Wednesday, December 23, 2009


China property market has now become a bubble. This is now turned into a fear which is expected to burst and shake the world economic recovery in the coming days. But now we can be relaxed to a certain degree that China have recognized this rising dragon and is making polices to control the dragon.

China has developed new reforms to control the dragon of bubble which took birth from real estate property prices. Its new policies are quite capable to control the dragon but much depends on the real figures that will come up in the coming quarters in China economy. The prices of home in 70 major Chinese cities rose 5.7% from a year earlier in November, the fastest pace in 16 months. The property market was a prime driver of the economy's 8.9% growth in the third quarter.
The below chart shows the price chart of chinese real estate.

The biggest house price rises are coming from the main cities of Beijing, Shanghai and Shenzhen. The investment in this sector is also the highest among all other sectors in china. In china the property investments alone accounts for about 12% of China GDP. Higher amount of investments have also resulted to a series of apartment projects being developed by companies such as China Overseas and China Vanke will likely be completed next year. Some developers have also resumed their projects this year after putting them on hold for months during the global economic downturn.
The demand for residential properties was already rising rapidly by March 2009. In that month housing sales were up by 36% on a year earlier. Even in 2007 the residential property prices in China had soared. Home prices are likely to climb 15 per cent next year, spurring revenue growth for developers. This could boost the prices for some real estate shares by 30 and 50 per cent in the next six months

If we get in to the historical property prices of China we find that in 2001 and 2002 period china made easy policies for expansion of the market. They allowed foreigners to freely own properties in 2001 (2002 in Beijing).The government restricted ownership to resident foreigners who have worked, studied or lived in China for at least a year. The property can only be used for personal purposes and not for rental.
This policy in 2001 and 2002 has created the journey of boom phase of Chinese property market.

When we look into the present market there are number of factors which drive the price of property upward.
• Ample amount of liquidity and that also cheap money is deriving the investments in the real estate sector.

• Real estate investment jumped by 28.% on a yearly basis, topping 989 billion yuan ($130.7 billion) in the first six months, according to the NDRC

• The interest rate is rather low now

• Other asset classes are very prune to risky levels. Like gold equities and currency.

• During recession times the price of the properties came to record levels low. Residential property prices in Beijing slid by 2% (3.2% in real terms) in 2008.

• Shanghai house prices stagnated in this period in real terms. In nominal terms, prices rose by 2%.

• The government announced a CNY4 trillion (US$585 billion) stimulus package in November 2008, with allocations for housing and infrastructure projects, manufacturing, education, and industry.

• The property deed tax rate for first-time home buyers was reduced to 1% from 1.5% from January 2009 to December 2009, if the area of the residential property bought is less than 90 sq. m.

• Stamp duty and land value-added tax was waived for individuals purchasing residential properties from January 2009 to December 2009.

• If residential property is held for more than two years, the seller is exempted from the 5.5% business tax.

• Lending conditions were made cheap in recession times like the down-payment for mortgages of first-time buyers was lowered to 20%, and the floor interest rates for home loans was lowered to 70% of the benchmark lending rate.

• So once the recovery of the Chinese economy took place the surging growth in property market of china resulted to a bubble where supply went ahead of demand. Where prices soared to in the country’s 70 large and medium cities rose by 7.1% on a yearly basis.The below chart shows the interest rates that drived the cheap money to flow in this sector.

So now the china is laying down the ground work to control the dragon of property bubble. It introduced new policies to suck out the bubble without harming the economy.

A quick look at the policies:

• Developers must now make a 50% down payment while acquiring land.

• From January 1 sales tax on homes sold within two years of purchase has been imposed slashing the time period from five years.

• The taxable period on home sales to five years from date of purchase.

• The government would re-impose the 5.5% tax on sales of homes bought less than five years previously to discourage speculation.

So what it means for equity markets. In one word protection from the bubble which was about to burst out. Now we need to keep a tab on how much the real affect of the new policies will have on the real estate growth sector. China is also curbing other dragons of asset bubble in automobile, steel, cement sectors respectively. In my next article I will throw light on Indian real estate followed with Chinese new policies to control the dragon.

Tuesday, December 22, 2009


Indian steel industry-in a capsule.
This article is an continuation from the ASIAN STEEL INDUSTRY-SERIES 1 CHINA.

To read that part please click below.

If we look at India we find that historically the Indian steel industry entered into a new development stage from 2005–06, resulting in India becoming the 5th largest producer of steel globally.
• Producing about 55 million tonnes (MT) of steel a year, today India accounts for a little over 7% of the world's total production.

• Steel production reached 28.49 million tonne (MT) in April-September 2009. Further, India, which recorded production of 22.14 MT of steel during April-August 2009, is likely to emerge as the world's third largest steel producer in the current year.

• The National Steel Policy has fixed a target of taking steel production up to 110 MT by 2019–20. Nonetheless, with the current rate of ongoing green-field and brown-field projects, the Ministry of Steel has projected India's steel capacity is expected to touch 124.06 MT by 2011–12.

• India's steel consumption rose by 5.7% to 26.49 MT in the first six months of the current fiscal over the same period a year ago on account of improved demand from sectors like automobile and consumer durables.
The chart below shows the growth of India steel production.

Indian demand for steel consumption is increasing in the coming days. We get proof of the putting when we analyzed and found that steel players like JSW Steel and Essar Steel are increasing their focus on opening up more retail outlets pan India with growth in domestic demand. JSW Steel currently has 50 such steel retail outlets called JSW Shoppe and is targeting to increase it to 200 by March 2010. They expect at least 10-15%of their total production to be sold by their retail outlets. Huge flow of investments will happen in the coming days in the steel sector due to increasing trend of domestic consumption.
Investments in Indian steel industry.

