Valuations may be high, but India growth story is secure, feel FIIs

Indian markets are looking expensive and the continued inflows are being driven more by a desire to avoid underperformance rather than conviction in the fundamental story, say some of the leading foreign institutional investors (FIIs) invested in the India equities market.
After having net sold shares worth $8 billion in 2008, foreign investors have mopped up close to $12 billion worth of equities so far in 2009.
“Valuations are expensive (18 times FY10 earnings), relative to the rest of the world. But India’s growth story is more secure than many other countries. And there is a lot of liquidity in the world chasing growth. As such, institutional investors believe that the earnings growth and GDP are strong enough to sustain these valuations,” says Jyotivardhan Jaipuria, MD and Head-Research of BoA Merrill Lynch.
India has long been touted as being at an advantage, given that its growth is less co-related to that of the global economy. And with central banks around the world pumping in liquidity to kick-start their respective economies, the stock of money in the system has shot up drastically. With no return on deposits in any part of the world, there is a lot of money chasing the few growth economies.
But there are those who believe that this in itself calls for investors to exercise caution. “There is an element of risk in that if the newsflow is not as good as expected, the market may react adversely. The market needs pause to allow valuations to catch up with earnings growth. In the long term, this is good for markets,” added Mr Jaipuria. Sandeep Kothari, portfolio manager at Fidelity Mutual Fund is positive on the market but like most of his peers, is concerned about valuations.
“The economic cycle is turning and the business is strengthening. The question is how much markets have run up and what is in the price and what is not. One is worried you could see a last phase of frenzy like you saw in 2007. We are yet to see that kind of retail participation,” he added.
FIIs maintain that flows are unlikely to slow down till such time central banks start pulling back the stimulus money. There is a perception that markets are likely to surrender some of their recent gains before long. However, the general perception is that it is likely to be a gradual decline.
Whatever the case maybe, the recent upsurge has seen the Sensex overshoot most of the fair value targets set by foreign brokerage houses. While Citi had set a 15400 target for the Sensex, Deutsche Equities target was over 16000. “Our fair value Sensex target for the year is 16500. However, liquidity and high levels of risk appetite could lead the market to overshoot our fair value target in the short term. India remains a highly attractive market from a long-term perspective, offering a structural growth story,” said Abhay Laijawala, head of research, Deutsche Equities India.

Source: http://economictimes.indiatimes.com/news/economy/indicators/Valuations-may-be-high-but-India-growth-story-is-secure-feel-FIIs/articleshow/5074163.cms

'We are cautiously optimistic'

The world markets are abuzz with talks of an earlier-than-expected economic revival. Yet, it makes sense to be cautiously optimistic, Bruno Leefeels Bruno Lee, regional head, wealth management, personal financial services, Asia-Pacific, HSBC. In a conversation with ET, he articulates his views on the wealth management in India and the impact of the regulatory changes on the mutual fund pricing structure. Excerpts:

Many feel that the worst is behind us. Would you agree?
There is some positive improvement in terms of economic data in the US market and Asia. Also, the fear factor has significantly reduced. But, I think we still need to be cautious as there are things that might crop up such as the unemployment situation. Overall, I would say we are cautiously optimistic.

What has been your advice to your high networth income (HNI) clients?
We feel that one should not wait till the market touches a record high to return to investing in equity. HNIs should review and rebalance their portfolios on a regular basis to ensure that they are comfortable with their exposure to risk and the changing environment. Further, to deal with volatility in the markets, diversifying into different asset classes is crucial. In India, where fixed income has been providing attractive returns, clients should have a strategy to allocate assets among equity and fixed income. Indian investors need to understand that the fixed income environment is quite attractive and the equity market is recovering. But outside India, in the US or eurozone, interest rates are low. There is a huge pool of cash sitting on the sidelines. When people’s risk appetite increases, BRIC market will attract a lot of inflow and that will push up the market to the next level.

How do you see the recent regulations on Mutual Fund (MF) pricing structure affecting the market?
Overall, MF penetration is low in India. The regulation ensures more transparency in pricing, which we support. But the other thing to be considered is the high cost of distribution. Bulk of people’s savings are still in fixed deposits, so many are not familiar with stocks/MFs. Thus, it requires a lot of education and financial planning support. Also, unlike stocks, MF is an ongoing service and maintenance cost is high for distributors. So, we are looking at pricing it correctly without sacrificing the service quality.

As a distributor of MFs, what shape is the new charge structure likely to take?
We are thinking along the direction of giving customers a choice. Some customers may do only one transaction for a one-time fee. They could be sophisticated and require relatively limited ongoing servicing. But other customers may need more frequent updates and ongoing services, for them we could charge a certain advisory fee. The charges will also depend on their needs, which are different for customers with lower investible surplus and ones with higher investible assets. We will have to look at customer needs, behaviour and requirements to design an appropriate way within the regulatory environment.

We took some time do our research on how best this could be done and are now on the verge of launching our charge structure. We want to ensure that this is a sustainable, profitable structure, otherwise, it could kill the whole distribution.

What kind of potential do you see in the wealth management space in India?
At HSBC, we are excited about opportunities in India. Some estimate the retail segment will grow at around 10% CAGR, from 900,000 in 2007, to over 1.6 million until 2013. The country has a large young population. As education is important in India, there is a need to save for the long-term — for kids’ education and retirement. We are well positioned to provide quality wealth management services to the mass-affluent segment to help fulfil their important goals in life.

Which are the markets that seem attractive at the moment?
Our quarterly global fund managers survey indicates that the relative allocation to equity market will improve during the third quarter. At the same time, within the global equity market, Asia (excluding Japan), particularly the Greater China region, will continue to attract more inflows because of the continued growth. And recently, we have seen the market reaching a relatively high level compared to March. Sensex in India has almost doubled in about six months’ time. So that is a sign that the money is flowing back into the market.

Source: http://economictimes.indiatimes.com/articleshow/5035815.cms?flstry=1

U.S. Economy May See Its Slowest Recovery Since 1945

The U.S. recovery may be the slowest since World War II to regain all the ground lost during the recession, even if economists’ more optimistic forecasts for expansion turn out to be right.

The slump this time was so deep, said JPMorgan Chase & Co. chief economist Bruce Kasman, that the 3.5 percent average quarterly growth rate he sees in the next year won’t be enough to bring gross domestic product back to its $13.42 trillion pre- crisis peak. That’s in contrast with the last 10 recoveries, when GDP returned to its previous levels within 12 months.
The result: A year after the Lehman Brothers Holdings Inc. bankruptcy helped drive GDP down to an annualized $12.89 trillion in the second quarter, there’s still “plenty of malaise,” Kasman said. Unemployment may remain close to the current 26-year high of 9.7 percent through 2010, upsetting voters ahead of mid-term Congressional elections and forcing officials to keep interest rates near zero and the budget deficit around this year’s record $1.6 trillion.

“This will be the most disappointing recovery,” said Kasman, whose forecast compares with the median estimate of 2.5 percent growth in a Bloomberg News survey of economists.

The U.S. might not recover the 6.9 million jobs and the $13.9 trillion in wealth lost during the recession until about the middle of the decade, said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. The unemployment rate may never get back down to the 4.4 percent low of 2007, he said.

Cyclical Revival

Stock prices may take three or four years to reach their previous highs as the cyclical revival of the economy gradually boosts corporate profits, said Allen Sinai, chief economist at consulting group Decision Economics in New York.

“It will be a bull market, but not a roaring bull market,” Sinai said. He sees the Standard & Poor’s 500 stock index rising to 1,100 by the end of 2009 from its close of 1,042.73 on Sept. 11. The index hit a record 1,565.15 on Oct, 9, 2007, and then fell to a 12-year low of 676.53 on March 9, 2009.

Companies, particularly retailers such as Macy’s Inc., may have to adjust as consumers buy less. Household spending as a share of GDP might fall to its long-run historical average of 65 percent from 70 percent in the past decade as people opt to save more, according to economists Peter Berezin and Alex Kelston, of Goldman Sachs Group Inc.

Biggest Drop

The restrained performance that is forecast for the economy reflects both the depth and the origins of the recession, which began in December 2007. The 3.9 percent decline in gross domestic product was the most since World War II.

While Nippon Yusen K.K., Japan’s largest shipping line, has been able to raise rates on container services to the U.S., it continues to lose money on the business. Mikitoshi Kai, head of investor relations for the Tokyo-based company, said in an interview that “we need to increase rates by a lot more to make a profit.”

The decline has been a “balance-sheet recession,” says Richard Koo, chief economist at Tokyo-based Nomura Research Institute. Those take time to recover from, as once highly leveraged banks and consumers gradually reduce their debt, he said.

Fed Outlook

Policy makers may have to keep interest rates low and the federal budget deficit high to push the economy forward as financial institutions and households adjust. Federal Reserve Chairman Ben S. Bernanke and his fellow central-bank colleagues might hold their target for the federal funds rate between zero and 0.25 percent through 2010, said Kasman at JPMorgan in New York, the second-largest U.S. bank. That’s the rate at which commercial banks lend each other money overnight.

