Monday, March 21, 2011

INFLATION BURNS


INFLATION BURNINGS:
The RBI came up with another round of old fashioned rate hike to control inflation. We have already witnessed 7 rate hikes within 2010-2011 to control the food inflation. Every time we find RBI using words related to control the devil of inflation by compensating growth, but this time their was a twist in the tale. This is the first time RBI is more concentrated about the slowing growth of emerging economies including the Home country.

The emerging economies are facing the heat of paying more import bill due to rising oil prices. Everything cannot be blamed on tension among Middle East about rising crude prices. When the emerging economies are going to bring new GDP figures for their economies like India being projected to bring 10% GDP growth, demand of crude is bound to increase along with the price increase. India is grappling with the problem of poor and low crops cultivation. That’s one of the biggest reasons for higher food inflation. Despite of having a good monsoon in 2010-2011 India enjoyed the flavor of 18% food inflation. Keeping this in mind this year the Union Budget proposed to set up and spend funds on building food storage infrastructure and also in order to promote agriculture activities refined the loan rate structures.
Non food items have dropped under the production ladder reflected through index of industrial production (IIP).  India's factory output rose 3.7% in January. The biggest blow of the game to capital goods segment. Capital goods output contracted 18.6 % in January in a sign that higher cost of credit and rising input cost pressures may have forced companies to defer planned investments.
REELING EXPORTERS:
If we look towards the exporters we find that they are also reeling under the pressure of higher cost of exports. Micro small and medium enterprises (MSMEs) which contribute to 45% of the countries export are the one who are worst hit. FIEO Chief however expressed his concern that the IIP has shrunk from 16.8% a year ago to 12.10% a quarter ago and is only 3.7% currently.  The high cost of credit has dampened plans of expansion and capital expenditure and would hit Profit After Tax (PAT) of most companies in Q4. 
If we club all the punches we find that export, industrial growth and purchasing parity all went into a tailspin in order to control food inflation. The prices of protein sources such as milk and ‘eggs, meat and fish’ continued to remain high reflecting structural demand-supply imbalances and poor infrastructure facilities of storage.
  
WRONG TREATMENTS:
It seems that the problem was some where else and we were doing the treatment at some other place. After making a wrong treatment RBI is now under the threat of slowing growth due to the rising cost of loans. India is still about to witness in the coming two quarters the slow down in corporate earnings. Their will be significant drop in margins of profitability and rising cost of operation followed with higher interest cost, eating up much of the dividend of the financial year 2011-12.
In the third quarter RBI has projected the WPI to be around 7%.Indian government is going to face some tough situations due to the increasing fiscal deficit due to the rising import bill of crude. The planned expenditure of Indian government will take a hit from the rising crude bill. Moreover companies are eagerly passing out the higher cost of loans to the consumer and hence monthly expenditure are now double and savings of Indian citizens are now running half of what it was in 2009.The financial yardsticks of India like direct and indirect tax collections, merchandise exports and bank credit, suggest that the growth momentum persists, giving some great signs of Not Too Much Bad but the damage is happening to some other corner of the same room.
STEROIDS OF LIQUIDITY.
As interest rates have been hiked to suck out the excess liquidity from the market to control food inflation, but at the same time the Indian market was injected with a Steroid of liquidity. Net liquidity injection through LAF declined from an average of around ` 93,000 crore in January to ` 79,000 crore in February 2011, and further to ` 68,000 crore in March (up to March 16) due mainly to increase in government spending and consequent decline in government cash balances with the Reserve Bank. 
In between these times of low interest rate to high rate companies who took off the projects for expansion are the worst hit and struggling to scout for easy liquidity. This very particular factor is one of the prime factor why china is providing easy funding (funds at low interest rate) to the Indian corporate. This same factor can spook off another round of unauthorized improper quality of loan disbursement. Since banks will be busy to win the race of higher loan disbursement. Quality of loans and quality of expenditure are going to be the prime agenda of Indian financial streets.
SOME GOOD NEWS
One good news among all these hiccups is that the area sown under the Rabi crop is higher than in last year which augurs well for agricultural production. This will provide healthy foods for the financial year 2011-2012.
At last I would like to accentuate the thoughtful minds of my readers.RBI rate hike, higher cost of interest rates and consumers paying more for their purchase where one finds financial inclusion of India. When Budget comes we raise voices of financial inclusion. But with rising inflation financial inclusion disappears. Without being inclusive, financial and economic stability cannot be sustainable. India needs to identify the areas of where we can control and cut off the interest rates. Financial inclusion is about credible access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. If Indian financial regulators concentrate on this, India can avoid fiscal imbalance and will be able to control  food inflation by focusing on higher production of crops. Urbanization should be seized and should not be allowed further to expand where it destroys agriculture land to a Multi Complex.
THE REAL AFFECTS.
Emerging economies are rattle with inflation and Indian economy is not only inflated but also facing the probe of high petrol and diesel prices which are passed on to the end consumer. Indian must quest for alternative energy resources so that inflation can be controlled. We are focusing on infrastructure to a much greater extent. But we are not aware that this infrastructure will be of no use if inflation keeps on climbing since all infrastructure projects will be at a high price and less profit and less dividend for the share holders.

