| Markets Outlook- Who's moving the markets? | | | | active in smoothing out any volatility, credit problems |
| Global equity markets have been through volatile | | | | or other factors that might have some adverse |
| times and we noticed some rebound since been | | | | effects on the markets. |
| affected by the US subprime mortgage market | | | | India Outlook |
| collapse. What started of in the subprime sector | | | | With an ever increasing India’s middle class |
| enveloped the prime home loan as well as the | | | | (100-200 million), along with the consumer boom that |
| securitized debt markets as a spillover effect. Yet, | | | | has started to take shape lately, India is flying high in |
| the Fed and the Central banks were quick enough to | | | | the global capital markets like a dove. More FDI and |
| buffer the market crisis with the former cutting | | | | FII are flowing into the markets, targeting hot |
| interest rates and the later pumping huge money, | | | | sectors like IT, real estate and the infrastructure. |
| around $550 billion till now, into the markets. The | | | | Annual FDI flow close to US $30 billion are expected |
| cumulative effort saw the markets react with some | | | | to hit the markets and will be canalized to the fund |
| bull rallies before turning volatile again. The CME | | | | crunched much needed infrastructure sector. India is |
| volatility index has been around 21-23 last month | | | | wooing Japan to invest in India’s infra-techs, one |
| against 37 in August, the highest since last year. | | | | such example being the successful completion of the |
| Some banking consolidation has taken place since the | | | | Delhi metro rail project. The ambitious plan drawn up |
| subprime with major investment banks re-pricing risks | | | | to create DMIC, -Delhi-Mumbai Industrial Corridors of |
| on MBS bonds. Hedge funds also have reported | | | | 1500 km long, at a projected cost of around US$90 |
| some big losses exposed to the MBS bonds. | | | | billion is under consideration by the central planning |
| The other prime market mover is the crude oil, which | | | | commission. The government wants to create SPV |
| have in fact quite rude on the markets. Oil price | | | | (special purpose vehicles) to fund the project. And |
| shock with Nymex touching nearly $100, have had | | | | with multiple SEZs on the pipeline, it seems India has |
| enough stress on the economy. The OPEC is | | | | entered the same construction boom that prevailed |
| expecting some oil price moderation and the oil is | | | | during Deng Xiaoping’s era in China, early |
| expected to settle in the range of $ 70-$ 85 per | | | | 1980’s. Recent visit by the Japanese Prime |
| barrel in 2008. The depreciating US $ have been | | | | Minister Shinzo Abe to India and Indonesia did boost |
| implicated to be one of the cause of rising crude oil | | | | up Indo-Japan tie. Japan might be hedging against the |
| price, apart from supply constraint and gulf events. | | | | dependency on China—an event that could be |
| Sustained oil price rise could prove detrimental for the | | | | related to his more inclined visit to India. |
| already struggling US economy, as it might further | | | | However, Japan would be reluctant to deteriorate |
| accentuate the chance of an US economic | | | | any ties with China, as India-Japan-China has more |
| slowdown, fearing a faltering in Asian exports, | | | | become like economic allies rather than pure |
| according to Bloomberg. | | | | competitor to say. India, would also like to take the |
| We have also noticed some risk de-leveraging in the | | | | opportunity to improve bilateral ties with |
| alternative investment sectors, but that would be a | | | | China, since India and China constitute the two |
| temporary effect, according to global economists, | | | | largest and fastest growing economies in the world. |
| which they expect to pass off in recent times as | | | | Neither India nor Japan would like to jeopardize each |
| investors, now being more risk averse, will tend to | | | | other’s ties with China in the meantime. Though |
| diversify their asset holdings in the emerging markets. | | | | it is obvious that China and India would at some point |
| Liquidity crunch within the interbank system have | | | | of time in future will become chief competitors of |
| been somewhat contained with prompt central bank | | | | Japan. |
| interventions, but credit conditions beyond the | | | | Thus, it throws some light that how India has |
| banking sector remain much stressed. Global investors | | | | positioned itself within the Asia-Pacific region |