“The Fed may need to maintain fairly low interest rates over a period of many years,” Berezin and Kelston, of New York- based Goldman, the fifth-biggest U.S. bank, wrote in a Sept. 9 report.
On the fiscal front, the deficit will total $1.29 trillion in the year starting Oct. 1, boosted by a $787 billion stimulus package and aid to banks, according to Maury Harris, chief economist in New York at UBS Securities, a unit of Zurich-based investment bank UBS AG.

“I suspect the deficit will continue to balloon for years,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund who is now a professor at Harvard University in Cambridge, Massachusetts.

‘Wild Card’

The “wild card” is the political impact the economy’s chronic difficulties will have on mid-term Congressional elections in November 2010 and beyond, Kasman said.

Democratic lawmakers in the House of Representatives are particularly vulnerable if voters blame President Barack Obama for a sour economy, said Nathan Gonzales, political editor for the Rothenberg Political Report in Washington.

Since 1945, the party that controls the White House has lost an average of 16 House seats in a president’s first midterm election, according to the Cook Political Report. Obama’s Democratic Party currently has 256 seats in the chamber, compared with 178 for the Republicans.

In the past, deep recessions have often been followed by rapid recoveries. That’s what happened in 1982-83 as the economy surpassed its previous peak in about six months, thanks to a 7.2 percent surge in growth. Behind the turnaround: aggressive monetary easing by the Fed, which brought short-term interest rates down to 8.5 percent from 15 percent in 1982.

No ‘Gas’

“We thought that if we really stepped on the gas, the economy would take off, and it did,” said Lyle Gramley, a senior economic adviser for New York-based Soleil Securities who was a member of the Fed’s board at the time. That option isn’t available to the central bank now as the overnight interbank rate is at zero.

The Fed has also been hampered by a credit crunch that has restricted the flow of money from lenders to borrowers, Gramley said. Banks, faced with mounting credit losses, have tightened terms and standards on loans to businesses and households since the middle of 2007, according to the Fed’s tri-monthly survey of lending officers.

That’s akin to the situation in 1991-92, when tight credit in the wake of the savings-and-loan crisis restrained the recovery, according to Gramley. It took about nine months for the economy to return to pre-recession production levels as growth clocked in at an average 2 percent.

Borrowing Falls

Household borrowing fell by a record $21.6 billion in July to $2.5 trillion, the Fed reported on Sept. 9. The drop was the sixth straight monthly decline, the longest since the 1991 credit crunch.

Behind the fall: Banks are becoming stingier in handing out credit while consumers are growing more wary of taking on more debt. The savings rate rose to a 14-year high of 6 percent in May before falling to 4.2 percent in July, government data show. It was 1.3 percent at the start of 2008.

Retailers are taking notice of the increased consumer thriftiness, including Cincinnati-based Macy’s. Chairman and Chief Executive Officer Terry Lundgren told Bloomberg Television on Sept. 8 that the second-largest U.S. department-store company has reduced inventories “fairly significantly.”

Home builders may have to adjust, too. Sales of new houses jumped 9.6 percent in July, the most since February 2005, to a 433,000 annual pace. That was still less than half the 923,000 average since the start of 2000.

The increase in sales has helped boost the price of copper. Copper for delivery in three months closed Sept. 11 at $6,250 a metric ton on the London Metal Exchange. That compares with $3,231 on Jan. 2 and a high of $8,730 in April of last year.

“There were huge excesses built up during the expansion,” Sinai said. “It may take the economy a few years to get back to its previous peak.”

Source: http://www.bloomberg.com/apps/news?pid=20601109&sid=aBj5AeyQqun8

Lessons from the world financial crisis

(D. H. Pai Panandiker is President of RPG Foundation. The views expressed in this column are his own)
By D. H. Pai Panandiker
The collapse of Lehman triggered the world financial crisis this time last year. Stock markets crashed; credit was frozen and banks were scurrying for cash; crude oil prices dipped and gold prices shot up; investment shrank.
Finally, the financial crisis translated into recession with severe loss of employment and income. With the inter-linking of economies no country escaped these drastic consequences.
India was hit badly but avoided recession. Nevertheless growth dropped and is yet to recover. FIIs repatriated more than $13 billion and deepened the fall in stock prices.
Sensex plunged 62 per cent, much more than Dow Jones. The RBI had to draw down reserves. The rupee fell 20 per cent, industrial production declined and exports slumped.
Indian banks, except probably two, did not have exposure to sub-prime debt since they did not have much international business. Besides, the regulations of RBI did not permit excessive debt:equity ratio. Hence Indian banks were largely unaffected.
The international crisis prompted the Indian Government to act. That was more to avert recession than to back up the financial system.
Stimulus packages were introduced mainly aimed at increasing demand by reducing excise duties and increasing investment in infrastructure. The RBI did pump in liquidity with cuts in CRR, SLR, and the repo and reverse repo rates. Recovery has started but progress is slow.
There are lessons to learn from the crisis and new initiative to be taken.
First, with large infusion of cash by Federal Reserve, it is likely that the dollar will weaken in future against other currencies. RBI has a large part of its foreign exchange reserves in dollars and should therefore change the composition of reserves in favour of the euro and gold.
Second, although most banks are owned by Government, they should be financially sound on their own. Therefore the capital base of banks has to be sound and conform to the new Basel standards. Banks should be modernized and to attain economic size through mergers.
Third, financial supervision has to be strong. That also requires that there should be coordination among the concerned agencies like the RBI, fiscal authorities, Sebi, etc.
Fourth, regulation should go hand in hand with innovation of financial instruments. The financial crisis was to a large extent spurred by financial instruments like Collateralized debt obligations (CDO).
Fifth, RBI should keep constant watch on liquidity requirements. The financial system in the U.S. would have collapsed but for the timely release of cash by Federal Reserve. The measures taken by RBI were a little too late.
Sixth, Government should curb fiscal deficit to ease pressure on the market and continue to take steps to open up the economy, whether in respect of trade, convertibility of the rupee, external commercial borrowing and foreign investment, since the benefits would be much more than the safety of a closed system.
It appears that the worst is now over and the salvage operations are complete. It is time to reform the system to enable it function smoothly and efficiently under good supervision.

Source: http://in.reuters.com/article/economicNews/idINIndia-42327820090909?sp=true

The sharp contraction in the U.S. economy "seems to be ending"

The sharp contraction in the U.S. economy "seems to be ending" but recovery will be slow with risks still looming from the weak labor and housing markets, the International Monetary Fund said on Friday.
The IMF, in its annual report on the U.S. economy, stuck to earlier forecasts that gross domestic product will shrink by 2.6 percent in 2009 and then rise by 0.8 percent in 2010.
The report was prepared before U.S. data on Friday showed the economy contracted by a 1.0 percent annual rate in the second quarter.
"As a result of their increasingly strong and comprehensive policy measures, the sharp fall in economic output seems to be ending, and confidence in financial stability has strengthened," the IMF said in its report, which followed consultations with U.S. officials and institutions.
"Nevertheless, with financial strains still elevated, the recovery is likely to be gradual, and risks are tilted to the downside," it said.
The IMF said unwinding fiscal and monetary stimulus measures would have to wait until a sustainable recovery is underway. But they need to develop exit strategies from stimulus programs, strengthen financial regulation and in the medium term cut budget deficits.
Charles Kramer, head of the IMF's North American Division, said the United States may need more stimulus measures if economic and financial conditions worsen significantly.
Still, he said, policy-makers should be thinking about how to end the generous fiscal and monetary policy measures put in place over the last 10 months.
"We should emphasize that now is not the time to implement the exit, but it's a good time to be developing and communicating exit strategies to underpin confidence," Kramer told reporters on a conference call.
The IMF's North American division deputy, Marcello Estevao, said rising unemployment is the greatest threat to recovery efforts.
"The weakness in the labor market is going to reflect into the weakness in the housing market. When people lose jobs, wages don't grow as much, it's harder for people to pay their mortgage, Estevao said.
"There is substantial uncertainty exactly how this feedback would play out. And that is one of the reasons we have this very gradual recovery outlook for the U.S."
He said the IMF sees U.S. GDP growing "a little bit" in the second half, with a sustained recovery not starting until the second quarter of 2010.
The IMF's forecast for unemployment was unchanged, seeing 2009 unemployment averaging 9.3 percent and rising to 10.1 percent for 2010.
DIVERSE FED TOOLKIT
The IMF directors said the Federal Reserve would need to maintain a diverse set of tools to respond to evolving market conditions, and it recommended that assets it holds from bailed-out financial institutions, known as the Maiden Lane facilities, be transferred to the U.S. Treasury to protect the central bank from credit risk.
The value of assets that the Fed has taken over from American International Group (AIG.N), for example, have been reduced by several billion dollars in recent months.
The IMF welcomed the Obama administration's efforts to revamp the U.S. financial regulatory system, and said this should aim to discourage size and complexity among financial firms to limit potential systemic risks in the system.
The IMF also maintained its view that the U.S. dollar was "moderately overvalued," though Kramer noted the dollar has been volatile because of safe-haven flows into U.S. assets during the crisis and the subsequent unwinding of that as the crisis eased.