Even if we look into the type of investments that have happened after recession in India we get very impressive an bullish outlook on the sector.

• According to the Investment Commission of India investments of over US$ 30 billion in steel are in the pipeline over the next 5 years.

• Very recently Tata Steel has raised US$ 500 for its expansion of Jamshedpur plant and overseas mining projects.

• Many Steel companies have committed US$ 122.50 million for setting up sponge iron units in Koppal and Bellary in Karnataka.

• Even SAIL have declared that they will invest US$ 724.12 million to set up a 4-million tonne per annum steel mill at its Bhilai Steel Plant.

• Uttam Galva Steel plans a capital expenditure of US$ 62.8 million-US$ 104.6 million over the next two years for setting up of a 60 MW power plant. The power plant will help reduce its production costs.

Fortune of steel prices in 2010.
• Steel prices are set to go up from January 2010 due to increase in raw material costs, like iron ore and metal scrap.
• Led by demand from China, prices of iron ore—the key raw material for pig iron—have gone up sharply over the past two months to $106 per tonne from almost $81-$82 per tonne.

• Coking coal prices have also gone up to $165-$170 per tonne from $128 per tonne as China imported more coking coal this year.
If we look into the distribution of iron ore inventories we find:
• According to a report by industry consultancy, this week, iron ore inventories at China's major ports rose by 830,000 tonnes to end at 66.75 million tonnes,

• While stockpiles of ore originating from Brazil increased by 180,000 tonnes to 19.1 million tonnes, and Indian ore rose by 830,000 tonnes at 13.18 million tonnes.

• Australian ore inventories fell by 480,000 tonnes to end at 21.95 million tonnes by the end of the week.

• Chinese iron ore prices remained steady, the average price of imported iron ore increased by 2.3%. Iron ore prices are 25.8% higher than December 2008.

So raw material prices followed with stringent position of inventories of iron ore steel prices are on the track of a  major jump of prices of raw materials.
In Indian and global context the raw material negotiations are slated to start in January and indications are that the increase in new contract prices could be between 10% and 30%. Last year, iron ore contract prices were sealed at $80 a tonne (Rs 3,742). Currently, spot iron prices in China are trading at $126 a tonne (Rs 5,893), an increase of 13.5 per cent in the past six months. Coking coal prices have increased to $186 (Rs 8,692) a tonne since May. Last year, contract prices were $129 (Rs 6,033) a tonne.
Industrial analysts see iron ore prices going up by about 10% to 20% next year on increasing demand as the world economy recovers. In the coming quarters steel sector is set to make a living in a Competitive Economy from an Easy economy that took birth from recession.2010 will be a period for steel industry where growth will be high along with huge wave of demand, but with many twist. Like wise RBI rate hikes which will push up the cost of borrowing , higher commodity prices and inventory position of iron ore. But among all these we are bullish on the steel industry in the log run with few hiccups in short term.


The world economic recovery has finally started taking new baby steps. This has lead to increase of demand of commodities. Infrastructure will be the prime reason for the recovery journey. This is the only sector which will lead the path of global economic recovery. When share views on infrastructure we get many sectors being clubbed to them. Banks, Cements, Steel, Capital Goods, Construction are the prime industries which are linked with infrastructure growth.

In this article I will bring out the future vision of steel sector. This sector is one of the most volatile among all the prime sectors. Steel is a sector which applies to every corner of our life. It’s not surrounded within a specified ambit. We all know that at the back of every economic growth there is a high presence of Steel. Its also a prime contributor to fiscal balance of an economy.
Chinese steel industry-wonderful performance and future control mechanism.
When Global Recession started its dance from November 2008 we find steel demand took a massive hit. But now the scenes are changed as global economy is coming out of the recession. As we all know that china is one of the largest producer of steel.

• In 2009 till date China's steel output has reached 472 million tonnes in the first ten months of this year, as global output rose to 982 million in the same period, World Steel Association figures show. Analysts expect China's year-end output to rise above 550 million tonnes.

• China's auto and shipbuilding industries may consume 15 million tons and 13 million tons of steel respectively.

• According to the secretary general of China Iron & Steel Association, China apparent steel consumption is predicted to rise by 120 million tonnes or 26% this year given the fast increasing steel productions, particular those of small and medium size mills.
This was all about the consumption and production of Chinese steel, where we find a huge pull up from the recession times and also it’s never ending journey of growth. Among all these we should also account that china is also running at over capacity bubble too in steel production which might shake the tomb of china steel. This overcapacity have also lead to growth of export and as well as antidumping.

• China has made a production of 472 million tones of steel out of which domestic consumption accounts 120 million tones.

• China steel export tumbled reflecting the dwindling global demand, with the net export of crude steel expected to hit zero, sharply compared with 47 million tonnes in 2008.

• Total capacity in China's steel industry hit 660 million tons by the end of 2008.

• By October, excess capacity in the sector had reached 200 million tons with another 58 million tons under construction, according to MIIT figures released on Oct 27.

• Long products take more proportion of the total steel products, which accounts for 65.6% of the YoY increased 75.38 million tonnes of steel products during January to October.

• Profit of 70 steel mills slumped 70.67%YoY and sheet and plate businesses.

• The rising capacity was accompanied by expanding investment in those sectors. Investment in the by 3.8 % year-on-year in the first 10 months.
This excess over capacity production will open to two options.1) Break down of the over capacity which will lead to free fall in the global steel prices and 2) Merger and Acquisition in Chinese steel industry. The Chinese government is very much concerned about this rising bubble. The Industrial Coordination Division under the National Development and Reform Commission (NDRC), the country's top economic planning body has said that along with NDRC would join with the MIIT and other government departments to strictly control overcapacity in some sectors.
The government documents IS expected to release soon some ploicies regarding industrial readjustment. Projects which are involving new capacity building or expansion in the steel industry would be refused approval and support by the government. If these steps are brought into shape then the rising bubble might consolidate and the save the economy from a major crisis.

