find a way out of the deadlock through dialogue, debate, sagacity and statesmanship.
Indian markets
Indian equity investors seem to be concerned about the consequences of the prolonged agitation against the scourge of corruption. The controversy surrounding the arrest of Anna Hazare is not good for the country economically and politically. The earlier the crisis is resolved the better for us. Let us hope that serious and sincere action is taken by the Government to punish the guilty swiftly.
Reserve Bank of India has been repeatedly saying that it will not stop its fight against inflation despite global problems. RBI’s statements have not helped the markets.
It is wrong to look at narrow benchmark indices like, Sensex or Nifty. We need to look at broader indices, like, CNX 500 or BSE 200. Many mid-cap and small-cap stocks have fallen by more than 50 per cent in the last one month. It is too scary to see that highly volatile stocks, like, IVRCL, Lanco Infratech, HDIL, IDFC, Crompton Greaves, metal stocks falling like nine pins in a matter of one or two weeks. Even a heavyweight like, Tata Motors, has fallen by around 50 per cent since its peak of Rs 1,390 in November 2010. As a result, investors’ individual portfolios’ are showing negative returns of between 25 and 40 per cent in just one month.
My take on Indian Equities
We watch motorists walking free after spectacular crashes and burning flames in motor races. The motorist comes out unscathed because:
--- the race cars are designed keeping safety in mind
--- the race car drivers wear helmets, seatbelts and other safety equipment, and
--- quick help is at hand to rescue the drivers from accidents
Unfortunately, we investors do not follow such time-tested risk management practices in equity markets and we end up losing badly in stock market crashes. If we lose money in stock market, nobody will come and mitigate our losses! Our own misconceptions and misdeeds are responsible for our losses and we should not blame markets for our self-made losses. The simple rules for risk management are: diversification (but not over-diversification), good asset allocation, not borrowing money to invest in stocks, keeping winners and selling losers and buying only what we know.
It’s foolhardy to think that we are so intelligent that we can pick up stocks at rock bottom. The probability of our finding stocks at abysmal levels is extremely remote. Hence, the best strategy for common investors is to pick up fundamentally good quality stocks even as the Sensex has fallen by 20 per cent year-to-date to the current level of 16,150. The assumption here is that common investors are having surplus cash on hand and have the risk appetite to invest in stocks, which are one of the highly risky asset classes.
Don’t sell if you are holding good stocks, like, Bharti Airtel, Bajaj Auto, Power Grid, Hero MotoCorp, L&T, Tata Steel, BHEL, TCS, Infosys, M&M, HDFC, HDFC Bank, etc., unless you are badly in need of money. Likewise, you better stick to your companies with good pricing power: Asian Paints, Pidilite Industries, Exide, Amara Raja Batteries, Nestle, Bosch and others. There are several mid-cap companies with reasonable valuation, like, Unichem Laboratories, Maharashtra Seamless, IDFC, Coromandel International and Biocon. One needs lot of patience and total portfolio approach here. These companies have weathered many a storm and are likely to do well in uncertain and difficult times. Investors can consider investments, in a staggered manner, in good equity mutual funds, like, HDFC Top 200, Quantum Long-term Equity, Franklin India Bluechip, Canara Robeco Equity Diversified, HDFC Prudence, DSPBR Top 100 Equity, Fidelity Equity, Reliance Regular Savings Equity, Sundaram Select Midcap and exchange-traded funds, like, Benchmark Nifty and Benchmark Junior Nifty.
India’s finance minister says that the he would not be in a position to sell government stake in public sector undertakings due to stock market crash. If the government is unable to proceed with its disinvestment programme, it would further weaken the precarious fiscal situation as India is grappling with rising fiscal deficit. It will have repercussions for the government bond market.
After Sensex has fallen from 19,000 to 16,000, it’s very easy to predict that it will come down further to 15,000 or 13,000. As is well-known, stock markets go up or come down very sharply and in no time. At any point of time, we cannot rule out markets falling by 10 to 15 per cent in matter of a few weeks as there are real doubts about Indian economy growing at a respectable and reasonable rate of eight per cent annually.
For many investors, stocks look more attractive at 21,000-Sensex than at 16,000-Sensex!
Fact is stranger than fiction, do you agree?
Important Data:
Disclaimer: The author’s views are personal. He has a vested interest in the stock markets and his views should be taken with a pinch of salt. He may change his views very fast without any notice depending on the market and economic conditions. His views should not be construed as investment recommendation. Investors need to consult their certified financial adviser before making any investment decisions.
For author’s articles on financial markets, just click:
www.scribd.com/vrk100
or,
http://www.ramakrishnavadlamudi.blogspot.com/
The Terminal (2004)in an interesting movie directed by Steven Spielberg featuring Tom Hanks and Cahtherine Zeta-Jones in the lead roles. Tom Hanks finds himself stranded at the JFK International Airport, New York. He is not allowed into New York city by the airport security manager. The security manager tries every trick up his sleeve to send Tom Hanks back to his country. For every trick, Tom Hanks would respond by saying ‘I Wait,’ and refuses to go back home without visiting New York city. Investors seem to be in a similar mood and following his mantra:
“I Wait”
Of course, Tom Hanks’ long- wait would be fruitful at the end. I doubt whether equity investors would be benefited from their “waiting & watching” mode to buy good quality stocks. Investors who take more risk during the highly uncertain times are rewarded the best in markets. And we are going thro uncertain times now.
Global Investors are afraid of recession in the US and Europe. The same sentiment is echoed in India too with benchmark Sensex losing about four per cent for the week ended August 19. However, the benchmark indices do not truly represent the kind of pessimism and negativism that exists in the minds of Indian equity investors. Till a few weeks back, experts treated rising inflation as problem number one for India. However, fast changing developments have taken place and now people seem to be less worried about inflation. Our mindspace is now fully occupied by political controversies surrounding the ways of tackling India’s corruption. This means to say that corruption has now become India’s number one issue confronting the nation.
Business media loves stock market crashes. Newspaper editors seem to be fast running out of adjectives/epithets to use for headlines. In the last two weeks, they have already used up their repertoire of words – bloodbath, mayhem, massacre, butchery, carnage, slaughter, sea of red, stocks bludgeoned, distress sale, etc. What words will they use if markets fall further next week? It’s strange that the more educated we are the more we use primitive and tribal words signifying that ‘homo sapiens’ has not yet come out of the cave world!
Global cues
Some European nations and the US seem to be hurtling toward recession. There are concerns that the US is going the way of Japan – long-term decline. While the stock markets are going down the world over, the government bond prices are moving in the opposite direction. The price of the benchmark 10-year US Treasury security had gone up with its yield going down below 2 per cent for a brief period last week. This is the lowest yield for the benchmark 10-year US Treasury since the World War II. (Bond prices and yields move in opposite direction.). Standard & Poor’s has tried to calm the markets by telling that it is confident of France maintaining its AAA rating. Stocks are falling while gold and silver are going through the roof.