Budget Highlights

Highlights
Taxes
· Surcharge of 10% on personal income tax removed
· No change in Corporate taxes
· Increase exemption on personal income tax by Rs 15,000 to Rs 2,40,000 for senior citizens
· Increase exemption on personal income tax by Rs 10,000 to Rs 1,90,000 for women
· Increase in exemption on personal income tax by Rs 10,000 to Rs 1,60,000 for all others
· Surcharge of 10% on personal income tax removed
· Propose to phase out surcharge on Direct Taxes
· To remove Fringe Benefit Tax
· To remove Fringe Benefit Tax
· States agree on basic structure of Goods and Services Tax
· To raise Minimum Alternate Tax(MAT) TO 15 % of book profit
· MAT hiked from 10% to 15%
· Commodity Transaction Tax scrapped
· Carry Forward Tax credit on MAT to 10 year
· To exempt Pension trust from Securities Transaction Tax
· To create Alternate Tax disputes resolution mechanism for foreign companies
· Software Technology Parks of India (STPI) extended by a year
· GST to be a dual regime with Central and state terms
· No Securities Transaction Tax (STT) on sale/purchase of shares by NPT

Reforms, Tax reforms
· To work on Saral 2 form to make income tax procedure simple
· Tax reform system to be completed in 4 years
· Balanced approach to financial de-regulation in justified
· Review and aims of the budget
· It a mandate we accept with humility and will do all we can for the welfare of the nation
· Strong mandate for growth
· Sensitive to the challenges of a young India
· The govt has to sustain a growth of 9% create 12 mn jobs per year
· Reduce poverty levels by half by 2014 infrastructure investment to more than 9% by 2014
· Focus to sustaining momentum in exports
· Strengthen primary healthcare delivery
· Plan to strengthen primary health care
· Broaden inclusive growth agenda
· Our target of agricultural growth at 4%
· Signs of revival of domestic industry
· Fiscal deficit has widened from 2.7 % to 6.2% of GDP
· Institutional reforms to bring the fiscal deficit under control

Challenges
· To get the GDP growth to 9% at the earliest
· To deepen the process of inclusive development
· To reenergise govt, govt must provide service with accountability
· Growth driver in the last 5 yrs has been private investment
· Structure of Indian economy has changes in last 10 yrs
· Now services constitutes more than 50% of GDP
· Increase investment in infrastructure to 9% by 2014
· To focus on infrastructure development
· Growth co-operative effort of Centre and States
· Job growth rate hit by dip in GDP
· Integration of Indian economy with the world has opened up new opportunities and new challenges
· Aim to return to FRBM target at the earliest

For revival
· Govt provided three stimulus package
· RBI took monetary measures to meet the needs of productive sector
· This led to fiscal deficit to rise to 6.2% in 08-09
· We achieved a growth of 6.7% of GDP last fiscal
· Signal of recovery visible in the last few months
· Uncertainty about revival of global economy remains

Infrastructure
· We had set up IFFCL to provide financial assistance to infra companies
· IIFCL will be given greater flexibility
· IIFCL will refinance 60% of bank loans in critical sectors
· IIFCL will evolve a take-out financing schemes for incremental funding in infra
· Fiscal stimulus at 3.5% of GDP helped economy revive
· Sensitive to the needs of young India
· Endeavour to make Budget participatory and ensure continuity
· Significant increase in capital inflows needs
· PPP to be encouraged especially in infrastructure
· Need to improve and strengthen regulatory framework
· To speed up Golden Quadrilateral Project
· Total investment of 100000 CFR in infrastructure
· Need to remove bottlenecks for speedy implementation of infra projects
· Highways allocated 23% more than 08-09
· Rs 15800cr for Railways
· JNURM allocation increased by 80% to Rs 12887 cr
· Basic amenities for urban poor to get more than 3000 cr to make country slum free in 5 yrs
· Provision for housing urban poor at Rs 3973 cr
· Allocation to NHAI increased to 23& Y-O-Y
· Fiscal deficit has widened to 6.7% of GDP
· Target agriculture credit inflows ay Rs 3.25 lakh cr
· · Focus of NCC, Gammon for highway development
· JNNURM to get more than Rs 12000 cr up 87%
· Basic amenities for urban poor to get more than 3000 cr to make country slum free in 5 yrs.
· Provision for housing urban poor at Rs 3973 cr
· Allocation to NHAI increased to 23& Y-O-Y
· Fiscal deficit has widened to 6.7% of GDP
· Target agri credit inflows ay Rs 3.25 lakh cr
· Focus of NCC, Gammon for highway development
· Rural electrification allocation up 27%

Agriculture
· Interest subvention scheme for agriculture loans to continue
· 60% population depended on agri
· Sustained increased in plan allocation
· Target credit flow Rs 325000 cr
· Loans upto 3 lakh at 7% per annum
· Those who pay their loans in time will get loans at 6%
· Task force set up to look into farmer suicides in Maharashtra
· Rajiv Gandhi Krishi Vikas Yojana allocation up by 30%
· Fertilizer subsidy to go to farmers directly
· To move towards Nutrient based subsidy regime
· Additional allocation of Rs 1,000 crore for accelerated irrigation project
· Central assistance for storm-water drainage project increased to Rs 500 crore from Rs 200 crore in the interim Budget

Exports
· Market development assistance schemes allocation up by 180% to 124 cr
· Interest subvention extended to march 2010 for employment extensive export sector
· Special fund for small industries development bank of Rs 400 cr
· Focus to sustain momentum in exports
· 2% Interest subvention for exporters
· Extension of interest subvention scheme extended upto March 2010 to cover sectors like handicrafts and handlooms
· Allocation for market development assistance scheme enhanced by 148 per cent
· To set up handloom mega clusters in Rajasthan, West Bengal and Tamil Nadu
· Export Credit Guarantee scheme extended till March 2010

Oil and gas
· Domestic oil prices should be in sync with global crude
· National gas grid to be set up
· Outlay for Assam Gas Project increased
· Effective interest rate is 8% for farmers with foreclosures
· Expert group to be set up petro product pricing
· Domestic oil prices should be in syncy with global crude
· To develop National Gas Grid

PSUs, banks and Insurance
· To hike promoter shareholding in PSUs
· Encourage people participation in disinvestment
· Banks and insurance will remain in public sector and will get all support
· Banking network to be expanded
· One banking centre in every block planned
· 160% hike in ADPRP
· Capital in fusion in PSU banks to keep them competitive

Inclusive development
· Creating entitlements backed by legal authority to provide basic facility to the aam aadmi
· NREGA gave employment to 4.4 cr household
· Reserve wage of RS 100 per day as an entitlement under NREGA
· Rs 39100 cr for 09-10 for NREGA an increase of 140%
· NREGA allocation increase at 144%
· New scheme PMAGY for integrated development of under developed villages

Pilot project this year
· Poverty eradication goal by 2014-15
· Interest subsidy to poor families for loans upto Rs 1 lakhs

Pension
· Substantially improve pension for armymen
· Pension benefit extended to war wounded being liberalised
· One Rank One Pension committee recommendations accepted

National Food Security
· BPL entitled by law for Rs 25 kg of rice/wheat at Rs 3 kilo
· Bharat Niraman allocation up 45%
· PM Gram Sadak Yojana allocation up to Rs 12000 cr
· Indira Gandhi Awas Yojana allocation up by 63%

Women and child development
· Focus on women self help groups
· 22 lakhs such groups of women active today, aim to link such self help groups to banks
· Corpus for such schemes to be raised to Rs 500 cr in this fiscal
· Aim to reduce female literacy by half in 3 years
· New scheme to give interest subsidy to poor students pursue any recognised course

Climate change
· Rs 562 cr for national river and lakes conservation

To build accountable institutions:
· RTI act an important step in ushering in accountability
· Unique ID project is major step in this regard: it also marks a beginning of the private involvement in projects of national importance

Police and security
· Rs 430 cr for police modernisation
· 1 lakh housing units for central paramilitary forces
· Borders: 2284 cr for strengthening of borders

Education
· Rs 50 crore for Chandigarh University
· Interest subsidy on loans for higher education
· Rs 2130 crore to set upto more IITs and IIMs
· Spending on higher education raised to Rs 2010 crore

Minorities
· Allocation hiked from Rs 1000 cr to 1700 cr in 09-10
· Scholarships for minorities
· AMU to get Rs 25 cr for each of its new campuses
· Rs 1740 crore outlay for minorities

Budget estimates
· Rs 1020838 cr total budget allocation for 09-10
· Out this more than Rs 6000 cr is planned expenditure while the rest is non-plan
· Increase in non-plan expenditure was due to pay commission and food subsidy
· Interest payment consists of 36% of non-plan expenditure
· Defence outlay up from Rs 105600 cr in 08-09 to 104703 cr in 09-10
· Total tax receipts expected at Rs 641079 cr
· Revenue deficit is estimated at 4.8% and 4.6 as per provisional account for 09-10
· Revenue deficit as percentage of GDP is pegged at 6.8%
· To spend Rs 10.20 lakh crore as total expenditure in 2009-10, crossing the Rs 10 lakh mark for the first time in history
· Increase in plan expenditure 34 %, non-plan at 37 %
· Revenue deficit projected at 4.8% in FY 10
· Fiscal deficit projected at 6.8 % in FY 10

Others
· DEPB scheme for print media extended
· Stimulus package for print media extended to Dec 31
· Hike in allocation for management of Mumbai Floods
· New project for modernisation of employment exchange
· A national web portal for the same
· New programme for rehabilitation of those effected by cylone Alia

"Recession Is The Best Time To Invest" : McNally Capital

McNally is advising a family office to set up a $150M healthcare focussed PE fund in India.