In my next article you will find details about the future prospect of Indian steel industry. I have broken it since I want my readers to have a clear concept about the sector in gamut.

Saturday, December 19, 2009


Banking trouble never seems to end for the world. Even despite of pumping huge funds to bailout and buying up crisis lead bank mortgage assets the story still remains to be unfolding few funds more to be spent.

This time the number have taken a growth in European banks (ECB).European countries have been trying to hard to come out of the crisis of recession which have jeopardized theirs future economic growth.
• The total demand for European bank write downs has only increased in the last six months.
• At present the ECB have increased the limit of bank failure and toxic assets buy up to at €553 billion ($796.57 billion) for 2007 to 2010.
• The estimate, which is €65 billion more than what the central bank forecast just six months ago.
• The prime reasons for hike of this is that new real-estate problems and loan risks in central and eastern Europe.
• This simply depicts that the major world economies are still struggling and spending tax payers money to buy up the worst night mares of the economy.

In the month of June 2009 the ECB have estimated the that toxic assets and bank write down will eat up in total around $218 billion from the start of the financial turmoil to the end of 2010, while bad loans would account for another $431 billion -- a total of $649 billion, with an estimated $366 billion already announced. Now this figure is revised up for more write ups.

Now a question might come when this nightmare of toxic assets and bailout will come to an end. And last but not the least how this affect Indian market ?
•The ans to the first one is that this process of bailout and toxic assets buy up will end only when fresh new cases will not come up, when the European government designs some regulatory norms for the ECB. Other wise in the future loose ECB monetary policies will lead to burst out of financial time bombs.
• India will hardly get any affect from the rising ECB toxic assets and bailout in direct link up but when ever their will be burst out of these time bombs in the short term one will get knee jerk reactions from the market.
• But as this process of bank failures will rise in the future more pressure it will exert on the long term prospect of Europe and Us economy to revive back.
• Since we should not forget that U.S and U.K are the prime exporting countries of India and we are all convoluted internally where a pull at one end of the thread and pull up us too.

The UK has strong ties with India, and UK companies are well positioned to take advantage of this growing export and investment market. India's major trading partners are China, the US, the UAE, the UK, Japan and the EU. The exports during April 2007 were $12.31 billion up by 16% and import were $17.68 billion with an increase of 18.06% over the previous year.The image below shows the import figures of Europe.

So the rising bailout funds will exert tremendous pressure on the Indian economic growth in the comings days. The market which is flooded with cheap money might work against all these negative cues but in the later time India along with other Asian economies will have to face some hard times due these mounting deficits.

Monday, November 30, 2009


Zero interest rates of US and low interest rates of other countries made cheap money to flow like water coming out of a fountain. All these cheap money founded BRIC economies assets at cheap valuations giving them enough scope to generate healthy ROI.
Indian stock market was one of the most lucrative market to generate good ROI. This particular growth prospect made the FII’s to pick up investments avenues in Indian market directly via FDI or through stock market.
From early 2008, the Nifty nosedived from about 6,287 to just above 2,500 by late October and remained below 3,000 until late March this year. This can be attributed mainly to the virtual stagnation of global liquidity flows. Once the flow of funds started rest is now history. The speed of the journey of Indian market from the lows of 2008 and 2009 was very much eye catching. The speed made many economists around the world surprised. Cheap money started chasing the cheap assets around the world. Funds behind Indian stock market were:
 Many Americans – have are poured money into mutual funds that buy foreign stocks, especially in emerging markets such as China and India.
 Investors are rushing overseas too aggressively.
 This year, individual U.S. investors, still jittery about the stock market overall; have invested almost $21 billion into risky emerging-market funds.
 Overseas fund inflows into the Indian stock markets have crossed the Rs 60,000-crore (about $12 billion) mark so far this year.
 There is a sudden surge in foreign institutional investor (FII) inflows through the participatory notes (P-notes) in the last two months.
 The finance ministry have also revealed that the outstanding P-notes position in October 2009 is Rs 1,24,575 crore.
 According to Sebi, outstanding investment by August-end stood at Rs 110,355 crore. This means Rs 14,220 crore of FII inflows, or roughly a third of the total FII inflows of Rs 44,652 crore during September and October, came through the P-notes route.
 FIIs' net investments in Indian stocks this year have crossed US$15bn, as per SEBI's web site.

The below chart shows the historical data FII’s inflow in Indian stock market till 2008.

Between March 2001 and March 2007, the market value of shares owned by FIIs went up from $9.7 billion to $124 billion.March 2007 have been taken to exclude the pull out of funds in 2008.This will clear that what was their investments in normal phase of the World Economy.

The below image shows the FII's investments in India in 2009 only.

We find from the above chart that from March 2009 the cheap money started flowing into the roads of Indian stock market.
The US investment vehicles are so aggressive that recently Fidelity Investments, which just increased its recommended international exposure for a typical investor to 30% of one's overall portfolio from 20%, launched a program last month for individuals to directly buy securities online in foreign markets, something once reserved for financial professionals.
But the cheap money flowed from all directions into the Indian stock market. Even when I am writing this article we find that still huge amount of funds are still in the sidelines getting ready to pour into the Indian stock markets. Global emerging market equity funds have got an  investments around  $56.8 billion this year, putting them on track to eclipse a record $50 billion in 2007. A year ago funds had seen accumulated outflows of $40 billion.So India remains in the top list of develped economies for investments.Even if any recession comes in the future India will still remain the lucrative investments destination.