Gold price is the ultimate Fear Index
Gold price (in dollar terms) has gone up by around six per cent, while Sensex and Dow Jones have gone down by more than four per cent for the week ended August 19. World gold price is quoting at $1,850 per ounce while in India it is quoting at about Rs 28,000 per 10 gram. Gold seems to be the ultimate Fear Index. Investors are scared that paper currencies are in danger of becoming toilet paper! The high government debt in the US and eurozone is threatening the growth prospects of economic growth in the developed world. However, Indian investors may start selling their gold partially and switch their money to good quality Indian stocks gradually as part of risk management. Let us assume gold touches $2,500 per ounce and then it starts to fall. When everybody starts selling gold there will not be anyone left to buy your gold except Chinese central bank. Remember Tulip mania of 1600s?
Corruption and hypocrisy
We Indians are hypocritical about tackling corruption. Indira Gandhi famously (one can say notoriously) said, “Corruption is a global phenomenon.” It would be no exaggeration to say that corruption has touched every nook and corner of India. Corruption is entrenched in our minds. Everybody is affected by it. Some are positively, but the poor highly adversely. Strangely, the most corrupt in India keep their ill-gotten in gold and real estate! There are several businessmen and middle classes who love corruption. But, outwardly they maintain a façade of honesty. I think it’s time we admitted that we are corrupt. If we realize that we are corrupt, we can take up the cudgels against corruption sincerely and effectively. Realisation is the first thing in solving the problem. One fervently hopes that our lawmakers would find a way out of the deadlock through dialogue, debate, sagacity and statesmanship.
Indian markets
Indian equity investors seem to be concerned about the consequences of the prolonged agitation against the scourge of corruption. The controversy surrounding the arrest of Anna Hazare is not good for the country economically and politically. The earlier the crisis is resolved the better for us. Let us hope that serious and sincere action is taken by the Government to punish the guilty swiftly.
Reserve Bank of India has been repeatedly saying that it will not stop its fight against inflation despite global problems. RBI’s statements have not helped the markets.
It is wrong to look at narrow benchmark indices like, Sensex or Nifty. We need to look at broader indices, like, CNX 500 or BSE 200. Many mid-cap and small-cap stocks have fallen by more than 50 per cent in the last one month. It is too scary to see that highly volatile stocks, like, IVRCL, Lanco Infratech, HDIL, IDFC, Crompton Greaves, metal stocks falling like nine pins in a matter of one or two weeks. Even a heavyweight like, Tata Motors, has fallen by around 50 per cent since its peak of Rs 1,390 in November 2010. As a result, investors’ individual portfolios’ are showing negative returns of between 25 and 40 per cent in just one month.
My take on Indian Equities
We watch motorists walking free after spectacular crashes and burning flames in motor races. The motorist comes out unscathed because:
--- the race cars are designed keeping safety in mind
--- the race car drivers wear helmets, seatbelts and other safety equipment, and
--- quick help is at hand to rescue the drivers from accidents
Unfortunately, we investors do not follow such time-tested risk management practices in equity markets and we end up losing badly in stock market crashes. If we lose money in stock market, nobody will come and mitigate our losses! Our own misconceptions and misdeeds are responsible for our losses and we should not blame markets for our self-made losses. The simple rules for risk management are: diversification (but not over-diversification), good asset allocation, not borrowing money to invest in stocks, keeping winners and selling losers and buying only what we know.
It’s foolhardy to think that we are so intelligent that we can pick up stocks at rock bottom. The probability of our finding stocks at abysmal levels is extremely remote. Hence, the best strategy for common investors is to pick up fundamentally good quality stocks even as the Sensex has fallen by 20 per cent year-to-date to the current level of 16,150. The assumption here is that common investors are having surplus cash on hand and have the risk appetite to invest in stocks, which are one of the highly risky asset classes.
Don’t sell if you are holding good stocks, like, Bharti Airtel, Bajaj Auto, Power Grid, Hero MotoCorp, L&T, Tata Steel, BHEL, TCS, Infosys, M&M, HDFC, HDFC Bank, etc., unless you are badly in need of money. Likewise, you better stick to your companies with good pricing power: Asian Paints, Pidilite Industries, Exide, Amara Raja Batteries, Nestle, Bosch and others. There are several mid-cap companies with reasonable valuation, like, Unichem Laboratories, Maharashtra Seamless, IDFC, Coromandel International and Biocon. One needs lot of patience and total portfolio approach here. These companies have weathered many a storm and are likely to do well in uncertain and difficult times. Investors can consider investments, in a staggered manner, in good equity mutual funds, like, HDFC Top 200, Quantum Long-term Equity, Franklin India Bluechip, Canara Robeco Equity Diversified, HDFC Prudence, DSPBR Top 100 Equity, Fidelity Equity, Reliance Regular Savings Equity, Sundaram Select Midcap and exchange-traded funds, like, Benchmark Nifty and Benchmark Junior Nifty.
India’s finance minister says that the he would not be in a position to sell government stake in public sector undertakings due to stock market crash. If the government is unable to proceed with its disinvestment programme, it would further weaken the precarious fiscal situation as India is grappling with rising fiscal deficit. It will have repercussions for the government bond market.
After Sensex has fallen from 19,000 to 16,000, it’s very easy to predict that it will come down further to 15,000 or 13,000. As is well-known, stock markets go up or come down very sharply and in no time. At any point of time, we cannot rule out markets falling by 10 to 15 per cent in matter of a few weeks as there are real doubts about Indian economy growing at a respectable and reasonable rate of eight per cent annually.
For many investors, stocks look more attractive at 21,000-Sensex than at 16,000-Sensex!
Fact is stranger than fiction, do you agree?
Important Data:
Disclaimer: The author’s views are personal. He has a vested interest in the stock markets and his views should be taken with a pinch of salt. He may change his views very fast without any notice depending on the market and economic conditions. His views should not be construed as investment recommendation. Investors need to consult their certified financial adviser before making any investment decisions.
For author’s articles on financial markets, just click:
www.scribd.com/vrk100
or,
http://www.ramakrishnavadlamudi.blogspot.com/
Friday 19 August 2011
Market Outlook-VRK100-12Aug2011
Market Outlook
Rama Krishna Vadlamudi, HYDERABAD 12 August 2011
Stock markets are inherently volatile. But, they have been subjected to some extreme volatility since the beginning of August 2011. Various factors have contributed to these wild fluctuations. First, it was the controversy between the US president and the Congress about solving the debt deal. Afterwards, the global markets have fallen heavily following concerns about sovereign debt crisis spreading to other eurozone countries, like Italy and Spain. Even commodities have fallen sharply while gold prices are surging relentlessly. The final blow came when the Standard and Poor’s has downgraded the US long term debt rating by one notch from AAA to AA+ after the markets in the US closed on August 5th. Here is an analysis of the global markets with an emphasis on Indian markets between August 1st and August 12th.
To know all about the S&P’s US Debt Downgrade and Its Impact, just click:
http://ramakrishnavadlamudi.blogspot.com/2011/08/us-debt-downgrade-and-its-impact-vrk100.html
or,
http://www.scribd.com/doc/62314269
The news flow was too much for the financial markets to absorb. Investors are at a loss to understand what’s going on. They are reacting very wildly due to panic. There are some concerns in the currency markets also. Stock prices across the world, right from Dow Jones to Dax, Cac, Hang Seng and Nikkei, are all over the place. Countries, other than the US and in eurozone, are worried about the appreciation of their domestic currencies against the US dollar. Investors are selling their dollar assets and moving to other currencies, like, the Japanese Yen and the Swiss Franc on concerns about the bloating US government debt. Japan intervened in the foreign exchange markets on August 4th to prevent the appreciation of Yen against the US dollar. The Swiss National Bank, the country’s central bank, cut interest rates with a view to preventing the Swiss Franc from appreciating against the US dollar. The Bank lowered its target for the three-month Libor to as close to zero as possible from 0.25 per cent. Against the US dollar, the Swiss Franc rose up to 0.76 on August 2nd. Investors are having real concerns about the global slowdown in GDP.