Chicago--based McNally capital is an investment firm that addresses the private equity needs of family offices and high networth individuals (HNIs) with two core businesses: a $75 million US based buyout fund that makes controlled investments in US based firms that have an opportunity to leverage India, and second, managing private equity assets of family offices worth $150 million.
Their family office clients, numbering over 100 and located either in US,India or the UAE, are looking to invest in Indian funds, fund of funds with an India focus and also at making direct investments into companies. It is currently working on a $150 million healthcare focussed private equity fund for India, with an NRI family as the main investor. VC Circle's Shrija Agrawal spoke to John P.Rompon, Managing Partner, McNally Capital, on their India plans. Rompon's association with India goes back to 20 years, when he was the CEO of Brigade Corporation, a General Atlantic Portfolio Company based out of Hyderabad. Excerpts:
 
How is McNally's strategy in India evolving?
As a buyout fund, we will take control positions in companies that can leverage India either as a "sell to" or "deliver from" destination. We could subsequently look at those firms making acquisitions abroad. We believe that there is a trend of Indian companies making acquisitions in the US. We see an opportunity where our portfolio companies can be acquired by Indian companies. Our experience in India would be helpful.  
Secondly, as for our managed account business, our family office clients like to make investments in India, either in the funds which have an India focus, fund of funds with an India focus or directly in Indian companies. At the moment we have 106 families in our system and many of them are interested in investing in India or have already made investments in the country. We have not invested directly in India till now.
 
What do you think about the India story? How do you see that unfolding?
I am very bullish on India and have been for several years. My bullishness does not come from an interest in labour arbitrage, rather from a first hand observation of the talent and skill level that's available from the work force. India has an advantage over several other developing countries.
 
 
Private equity is still at a nascent stage in India. We don't see many controlled transactions. Do u think that India will transition to a mature buyout market?
 
I think the balance of trade between India and the rest of the world will revert to positive from its current negative, and I believe that liberalisation of the foreign direct investment will encourage control investments. One challenge is that within India, the best companies are family controlled and these families are typically reluctant to give up control. So the first stage in the process may be that domestic or foreign investors are allowed to take economic control of Indian companies but not take governance control. It goes on to say that even if the investors own more than 50% of the shares, they won't necessarily be able to control the board. The second phase would be that would permit domestic or foreign investors to take both economic and governance control.
 
Any particular deals that you are working on right now in India?
Yes, the areas that interest us are principally in the health care area and in business services. We are currently working with one of our investors who wants to set up a private equity fund focused on health care opportunities in India.
 
Which one is that?
well I can't identify the investor for you. I would just describe this as an Indian family that's been in the US for the past 20 yrs and is working to establish in India.
 
And how big would be this healthcare focussed private equity fund?
The fund is targeted to be $150 million.
 
 
Talking about current fund raising environment, do you think its easy to raise funds right now?
No, it's not easy to raise funds right now, but it's a great time to invest.
 
Any value picks that you are seeing in India right now?
The best time to invest historically has been recessionary period and a negative GDP growth. So in the US we have negative GDP growth now, which is an outstanding time to invest. Within India there is no negative GDP growth, and it is expected to grow at 6 to 7%. Since it's a slow and a tedious growth rate (for a growth market like India), it is an attractive opportunity to invest in private equity in India.
I don't pretend to understand the public markets in India or elsewhere but within private equity I do think this is an attractive time to invest and the sectors that are particularly attractive have to do with staple sectors such as power, food, infrastructure and other basic commodities or companies that serve those sectors.
 
I also believe that, over the last 20 years, private equity has consistently delivered the highest risk adjustability returns than any other asset class. Secondly, more and more institutional investors are adopting an endowment style of private equity that involves investing in an asset class year over year rather than trying to time the market. I believe that all investors – both institutional and individual have come to understand the nature of private equity investing with regard to the cash flow and other elements of it, and their expectations have matured.
 
Which sub-sector within healthcare are you most upbeat about?
Historically, spending on health care increases faster than the rate at which GDP grows and this is one reason why we have been taking a hard look at the healthcare sector in India. We expect spending on healthcare to grow even faster than the rate of growth of GDP. We and our investors feel that the best opportunities that are available in service delivery and in particular ambulatory care. We believe that those investments are for the greatest returns and offer the greatest opportunity to positively impact the healthcare within India.
 
Would you be looking at any PIPE transactions?
Absolutely not.
 
Would you be also looking at distressed investing now?
we aren't targeting distressed investing, but we are targeting companies which have reached a point where they can't grow without some assistance.

Source:http://www.vccircle.com/500/news/recession-is-the-best-time-to-invest-mcnally-capital

Warren Buffett recently spoke to Fox Business about what he thinks the government should do to help the auto industry. Click below to see the intervie

India's New Rural Roads May Buffer Economy From World Recession

The 100 kilometers (62 miles) of rural roads India is adding each day may save Asia's third-largest economy from the worst of a global recession.
New roads built so far under the $27 billion program have brought urban markets within reach of 60 million village dwellers over the past five years, letting them earn money selling fruits, vegetables and milk that would have spoiled otherwise. They are now spending their cash just as the world economy falters.
``Rural demand is keeping the economy kicking along,'' said Shashanka Bhide, chief economist at the privately funded National Council of Applied Economic Research in New Delhi. ``Growth will slow in India, but not as dramatically as the rest of the world.''
Some of India's biggest companies are already benefiting: shares ofHindustan Unilever Ltd., the biggest maker of household products, and Hero Honda Motors Ltd., India's largest motorcycle maker, are up this year while the benchmark stock index has plunged 56 percent. Domestic spending will help cushion India from the worst global meltdown since the Great Depression, according to the Reserve Bank of India.
When the roads program is completed in two years, every village with 1,000 or more inhabitants will have access to all- weather roads, up from 40 percent when construction started in 2003. Spending on the project, run by the National Rural Roads Development Agency, was worth about 5 percent of gross domestic product when it was announced.
More to Come
Even at its current pace of investment, India still needs to spend more to buoy growth. The South Asian nation requires $100 billion annual investments in its highways, railways, power systems, ports and other infrastructure for the next five years, according to the government. Inadequate capacity shaves two percentage points off the nation's growtheach year, the finance ministry estimates.
Rural connectivity is increasing people's income and adding to domestic consumption, which makes up 55 percent of India's economy, compared with 37 percent of gross domestic product in China.
Hazari Lal Negi, 55, a farmer in the northern Indian state of Himachal Pradesh, says this year's crop of cabbages, potatoes, beans and cauliflower was his first not to perish on the way to market because of lack of transport.
``Earlier, we would have to haul our produce and walk all night to the nearest town to catch the early morning trucks,'' Negi said. ``We could sell only about a quarter of our produce and the rest got wasted. Now, we sell everything.'' Negi plans to expand into organic farming to boost his income.
`Consumer Boom'
``New markets are opening up for our products,'' said Pranay Dhabhai, chief operating officer at Haier Appliances (India) Ltd., the local unit of China's biggest home appliances maker. ``People's aspirations levels are rising with higher incomes. There's a huge consumer boom waiting to happen because penetration levels are so low in India.''
Haier, which opened its first factory in India last year, estimates that only 19.6 percent of Indian households have refrigerators, 27 percent own television sets and just 3 percent of homes have air-conditioners installed.
Sanjeev Chadha, chief executive officer of PepsiCo Inc.'s India unit, said the September-October period ``has been one of the best ever'' for sales.
``Buying power is coming,'' said Joerg Mueller, head of India operations for Volkswagen AG, which is building a 580 million euro ($730 million) car factory in the western Indian city of Pune. ``We are optimistic and happy to be here. We see a very positive future.''
Cushioning the Slowdown
The International Monetary Fund expects India's economic growth to slow to 6.3 percent in 2009 from an estimated 7.8 percent this year. That's still faster than the South Asian nation's average 4.5 percent expansion since 1947.
China may grow 8.5 percent in 2009, compared with 9.7 percent this year, according to the IMF. The U.S. and the Euro area may shrink by 0.7 percent and 0.5 percent in 2009, the Washington-based lender said.
``Overall, India is still poised to rank as the second- fastest growing major economy after China,'' said Rajeev Malik, regional economist at Macquarie Group Ltd. in Singapore. ``Consumption expenditure is poised to be resilient, but investment spending will be hit owing to scarce availability and higher cost of funding.''
Even though India has a domestic consumption-led economy, its growth may be hampered by slower investments by companies as borrowing options dry up in a global recession.
Lending Slips
Investor appetite in the stock market has waned, with overseas funds selling a record $12.7 billion of equities this year. Foreign lenders are shying away from emerging markets like India, as Europe and Japan last quarter slipped into recession.
The rural roads program is financed by the federal government using revenue from an additional tax imposed on the sale of diesel.
``India can't be fully insulated from what's happening in the rest of the world,'' said Rajat Nag, managing director at the Manila-based Asian Development Bank. ``Infrastructure financing will be tight for a while.''
Nag said India's banks are well capitalized and can afford to step up lending. They have just $1 billion of toxic Western assets out of a total loan portfolio of $510 billion, according to the central bank. The global credit crunch has seen financial institutions around the world write off or lose $965.8 billion.
To stimulate investments, India's central bank has slashed lenders' reserve requirement in cash and bonds by 3.5 percentage points and one percentage point respectively and cut interest rates by 1.5 percentage points in the past month.
``India is connected with the global crisis, but not as severely as other Asian countries,'' said K.V. Kamath, chief executive officer of ICICI Bank Ltd., the nation's second- biggest. ``We will have to get back to the consumers to get India back on a higher growth path.''