When the market started and I was busy in listening the CNBC TV.Suddenly around 11 am Udayan Mukherjee of CNBC TV jumped of his seat and shocked to find the GDP numbers of India.Within few minutes india was into a roller coaster ride. July-Sept GDP up 7.9%. Economist and all market speculators are having their eyes coming out of socket. Before I get into further analysis just a quick look into the break up figures.
 The construction sector grew at 6.5% while financing, insurance, real estate growth came in at 7.7%.
 The manufacturing sector grew at 9.2 % in the second quarter vs 5.1% a year earlier.
 The mining space has posted the highest growth at 9.5% as compared to 3.7% YoY
If we look into the historical GDP number of India we even get more shocked. Since in the history of Indian economy very often find GDP around the growth of 7.9% GDP.
The trend for India’s GDP growth rate are given below:

  • 1960-1980 - 3.5%

  • 1980-1990 - 5.4%

  • 1990-2000 - 4.4%

  • 2000-2008 - 6.4%

Few of the prime reasons behind 7.9% GDP numbers are :
 India has taken various policy measures to buffer the economy. Repo rate, SLR and CRR have already been slashed. CRR can be brought down to about three per cent (RBI’s medium term goal). All these measures in turn would infuse liquidity into the economy.
 GDP rate have also improved fabulously because of the high commodity prices which supported the agri sector.
 Indians have something to do with agriculture and inflation will soon prove a boon to the rural public. Their profits are going to soar. This rural boom will kick start the next round of self enhancing growth cycle.
 The growth rate of Indian GDP fell from 7.35% in 2008-09 to 5.36% till the end of 3rd quarter of the 2009-10.
 The cumulative FDI Equity inflows (from August 1991 – August 2009) stood at Rs. 5,20,589 crore.
 Budgetary support for National Highway Development Programme (NHDP) has gone by 23% on y-o-y basis for 2009-10.
 Expenses for the Commonwealth Games 2010, went up from Rs.2,112 crore in Interim Budget to Rs.3,472 crore for 2009-10 fiscal.
 Allocation to railways have gone up from Rs.10,800 crore in interim budget toRs.15,800 crore for FY 2009-10.
 Allocation under National Rural Health Mission (NRHM) has gone up by Rs.2,057 crore over Interim Budget estimate in 2009-10 of Rs.12,070 crore.
 Rs.2,113 crore has been allocated for IITs and NITs, comprising of a provision of Rs.450 crore for new upcoming IITs and NITs.
 India has weathered the global slowdown quite well because of substantial government actions. Fiscal stimulus in form of tax cuts, and spending increases on the rural sector and infrastructure has contributed to the rebound in production.
 Purchases of government bonds and lowering of repurchase rate by the central bank has been helping the banking sector. Adding to that a quite good performance of the agricultural sector and India looked like it had been set for a sustainable recovery.
 Fiscal pay outs such as Sixth Pay Commission award lower service tax excise duty and employment guarantee scheme have put Rs 1,20,000 crore (2.5% of GDP) into the system in turn boosting consumption demand.
 The Indian banking system is very much quite safe and sound with capital adequacy ratio of most banks at 12% against the mandatory nine per cent. The money multiplier will have to rise to meet growing demand for funds, subject to additional capital with banks.
 NPA are under stringent control of the RBI.
 Moreover housing/realty exposure of banks is less than 14% of the total loans and most of these loans are well collaterised.
 The markets are booming, the stock exchange is bullish, and the rupee-dollar rates have crossed new frontiers.
 And last but no the least India have shrugged off the poor monsoon affects on the agri sector.

So all the above are the key contributors behind astonishing GDP growth of 7.9%.Along with this it is clear that in the future Indian economy is on a roller coaster ride.The huge spending from the hands of government will boost up the consumption in the next coming quarters too. The huge spending is focused approach and not like the one in China.
Below is the Chart of historical GDP of India.

If we look into the key sector contributors of GDP growth we get historically:
Below are the contributions of different sectors in the India’s GDP for 1990-1991 –
Agriculture: - 32%
Service Sector: - 41%
Industry: - 27%
Below are the contributions of different sectors in the India’s GDP for 2005-2006-
Agriculture: - 20%
Service Sector: - 54%
Industry: - 26%

Below are the contributions of different sectors in the India’s GDP for 2007-2008-
Agriculture: - 17%
Service Sector: - 54%
Industry: - 29%

The service sector contributes more than half of India’s GDP. Earlier agriculture was the main contributor to the GDP. To improve the GDP and boost the economy, the government has taken various steps like implementation of FDI policies, SEZ’s and NRI investments.

Above is the chart of historical chart of India's inflation.
 Now RBI will have to check into inflation devil. GDP of 7.9% is bound to spook off the inflation. We are already having higher index for food prices.The CPI is already floating in the range of all time high in the history of Indian economy.  Excess flooding of money have created this euphoria. we should not be surprised if RBI takes immdeate steps to curb the rising devil. As we all know that one of the most common ways of controlling inflation by RBI is rolling back of interest rates which were given as stimulus plans. But that will not affect the long term journey of the Indian economy.To reasons behind this is.1) India has huge potential untapped as a Emerging Economy among the BRIC nations.2)The Indian economy have a high purchasing power parity then any other economy in the BRIC table.
By purchasing power parity we mean:
Using a PPP basis is arguably more useful when comparing generalized differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of the countries, rather than using just exchange rates which may distort the real differences in income. This entry gives the gross domestic product (GDP) or value of all final goods and services produced within a nation in a given year. A nation's GDP at purchasing power parity (PPP) exchange rates is the sum value of all goods and services produced in the country valued at prices prevailing in the United States.

The below chart shows the purchasing parity index of India in dollar terms.

 What ever happens in in Indian economy from RBI measures to any otehr measures as imposed from time to time.India remains in the top prority list of Investments.All we need is that to look into that Growth of income is important in itself, but it is as important for the resources that it brings in. These resources provide us with the means to bridge the critical gaps that remain in our development efforts.