| certainly look forward for a better 2008 as | | | | demanding more attention in the regional economic |
| macro-economic fundamentals have started to | | | | cooperation and multilateral free trade ties with the |
| improve since the last quarter. | | | | ASEAN nations. Along with the US Nuke deal, India is |
| One of the prime agenda of the Bush administration | | | | also counting to tap on the Japan’s and France's |
| and the Fed is targeted to rescuing distressed | | | | civilian nuclear technology for its energy demands. |
| mortgage lenders and sheltering subprime borrowers. | | | | What could give a real boost to the FTA in the |
| These measures have indeed upgraded the investor | | | | Asia-Pacific region if India lowers or removes some |
| sentiments while they await to see more aid from | | | | tariff on component businesses from Japan, the |
| the Fed, if it likely be so needed to cut interest rates | | | | same Indonesia did remove tariffs on |
| further. Fed Fund rate outlook for the next session | | | | auto-components from Japan, and Japan responded |
| hovers around 4.0% or even 3.5%-3.75%, industry | | | | with removing tariffs on agricultural imports from |
| analysts expect. | | | | Indonesia. In Fact, Indonesia is still a bigger trade |
| Market Pulse-Asia-Pacific- Feeling the stability! | | | | partner of Japan than India, and India needs to look |
| With stabilization of global assets, equity markets | | | | into this prospect. |
| might see some rebounds as indices in the emerging | | | | Bilateral trade between Japan and India stands around |
| markets have been in their best rallies in recent times. | | | | $8.5 billion and is projected to reach $14-20 billion by |
| The BSE crossed a big milestone when it touched the | | | | 2010-2012. Even though, due to widening of |
| 20k mark around October. The Hang Seng did cross | | | | investment options for Indians, there might be a |
| the 30k mark too. It has been implicated that the | | | | continued upside potential for the BSE Sensex, since |
| opening up of investment opportunities for Chinese | | | | some analysts have a view that BSE could reach well |
| investors to invest outside China for the first time | | | | beyond 23k next year, and with continued upswing, |
| have been met with success, with more investors | | | | there might be more overseas investors queuing up |
| investing in H-shares traded in Hang Seng as an | | | | the lane, if all goes well. |
| alternative to the A-shares trading at Shanghai’s | | | | See JETRO for more on Japan’s International |
| SCI 300. This has also created an arbitrage | | | | Trade. |
| opportunity for the same share being traded both in | | | | Forex Markets: Exchange Rate Swings |
| Hang Seng and SCI 300. | | | | Major traded currencies like $ and the Yen have been |
| The Asia-Pacific market pulse indicates some positive | | | | highly volatile, and in-fact, the dollar has lost around |
| trends in the coming, partly because of some | | | | 10% against global currency majors. The Indian rupee |
| recovery in the global equity markets, except | | | | has appreciated further on account of FII inflows, |
| Nikkie-225 that lost around 11% for the first time in | | | | and some analysts expect the rupee to tighten |
| last five years, and partly by the inflow of some | | | | further till 36-37/$ mark as against 39.41/$ at |
| good information about the US labor markets, | | | | present. But the Rupee along with other Asian |
| consumer sentiments and about the festive season. | | | | currencies is also vulnerable to risk of devaluation |
| With C/A surpluses of Asian economies and better | | | | against a sudden reversal in capital flow dynamics, i.e., |
| industrial production rates in China, India, these | | | | capital flight. Though it may not likely to happen in |
| countries have the least minimum exposures to US | | | | the near term as long as the dollar remains week and |
| subprime and a likely US or Chinese slowdown, | | | | the emerging market growth story remains firm. The |
| however, enjoys substantial freedom from a sudden | | | | Yen appreciation to 113/$ saw the unwinding of carry |
| capital outflow or a rapid currency devaluation as it | | | | trade, a tool where one borrows cheap and invests |
| happened during the last Asian Financial Crisis in 1997, | | | | in higher yielding assets. The low interest scenario of |
| according to some analyst. | | | | Japan-0.50% and the continued deflation has put the |
| Emerging markets are awash with abundant liquidity | | | | Japanese yen under pressure, which saw resumption |