World Bank should help India, says Chidambaram

Frankfurt: Finance Minister P Chidambaram has said that the World Bank should enhance assistance to India to help tide over the fallout of the global financial crisis on his way to the G-20 summit in Washington.
''The World Bank can step up lending to India from the present level of three billion dollars a year for Central and State projects and programmes. It is very important that the few countries that are able to drive economic growth and other countries which are put on the bandwagon of development, should not suffer in the period during which we grapple with the world crisis. Resources must be made available to developing countries, including India, so that they can continue to grow,: Chidambaram said.
Chidambaram and Prime Minister Manmohan Singh made a brief stop in Frankfurt, on their way to Washington where the Finance Minister made the appeal.
World leaders are meeting in the Washington to discuss ways to tackle the global financial meltdown.
Manmohan Singh is likely to demand a bigger say for India in financial bodies such as the International Monetary Fund and the World Bank.
He is also likely to express India's desire to cooperate with China, South Africa, Mexico and Brazil with regard to monetary and fiscal policies.

Source: http://ibnlive.in.com/news/world-bank-should-help-india-says-chidambaram/78145-7.html

One of the successful person in predicting Indian & Global Market Condition in this once in a life time MELTDOWN

Look at the article published in moneycontrol on 14th Oct. Mr. Sankar Sharma is the only one who predicted market to go below 10k openly in early Oct.

Sensex could dip below 10K levels: Shankar Sharma

Shankar Sharma of First Global said poor IIP numbers and a sell-off in metals is the beginning of a sharp correction. "Newsflows are still poor. The markets have still not bottomed out. We don't see the Sensex rising beyond 12,500 in the current move and expect a further downside in October. The Sensex could head back to 10,000 levels, and may even dip below that."

According to Sharma, markets won't re-conquer fresh highs in the next three years. "The environment in equities is likely to be tough over the next few years. The situation in the US is getting worse. The S&P 500 could dip to 600 levels. We see a 40% downside in emerging market equities."

On the rupee, he said the rupee is also not secure at current levels, and may test new lows. "Even if emerging markets stabilize, currency problems will worsen the impact."

He feels RBI's last few CRR hikes may have been excessive. On liquidity, Sharma said India had a lot of liquidity but it was sucked out by RBI. "The central bank may be slightly behind the curve in freeing liquidity. Sentiment in market has soured, so fresh liquidity may not work. The Monetary Policy may not change the course of downward trend."

Here is a verbatim transcript of the exclusive interview with Shankar Sharma on CNBC-TV18. Also watch the accompanying video.

Q: Your targets for the year got hit last week. Do you still expect lower levels from here or do you think we have hit some kind of a bottom?

A: The real problem is that while we did have a target of 10,000 at the beginning of the year, it is a target that you would be happy to get wrong rather than get right. The Sensex at 10,000 means that everybody gets hit whether it is a bull or a bear. The fact of the matter is the aggregate community of financial services get hit, the whole economy gets hit.

So, there is no great pleasure in seeing the target get achieved. That said, our view remains that – the first part of any market’s move is almost always dictated by what is just presently visible. What was visible that India was just going into a small slowdown from 9% GDP to maybe 7.5-8%, and the world was hit but not that badly hit.

Back in May or June, whilst at least our view was that one or two banks would go belly-up, there was by no means our view that there would be a mass scale decimation on Wall Street and Main Street banks like Wachovia or Washington Mutual.

So, you see when the markets go into a certain bear market territory, a new fact emerges, which can only buttress the fact that the original move of the market was correct, and it started selling off before much of the bad news was visible. Once the bad news has continually gotten worse, the markets have continued selling off.

As we stand right now, I cannot understand how the US gets out of the kind of mess it is in, or how for that matter Europe gets out of the mess it is in. Asia is getting into one slowly but surely. You have Singapore in a technical recession, you have New Zealand in recession, you have Australia in big trouble. Australia has exactly the same characteristics as the UK or the US – big property bubble. So, pretty much the same kind of venom exists there.

The UK is in deep trouble, Eurozone banking system is all shot to hell. You have banks like Deutsche et cetera still between 45 and 50 times leverage on tangible networth. Banks like Barclays that have gone and bravely bought Lehman Brothers but then on the backside they go and seek financing from the Bank of England.

I don’t see the landscape changing at all for the better. You have a country like Iceland going completely bankrupt. In the US, based on whatever we have heard a lot of problems still exist on the Lehman Brothers CDS’. So, it is all those factors.

Coming home, you have had terrible IIP numbers coming in from our own companies. You saw the metal pack sell-off today. I think that is just the beginning of a big correction downwards in metals. It started a little while back, and that is something we need to be very clear about that how can the whole world be experiencing a slowdown and steel and iron ore companies record profits.

I don’t see how the new bad news has abated. In fact if anything the world looks a lot more bleak than it did back in January. Much as I would want to see that the market has bottomed out, I don’t think that case can be made just yet.

Q: How much would you give the current pullback, given the regulatory action that you have seen in the last 48-72 hours? Can you play for a couple of thousand points more on the Sensex, or do you think that is being optimistic?

A: That is being terribly optimistic. I wouldn’t say with any degree of conviction that the market can go beyond 12,500. I think that is the absolute top. I doubt if it will get there, in this move itself, looking at the way the price action happened today. 

This was on the back of a pretty strong Asia rally, and even as we speak, Europe has been holding up quite well. Despite that, India kind of decoupled strangely enough for the first time in a couple of months because India has generally been one of the relative better performers. Even though it has been down, it has been down a lot less than others say a Brazil or a Russia, in the last leg of the bear market. This was a big disconnect move. The rest of the markets were quite okay. But India sold off, and that is not again a good sign.

So, I doubt if the market can make its way beyond 12,400 or 12,500, if at all it can make its way back to even that level.

Q: Do you think in the next few weeks, the market will try and hold a bit of a range between 10,000 and 12,500 or are you seeing substantially lower than 10,000 levels even in 2008?

A: This range is a pretty weird thing. I don’t understand why people keep talking about trading ranges. Everything is a trading range from 3,000 and 21,000 would have been a trading range. So, the fact is that the markets are headed lower in our view.

My sense is October is not over yet, and October is a cruel month. In our view in September was that October would really be a cruel month. So, far that has not changed.

Our take is you will probably again go back to levels closer to 10,000 or probably a tad lower than that, because if you think about it, and view it in context, our basic broad theme this year has been to be long US equities and short emerging markets. The trade has actually worked very well, and more so if you account for the currency, where the dollar has completely decimated all other currencies including the euro, the riyal or the rupee, and the Aussie dollar, except the yen. Other than that, all other currencies have weakened markedly. So, US equities have actually outperformed significantly this year.

They are still down about 30-35% for the year while the rest of the markets are down about 55-60%, and more if you look at their own currencies.

Therefore, if you think about it, the US situation keeps getting worse. Companies like GE are in deep trouble. Obviously mainstream banks are in no good shape. Investment banks whatever are remaining are very shaky. I doubt if Warren Buffett’s USD 115 call option will ever get exercised because I doubt if Goldman Sachs would go back to USD 115 any time soon.

So, my target on the S&P 500 is probably 650 or maybe 600, which is lower than where it was in 2001. So, if you think about it, it is a good 30% away or thereabouts.

If EMs underperform then that means you are looking at about a 40% downside to general EM equities. If you just go straight by that analysis, you are looking at substantial downsides overall for the entire emerging market pack, not just India, but if you take a Brazil or Russia or a China or India or Mexico. We think that there is still pretty substantial downside merely based on the fact that we think the US is still headed lower, and US would still outperform other markets, despite being headed lower. Therefore, other markets would go down more than what the US is going down.

So, it could be a combination of two things. In absolute price terms we go down lower, or we may go down by let’s say 20% and the currency does the rest because the rupee by no means is secure at 48-49 to a dollar. I think it will take out its lows quite comfortably. So, a combination of price action and currency will mean that we will go down 30% from here in dollar terms.