Indian industries needs to focus on the composition of funding. A prudent mixture of equity and debt needs to be arranged so that cost of high interest does not affect in the course of delayed execution of projects. This is one of the most important aspects we need to keep in mind when planning or executing cash flow structures of a project. We should not forget that all projects in India are completed with a delay tag where cost of the project goes up substantially by a around 30%-40% of the initial cost of the projects. We need to keep an eye on this.

Sunday, March 13, 2011

JAPAN FINANCIAL SHOCKS

JAPAN no words are required to describe even to a 4 years child since he also heard and saw the name many times on Television and Newspaper. On Monday morning every one will be having an eye on what will be the affects of the crisis of Japan. Now I don’t call myself as a financial guru or speculator but rather prefer to mark myself as an analyst.

THE CRUDE AFFECTS:
The crude prices have taken a U turn after the debacle of Japan. Over here I would like to accentuate my readers that Japan is one of the biggest importers of crude oil. So prices are bound to fall but prices will rise more high in the coming days as Japan had shutdown refineries which were having a combined oil-processing capacity of 1.2 million barrels a day, roughly a quarter of Japan's total refining capacity. Hence the good news of low crude prices are meant for short term. Moreover fires broke out at two Japanese refineries while others closed down automatically when the earthquake hit. This will also add losses for the Japanese oil refineries
FINANCIAL SHOCKS:
Japanese losses will be borne and shared maximum by the Insurance companies. Already Shares in some of the world's biggest reinsurance companies took a pounding on fears that the earthquake in Japan and the subsequent tsunami will cost them dearly.For rebuilding Japan the government have to come out with a new budget policies on 1st April 2011. For now, officials will use about 200 billion yen ($2.4 billion) left over from the budget for the fiscal year ending March 31.The bill will bear the cost of long term and short term funds planning for expenditure. The northern Tohoku region most affected by the disaster makes up about 8% of gross domestic product, and is host to factories making products from cars to beer.  The Ministry of Finance projected in January that government debt will increase 5.8 percent to a record 997.7 trillion yen ($12.2 trillion) in the year starting April 1.
US treasuries are also under severing threat form calculating the losses of Japan. Since when Japan will go for rebuilding its states then it might press the button of selling foreign holdings. Japan is the second-largest holder of Treasury securities, with $882 billion at the end of 2010, following China's $1.16 trillion, according to U.S. Treasury data. This sell of will create global sell of for the world financial markets. Dollar will be worst affected with correction in many asset classes due to pull out of Japanese funds. Japan is the second-largest holder of Treasury securities, with $882 billion at the end of 2010, following China's $1.16 trillion, according to U.S. Treasury data. Moreover the insurance companies will have to sell their holding across various asset classes which will further initiate a correction for all assets classes. Japan’s sovereign debt was recently downgraded, financial markets may become more wary of even an incremental increase in government borrowing and bond issuance