| to propel their growth engines toward sustaining this | | | | in carry trade. There was a short term bounce in |
| economic boom in a healthy pulse, even in the event | | | | GBP/JPY (219/£) against the Yen (¥) trading at |
| of an impending US slowdown. It should however be | | | | 248/£ in August this year and the present range |
| noted that the Dow Jones P/E ratios are far lower | | | | have been somewhere around a low ¥111-119/$, |
| than their Asian counterparts which awaits some | | | | according to Bloomberg and ET. |
| corrections likely, of the Chinese SCI 300, as the | | | | The Philippine Peso has also appreciated by 10% and |
| economy have become overheated , according to | | | | thus risks depreciation if the US economy slows |
| Bloomberg and other economists. On a sector-wise | | | | down. Since about 10% of Philippines are overseas |
| outlook, three sectors seems to have caught the fire | | | | workers that contribute remittances from abroad |
| in the markets; i.e, the cement, steel and the Oil. | | | | which constitute 10% of their GDP, a slowdown in |
| Prevailing infrastructure boom in many emerging | | | | Gulf or the US might affect the inward remittances in |
| economies like China, India, Vietnam and others, | | | | Philippines, thus hurting their consumer boom. There |
| correlate between the sector performances with the | | | | has been much pressure from the G7 nations to |
| infrastructure and real estate growth in these | | | | revalue the Chinese yen, as it has maintained an |
| countries. The mineral stocks like copper, silicon are | | | | artificial low since it got un-pegged from the US $. |
| likely favored long term stocks as well as the | | | | The Chinese Yuan is devalued around 12% against |
| diamond sector and the gold stocks and the utilities, | | | | the US$ that is causing much un-pleasure since it has |
| that is expected to do well even in a bad market. | | | | resulted in a huge trade imbalance between the US |
| Global Liquidity-Is there enough out there? | | | | and the China. This is in part good for the Chinese |
| Global markets now have more liquidity and assets | | | | exporters who enjoy marginal competition among the |
| than any other time in history. With buoyant credit | | | | Asian exporters. |
| markets funding LBO deals on high leverages along | | | | Since consumption constitutes around 70% of US |
| with the participation of Private Equity players, there | | | | GDP, credit squeeze in the US could hurt the |
| is no dearth in liquidity in the market. If the | | | | corporate sector that might bring down consumer |
| developed markets are supplying liquidity, the | | | | sentiment heavily. According to analysts, real GDP in |
| Emerging markets are contributing to this sustaining | | | | US is growing by around 2.3% y-o-y, and some |
| the economic growth, like China that contributed to | | | | analysts forecast it around 3.2% at best. The US still |
| the highest global growth last year-15.6% compared | | | | remains the largest economy followed by Japan, and |
| to 15.4% from the US. In private capital investments, | | | | with an increased possibility of the US slowdown, the |
| US and the Japan are the major sources of liquidity in | | | | growth story of the emerging markets might sing on |
| the markets, with a bulk of it from the US. As such, | | | | the wrong tune. An equity outflow from the Asian |
| any major US downturn would generally hit the credit | | | | markets could also trigger forex weakness, since |
| markets hard and the Asian exports would be hit due | | | | emerging markets have increased their foreign |
| to a low consumption in the US. India, being on the | | | | ownership in stock market capitalization. As the US |
| forefront with major infrastructure programs being | | | | still remains the major investor in global economy, a |
| financed, which would otherwise be delayed if hit by | | | | redemption pressure in the US could also jeopardize |
| a credit halt. | | | | the ambitious plans in the emerging nations. |
| Remittances from NRI’s (Non Resident Indians) | | | | Considering all these risk factors on currencies, it |
| form a substantial source of forex reserve in India as | | | | might be said that the financial markets in Asia are in |
| like Philippines, and as such, any events effecting | | | | better shape than what they were in 1997-98, during |
| demands for foreign workers in US and the gulf could | | | | the Asian financial crisis and it likely to buffer to some |
| have an effect on inward remittances. Analysts have | | | | extent if a full fledge global economic slowdown |
| a view that the Central Banks now should be more | | | | comes around. |