Saturday, November 28, 2009


BRIC countries have always remained a favored destination for doing investments and getting good returns other that any other investments. Each day we hear a word called FII’s. They are the ones who make the stock market climb new heights. In this article of mine I will try to describe and bring forward one the FII’s who one of the major investor in BRIC economies. The have huge wealth which gets accumulated year after year and we are among their most favorite destination once the BRIC economies started making a turn around to the World economies.
Very recently we heard the name of DUBAI panic. By the time I write this I hope my readers are well acquainted with the fiasco that happened on Friday. A BRIC economy has always remained a hot destination for investments. DUBAI, UAE and Gulf countries does investments via Sovereign Wealth Fund – SWF.

 What is sovereign wealth fund ?
A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Some countries have created SWFs to diversify their revenue streams. For example, the United Arab Emirates (UAE) relies on oil exports for its wealth; therefore, it devotes a portion of its reserves to an SWF that invests in other types of assets that can act as a shield against oil-related risk.
Sovereign wealth funds are nothing new, but they are growing larger. Dubai, UAE and the entire Gulf countries has a huge accumulation of sovereign wealth fund.

 They emerged in the 1970s in oil-producing emirates, such as Kuwait and Abu Dhabi, as a way to accumulate current account and budget surpluses during the oil boom. Now, Abu Dhabi boasts the largest fund, sized at $600-700 billion, and other countries have followed its lead.

 Since 2003, oil producing states have reaped a revenue windfall. As oil increased from $27.69 per barrel on average in 2003 to as much as $79 per barrel in 2006.

 Saudi Arabia, for example, saw its gross domestic product (GDP) increase by well over $130 billion over that time period, and the United Arab Emirates took home more than an additional $80 billion.

 Such revenues have generated enormous liquidity among the Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—and created unprecedented opportunities for large-scale overseas investments. The amount of money in these SWF is substantial.

 As of May 2007, the UAE's fund was worth more than $875 billion. The estimated value of all SWFs is pegged at $2.5 trillion

Other economies have also build up such sovereign wealth fund like:

 Norway established a fund for its excess oil incomes in 1990.

 Singapore has accumulated two large funds that, unusually, are not based on oil income.

 And more recently, China and Russia have instituted large sovereign wealth funds of their own.

 Today, such funds hold as much as $2.5 trillion in assets.

 It is forecasted that they will grow to $12 trillion by 2015
Estimated assets under management by a range of sovereign funds at the end of 2007.The image below.
(Source data: National central banks, IMF, Morgan Stanley, RGE estimates )

A rapid rise in the price of major commodities between 2000 and 2008 greatly increased the cash holdings of some exporting countries, enabling them to seek new ways to diversify their wealth. AnotherOne of the prime reasons for building such reserves of sovereign wealth fund is not getting return from other non oil investment avenues like commodities. So they have built reserves where they can invest in emerging economies.

All these investments in the past have been made in other emerging economies but recently they have turned their heads towards BRIC economies.
How much India got investments out of the BRIC economies?
 An internal and yet unconfirmed government estimate has recently suggested that the UAE has invested around $4.5 billion (Dh16.5 billion) in India in the past few months.

 Several companies from the Arab world are now active in India.

 According to a recent survey by the Federation of Indian Chambers of Commerce and Industry of India (FICCI), a leading trade body, total trade between India and the Arab countries (including the Gulf) stood at around $102 billion in 2007-08. In the next ten years it is expected to increase by around five times this figure.

 In 2007-08 India’s trade with Bahrain grew by 65%, with Egypt by 35%, with Syria by 42% and with Kuwait by 27%.

 Between April 2000 and February 2009, FDI inflows from Arab countries were as follows: UAE $911 million, Oman $61 million, Bahrain $25 million, Saudi Arabia $16 million, Morocco $15 million, Kuwait $7 million, Tunisia $4 million and around $1 million each from Yemen, Jordan, Lebanon, Qatar, Egypt, Libya and Sudan

 Even Kuwaiti investors, geographically slightly further removed, have named India as the country of their choice.

 The Indian government has even entered into an understanding with Saudi Arabia and Oman to set up investment funds of $500 million and $100 million respectively.

Sovereign wealth funds from Kuwait, Qatar and the UAE are poised to pour billions of dollars into the markets of Brazil, Russia, India and China next year as they seek to tap into the BRIC countries explosive economic growth. SWFs will invest more into industrial companies, sizable companies with global footprint like car manufacturers, consumer products, and transportation. sectors.

Another point is  the Gulf as a key contributor in India’s development. Last year 2008 record oil prices and windfall revenues have driven cash rich Arab investors to park billions of dollars in industry. A number of investment and development companies of UAE and Arab countries along with Dubai have been developed by the Gulf governments to explore investment avenues both at home and abroad either through direct acquisitions, joint ventures or private equities. Among all these India is on the prime list.

FDIs to India from the Gulf have increased over the past couple of years, with both institutional and private investments in some projects, particularly by investors from Dubai Emirate. Few of them are Emaar Properties, Dubai Holding, Dubai Aluminium Company, Dubai Internet City and Dubai Ports are some of the major players with projects under process in India at present.
Below is the data of GDP of Dubai.

At the end I would like to add that if Dubai goes for tailspin in its finance activities the world remain at a huge threat, More over India remains at the high end of the risk.

Where the tide of risk lies from Dubai ?
 Property prices have fallen in Dubai,

 all constructions are for cash rich people,

 global recession have pulled off the buyers,

 So sellers will hardly get buyers,

 Crude prices are less,

 Not much income from crude as required for Dubai expansion,

 The rising debt needs to be bailout,

 Once Dubai gets bailout,

 After bailout Dubai have to sell assets, since no earnings from sell of costly properties. This debt will be cleared by shedding off the investments from Sovereign Wealth Fund.