Q: Last time I spoke to you, you were saying that we will go to probably 10,000 but you didn’t see the Sensex at 8,000-9,000 and that was unlikely in your eyes. Do you think the way events have unfolded; those scenarios could also turn true?

A: You can make a forecast based on what is reasonably visible. You cannot jump too far ahead of the curve. But clearly the last one month’s events, although by no means were completely unforeseeable. The fact is the ferocity of the problems, and that especially happened after the Lehman bankruptcy, with the entire freeze in the credit market globally and the liquidity squeeze back in India, which has had no problems of the kind that the west is experiencing, but our liquidity - prices seem to be pretty significant.

And just looking at price action you see the market doesn’t even hold an intraday rally. That is telling you that 10,300 or wherever we reached last week is not absolutely set in stone that it doesn’t get violated. I wish it doesn’t get violated but evidence on the ground here and globally doesn’t suggest that any lows established in the last week are inviolable. 

Q: We have seen quite a bit of regulatory action in India as well. The Reserve Bank is trying to throw liquidity. May be it will cut interest rates. To what extent can that come as a relief to the stock market?

A: For one, I have been personally very critical of Dr. YV Reddy’s last few CRR hikes. That was excessive and he was just trying to go by the textbook that if you have inflation – you have to tighten and inflation will therefore come-off. I don’t think you can play everything by the textbook. Some things have to be played outside of the textbook and the fact is that our inflation problem was an imported problem and that had nothing to do with domestic demand – whether it is a crude oil or agricultural commodities. I think he went too far overboard in his desire to quell inflation and the result of that has been that lot of money got sucked out of the system through the various CRR hikes and that when you look at in a global context, every single country across the world is reeling from a credit crunch. 

India had a lot of slosh in liquidity. We sucked it back. Now we are again a little bit behind the curve. We are trying to give it back. But when markets have already turned sour then these actions while they have to be done and let us face it – there is no other way out but for the RBI to let go of the tight reins, I doubt if that will mean a lot for equity markets in India as they have not mattered even for global equity markets. The Fed has been doing what it can do and probably a lot more than it can do. It is already having a pretty bad looking balance sheet on its own. The ECB has for the first time turned dovish – cut rates after many months, if not years, of staying put and every other economy that has been tightening is actually loosening now. 

But equity markets are still headed lower because monetary policy is a blunt instrument. It can have a day or two to rally but that’s about it and I doubt if it changes the basic course of a downward spiral just as raising interest rates in a bull market can pause the bull market for a day or two but it doesn’t necessarily finish a bull market off. 

Q: The last leg of the fall has been hastened at least for the index by two largecap names – Reliance which we spoke about last time and ICICI Bank which got in the midst of all sorts of rumour mongering. Where do you see these two heavyweights going from here?

A: In the last episode, we spoke about Reliance as being the largest threat to the market and it has been a laggard in the last couple of months. Our view on that has not changed. We think because of lower oil prices and the fact that it is very large over owned stock we think it is headed lower and will underperform the markets. 

On ICICI Bank – our view on banking generally has been that banks in India were trading way too expensively for us to like them and between 2.5 and 4 or 5 times book about a year back. A lot of that valuation has contracted and ICICI Bank has gone all the way down to book value. The rumours I have no idea about what value to attach the rumours but the fact is rumours or not, the stock has sold off big time and which is not the same case for any other bank in the entire peer group whether you take private sector or the public sector banks. 

The fact is that ICICI Bank has an overseas subsidiary. ICICI Bank says that it has investment grade paper in those asset books. Investment grade paper in today’s context, I would attach very little value to because AIG was double AA rated on the morning that it was seeking USD 85 billion in financing and I am sure lot of the US banks are still rated A or AA. The US itself is rated AAA which I cannot understand which credit rating agency doing proper arithmetic can rate that country as AAA? 

We are not big fans of credit rating agencies and I doubt if anybody sensible would be. So, holding investment grade paper in today context may or may not lend much comfort to investors. What would lend comfort is the fact that the investment grade paper is in reality truly investment grade and we would love to get more details breakdown of those assets because like I said, lot of the world is holding investment grade paper which is really not what the paper is printed upon. Iceland was investment grade till it went bust. That tells you. I would not attach too much importance to an S&P rating or a Moody’s rating because they have all shown themselves as to be completely compromised in every sense of the word. They have been the root cause of this entire problem. 

ICICI Bank has suffered. I don’t know rightly or wrongly. I have no real call on that because in banks, it is very hard to make out asset quality and such things without getting full access to the books. All I can say is that the stock looks cheap if everything is absolutely fine and the book is in absolutely fine fettle irrespective of this investment grade logic – the book is generally in good shape. We think at book value it looks attractive. But then again, I must have the caveat in there that investment grade paper means nothing in today’s context – not one bit at all. 

Q: For the first six or seven-month of this bear market, a lot of people were in denial that this is indeed a bear – that it was just a bull market correction or retracement. Now those scales have fallen from people eyes but now they are asking the question – how long could this bear market be? Is it going to be another six-months and then we are done with it or is it going to be one of those two-three-year bear markets? From what you have seen in the last one-month, what's your best guess of how long this drags on?

A: Our view has been that you will not see the highs being taken out in the next three or four year’s time – definitely not for the next three-years. Even the most optimistic estimates of what the companies comprising large parts of the index will earn and what multiple you want to attach to those earnings and thereby make a projection for the Sensex, it is very hard to come up with a number that exceeds even 18,000 let alone 21,500. So, our take is that you are not going to see the markets take out their highs for another three or four years and that goes for pretty much every global market. 

So let’s at least have some consolation that the whole world will suffer alongside us and which brings me back to my original point which I have always said that there is nothing known as an Indian bull market. We take the bull markets too personally that it belongs only to us. It was a large global bull market based on very easy money. Easy money came to all parts of the world outside of the US because of the weak dollar that inflated prices of various kinds of assets because INR expectations of those dollar is very low considering what they were getting back home. So it came and it fueled your capex, infrastructure, a lot of the ground level growth that you had. So, India grew because of large influxes of foreign capital. 

That capital is not coming back in the same kind of intensity that we have seen largely on account of the fact that the dollar will become a very strong currency even incrementally. We see the dollar going to 1.1-1.2 against the euro which means dollar will head back to the US. So, the fact is emerging markets benefited from the weak dollar. They will now get hurt by the strong dollar. Overall three-years definitely we doubt that we will go anywhere near the highs let alone take out the highs. So, it is going to be a tough environment – make no mistake. Anybody who believes that it is going get over soon or things would come back to normalcy is not doing real analysis. I do know still very many people who are still especially hedge funds, which were net longs in the market still hoping for the best. Then you are no longer a fund manager. Then you are just a pure hopeless optimist and may god be with you.

Hope you like the article. Happy Investing....

Source: http://news.moneycontrol.com/india/news/market-outlook/sensex-could-dip-below-10k-levels-shankar-sharma/10/37/361277

How the crisis came home

Capitulation is actually a military term. However, last fortnight it was resonating across world markets as equities tumbled scarily. In tandem, commodities led by crude, and virtually all global currencies barring the dollar, dipped to new lows. Fears of a deep, long global recession gained ground even as the UK economy shrunk in July-September— for the first time in 16 years. 

Chaos reigned back home, too. As the Sensex plunged to a threeyear low, and blue-chip stocks crashed by 40-50 per cent, talk of sovereign stabilisation funds and “unconventional” measures to infuse liquidity gained currency. “With other sources of funds drying up, the banking sector is saddled with twice the normal requirement for funds,” says Jitender Balakrishnan, Deputy Managing Director, IDBI Bank. Despite the central bank having pumped Rs 185,000 crore (till the time of BT going to press) into the banking system via a series of measures (see Interview with Reserve Bank of India Governor alongside), banks are still fearful of lending, and are parking surplus funds with the central bank. “Banks have not resumed lending to consumers or companies. It takes time for policy actions to trickle down,” says A.K.R. Nedungadi, President and Chief Financial Officer, UB Group. He hopes that when his company approaches the market for funds in another two months, things will have stabilised.

If the fall of Wall Street giants was a shock, then the rapidity of the reverberations on Dalal Street is unnerving. What happened? And why? Isn’t the Indian economy largely insulated from the global capital pool? How did the crisis come home?

A recent paper co-authored by Jahangir Aziz, Ila Patnaik and Ajay Shah under the aegis of NIPFP-DEA tries to explain the complex linkages between the seemingly unrelated events. Their hypothesis in brief: in trying to manage the exchange rate, growth and inflation, the central bank had kept the system chronically tight on liquidity. Several Indian companies that had been using the London money market fell short of dollar liquidity in mid-September. So they borrowed on the money market and took US dollars out. At the same time, corporations were liquidating their holdings in mutual funds. Mutual funds, too, then started making claims on the money market, leading to a colossal shortage of liquidity. This was accentuated by factors such as advance tax payments and sale of dollars by RBI to prop up the rupee.