Investors have been losing confidence in the stock markets in the last four years since the global financial crisis broke out in 2007. So far, Greece, Portugal and Ireland received bailouts for their debt woes. The only silver lining in Europe is Germany, whose economy remains strong till date. Commodities too have been sold off, except gold and silver. Gold prices are rising amidst the gloom. The price of gold has crossed the important level of $1,800 per ounce. On August 9, Nymex crude oil fell to $76 a barrel while Brent crude sunk to $100 a barrel in reacting to the US credit rating downgrade by S&P. However, by weekend oil prices recovered. US unemployment rate is down to 9.1 per cent in July 2011 from 9.2 per cent in June.
Various measures have been taken in the last few weeks to cool down the highly volatile markets. The US Fed has issued a statement stating that it would keep the interest rates near zero for the next two years. The European Central Bank (ECB) has promised to take more action to douse the fears about sovereign debt crisis spreading to other countries. France, Spain, Belgium and Italy have temporarily banned short selling in stock markets for 15 days. But these measures may not be sufficient to bring some sense to the financial markets. The extreme volatility will continue for some more time. The global markets have entered a new phase of uncertainty and investors have to brace themselves for such extreme situations.
In India, the benchmark Sensex had fallen 700 points intra-day and closed down 2.2 per cent or 387 points at 17,306 on August 5th. The selling continued next week with the Sensex hitting an intra-day low of 16,432 on August 9th after the markets absorbed the news of S&P downgrade of US credit rating. The Sensex closed at 16,840 on August 12th. The government authorities have tried to calm the markets during the last two weeks. Global factors like the sovereign debt crisis in the US and eurozone are compounding the domestic problems for Indian stock markets. India at present is plagued with high and stubborn inflation, slow policy reforms, milder corporate profits and problems associated with project implementation.
Important Data:
Indices Closing Commodities Closing
12-Aug-11 12-Aug-11
Dow Jones 11 269 Nymex Crude ($/barrel) 85
Nasdaq 2 508 Brent Crude ($/barrel) 108
S&P 500 1 179 Gold ($/ounce) 1 746
FTSE 100 5 320 Silver ($/ounce) 39
Dax 5 997
Nikkie 225 8 963 Currencies
Hang Seng 19 620 GBP-USD 1.63
Shanghai composite 2 594 EUR-USD 1.43
Sensex 30 16 840 USD-JPY 76.86
Nifty 50 5 073 USD-RMB 6.39
US dollar index 74.6 USD-INR 45.19
The US Debt Deal
The US lawmakers have reached an agreement to reduce the budget deficit and avert a debt default. According to the much-awaited deal between the US president and Congress, the ceiling for US borrowing will be raised by up to $2.4 trillion. Immediately the debt ceiling is raised by $400 billion and next by another $500 billion. The debt ceiling is the legal limit on the total amount of debt the US government can run up in order to pay its bills. (Before this deal the ceiling was $14.3 trillion.) In the meantime, the deal puts in place measures to cut the US deficit by at least $2.1 trillion over 10 years. From October 210, $917 billion worth of spending cuts kicks in.
Guidelines for investment by foreigners in Indian mutual funds
The Government of India has issued guidelines for investment by foreigners in Indian mutual funds. This was as part of the Union Budget announcement in February 2011. The salient features are:
--- Qualified Foreign Investors (QFIs) can now directly invest in Indian mutual funds, either debt or equity
--- QFIs are foreign pension funds, trusts and individuals – not registered with SEBI as foreign institutional investors (FIIs) or sub-accounts thereof
--- These guidelines for QFIs are separate from guidelines that are already in place for Foreign Institutional Investors (FIIs)
--- QFIs can invest up to $10 billion in equity schemes, while for debt mutual funds there will be an additional limit of $3 billion
--- There will be no limit for one investor or one scheme
--- QFIs will have to fulfil the know-your-customer norms
SEBI’s concept paper on Alternative Investment Funds (AIFs)
The Securities and Exchange Board of India has released a concept paper on proposed alternative investment fund regulation for public comments. The proposals are:
--- Registration is a must for AIFs
--- The entity must be a trust, a limited liability partnership or a company
--- The sponsor and fund manager shall have relevant experience
--- The AIFs are not to accept any funds from the public or retail through issue of prospectus or offer document
--- AIFs are private equity funds, private investment in public equity funds (PIPE), real estate investment trusts (REIT), venture capital funds and others
--- AIFs are privately pooled funds of institutional investors and high net worth individuals
News Notes
Royal Bank of Scotland reported loss of GBP 897 million in the second quarter (April-June 2011) due to Greek debt write-down. RBS made a provision of GBP 733 million for Greek government bonds.
The Economist says that Indian Rupee is undervalued by 53 per cent against the US dollar, as per the Big Mac Index-July 2011. Chinese currency Yuan is undervalued by 44 per cent, while Mexican and Russian currencies are undervalued by 33 and 34 per cent respectively. Brazil and Argentina are overvalued by 52 and 19 per cent respectively. The Big Mac index is developed by The Economist 25 years back and uses the price of McDonald’s burger in different countries to build the index.
The Prime Minister’s Economic Advisory Council (PMEAC) has asked the Indian Government to take active measures to improve investment climate and go ahead with unfinished economic reform agenda.
HSBC Holdings is cutting 30,000 jobs globally by 2013
HSBC Purchasing Managers Index (PMI) for India fell to 53.6 in July from 55.3 in June
Indian Government sought parliament’s approval for an additional Rs 34,724 crore expenditure for 2011-12, but the net outgo will be only Rs 9,000 crore
Cognizant has overtaken Wipro in June 2011 quarter, in terms of revenues, and become number three software exporter from India after TCS and Infosys
The stock price of BL Kashyap had fallen by 20 per cent on August 4th, after allegations surfaced that it resorted to evasion of provident fund dues to Employee Provident Fund Organsiation (EPFO). However, the company denied the allegation.
Reserve Bank of India has asked banks to obtain board resolutions from companies on their risk management policy before offering derivative products to companies
BEST bus service in Mumbai has completely replaced the old bus ticket boxes with electronic devices
The Government of India has announced a package of Rs 1,200 crore for the ailing Air India. However, Moody’s has cautioned that defaults by Air India may dent ratings of banks which have lent money to Air India. SBI, PNB, BOB, BOI, IDBI Bank, CBI and OBC are its large lenders.
State Bank of India raised its base rate by 50 bp to 10 per cent and its BPLR by 50 bp to 14.75 per cent while ICICI Bank raised its base rate and BPLR by 50 bp to 10 per cent and 18.75 per cent respectively
Mahindra Satyam Limited has announced the ‘winding down’ of its ADS (American Depository Shares) as it faces cancellation of its registration from SEC. The company’s shares were delisted from NYSE after a fraud by the promoter.