Financial time bombs are present and are about to shake the world economies in the coming days.

Friday, November 27, 2009


Forty years earlier Dubai was a village on the edge of the Arabian Desert. Locals citizens lived in houses made out of mud shacks and the only vehicle for travel or moving was ‘The Ship of The Desert’.

After 40 years Dubai have created artificial islands full of luxury villas, the world's tallest tower, an underwater hotel and many more things which might make tails spin of ones eyes. Dubai is now the glittering crown of the Middle East. The gulf state is now being known for its tall skyscrapers, wall-to-wall shopping centers and luxury hotels.
But the whole glittering castle is of the boom in real estate was constructed on sand. Sand made of credit/borrowed money. But the leash of bubble got broken when the financial crisis broke off sending the prices of real estate to rock bottom levels.
• Now prices in the real estate sector crashed where prices have fallen by up to 60%.
• 400 construction projects worth more than $300 billion have been shut down or postponed. The project cancelaation reveals demand havedried up and future outlook is also very bleak.
• Even after the world economy tried to come out of the dark woods of recession the Dubai real estate sector struggles to survive. They are finding hard to find buyers even after prices came down by 60%.
• Moreover the cost of living in Dubai has gone up like any thing.
• All these will add the unemployment in Dubai. Most of the Asians are placed their and they might come back as Dubai have less to offer now and cost of living have goes up.
• Foreigners have refused to buy the projects which have resulted further trap for inventory creation. This has resulted to default of payments of debt.
The fear in Western markets is that banks risk losing billions, which will damage their lending process and recovery of the economy too. Dubai World has a net exposure of debt of $59 billion of liabilities as of August. Where as the total debt of Dubai is $80 billion. So the Dubai World holds debt of 73.75% of Dubai’s total debt. The Dubai Government announced that it is restructuring Dubai World, an investment company owned by the government, with immediate effect. It has asked creditors for a six-month standstill on its obligations until at least 30 May 2010. Nakheel, a real estate subsidiary of Dubai World, has a convertible bond due next months
The most of the fear of UK and US is that Dubai might go for sell of assets which they are holding in UK and US. If this breaks out then one might find cascading fall in the world equities.
The fall in the share prices of banks eroded £14 billion from the UK alone.  As per Credit Suisse European banks could have an exposure of €40 billion (£36 billion) as loans to Dubai. Banks including HSBC and Royal Bank of Scotland have helped to finance Dubai’s acquisitions and are now on the hook if the state cannot repay its debts.

When we dig into the past to find out the type of investments growth made in Dubai we find some astonishing facts.
• US-headquartered private equity firms like The Carlyle Group active in the Middle East, UK firm were historically more active at entrepreneurial investments and acquisitions in the Middle East.
• A sample of such transactions was the acquisition of Middle East news portal AME Info by Emap, a UK Media group.
• Acquisition of Dubai-based recruitment firm iQ Selection by UK-based Imprint Group was another sample of such UK edge over US firms.
• Firms like Goldman Sachs, Morgan Stanley are already based in the Middle East and expanding. Ironically, this is happening at the same time that Middle East sovereign wealth funds are making high-profile investments in the US.
• US Treasury Secretary, Henry Paulson, have even visited the Middle East  in 2007-08 and assured investors in Abu Dhabi that the United States will remain open to sovereign wealth funds.
• Moreover Gulf governments hold more than US$400 billion worth of US investments, making them second only to China as America's biggest creditor
• Dubai-based Nakheel Group entered into a 10 bln usd deal with India''s DLF Ltd for residential projects in Tier I and II cities in 2007 which was followed by three financial institutions -- Khaleej Finance and Investment (KFI) from Bahrain, Kuwait Investment Company (KIC) and Kuwait Finance House (KFH) -- from the Middle East promoting a 200 mln usd fund for investing in India.
So the investment process of Dubai along with US and UK is very much convoluted. They are all well entangled in terms of investments. The burst of the boom might have a huge affect beyond our vision. The most affected will be the emerging economies in coming days if Dubai is unable to find a way out that might drag the world economy back to recession. Moreover developing economies will hesitate to do investment in emerging economies in the coming days. This failure will increase the risk of doing investments as well as will shaken the confidence of doing investments in emerging economies.

Who ever says that emerging economies will not get affected should understand that before any fresh investments the lack of confidence will play the game. Its true that there is ample amount of liquidity which is dragging the world market to roller coaster ride but this time their might be no one as in case of a double dip.

Thursday, November 26, 2009


Japan’s second quarter GDP increased by 4.8% in 2009 from a year ago. This was surprising for most economists as the predicated a 2.7% growth. The figure is very much reliable as the GDP number came riding not only at the cost of export buts also domestic demand contributed too. Consumption of goods has increased in Japan along with investments growth in manufacturing and capital goods and other sectors excluding residential projects.
4.8%GDP growth came from the following: 
 Domestic demand gained 3.3% from a year ago and private demand jumped 4.2% in the period.
  • The report notes that private consumption advanced 2.8%, while consumption of households increased 2.9%.
  • Private residential investment declined 27.5% and private non-residential investments soared 6.6%.
    But there is a mismatch of data which is well highlighted.
  • Japan's exports fell 23.2% in October from a year earlier.
  • Exports to Asia, which now account for more than half of Japan's total exports, fell 15.0% from a year earlier.

The below chart shows the Export and Import figures comparison for October 2008 to October 2009

October 2009
October 2008
Percent Change





So when export is down and even the export to Asian economies which constitutes 50% of Japan’s exports then from where one gets an economic growth of 4.8% based on domestic consumption growth of 3.3% and private demand of 4.2%.It well hard to find the growth ladder steps climbed by GDP  in real terms when the spikes of ladder are missing. We only hope that in the coming days we will get more realistic picture of the Japan economic growth.