Japanese investments in India were on the rising steps. the India Brand Equity Foundation has released a report "Proven Strategies: Japanese Companies in India" which records that about 71% of surveyed Japanese companies in India planned to raise their investments in India. The report surveyed 25 Japanese companies in India and profiles 17 Japanese companies in India. After the crisis all these investment planning will get stopped affecting the long term strategic growth of the Indian economy. Information technology sector will also a take hit from the collapse of Japan. Japanese firms are setting up software development centre’s in Bangalore, India. Factory shutdowns, power cuts and the impact on consumer confidence may hurt Japan’s GDP for a period of months, while contributing to growth later as reconstruction occurs.

These include electronics industry giants such as Sony, Matsushita, Fujitsu, Toshiba, among others. All these are now uncertain for quite some time.

Recently the Japanese investors were flocking for growth from investments .Japanese investors were hungry for yield in a low-interest environment. India was their favored destination followed with Europe and other nations.
I read somewhere that many are whispering that rebuilding Japan will proposer the global economy particularly the struggling ones. I repeat here that again that every economy survives at the cost of another economy. Japan rebuilding will bring growth but with a high cost. It is hardly important to any one what financial crisis Japan will face but every one is eager to know what crisis the other economies will face from Japan earth quake. Japan will make it difficult for US treasuries and other nations as redemption of investments will triggered off. Gold and other precious metals may see some selling pressure from the Japanese earthquake and tsunami.Preliminary estimates reckon the disaster could knock around 1% off Japanese GDP.

Among all these this disaster can bee a boon for the other nations as rebuilding of infrastructure and other segments will bring investment opportunities and job opportunities for those nations who will come forward towards Japan. In this case Indian infrastructure migh face some hardships since capital requirements will be the deciding factor for the growth of Japan and Indian infrastructure. In other words the growth of Japan economy will fetch more return to investing nations as compared to investments into Indian infrastructure. This may sound like some thing strange but think for a moment where you will invest your money where growth rate will be high with return more guaranteed. Don’t forget Indian markets are fighting with corruption boons. Japan in fact stays away from all these for the next 3 years.

Indian economy will face some tightness in foreign investments into the country. Time will be the best speaker so wait and watch.

CRUDE PRICES & BLESSINGS FOR U.S.

Every Economy is having discussion regarding finding ways of managing the fiscal surplus or deficit with respect to rising crude prices. Its know to every one even the 5 years child that due to the tension of Libya the crude prices are set to climb high. What we are busy in finding is the level to which the crude prices will climb and how long the tension of Libya will fill the pockets of Sovereign funds. In my previous articles I have depicted that one economy makes growth at the cost of another economy. In pure economic terms every economy cannot prosper at the same time. History stands for the proof.

NEW SOVEREIGN FUNDSThe high crude has brought smiles on the Middle East companies. Once again their pockets of Sovereign funds will swell like Elephant Size egg. Thank god we don’t find elephant eggs otherwise that should have fell short of the original size of the Sovereign Funds size. The aggregate assets under management increased from $3,590bn in 2010 to $3,980bn or 4 trillion approximately, at the start of 2011.So now one can imagine how hard it is to describe the size of the fund.

The difference between the benchmark price and the prevailing price of oil is usually paid into the Excess Crude Account. This amount is being kept and transferred to another account for deployment or investments purpose. Very recently the African Government is coming out with a policy for creating and doing investments through sovereign funds. It is expected to cease soon, as the Senate has joined their House of Representatives counterparts to record a significant progress on the passage of the Sovereign Investment Authority bill.

The bill seeks to invest a portion of the excess profit made from crude oil sales in the Sovereign Wealth Fund to be held and managed by the Nigerian Sovereign Investment Authority. The authority is expected to invest the funds in a diversified portfolio of medium and long term investments "for the benefit of future generations of Nigerian citizens.