India’s indirect tax collections (customs duty, excise duty and service tax) have surged by 27 per cent to Rs 125,900 crore in Arpil-July 2011 against the same period last year
India’s direct tax collections fell by 8.1 per cent during April-July 2011 due to sharp jump in income tax refunds
The Government has given D Subbarao two-year extension till 2012 as the Governor of RBI
India’s exports grew by 82 per cent year-on-year to $29.3 billion in July 2011 driven by engineering, readymade garments, gems and jewellery and electronics
Index of Industrial Production (IIP) has grown up by 8.8 per cent in June 2011 year-on-year
National Stock Exchange (NSE) has decided to impose transaction charges on trades it is currency derivatives (futures and options) segment
BPLR-Benchmark Prime Lending Rate, NYSE-New York Stock Exchange, RBI-Reserve Bank of India, and SEBI-Securities and Exchange Board of India.
Disclaimer: The author’s views are personal. Investors need to consult their certified financial adviser before making any investment decisions.
Rama Krishna Vadlamudi, HYDERABAD 12 August 2011
Stock markets are inherently volatile. But, they have been subjected to some extreme volatility since the beginning of August 2011. Various factors have contributed to these wild fluctuations. First, it was the controversy between the US president and the Congress about solving the debt deal. Afterwards, the global markets have fallen heavily following concerns about sovereign debt crisis spreading to other eurozone countries, like Italy and Spain. Even commodities have fallen sharply while gold prices are surging relentlessly. The final blow came when the Standard and Poor’s has downgraded the US long term debt rating by one notch from AAA to AA+ after the markets in the US closed on August 5th. Here is an analysis of the global markets with an emphasis on Indian markets between August 1st and August 12th.
To know all about the S&P’s US Debt Downgrade and Its Impact, just click:
http://ramakrishnavadlamudi.blogspot.com/2011/08/us-debt-downgrade-and-its-impact-vrk100.html
or,
http://www.scribd.com/doc/62314269
The news flow was too much for the financial markets to absorb. Investors are at a loss to understand what’s going on. They are reacting very wildly due to panic. There are some concerns in the currency markets also. Stock prices across the world, right from Dow Jones to Dax, Cac, Hang Seng and Nikkei, are all over the place. Countries, other than the US and in eurozone, are worried about the appreciation of their domestic currencies against the US dollar. Investors are selling their dollar assets and moving to other currencies, like, the Japanese Yen and the Swiss Franc on concerns about the bloating US government debt. Japan intervened in the foreign exchange markets on August 4th to prevent the appreciation of Yen against the US dollar. The Swiss National Bank, the country’s central bank, cut interest rates with a view to preventing the Swiss Franc from appreciating against the US dollar. The Bank lowered its target for the three-month Libor to as close to zero as possible from 0.25 per cent. Against the US dollar, the Swiss Franc rose up to 0.76 on August 2nd. Investors are having real concerns about the global slowdown in GDP.
Investors have been losing confidence in the stock markets in the last four years since the global financial crisis broke out in 2007. So far, Greece, Portugal and Ireland received bailouts for their debt woes. The only silver lining in Europe is Germany, whose economy remains strong till date. Commodities too have been sold off, except gold and silver. Gold prices are rising amidst the gloom. The price of gold has crossed the important level of $1,800 per ounce. On August 9, Nymex crude oil fell to $76 a barrel while Brent crude sunk to $100 a barrel in reacting to the US credit rating downgrade by S&P. However, by weekend oil prices recovered. US unemployment rate is down to 9.1 per cent in July 2011 from 9.2 per cent in June.
Various measures have been taken in the last few weeks to cool down the highly volatile markets. The US Fed has issued a statement stating that it would keep the interest rates near zero for the next two years. The European Central Bank (ECB) has promised to take more action to douse the fears about sovereign debt crisis spreading to other countries. France, Spain, Belgium and Italy have temporarily banned short selling in stock markets for 15 days. But these measures may not be sufficient to bring some sense to the financial markets. The extreme volatility will continue for some more time. The global markets have entered a new phase of uncertainty and investors have to brace themselves for such extreme situations.
In India, the benchmark Sensex had fallen 700 points intra-day and closed down 2.2 per cent or 387 points at 17,306 on August 5th. The selling continued next week with the Sensex hitting an intra-day low of 16,432 on August 9th after the markets absorbed the news of S&P downgrade of US credit rating. The Sensex closed at 16,840 on August 12th. The government authorities have tried to calm the markets during the last two weeks. Global factors like the sovereign debt crisis in the US and eurozone are compounding the domestic problems for Indian stock markets. India at present is plagued with high and stubborn inflation, slow policy reforms, milder corporate profits and problems associated with project implementation.
Important Data:
Indices Closing Commodities Closing
12-Aug-11 12-Aug-11
Dow Jones 11 269 Nymex Crude ($/barrel) 85
Nasdaq 2 508 Brent Crude ($/barrel) 108
S&P 500 1 179 Gold ($/ounce) 1 746
FTSE 100 5 320 Silver ($/ounce) 39
Dax 5 997
Nikkie 225 8 963 Currencies
Hang Seng 19 620 GBP-USD 1.63
Shanghai composite 2 594 EUR-USD 1.43
Sensex 30 16 840 USD-JPY 76.86
Nifty 50 5 073 USD-RMB 6.39
US dollar index 74.6 USD-INR 45.19
The US Debt Deal
The US lawmakers have reached an agreement to reduce the budget deficit and avert a debt default. According to the much-awaited deal between the US president and Congress, the ceiling for US borrowing will be raised by up to $2.4 trillion. Immediately the debt ceiling is raised by $400 billion and next by another $500 billion. The debt ceiling is the legal limit on the total amount of debt the US government can run up in order to pay its bills. (Before this deal the ceiling was $14.3 trillion.) In the meantime, the deal puts in place measures to cut the US deficit by at least $2.1 trillion over 10 years. From October 210, $917 billion worth of spending cuts kicks in.
Guidelines for investment by foreigners in Indian mutual funds
The Government of India has issued guidelines for investment by foreigners in Indian mutual funds. This was as part of the Union Budget announcement in February 2011. The salient features are:
--- Qualified Foreign Investors (QFIs) can now directly invest in Indian mutual funds, either debt or equity
--- QFIs are foreign pension funds, trusts and individuals – not registered with SEBI as foreign institutional investors (FIIs) or sub-accounts thereof
--- These guidelines for QFIs are separate from guidelines that are already in place for Foreign Institutional Investors (FIIs)
--- QFIs can invest up to $10 billion in equity schemes, while for debt mutual funds there will be an additional limit of $3 billion
--- There will be no limit for one investor or one scheme
--- QFIs will have to fulfil the know-your-customer norms
SEBI’s concept paper on Alternative Investment Funds (AIFs)
The Securities and Exchange Board of India has released a concept paper on proposed alternative investment fund regulation for public comments. The proposals are:
--- Registration is a must for AIFs
--- The entity must be a trust, a limited liability partnership or a company
--- The sponsor and fund manager shall have relevant experience
--- The AIFs are not to accept any funds from the public or retail through issue of prospectus or offer document
--- AIFs are private equity funds, private investment in public equity funds (PIPE), real estate investment trusts (REIT), venture capital funds and others
--- AIFs are privately pooled funds of institutional investors and high net worth individuals
News Notes
Royal Bank of Scotland reported loss of GBP 897 million in the second quarter (April-June 2011) due to Greek debt write-down. RBS made a provision of GBP 733 million for Greek government bonds.