Plausible? Perhaps, but that may not be the only explanation for the domestic turmoil, say finance heads of companies. “Yes, we did sell over Rs 200 crore of our holdings in mutual funds; yet, that was to meet our domestic requirements. The redemptions would not have happened if the consumer market was growing,” says the Chief Financial Officer of a consumer durables company. The rupee’s fall also hastened the outflow.

Whatever the reason, the heightened risk perception is cascading through the economy. Sample: fear of deteriorating credit quality of the papers subscribed by mutual funds under the Fixed Maturity Plans (FMPs), especially those by realtors and non-banking finance companies. On the liquid funds, credit rating major CRISIL gave eight debt mutual funds schemes a 30-day period forrealigning their portfolios in line with credit quality requirements so as to avoid a rating action. Though this represents a fraction of the overall investments, it indicates rising stress in the face of deteriorating macro-economic fundamentals.

Is there a way to manage this extraordinary crisis? In their paper cited above, the three economists point to a four-pronged strategy—increase rupee liquidity, increase dollar liquidity, refrain from artificial exchange rate stability, and remove currency mismatches. Author Ajay Shah believes the RBI has moved quite a bit on providing rupee liquidity but the weakest links in the coming days will be dollar liquidity and currency mismatches.

However, as M.M. Miyajiwala, CFO, Voltas, says: “In this scenario, normal measures by the RBI alone will not help.” The government, too, can help with measures like increased government spending. So would measures like a direct release of dollars to large companies.

Source:http://businesstoday.digitaltoday.in/index.php?option=com_content&task=view&id=8374&sectionid=5&issueid=42&Itemid=1

4 reasons why you should buy while FIIs sell

LET’S assume that you have invested in both, the US and the Indian stock markets. Now, it turns out, while your Indian investments are doing exceedingly well, the US portfolio suffers acute losses.

What is the most obvious thing you would do?

You would book profits in India, in order to make up for the US loss. Right?

This, in a nutshell, is the current scene today. The only difference is that the investors are foreign institutional investors (FIIs). These are institutions that operate mutual funds, hedge fund and portfolio management services abroad and invest the fund money in other countries. FIIs by definition, have world wide investments. So, not only India but other Asian markets are also facing a sell off.

What happens when FIIs sell?
FIIs have a huge exposure to the Indian market. Due to this, their buy and sell actions have a considerable impact on the market. 


Recently, FIIs have been on a selling spree. This is one of the reasons for the markets to register steep falls. 

If FIIs are selling, should you buy?

The US is in turmoil but there is nothing wrong with us. The following factors just reaffirm this:


1. Toxic securities (such as MBS and CDOs) are conspicuously absent in our market, thereby preventing us from catching the infection.

Mortgage Backed Security (MBS) and Collateralized Debt Obligations (CDOs) are securities which are backed by a pool of mortgages that are paid by home loan takers in the US. So, if a home owner defaults on his repayment, the MBS holder suffers. Read all about these instruments and how they caused the big collapse . 


2. As far as domestic operations of banks are concerned, RBI has been extremely strict by continually increasing the risk weights to real estate and housing loans, thereby discouraging banks to get ahead of themselves, in a bid to increase business.

See: Why Indian banks are safe 

3. Unlike the West which has a negative savings rate, our domestic savings rate is more than 35 per cent, that means, on an average, Indians save 35 per cent of their income. So, even if there is a protracted slowdown, we would still have considerable demand for products and services, which in turn will help the economy to achieve good growth.

4. Amongst all emerging economies, our export to GDP ratio is the lowest. This means that even if our exports went down, our growth won't be significantly impacted. Therefore, even a full blown US recession will shave only around 40 to 60 basis points off our GDP growth rate. So, we will still have the capacity to chug along at an 8 per cent plus rate.


India - a safe haven
The fundamentals of our economy make our market nothing short of a safe haven during such turmoil. So, I don’t care if the market falls to 9,000 or even lower. Once this storm blows over, things will be back to normal.

In the meanwhile, your fortune as an investor would depend on how you react or, rather, don’t react to the situation.


The great fall of the market isn’t going to suddenly reverse the quality of the companies listed. If anything, I am looking forward to picking up some cheap but quality stuff.

Source: 

Sensex crashes on eve of Diwali

Joining a global equity rout on worries about a sharp global recession, domestic indices fell to their lowest levels in nearly three years on “Black Friday” as the benchmark BSE 30-Share Sensex tumbled by 1070.63 points to close at 8701.07.

The index had last tumbled below 9000 in November 2005. 

The sell-off began in the morning session itself — led by realty, oil and gas, bank and metal stocks — as the half yearly review of the Reserve Bank of India disappointed the markets, which were expecting some more measures from the central bank to expand liquidity in the system. 

Signalling what could be a dark Diwali on Dalal Street, as many as 350 securities hit their all-time lows.

These included big names like Reliance Power, Cipla, Ranbaxy, Ambuja Cement, Hindalco, Jet Airways, Suzlon Energy, Idea Cellular and realty majors DLF Ltd. and Unitech.

The RBI had announced a slew of measures to assuage markets in the last one month, including the repo rate cut by 100 basis points four days back and a cut in the Cash Reserve Ratio — a portion of the deposits that banks have to keep as a reserve — to 6.5 per cent from October 11. 

However, the sell-off intensified with the domestic as well as the foreign funds hammering Indian stocks in line with its Asian peers whose stocks tumbled on fears of a severe global downturn. 

In the bloodbath, 20 stocks from the 30-Share Sensex fell more than 10 per cent. This was the steepest fall in any single trading session after a 1,408-point plunge on January 21 this year. A broader index, the NSE 50-Share Nifty, lost 359.15 points to close at 2584. The Sensex fell 1204.88 points at the day’s low of 8566.82 in late trade, its lowest level since November 23, 2005. Nifty hit a low of 2525.05 in late trade, its lowest level since November 11, 2005.

Meanwhile, announcing its stance of monetary policy for the remaining period of 2008-09, the RBI kept all the key rates unchanged even as it lowered its 2008-09 growth forecast to 7.5 per cent to 8 per cent from a previous forecast of around 8 per cent. 

“The global downturn may be deeper, and the recovery longer than expected earlier,” said RBI Governor D. Subbarao, here. The central task for the conduct of monetary policy has become more complex than before, with increasing priority being given to financial stability. The current challenge, according to Dr. Subbarao, is to strike an optimal balance between preserving financial stability, maintaining price stability, anchoring inflation expectations and sustaining the growth momentum. 

European shares — the U.K., French and German — lost between 8.1 and 9.79 per cent on data suggesting Britain would enter a prolonged recession. 
Rupee breaches 50-mark 

The rupee breached the historic 50-mark intra-day against the U.S. dollar on sustained demand for the greenback amid its sharp rise against major currencies. It, however, recovered after the announcement of the monetary policy review and closed the day a little lower at 49.95/96.

http://www.hindu.com/2008/10/25/stories/2008102558300100.htm

Risk-reward ratio is looking very attractive: Hedge funds

As the Indian market went into a tailspin yet again on Friday, the finger of blame once again pointed to leveraged hedge funds, which 
are trying to cut their 
losses and run. But some global fund managers and hedge fund officials maintain the crash was accentuated by too many leveraged players rushing for the exit door at the same time, and not just hedge funds alone. 

“Money is flowing out of every emerging market, not only in India. How does one differentiate between a hedge fund and local mutual fund selling,” asks Amit Bhartia, partner, GMO (Grantham, Mayo, Van Otterloo), a global institutional money management firm managing $120 billion of assets. 

“For any country today, you need serious policy action to stop the carnage. What is worrying is that in a country like India, actions are more reactive than proactive. What is the need of the hour is a serious statement and policy action by government to jump-start infrastructure and maintain growth,” he adds. 

So far in 2008, foreign institutional investors (FIIs) have pulled out over $10 billion from Indian equities at the net level. “In the very short term, there are redemption pressures on domestic mutual funds and hedge funds which have to raise cash. 

Offshore hedge funds are increasing cash ahead of redemptions which they have to pay at the beginning of the next quarter ie January 2009,” said Sam Mahtani, director of emerging markets at F&C Investments which helps manage $2.8 billion in global emerging markets. 

As per a recent analysis by Credit Suisse, hedge funds are sitting on close to $800 billion in cash. On India, Mr Mahtani is of the view that the stock market is likely to remain volatile over the next few weeks and the market is close to a bottom, thereby presenting attractive buying opportunities. 

“We believe the risk-reward ratio is looking very attractive, as we are close to crisis level types of valuations. We see a 5-10% potential downside from here, while the potential upside could be between 30-40% for anyone with a twelve month view. If any one is willing to take a long-term view, this is an extremely attractive time to buy India,” he added. 

Mr Mahtani is betting on frontline. “Once sentiment changes, local and foreign investors will go back into big stocks. Mid-caps, however, could continue to be under pressure.”

Source:http://economictimes.indiatimes.com/Market_News/Risk-reward_ratio_looking_attractive/articleshow/3638730.cms

Warren Buffett's Reassuring Words On the Future

As the stock market's wild moves downward have average investor worried about their financial futures & looking for leadership, it's important to keep Warren Buffett's reassuring words about the long-run in mind. Here's what he said live on CNBC just a few weeks ago:

"You know, five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary (stock market) buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well."