UAE INVESTMENTSAs we all know that UAE is the biggest sovereign wealth reserve and also one of the biggest investor of the world. Very recently UAE is going to invest a huge block of sovereign wealth fund into Chinese agriculture segment. The UAE and other Gulf states in collaboration with Singapore companies are entering the Chinese agriculture market to ensure food security. There has been a considerable increase in the number of Singapore food companies, showing interest in expanding their presence in the UAE and Middle East. He said the number of Singapore companies in Gulfood almost doubled from 24 companies last year to 40 companies in 2011.
US AT THREAT FROM SOVEREIGN
Large U.S. banks went to sovereign wealth funds with hat in hand during the crisis. From 2007 to 2009, Wall Street sought tens of billions of dollars from Saudi Arabia, Abu Dhabi and Kuwait - as well as China and South Korea - hoping to shore up their balance sheets with those cash infusions. These investments have been unable to generate the return as dreamt while doing the same. The US is now of great concern about the return being generated on these funds since if they don’t proposer the sovereign funds might press the button of pull back. Another concern is that rising fiscal deficit might force the sovereign inventors to transfer their funds into other economies and resulting a tide for the dollar.

Overall the credit rating of US is at very much risk. The fiscial deficit of 14 trillion dollars is now turning out to be a night mare for the US government. The US government needs to improve and find solution to manage the fiscal deficit other wise foreign investments from US will flow to some other economies.

One will be surprised that high crude prices are turning out to be blessing for US economy. U.S. remains a popular investment for sovereign funds and other major foreign investors. This is due to its relative investment safety and stability when compared to Europe, which is suffering through a debt crisis, and more volatile emerging markets. This is the reason why US is going to advantageous when crude prices will be back to the level of 2008.One must understand that US needs funds for its economic life. It has no room for further Quantitative Easing measures. All its free money is on the way of exit.

U.S. policy makers are designing polices to become more open to foreign investments and specifically in offering tax breaks and loan guarantees to get funds like the China Investment Corp. and the Government of Singapore Investment Corp. with some $4 trillion in assets investing in U.S. infrastructure.

The $71 billion Australian sovereign wealth fund has also entered a joint venture with US pension fund/financial services group TIAA-CREF (Teachers Insurance and Annuity Association, College Retirement Equities Fund) to pursue further US investment opportunities over the next two years.

The US government will face a very hard time in drawing funds for its economy. This is one of the reasons why many financial institutions who were having investments into US treasuries are taking an exit button in the present market conditions. PIMCO's Total Return Fund (PTTRX) have exited all its holding from the treasuries. In January 2011 it was holding 125 of the portfolio into US Treasuries and in the month of February its holding is simply ZERO. The prime reason for this is that once the $600 billion QE2 comes to an end the interest rates are bound to go up form US Fed. Since government debt competes with corporate debt for bond investors' money, corporations will also soon need to pay higher interest rates to raise cash. Hence dollar is getting liquidated for the time being.US in under deep nightmare about the fear of loosing investments from the recent and old sovereign funds inflow.

US is busy in making arrangement to attract the high crude prices profits where as the rest of the world struggles to tame inflation and rising food prices.

CHINA THE BIRTH OF NEW ECONOMY.


The year 2011 started with a bang of flow of economic data and budget cuts across many nations. We know that as the time progress the flow of capital will take new shapes and new meanings for different nations. We are already witnessing imbalances of currency valuation, much of the credit of this goes to the uneven fiscal deficit of struggling economies. The economic data’s might paint a rosy picture of the state of the economies but in real terms one itself knows the proof of the pudding.

Among all these the Forbes released the prestigious data of the Billionaires list. In the year of 2009 when the Forbes Billionaire list was released we found new billionaires being born from China and Asian countries mostly replacing the western economies. This year also in 2010 we find that 49 new billionaires have taken birth. It seems that Chinese economy is developing new growth opportunities for the People of China.