Japan has another problem which might become a big threat to other Asian economies. We are always concerned about rising fiscal deficit of US and Europe but we never noticed the rising bubble just besides our next door. Gross public debt mushroomed during years of stimulus spending on expensive dams and roads, and this year it passed 187% of Japan’s economy.

Yes Japan has a fiscal deficit of 187% of its GDP. That debt could soon reach twice the size of the US$5 trillion (RM17 trillion) economy — by far the highest debt-to-GDP ratio in recent times— and the biggest, in real terms, the world has seen. Japan’s outstanding debt is as big as the economies of Britain, France and Germany combined.
·        For reducing this deficit Japan for the first time since the chaos of World War II, Japan will issue more  new government bonds than it will receive in tax receipts.

·        Japan will keep on selling more bonds this year and next to reduce the bubble of debt.

·        Japan got into such deep debt is a tale of reckless spending. The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, riddling Japan with highways, dams and state-of-the-art ports

·        They also provided like cash support for families with children and free high schools — could ultimately widen budget deficits at a time when tax revenue continues to plunge in the aftermath of the global financial crisis.
 Japan has also failed to build up its reserves. The yen made up 3.08 %of foreign currency reserves in mid-2009, down from 3.29% a year earlier and down from 6.4% in 1999. In mid-2009, the dollar accounted for almost 63% of global foreign reserves.
In the coming days we will get yen valuation just simply eroding. It is now hitting 14year high but in the coming days it will just have a cascading Journey.

 But we also find some hidden treasures within Japanese economy. Japan has made some radical changes in its economic policies which will boost its coming industrial days. We might get the burden of debt falling back and giving new shape to the economy to grow. When we dig into the invisible analysis we find that from 2001 to 2005 :
  • For U.S. companies, Japan is an attractive investment destination offering high investment yields. U.S. direct investments in Japan offer the highest yields among the country’s direct investments in major industrialized nations, exceeding the global average including developing countries.
  • Yields from direct investments in Japan are 1.5 to 2 times the yields from E.U. industrialized nations.
  • Direct investment yields of U.S. companies from Japan averaged 13% per annum from 2001 through 2005. This figure not only exceeds the global average of 10%, but it is also the highest among all G7 nation.
  • But among all these the twist in the story line is that Japan’s economic growth rate was not particularly high. On the contrary, it lagged behind other industrialized nations in most of the period. This made the return on Japan investment more lucrative.

  • The table below lists the U.S. direct investments in six major industrialized nations (G7 member nations other than the U.S.) as well as global average investment yields from the corresponding countries. To absorb yearly variations, five-year averages were used in the comparison. The shaded fields indicate the countries offering the highest yield in each applicable industry.
    Even in the recent times Japan again changed its polices to make its country further lucrative.

The below  image shows the the rate of US investments in Japan:

In early 2008, the Ministry of Economy, Trade and Industry (METI) proposed two measures to encourage foreign investment by reducing the potential Japanese tax burden on foreigners investing in private equity funds.
·        The first provides an exemption from local tax nexus (that is, treatment as a permanent establishment – PE) for foreign limited partners in certain kinds of Japanese limited partnerships (or “similar” foreign partnerships).
·        The second provides an exception for such partners from the partnership attribution.
All the above two measures were successfully incorporated into the 2009 tax reform, which was passed by the House of Representatives of the Diet on 27 February 2009 and became effective beginning 1 April 2009.
But the most important part to be accentuated is that how Japan will make benefits out of all these measures and investments. Else Japan will just remain an economy to make money and no real growth for the country. This will be cleared in the coming days of Japan economic movements.

 Japan is now in the mixed of its journey where it has to try hard more than US to come out of the dark woods of rising fiscal deficit. Since it erodes not only the reserves but makes the economy less competitive. Thats why other economies are taking advantage of Japan economy and making such high yield of returns on its economy.


In my last article I started with the advance planning stage for tax saving where one should to plan for tax saving starting from now so as to avoid eleventh hour preparation and most importantly Miss Selling. Since we often find that at the last moment preparation the few culprit Financial Agents or Advisors take the advantage of panic and does miss selling.
 In this second series I will discuss on the one out of the two most hot picked tax saving investment tools.
 Normally there is a thumb rule which one should follow for tax saving is that what ever is ones    age, he should go for equity investment according to that age limit. It might sound confusing don’t worry I am removing the confusion. If my age is 25 years then according to the financial thumb rule I should have an investment portfolio of 25% in debt and remaining 75% in equity. This is calculated by simply deducting your age from a value of 100. If my age is 45 then I should have an equity portfolio of 65% in equity and 45% in debt.