Just don't borrow money to buy your piece.

Warren Buffett's Three Rules for Investing In a Crisis

1. "Cash combined with courage in a crisis is priceless"
 
2. "Dont invest in things you don't understand"
 
3. "Don't try to catch a falling knife until you have a handle on the risk"
 

Sensex may hit 10500 levels: Ramesh Damani

Ramesh Damani, a member of BSE, said that this is a rare moment and extraordinary time in the capital markets. He added that this crisis is a once in 100-year event. He feels Indian markets have not yet seen bear market bottom as yet and sees the market ranging between12,000 and 13,000 levels. He expects a huge slowdown in growth and sees the Sensex slipping to 10,500. 

Damani said, “Price corrections may be over in a few months but time corrections will not be regained.” He does not expect to see the Sensex at 20000 for a long time. 

Here is a verbatim transcript of the exclusive interview with Ramesh Damani on CNBC-TV18. Also watch the accompanying video.

Q: What do you expect to see now over the next few days given what has happened in the west?

A: This is like a one in fifty year event or once in a hundred year event almost. We are living through extraordinary times in capitalism since the Berlin Wall fell. Today, the market has been going down so fast that somewhere during the day we will see a point of maximum pessimism, but we probably aren’t at the final bottom in this bear market. Once the index has broken 12,500 it is not going to stop at 12,000. It is probably going to head significantly lower. In fact, the way to look at the market is that 12,500–13,000 is probably now the higher end of the range for our markets. So, we are in for a very tough time, and I will just quote you what Lenin used to say in 1920s that, “Capitalist will sell you that six foot of rope with which you will hang him.” Thus, that is pretty much what the Wall Street and all the central banks in the world have done and all the financial institutions have hung their own noose around themselves.

Q: How do you approach the panic this morning? Do you seek value right now, or do you say no we are going to get better prices the way things are going and that there is no hurry to just go out and buy stocks yet?

A: I am sure when everyone is selling one clearly wants to be the buyer. I am not sure whether one will make money over the next three weeks. If one goes through the cash section, there are companies trading at book value, cash value and asset values––a whole host of bargains are available not only in A group but also in B group. 

So one may cherry pick but he probably may not make money in the next three weeks. However, probably over the next 12 or 24-months, these investments will mature and do better. But having watched cash shares for the last two decades, I have never seen anything like this. It has just been a total disregard to volumes of 10,000 shares; stocks have gone down to around 10%. 

These are good legitimate companies, having good businesses with huge cash in the balance sheets, not leveraged. There is just an all round panic and rout in cash particularly. I think what we are now seeing is a rout coming into the A group. One should certainly step in and buy where one is convinced about it. 

Q: For a lot of people who watched bear markets in the past, the flow chart usually works with incessant price damage and then there is a period when the market does nothing. In that sense where do you think we are? Do you think this is going to be a much longer phase than many of us imagined in January?

A: I think so clearly. If one goes back and studies the history of bear markets, we are barely in the first five over of the game. Bear market requires time and price corrections; the price corrections will get over in the next few months but the time correction will not. There has been an entire generation of people on the Wall Street, for instance, when the Dow peaked at 1,000 in the 1960s, it did not see that new high on the Dow for a period of almost 18 years. People in Nikkei who saw the high in 1989 haven’t seen anywhere close to the highs. Hence, the great bull markets end in a flurry and then comes a new bull market. The greater the excesses that have been created in the past bull markets, the longer it takes for it to regain its highs. I think 20,000 is going to probably stand for a long time.

Q: Is there still a global situation as you read it, or as you indicated earlier do you think now the domestic infrastructure in terms of growth expectations, etc. will start coming apart a bit?

A: The point I am trying to make is we have moved from an economy that was globally very leveraged, where capital was easy, there was an idea, a project and particularly in emerging markets such as India, money was thrown at promoters. One had a case where one bet the balance sheets and his stock price went up 10-times. It was in a capital expansionary phase and people forgot to respect the capital. People forgot to respect return on capital assets. Hence, the market now would go from a global leveraged situation to a global de-leveraged situation, and the first wicket that will be knocked off to continue analogy is growth because capital is not available for expansion. They will be put on hold because as growth subsides all the subsidiary functions will be put on hold. So, we will see a huge slowdown in growth. The predictions of 7-8% Gross Domestic Product (GDP) growth probably will have to go slightly down even in cases like India. Once that growth goes down the Price-Earnings (P/E) will be knocked off which is probably happening in India at present. 

Thus, we are going to get through an environment, where if one gets a company which grows at 15–20% and is available at a P/E of 7–8 times, it will probably be a great investment to lock in. The arrears that company could grow at 35–40% are clearly behind us for the immediate future.

Q: Past bear markets have generally taken out 50% in some cases more. Do you think from 21,000 we could get whittle down to 10,000–10,500 Sensex? Is that conceivable according to you on current reckoning?

A: I think it is entirely conceivable. Markets can be overvalued for long periods of time; 10,000 might be an undervaluation watermark for the market. We could remain undervalued for a long period of time, especially, given the hit that people who have invested in equity in 2006-2007-2008 have taken. I am very certain that bear markets will end in a revulsion; they do not end in denial. A few weeks ago, most global players, a lot of local players were in a state of denial, it was an interruption, it was a correction that the bull market would continue on. The market has now decisively proved that we are in a bear market and bear markets take time. The one thing that bear markets require is not only price but the dimension of time. So it will take time. It is definitely conceivable to me that markets could remain undervalued now for a long period of time.  

Q: Adrian Mowat from JP Morgan made the point that any support will come in from domestic hands. Do you see that likely in our market because if the rout spreads to the A Group as you said, what will happen with the Domestic Institutional Investors (DIIs), mutual funds, etc.?

A: They have been great supports to the Indian market. They have been consistently buying in a very disciplined and logical manner. However, sometimes water just goes over the dam and one cannot hold it. The water has just rushed over it. There is very little one can do. It will find its own level. 

India needs to distinguish between what happens in the markets and what happens in the economy. I think as an economy we are underleveraged, we will plod along. We have our own strengths that we will play to. I think markets are going to take a shellacking because there could be periods when the economy continues to do fine, the stock markets do not do well. The great mistake people make is that they think those two are related but those are not related. There could be periods of time when the economy will grow at 6.5–7% and the market will not do anything. For example, China, which has been growing 8–10% for the last 10 years and yet the stock market has collapsed 60–70%. Thus, it is basically double from where it started. 

So there is no holy grail that says if GDP (gross domestic product) growth is 7% the markets will follow suit.

Q: You have been a believer in higher crude prices for a while now. Do you think there will be a period where everything in terms of asset classes underperforms and something like gold are the ones that stand tallest? 

A: There is a case for buying gold. However, one doesn’t want to put large percentage of portfolio in it because there is basically a problem storing it. It doesn’t pay the interest to dividends and is basically a very non-productive asset. But as an insurance cover, gold serves two purposes. In case of inflation, it acts as a store of value and then against insurance. The kind of damage one has seen in paper assets means that we will move to harder assets which they know the value of and a common consensus historically has been gold. 

Gold is now trading at almost a 30-year high. Having tested that high it retraced back 20% and now it has gone back to that high. If gold can stay above USD 950–1,000 per ounce, we could see a very sharp upmove in gold. So yes, there is a case for putting maybe a few percentage of one’s portfolio into gold which is basically a non-productive investment. However, in uncertain times like this, gold will often be viewed as a safe haven. So, it does make sense to be a part of one’s portfolio; not maybe a major chunk but maybe as an insurance. 

Marc Faber and a lot of other analysts on the Wall Street have pointed out the ratio between the Dow and the gold, which in 1979, when gold was USD 1,000 per ounce, was 1:1. They are saying that if we move again, the ratio that is now is maybe 10:1, may be 5:5. Subsequently, there could be a sharp fall in equities and a rise in gold. These are theories, I am not saying this can happen but clearly the market has fallen out of love with paper assets. In that case they will move towards gold. 

Q: You have been bearish for sometime now and we are nine-months into this bear market. What’s your sense of how long we have got to crutch along in this bear market?

A: My sense is that it would take time––it might take two to three years before we actually get out of this bear market because bull markets are driven on liquidity. All the analysts and all the papers you read, the inter-bank market is basically frozen in America. Banks are lending to each other.  

Everything works on trust so when we go to restaurants, for instance, and we order a meal, the owner assumes that we will pay him at the end of the meal. It operates on trust. We clearly can’t have a contract for that.

Similarly, the inter-bank market also works on trust, and now, because of these failures, defaults and bankruptcy, the trust is completely vanished. So unless the US goes back and reintroduces the liquidity of the market, introducing a bailout package, it is going to be a long time when people will fund any projects. So people in mature markets, having got such a shellacking at home, will now come and invest in emerging markets which is even more riskier. Conventionally speaking, it seems illogical to me and if capital is not available there will be a problem in growth.

http://www.moneycontrol.com/india/news/market-outlook/sensex-may-hit-10500-levels-ramesh-damani/358913