TRANSITION OF EXPORT TO DOMESTIC GROWTH:

Among all these china posted a negative fiscal position. The trade deficit of china grew to4.5 billion yuan/ $7.3 billion (dollars).Exports were of china grew 2.4% where as imports grew 20%.The sudden upward push in import is due to the new economic policies which are being adopted by china is the coming days. China in its 12th Plan starting from 2011-2015 will focus on domestic growth of the economic. It will focus on developing the Tier 2 and Tier 3 class of living standards and bringing growth within its own development. This shift of economic policy will act as a Tectonic Plates shifting below the economic lands of the world. Although this shift will be a gradual process but tremors of the quake will be felt across the world financial markets.

In the past couple of sessions china have been acting as one of the biggest buyer of coal, iron ore, copper to fuel the growth of its domestic manufacturing and construction growth. If we combine all the figures of Chinese’s trade we find the exports are having a growth 21% where as imports stands at 36%.Now a question might come up in the mind that is china going to put brakes on its growth wheel which is running on the pedal of export. I am sorry to disappoint that no china is entering into a new phase of the growth where domestic economic growth will bring the double digit of Chinese GDP growth. Another advantage of higher imports and lower exports is that it will help the yen to be free from any debates of valuation. More over the sudden price increase in the crude will exert pressure on Chinese economic much more as compared to any other economy. The prime reason behind this is that a $1dollar increase in price of crude results to cut of 41.9 billion trade surplus of china, resulting to negative fiscal position.

In between china is attracting huge investments in various sectors primarily in energy efficiency, environmental issues an social investments. Its quest for alternative energy is stupendous and moving much faster as comparison to any nation on the planet. Chinese clean energy companies are coming out with IPO in 2011 to raise capital for the meeting the demands for alternative energy. Total amount of 1.1 billion amounts IPO will hit Chinese markets in 2011 from this segment alone.

FINANCIAL OF CHINA:

Chinese policies are bringing floods of FDI investments into china mainland.FDI investments in china swelled up to 2243 foreign funded enterprises. This growth is of 20.2% (YOY) and the amount of flow is 1.3billion dollars with a growth rate of 23.4% (YOY).In 2011 china is bringing reforms in its exchange rate and interest rate policies. The new policies of interest rates of china will help to fight inflation and asset bubble creation.
The below image shows the growth of China FDI in 2009-2010.

Below is the image of FDI investments in 2010

As I said earlier the picture of the economies are not always rosy as painted by the economic data. China is also having sever problems of debts too. The debts of Chinese government stand at $1.03 trillion equal to 17% of the Chinese GDP. But the strange fact is more brutal that Chinese is sharing half of the bad debts of US treasuries which is held by China. China have already taken steps in reduction of the debt and treasuries of the US. China is now a good friend of Europe. China is doing huge investments in to the European Sovereign Debts and infrastructure investments. Their are two prime reasons behind such an act is that China does not want euro to be diminished as its acts challenger of US Dollar and last but not the least china is backed at the G summits when currency manipulator voice is raised against China. Europe is now the 2nd largest trading partner of Europe.

Chinese pension funds and other instruments are scouting for investments across the globe. Among them few funds are coming to for Indian infrastructure too. Korea's 324 trillion won ($287 billion) National Pension Fund and China's $116 billion National Social Security Fund are both planning international expansions of their investments portfolios.

In China, more than 90% of the social security fund's total assets are invested domestically, mostly exposed to fixed income, equities and private equity. Overseas investments only account for about 7%.The fund is expected to grow to 20% in the 12th plan of Chinese economy. The fund is expected to grow to $300 billion by 2015, with a potential increase of about $50 billion in overseas investments.

Chinese investments into fixed assets have also swelled up showing indication that its 12th year plan is on its way of journey. Fixed-asset investment in China rose 24.9% year-on-year to 1.74 trillion yuan during the first two months of 2011, according to the National Bureau of Statistics. The central government recorded a 6.3% year-on-year increase in fixed-asset investment to 138.5 billion yuan during the first two months while investments by local governments rose 26.95 to 1.61 trillion yuan. When we dig further we find China invested 67.4 billion yuan on the production and supply of electricity and heat during the first two months, an increase of 1.3% year-on-year.