  • This thumb rule is equally important for doing investment in Tax Saving too. Since in many case we find that all the investments in tax saving now a days is being parked in equity where ones exposure is often more than 100%.
  • Its true that equity investments fetches much higher returns as compared to other investment avenues. But just remember what happened to your tax saving funds when the Indian equity markets went for a rock bottom decline. We find that all the NAV of the major tax saving funds having exposure in equity went for a cascading fall in their NAV values.
  • Mark there is another thumb rule which needs to be abide that is always make calculation for negative returns too which will help you to calculate the amount of risk one can take. This is very much important at times when the market enters for a prolonged Bear market phase.
  • Now many of friends will say that equity investment is for long term. Since we all ways gain in log term equity investments. True. I agree will all of you but tell me one situation where one is having all his eggs  in one basket.
  • So before doing any investment in tax saving instrument please calculate your current tax saving investment portfolios.
  • One should plan in this way that apart from doing investment in equity one should also try the other avenues available under section 80C for tax saving.
ELSS is one of the most picked investment tool for tax saving among all other tax saving avenues. ELSS stand for Equity Linked Saving Scheme. It is an mutual fund where all the pool of funds is invested in equity market with a ratio varying from 0-80% and remaining 20% in Debt fund.
 This year doing investment in ELSS will fetch more advantage. As SEBI have scrapped Entry Load on Mutual Funds, all these tax saving ELSS are now free of entry load. This makes your investment corpus to get invested without any deduction of charges as earlier their used to be a deduction of 2.25%. So if one does an investment of Rs.10000 his total investment will be Rs.10000.Where as in earlier case there is used to be a deduction of 2.25% which amounted to your investment of Rs.9775.This makes the ELSS more attractive this time for doing investment in tax saving.
Few Things one should look in to before doing investment in ELSS.
·        Make a detailed calculation of your current status of your tax saving investment portfolio.
·        Before investing in any ELSS look out for the negative returns the fund have generated before looking into the positive returns. This will help you to judge the fund performance in negative times. Since in every bull market even the worst funds works superbly. To judge the performance look for Sortino ratio of the ELSS.
·        The Sortino ratio classifies risk in terms of upside and downside risk. It arrives at a minimum acceptable return (MAR) for an investor. Whenever the fund return is less than the MAR, it adds the underperformances, but does not add out performances. This is a better measure of risk than volatility
·        Don’t get lured by the Dividend promotion campaign of ELSS. We have often found that during tax saving months that is from January to March many fund houses comes out with dividend module.
·        One must know that after dividend declaration the NAV of the fund drops down.
·        When a fund pays 40% dividend, for instance, its net asset value drops from Rs10 to Rs6. So investors get back part of the principal amount invested in the form of dividend, with no value addition by the fund house.
·        So avoid this type of traps. Since your investment will get locked for 3 years. So if the fund performance is not too good during downward trends of the market, the fund might not be able to scale back and provide you some return at the end of the third year in case the equity market remains bearish for 3 years.
  One more thing I would like to inform all my tax saving friends that this time you’re Financial Agent or Advisor might not suggest you to do investment in ELSS. Since as entry load have been scrapped by SEBI the agents will not get any commission out of the ELSS. So you might find some new marketing strategies by your advisor pushing you hard to do investment in insurance or some other product which carries some commission.
 So in this situation all you need to do is to do an advance planning for tax saving. That’s the main reason why I have started asking you before 4 months to do your tax saving investment calculation.
Don’t do last moment preparation and don’t cry later on that I have been miss sold .Miss selling never happens in one way. Both the parties the client and the advisor is involved.
In my next article I will bring out the hard ugly pictures of Tax Saving mistakes and their solution to avoid.

Tuesday, November 24, 2009


After 31st March 2010 Indian banks will have to adhere to the Basel II norms. India had adopted Basel I guidelines in 1999. later on in February 2005 gain , the RBI had issued draft guidelines for implementing a New Capital Adequacy Framework, in line with Basel II.
The deadline for implementing Basel II, originally set for March 31, 2007, has now been extended. Foreign banks in India and Indian banks operating abroad will have to adhere to the guidelines by March 31, 2009.
So let us dig what is this Basel II al about and how it will affect the Indian Banking sector.

What is Basel II ?
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face.
Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline – to promote greater stability in the financial system.

Lest digg out how all the three above pillars will bring changes in the Indian banking segment.
The first concept deals with minimum capital requirements.
This is one of the most important and prime tool which makes our Indian Banking Sector jealous.
 Banks have to keep aside 9 % capital against various risks. The risk consist of interest rate risk in the banking book, foreign exchange risk, liquidity risk, business cycle risk, reputation risk, strategic risk. This rate is expected to increase after much talked about Basel II norms come into place. So all the above risk will make the Indian banking sector more secured and more stable just like the one during the US financial crisis.
 In other words it can be described as the minimum amount of capital a Bank should maintain to cover its various business risks. This might affect the credit growth of banks since in first place Indian Banks are basically born skeptical which also acts as a boon in times of crisis. Banks will have to increase their margins for providing loans and moreover may reduce the rate of percentage of sanctions they make in usual conditions.
 Now a question might come up in the mind that what will be the affect on loans-this will be answered after 31st March 2010 when Basell II comes in to play.

The second pillar of Basell II is supervisory review.
 Banks have been given the power by which they will not only maintain the minimum capital requirements but will also be able to have a process by which they can assess their capital adequacy themselves. This process, and its assessment by the supervisory authority, is central to the second pillar of the Basel II Accord.
 This also ensures that banks will be able to make arrangements to ensure that they hold enough capital to cover all their risks. The prime responsibility will lie on the indvidual banks to compile with the norms.
 This review process will provide benefits when another financial crisis will hit in the future. We should not forget that when the US banks were getting sold out the Indian Banking segments stood still as if nothing has happened. That’s why we can go off to sleep when our prime wealth is being safely preserved in the Indian banks. It works in this frame work shown below.

The last but the most important one of Basel II is market discipline.
The recent financial crisis in US and the bailouts of the Century old Banks have raised the voice of market discipline. This is one of the most important pillar of any financial process.
Market Discipline in banking and financial sector is highly required in coming days as more globalization will expand. Market discipline as per Basel II focuses on:
 To achieve increased transparency through expanded disclosure requirements for banks.
 This will make sure that the banks are well positioned to handle the complex business process.
 This will bring transparency in the process followed with adequate updating to the banking regulators on the involved process of the various banks in dealing complex products.
So over all it can be concluded that with the advent of Basel II, banks with a risk appetite, i.e. high risk - high return lending strategy or lending without proper appraisal merely to generate additional business will find the going tough. We believe that such business models, which take disproportionately high risks, will not survive. The business models, which should survive, will be where risks are within acceptance levels for the banks backed by adequate returns.
After implementing Bsel II  our Indian Banking will feel more jealous.

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