The Economist says that Indian Rupee is undervalued by 53 per cent against the US dollar, as per the Big Mac Index-July 2011. Chinese currency Yuan is undervalued by 44 per cent, while Mexican and Russian currencies are undervalued by 33 and 34 per cent respectively. Brazil and Argentina are overvalued by 52 and 19 per cent respectively. The Big Mac index is developed by The Economist 25 years back and uses the price of McDonald’s burger in different countries to build the index.
The Prime Minister’s Economic Advisory Council (PMEAC) has asked the Indian Government to take active measures to improve investment climate and go ahead with unfinished economic reform agenda.
HSBC Holdings is cutting 30,000 jobs globally by 2013
HSBC Purchasing Managers Index (PMI) for India fell to 53.6 in July from 55.3 in June
Indian Government sought parliament’s approval for an additional Rs 34,724 crore expenditure for 2011-12, but the net outgo will be only Rs 9,000 crore
Cognizant has overtaken Wipro in June 2011 quarter, in terms of revenues, and become number three software exporter from India after TCS and Infosys
The stock price of BL Kashyap had fallen by 20 per cent on August 4th, after allegations surfaced that it resorted to evasion of provident fund dues to Employee Provident Fund Organsiation (EPFO). However, the company denied the allegation.
Reserve Bank of India has asked banks to obtain board resolutions from companies on their risk management policy before offering derivative products to companies
BEST bus service in Mumbai has completely replaced the old bus ticket boxes with electronic devices
The Government of India has announced a package of Rs 1,200 crore for the ailing Air India. However, Moody’s has cautioned that defaults by Air India may dent ratings of banks which have lent money to Air India. SBI, PNB, BOB, BOI, IDBI Bank, CBI and OBC are its large lenders.
State Bank of India raised its base rate by 50 bp to 10 per cent and its BPLR by 50 bp to 14.75 per cent while ICICI Bank raised its base rate and BPLR by 50 bp to 10 per cent and 18.75 per cent respectively
Mahindra Satyam Limited has announced the ‘winding down’ of its ADS (American Depository Shares) as it faces cancellation of its registration from SEC. The company’s shares were delisted from NYSE after a fraud by the promoter.
India’s indirect tax collections (customs duty, excise duty and service tax) have surged by 27 per cent to Rs 125,900 crore in Arpil-July 2011 against the same period last year
India’s direct tax collections fell by 8.1 per cent during April-July 2011 due to sharp jump in income tax refunds
The Government has given D Subbarao two-year extension till 2012 as the Governor of RBI
India’s exports grew by 82 per cent year-on-year to $29.3 billion in July 2011 driven by engineering, readymade garments, gems and jewellery and electronics
Index of Industrial Production (IIP) has grown up by 8.8 per cent in June 2011 year-on-year
National Stock Exchange (NSE) has decided to impose transaction charges on trades it is currency derivatives (futures and options) segment
BPLR-Benchmark Prime Lending Rate, NYSE-New York Stock Exchange, RBI-Reserve Bank of India, and SEBI-Securities and Exchange Board of India.
Disclaimer: The author’s views are personal. Investors need to consult their certified financial adviser before making any investment decisions.
Monday 15 August 2011
The US Debt Downgrade and Its Impact-VRK100-15Aug2011
The US Debt Downgrade and Its Impact
Rama Krishna Vadlamudi, Hyderabad August 15, 2011
Since the beginning of August 2011, financial markets around the world have been very volatile due to surfeit of fears and uncertainties. The biggest event that has impacted the markets is the Standard & Poor’s downgrade of the United States’ Government debt from AAA to AA+ on August 5th. However, the other two rating agencies, Fitch and Moody’s have retained the AAA rating for the US on August 2nd. In reaction to the S&P’s downgrade, equity markets and commodity markets have fallen heavily with increased volatility. However, gold price has surged by around five per cent as it is considered as a safe haven asset amidst debasement of paper currencies by several countries.
After the demise of the Soviet Union in 1991, the US had become the most powerful nation in the world. It has lost the superpower status politically after some serious blunders in Iran, Iraq, the Middle East and Afghanistan. Now, with mounting debt problems and credit rating downgrade, the US has been losing its predominance in the world economy also. One thing is sure: the US economy is on a decline and the repercussions will be felt across the world.
Here is an analysis of the issues behind the downgrade and its impact on markets:
Why has S&P downgraded the US credit rating?
After closing of market hours on 5 August 2011, S&P had downgraded the US long term sovereign rating from AAA to AA+. The reason cited by the credit rating agency for the downgrade is that the debt deal brokered by US lawmakers is not sufficient and expressed its doubts about the ability of US lawmakers to bring down the US debt level. S&P is concerned that US political parties are not working in tandem when it comes to fixing the US economy and bringing about fiscal consolidation. It’s first time in 70 years that any rating agency has downgraded US’ AAA-rating. The downgrade has not come as a total surprise. In April this year, Standard & Poor’s had first cautioned that there was a possibility of US downgrade if the US lawmakers did not agree for a deal over raising the statutory US debt level and bringing down the debt over long term.
What is the difference between AAA and AA+ rating?
According to the standard definition of S&P:
AAA : Extremely strong capacity to meet financial commitments. (Highest Rating)
AA+ : Very strong capacity to meet financial commitments (just below AAA)
As can be seen from above, AAA is the highest rating and AA+ is just below AAA. And still AA+ rating is considered as one of the best credit ratings in the financial world. Other countries that are having AA+ rating are Belgium and New Zealand, as per S&P.
What is the US debt deal?
The US Congress had on August 2nd approved a plan to raise the US debt level from the current USD 14.3 trillion in the short turn while bringing down the overall deficit by USD 2.4 trillion over the next 10 years. S&P is of the opinion that this USD 2.4-trillion debt reduction is not sufficient and it prefers a USD 4-trillion deficit reduction instead.
What are reasons for the high level of US Government debt?
The United States of America has been living beyond its means – meaning the country has been spending more than its earnings – for more than a decade. At the end of president Bill Clinton’s term, the US has enjoyed huge budget surpluses. But after George Bush took over as president in 2001, the US economy has been hurtling toward one disaster after another. Economists and market pundits have been warning the US about its debt burden for almost a decade. Due to the excessive spending, the US Government debt has mounted to a record USD 14.3 billion in May this year.
How is the US Government funding its fiscal deficit?
As the budget expenditure exceeds its revenues, the US Government every year raises huge money by selling its Treasury Securities and funds the fiscal deficit. The bonds are bought by various foreign governments that are having huge export surpluses. Some of the biggest holders of the US debt are: (in USD billion) China - 1,160; Japan – 910; the UK – 350; Brazil – 210; and Taiwan – 150. India holds USD 41 billion in US treasuries. Other investors in the US government debt are banks, pension funds, sovereign wealth funds and individual investors.
Will investors sell US treasuries now?