The oil and natural gas sector saw a 7.8% year-on-year rise in fixed-asset investment to 10.8 billion yuan. The railway sector attracted total investments of 58.6 billion yuan, up 45.3% (YOY).

CHINA RUSSIA CELEBRATION-THE NEW INVESTMENT GROWTH

In the past we have discussed a lot about the Chinese investments into the Africa but now china is spreading its diversification into other economies also. Very recently China and Russia celebrated the 10th anniversary of their signing the China-Russia treaty on good neighborliness, friendship and cooperation, as well as the 15th year anniversary of the establishment of mutual partnership. Over the past five years, Sino-Russia trade has nearly tripled in value.

• Trade has been mainly composed of natural resources: in 2010, crude oil and natural resources made up 48.5% of overall bilateral trade (something which will likely remain consistent as China continues demand energy inputs to fuel its rapid growth). China has then used those inputs, and then sent low to medium-value equipment back to Russia. Machinery and electronic products accounted for 68 percent China’s exports to Russia in 2010.
• In November both the nations dropped the use of Dollar as currency for trade practices. They both opted to use local currencies. That same month, a 866 kilometer-long railway opened, connecting Russia’s largest port city on the Pacific Ocean, Vladivostok, with Northeast China. In January, an oil pipeline linking Daqing in China’s Heilongjiang Province and Skovorodino, a Russian city, officially began production, and is expected to transport 15 million tons of crude oil per year, with a 30 million ton per year benchmark set for the immediate future.

• In February, EuroSibEnergo PLC (Russia’s largest independent power company) and China Yangtze International (China’s largest listed hydropower producer) announced an official JV—YES Energo Ltd—to develop hydro and thermal power projects in Russian Siberia.

How big is Russia?

Now question might come up in the mind that How big is the Russian economy on the map of Financial Market. By nominal value, Russia’s economy is the 10th largest in the world. By geography, Russia is the world’s largest country. According to UNESCO, it also has the world’s largest supply of energy and mineral resources (e.g., natural gas, oil, coal, precious metals, arable land). Growth rates have been fairly impressive since the Soviet Union’s collapse in 1991. Under Putin, Russia’s GDP doubled, and rose from being the 22nd largest economy in the world to the 11th. The size of Russia’s middle class has grown from 8 million to 55 million people during those same years. However, Russia’s massive geography, untapped natural resources, and relatively low position on the global value chain indicates a huge potential for growth that is still yet to come. I hope this was enough to make my readers understand how big is Russia on the map of Financial Market.

In the year 2011 Russia and China will become the Best Trading partners.

• Foreign trade turnover of Russia with China increased by 43.1% and has reached US$55.44 billion, according to the both Federal State Statistic Service (Roskomstat) and Chinese customs authority data.

• Chinese exports to Russia increased by 69% and amounted to US$29.61 billion compared with 2009 (US$17.496 billion), while Russian exports to China increased by 21.7% to US$25.84 billion.

• Trade in crude oil and natural-resource products accounted for 48.5 % of the overall bilateral trade volume, compared with 50% in 2008.

• In 2008, Russian-Chinese trade turnover grew by 38.7% to US$55.9 billion compared to 2007, with Russian exports to China having grown by 33% and imports from China by 42.3% . Some 74% of Russian exports to the PRC then was natural resources, and 50% of overall bilateral trade, while 68% of Chinese imports to Russia were machinery and technical equipment.

• China’s outbound direct investment in Russia was US$2 billion in first half of 2010 and is expected to hit US$12 billion by 2020.

So the new relation of trade practices by china will make the Chinese economy less dependent on US shopping floors. China is developing internally as well as extending and developing new trading partners across the globe. China will create little bit of tension when the process of shifting resources from export to domestic growth will take place. Volatility and trail and error will be their in the shifting process. We will witness a new economy birth for China. It is the world's fastest-growing major economy, with average growth rates of 10%for the past 30 years. After 30 years its going to change and take a new birth of its economy. We will have to wait and watch the New Baby and its acts.

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