A substantial portion of the US debt is held by central banks around the world. They may not sell their holding of US treasuries as they do not have any worthwhile alternative investments to buy at this point of time. Large holders of US debt, like, China, Japan and the UK may hold US treasuries grudgingly for the time being unless a credible alternative to US dollar emerges, which is a remote possibility as of now. Of course, investors have been moving to the Swiss Franc and the Japanese Yen for some time now. The euro is having its own problems. The dollar is relatively stable against major currencies till now.
What is the importance of US treasuries?
--- Till the S&P downgrade, the US treasuries are considered as benchmark securities for various classes of assets across the world.
--- It is a practice in the financial world to benchmark several securities against the US treasuries.
--- Every country will have its own risk-free interest rate. However, the US treasuries are treated as risk-free across the world.
--- With the downgrade, the US treasuries have lost some of their sheen and this will create problems for asset valuation models.
Why are the US economy and dollar so important to the world economy?
--- Till the S&P downgrade, the US dollar was considered as safe to hold it for long term
--- For several decades, the US debt has attracted investors due to the US’ stable growth
--- Much of the world trade in merchandise exports and services is done in dollar
--- The US dollar has become a reserve currency for the world
--- The reserve currency status has become questionable now
--- The US has 43 per cent weight in the MSCI Index, an index of global stocks
--- About one-fourth of the world’s GDP comes from the US
--- About 20 per cent of the oil is consumed by the US
--- Much of the world’s wealth is concentrated in the US
What steps should the US Government take to bring down its huge debt burden?
The following steps will help the US to cut down its debt levels:
--- The US Government should raise taxes without hurting the poor
--- The US Government should cut its wasteful expenditure, like, defence and others.
--- The Government should stimulate the economy through various measures
How does the downgrade impact US economy?
Theoretically speaking, if a country’s debt rating is downgraded the country’s interest burden will increase as the cost of raising money goes up. As such, US Government bond prices should come down and yields should go up. The US companies will have to pay higher interest rates when they raise money abroad for their needs. But it reality, this has not happened. After the downgrade, the benchmark 10-year US Government Treasury yield decreased by 20 basis points – meaning bond prices went up. This aberration is due to the fact that investors selling equities and commodities have moved the money to US Government debt causing the US bond prices to go up. However, in the medium to long term, the downgrade will hamper the ability of the US Government to sell its bonds to investors. Fund houses, like, PIMCO, have completely offloaded their US treasuries in March itself. Already the US economy is slowing down and the downgrade may further put pressure on the US growth. Overall, the downgrade is negative for the US.
What is the reaction of the US Government to the downgrade?
The US Government has said that the S&P’s analysis was hasty. It further said that S&P has made a USD 2-trillion error in its calculations. President Obama has thundered, “…the US still enjoys AAA rating!” The US Federal Reserve has said that it would keep the US interest rates at the historic low level of 0 to 0.25 per cent till the middle of 2013. The US Fed’s announcement had temporarily brought some relief to the markets.
How have the investors and marketmen reacted to the downgrade?
Several economists and marketmen have long argued that the US has been sinking into an abyss as far as the fiscal deficit is concerned. On the contrary, some argue that the US will bounce back from its debt pangs provided the US political parties act in a bipartisan way. Several experts have been criticizing the credit rating agency, S&P for downgrading the US credit rating. They are of the opinion that the rating agencies are acting like tyrants. It is clear from the debt burden controversy, the Republicans have been blackmailing the US president (who is a Democrat) as the former enjoy majority in the House of Representatives. In the Senate, the Democrats have majority. The Republicans are not allowing the US president to raise taxes which is necessary to reduce the debt burden. China has condemned the US for its “debt addiction” and exhorted the US to fix its debt problems. China will be adversely impacted by the downgrade as its holds a substantial portion of its foreign exchange reserves in the US Treasuries.
Which countries are enjoying AAA rating as of now?
The countries that are still enjoying AAA-rating, the highest credit rating, are: Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey, Hong Kong, the Isle of Man, Liechtenstein, Luxembourg, the Netherlands, Norway, Singapore, Sweden, Switzerland, and the United Kingdom. (Source: S&P)
What is the impact of the downgrade on Indian markets?
There are two ways to look at the issue. The issues that are plaguing the world economy are confined to the sovereign debt problems being faced by the US and Europe. To that extent, countries, like, India, China and Brazil are not impacted by the US downgrade. If one believes this assertion, India should do well going forward and it will continue to receive more foreign money in the form of portfolio inflows from foreign institutional investors (FIIs) and foreign direct investment (FDI). Another view is that India cannot remain immune from the global developments and India’s economy is pegged to global growth. However, one needs to take a balanced view on this. As Indian economy continues to be driven by domestic consumption and strong savings, India’s national income is likely to grow at reasonable rates even though its export sector (IT exports, textiles, etc.) may be adversely impacted due to the slowdown in the world economy.
What is the impact on Indian Rupee?
Indian Rupee has depreciated against the US dollar after the downgrade as the FIIs have been selling the Indian equities. In the long term, Indian Rupee should appreciate against the US dollar as: (i). our interest rates are much higher than those in the US, (ii). we are expected to grow much faster than the US, and (iii). the US will find it very difficult to fix its debt burden which may cause the dollar to fall further in future.
What should Indian equity investors do?
Due to inflation, slow policy reforms, tepid profit growth by Indian corporates and problems in implementing projects, Indian stock markets have already lost more than 20 per cent from their peaks last year. In the last three weeks alone since the unexpected hike in interest rates by Reserve Bank of India on July 26th, the benchmark Sensex has lost about 2,000 points or 10.8 per cent. In view of the above, long-term investors will be better off if they keep their cool and not resort to panic selling provided they hold quality stocks in their portfolio. In the stock market, a good nervous system is much better than a good head. If they are over exposed to sectors, like, information technology, they may reduce their exposure temporarily. However, investors need to watch the global developments carefully as there are several rumours about a possible downgrade of other countries’ credit rating.
Rama Krishna Vadlamudi, Hyderabad August 15, 2011
Since the beginning of August 2011, financial markets around the world have been very volatile due to surfeit of fears and uncertainties. The biggest event that has impacted the markets is the Standard & Poor’s downgrade of the United States’ Government debt from AAA to AA+ on August 5th. However, the other two rating agencies, Fitch and Moody’s have retained the AAA rating for the US on August 2nd. In reaction to the S&P’s downgrade, equity markets and commodity markets have fallen heavily with increased volatility. However, gold price has surged by around five per cent as it is considered as a safe haven asset amidst debasement of paper currencies by several countries.
After the demise of the Soviet Union in 1991, the US had become the most powerful nation in the world. It has lost the superpower status politically after some serious blunders in Iran, Iraq, the Middle East and Afghanistan. Now, with mounting debt problems and credit rating downgrade, the US has been losing its predominance in the world economy also. One thing is sure: the US economy is on a decline and the repercussions will be felt across the world.
Here is an analysis of the issues behind the downgrade and its impact on markets:
Why has S&P downgraded the US credit rating?
After closing of market hours on 5 August 2011, S&P had downgraded the US long term sovereign rating from AAA to AA+. The reason cited by the credit rating agency for the downgrade is that the debt deal brokered by US lawmakers is not sufficient and expressed its doubts about the ability of US lawmakers to bring down the US debt level. S&P is concerned that US political parties are not working in tandem when it comes to fixing the US economy and bringing about fiscal consolidation. It’s first time in 70 years that any rating agency has downgraded US’ AAA-rating. The downgrade has not come as a total surprise. In April this year, Standard & Poor’s had first cautioned that there was a possibility of US downgrade if the US lawmakers did not agree for a deal over raising the statutory US debt level and bringing down the debt over long term.
What is the difference between AAA and AA+ rating?
According to the standard definition of S&P:
AAA : Extremely strong capacity to meet financial commitments. (Highest Rating)
AA+ : Very strong capacity to meet financial commitments (just below AAA)
As can be seen from above, AAA is the highest rating and AA+ is just below AAA. And still AA+ rating is considered as one of the best credit ratings in the financial world. Other countries that are having AA+ rating are Belgium and New Zealand, as per S&P.
What is the US debt deal?
The US Congress had on August 2nd approved a plan to raise the US debt level from the current USD 14.3 trillion in the short turn while bringing down the overall deficit by USD 2.4 trillion over the next 10 years. S&P is of the opinion that this USD 2.4-trillion debt reduction is not sufficient and it prefers a USD 4-trillion deficit reduction instead.
What are reasons for the high level of US Government debt?
The United States of America has been living beyond its means – meaning the country has been spending more than its earnings – for more than a decade. At the end of president Bill Clinton’s term, the US has enjoyed huge budget surpluses. But after George Bush took over as president in 2001, the US economy has been hurtling toward one disaster after another. Economists and market pundits have been warning the US about its debt burden for almost a decade. Due to the excessive spending, the US Government debt has mounted to a record USD 14.3 billion in May this year.
How is the US Government funding its fiscal deficit?
As the budget expenditure exceeds its revenues, the US Government every year raises huge money by selling its Treasury Securities and funds the fiscal deficit. The bonds are bought by various foreign governments that are having huge export surpluses. Some of the biggest holders of the US debt are: (in USD billion) China - 1,160; Japan – 910; the UK – 350; Brazil – 210; and Taiwan – 150. India holds USD 41 billion in US treasuries. Other investors in the US government debt are banks, pension funds, sovereign wealth funds and individual investors.
Will investors sell US treasuries now?
A substantial portion of the US debt is held by central banks around the world. They may not sell their holding of US treasuries as they do not have any worthwhile alternative investments to buy at this point of time. Large holders of US debt, like, China, Japan and the UK may hold US treasuries grudgingly for the time being unless a credible alternative to US dollar emerges, which is a remote possibility as of now. Of course, investors have been moving to the Swiss Franc and the Japanese Yen for some time now. The euro is having its own problems. The dollar is relatively stable against major currencies till now.
What is the importance of US treasuries?
--- Till the S&P downgrade, the US treasuries are considered as benchmark securities for various classes of assets across the world.
--- It is a practice in the financial world to benchmark several securities against the US treasuries.
--- Every country will have its own risk-free interest rate. However, the US treasuries are treated as risk-free across the world.
--- With the downgrade, the US treasuries have lost some of their sheen and this will create problems for asset valuation models.
Why are the US economy and dollar so important to the world economy?
--- Till the S&P downgrade, the US dollar was considered as safe to hold it for long term
--- For several decades, the US debt has attracted investors due to the US’ stable growth
--- Much of the world trade in merchandise exports and services is done in dollar
--- The US dollar has become a reserve currency for the world
--- The reserve currency status has become questionable now
--- The US has 43 per cent weight in the MSCI Index, an index of global stocks
--- About one-fourth of the world’s GDP comes from the US
--- About 20 per cent of the oil is consumed by the US
--- Much of the world’s wealth is concentrated in the US
What steps should the US Government take to bring down its huge debt burden?
The following steps will help the US to cut down its debt levels:
--- The US Government should raise taxes without hurting the poor
--- The US Government should cut its wasteful expenditure, like, defence and others.
--- The Government should stimulate the economy through various measures
How does the downgrade impact US economy?
Theoretically speaking, if a country’s debt rating is downgraded the country’s interest burden will increase as the cost of raising money goes up. As such, US Government bond prices should come down and yields should go up. The US companies will have to pay higher interest rates when they raise money abroad for their needs. But it reality, this has not happened. After the downgrade, the benchmark 10-year US Government Treasury yield decreased by 20 basis points – meaning bond prices went up. This aberration is due to the fact that investors selling equities and commodities have moved the money to US Government debt causing the US bond prices to go up. However, in the medium to long term, the downgrade will hamper the ability of the US Government to sell its bonds to investors. Fund houses, like, PIMCO, have completely offloaded their US treasuries in March itself. Already the US economy is slowing down and the downgrade may further put pressure on the US growth. Overall, the downgrade is negative for the US.
What is the reaction of the US Government to the downgrade?
The US Government has said that the S&P’s analysis was hasty. It further said that S&P has made a USD 2-trillion error in its calculations. President Obama has thundered, “…the US still enjoys AAA rating!” The US Federal Reserve has said that it would keep the US interest rates at the historic low level of 0 to 0.25 per cent till the middle of 2013. The US Fed’s announcement had temporarily brought some relief to the markets.
How have the investors and marketmen reacted to the downgrade?
Several economists and marketmen have long argued that the US has been sinking into an abyss as far as the fiscal deficit is concerned. On the contrary, some argue that the US will bounce back from its debt pangs provided the US political parties act in a bipartisan way. Several experts have been criticizing the credit rating agency, S&P for downgrading the US credit rating. They are of the opinion that the rating agencies are acting like tyrants. It is clear from the debt burden controversy, the Republicans have been blackmailing the US president (who is a Democrat) as the former enjoy majority in the House of Representatives. In the Senate, the Democrats have majority. The Republicans are not allowing the US president to raise taxes which is necessary to reduce the debt burden. China has condemned the US for its “debt addiction” and exhorted the US to fix its debt problems. China will be adversely impacted by the downgrade as its holds a substantial portion of its foreign exchange reserves in the US Treasuries.
Which countries are enjoying AAA rating as of now?
The countries that are still enjoying AAA-rating, the highest credit rating, are: Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey, Hong Kong, the Isle of Man, Liechtenstein, Luxembourg, the Netherlands, Norway, Singapore, Sweden, Switzerland, and the United Kingdom. (Source: S&P)
What is the impact of the downgrade on Indian markets?
There are two ways to look at the issue. The issues that are plaguing the world economy are confined to the sovereign debt problems being faced by the US and Europe. To that extent, countries, like, India, China and Brazil are not impacted by the US downgrade. If one believes this assertion, India should do well going forward and it will continue to receive more foreign money in the form of portfolio inflows from foreign institutional investors (FIIs) and foreign direct investment (FDI). Another view is that India cannot remain immune from the global developments and India’s economy is pegged to global growth. However, one needs to take a balanced view on this. As Indian economy continues to be driven by domestic consumption and strong savings, India’s national income is likely to grow at reasonable rates even though its export sector (IT exports, textiles, etc.) may be adversely impacted due to the slowdown in the world economy.
What is the impact on Indian Rupee?
Indian Rupee has depreciated against the US dollar after the downgrade as the FIIs have been selling the Indian equities. In the long term, Indian Rupee should appreciate against the US dollar as: (i). our interest rates are much higher than those in the US, (ii). we are expected to grow much faster than the US, and (iii). the US will find it very difficult to fix its debt burden which may cause the dollar to fall further in future.
What should Indian equity investors do?
Due to inflation, slow policy reforms, tepid profit growth by Indian corporates and problems in implementing projects, Indian stock markets have already lost more than 20 per cent from their peaks last year. In the last three weeks alone since the unexpected hike in interest rates by Reserve Bank of India on July 26th, the benchmark Sensex has lost about 2,000 points or 10.8 per cent. In view of the above, long-term investors will be better off if they keep their cool and not resort to panic selling provided they hold quality stocks in their portfolio. In the stock market, a good nervous system is much better than a good head. If they are over exposed to sectors, like, information technology, they may reduce their exposure temporarily. However, investors need to watch the global developments carefully as there are several rumours about a possible downgrade of other countries’ credit rating.
Saturday 6 August 2011
Equity Valuation - Price Multiples - vrk100 - 18Jul2011
EQUITY VALUATION - PRICE MULTIPLES
Rama Krishna Vadlamudi, Hyderabad 18 July 2011
This article in PowerPoint presentation form is on Equity valuation and price multiples. One can understand the simple calculation of valuing a share based on price multiples, price-earnings ratio, price-book value ration, price-sales ratio and price-cash flow ratio with some live examples.
This PowerPoint presentation can also be accessed at:
www.scribd.com/doc/61716892
- - -
Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
CFA Charter credentials - CFA Member Profile
CFA Badge
He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
Twitter @vrk100
Tuesday 2 August 2011
Who's Who In India-Political & Business-VRK100-02Aug2011
Who's Who In India-
Political, Administration and Business
Rama Krishna Vadlamudi, Hyderabad
02 AUGUST 2011
CONTENTS PAGE
1. Who’s Who in India – POLITICAL
2. Who’s Who in India – ADMINISTRATION
3. Who’s Who in India – BUSINESS
About the Author:
Passionate about financial markets. Watches equity, bond and currency markets
from a macro point of view. Loves writing articles on financial markets. So
far, has written more than 120 articles running into about 720 pages of
original content, which have attracted more than 165,000 readers on SCRIBD.
Political, Administration and Business
Rama Krishna Vadlamudi, Hyderabad
02 AUGUST 2011
CONTENTS PAGE
1. Who’s Who in India – POLITICAL
2. Who’s Who in India – ADMINISTRATION
3. Who’s Who in India – BUSINESS
|
1. POLITICAL
|
|
|
Name of the Person
|
What is he/she?
|
|
Pratibha Devisingh
Patil
|
President
(Rashtrapathi)
|
|
Mohd. Hamid Ansari
|
Vice President
|
|
Manmohan Singh
|
Prime Minister
|
|
Pranab Mukherjee
|
Finance Minister
|
|
Anand Sharma
|
Commerce and Industry
|
|
Kapil Sibal
|
Telecom and Education
|
|
S M
|
Foreign Minister
|
|
P Chidambaram
|
Home Minister
|
|
|
Petroleum Minister
|
|
Sushilkumar Shinde
|
Power
|
|
Sharad Pawar
|
Agriculture Minister
|
|
Salman Khursheed
|
Law Minister
|
|
Kamal Nath
|
Urban Development
|
|
A K
|
Defence Minister
|
|
Veerappa Moily
|
Corporate Affairs
|
|
Jairam Ramesh
|
Rural Development
|
|
Jayanthi Natarajan
|
Environment
Minister (Minister of State)
|
|
Vayalar Ravi
|
Civil Aviation
Minister
|
|
|
|
|
2. ADMINISTRATION
|
|
|
Name of the Person
|
What is he/she?
|
|
Manmohan Singh
|
Chairman, Planning
Commission
|
|
Sunil Mitra
|
Finance Secretary
|
|
Ranjan Mathai
|
Foreign Secretary
|
|
Ajit Kumar Seth
|
Cabinet Secretary
|
|
Montek Singh Ahluwalia
|
Dy. Chairman, Planning
Commission
|
|
C Rangarajan
|
Chairman, Prime
Minister's Economic Advisory Council
|
|
Kaushik Basu
|
Chief Economic Advisor,
Ministry of Finance
|
|
T C A Anant
|
Chief Statistician of
|
|
S H Kapadia
|
Chief Justice of
Supreme Court of
|
|
G
|
Attorney General
|
|
Rohinton Nariman
|
Solicitor General
|
|
Gen. Vijay Kumar Singh
|
Chief of Army Staff
|
|
Admiral Nirmal Verma
|
Chief of Naval Staff
|
|
Air Chief Marshal NAK
Browne
|
Chief of Air Staff
|
|
K Radhakrishnan
|
Chairman, Indian Space
Research Organisation
|
|
Shiv Shankar Menon
|
National Security
Advisor
|
|
Vijay Kelkar
|
Non-executive
Chairman, National Stock Exchange
|
|
Vijay Kelkar
|
Former Chairman of
13th Finance Commission
|
|
Nandan Nilekani
|
Chairman, Unique
Identification Authority of
|
|
U K Sinha
|
Chairman, Securities
& Exchange Board of
|
|
D Subbarao
|
Governor, Reserve Bank
of
|
|
J Harinarayan
|
Chairman,
Insurance Regulatory & Development Authority
|
|
Yogesh Agarwal
|
Chairman,
Pension Fund Regulatory & Development Authority
|
|
|
|
|
3. BUSINESS
|
|
|
Name of the Person
|
What is he/she?
|
|
A M Naik
|
CEO, Larsen and Toubro
|
|
Adi Godrej
|
Chairman, Godrej Group
|
|
Anil Ambani
|
Head, Reliance ADAG
Group
|
|
Azim Premji
|
Chairman & CEO,
WIPRO Limited
|
|
B Prasad Rao
|
CMD, BHEL
|
|
Chanda Kochchar
|
CEO, ICICI Bank
|
|
Kumarmangalam Birla
|
Head, AVBirla Group of
Companies
|
|
Manoj Kohli
|
CEO, Bharti Airtel
(Global Operations)
|
|
Mukesh Ambani
|
Chairman & CEO,
Reliance Industries
|
|
|
CEO, TCS
|
|
N R Narayanamurthy
|
Chief Mentor and
Chairman, Infosys Limited
|
|
Pratip Chaudhuri
|
Chairman, State Bank
Group
|
|
|
CEO & MD, Infosys Limited
|
|
A K Hazarika
|
CMD, ONGC
|
|
Aurp Roy Choudhury
|
CMD, NTPC
|
|
R
|
Chairman, Indian Oil
Corporation
|
|
Ratan Tata
|
Chairman, Tata Group
of Companies
|
|
Sanjay Kapoor
|
CEO, Bharti Airtel (
|
|
N C Jha
|
CMD,Coal India Limited
|
|
Shikha Sharma
|
CEO, Axis Bank
|
|
Sunil Mittal
|
Non-executive
Chairman, Bharti Airtel Group
|
|
Y C Deveshwar
|
CEO, ITC Limited
|
Abbreviations:
CEO - Chief Executive Officer
CMD - Chairman & Managing
Director
MD - Managing Director
NB: All data updated as on 2nd August 2011.
Disclaimer: This is for information purpose only.
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