World Markets Simplified

Policy-makers in New Delhi and Mumbai are not convinced, but global banks and hedge funds with significant interests in India are deeply concerned that the European sovereign debt crises will adversely impact the country's financial system. They have sounded out mandarins in North Block and Mint Street that European banks' exposure to India could be as high as 14-15 per cent of the gross domestic product (GDP). In absolute terms, this is approximately $150 billion.

A global banker, who did not wish to be quoted, told that the de-leveraging risks of European banks for India were being underestimated by the Finance Ministry and the Planning Commission. European banks have actively participated in funding India Inc through external commercial borrowings (ECBs) and trade credit during the last two years.

"Of the approximately $120 billion exposure, trade credit alone accounts for about $36 billion," the banker said. Post-2008 global financial crisis, when credit turned cheap across the world on the back of coordinated stimulus by governments, India Inc borrowed almost $46 billion from European banks alone in just two years.

When contacted, senior government officials said the situation was not as scary as was being feared by some. "Over the next 12 months, it is true payments to the tune of $120 billion are due. Take the worst case scenario that there will be no foreign inflows over the next 12 months. So, our forex reserves will dip from $300 billion to $180 billion. Even if we assume that we need $120 billion to cover a year's import, we have 50 per cent more reserves," said a senior Planning Commission official. 

"Most of the credit is rolled over or extended by European banks. But they are not doing it anymore," said another banker, who recently had an interaction with senior officials in the Finance Ministry, the Planning Commission and the Reserve Bank of India. This has forced Indian corporates to borrow at higher costs from domestic banks. "Many Indian companies are moving onshore. This trend is likely to accelerate in the coming months," the banker said.

According to the Bank of International Settlements (BIS), European banks' claims against India stood at $159 billion at the end of June 2011. This is almost 55 per cent of the total international claims of $289 billion on India by banks of all foreign countries reporting to BIS.

"What happens if the crisis worsens and European banks require capital for themselves. The first casualty will be emerging economies such as India. They will stop extending trade credit, start selling participatory notes, syndicated loans and corporate bonds," the hedge fund manager, who manages $2 billion in equity investments, pointed out.

Indian banks will be required to take such assets on their books. Financial market pundits say some part of the domestic credit growth during the year is a result of offshore (foreign) credit being converted into onshore (domestic) credit. In other words, Indian banks have already started buying some of the assets sold by European banks, resulting in a higher credit growth. 

But, another government official said, this assumes that the economy will move to a high-growth trajectory immediately, resulting in high demand for credit. "The impact of monetary tightening on demand will persist for a while. So, we do not expect any rush for credit. The credit growth is expected to remain muted over at least the next six months," the official said. "Only if the domestic banking sector is expected to meet the entire demand for credit, we may face a liquidity pressure. But remember, even in 2008, we managed the crisis through just enhanced liquidity adjustment facilities (LAF)," the official added. 

"Policy-makers in India do have a sense that things can turn out to be bad," said a foreign analyst. "But can it get ugly?" One of the reasons why the Reserve Bank of India resisted cutting the cash reserve ratio (CRR) despite demands from various quarters in the recent monetary policy review was its sense of a build-up of liquidity pressures in the coming months. "RBI is the only institution that is alive to the adverse impact that the Euro zone crisis can have on India," the analyst said, based on interactions with officials in the central bank.

Such demands on the Indian banking sector already stressed due to a phenomenal exposure to infrastructure sector will call for additional capital infusion. But, given the government's fiscal position, setting aside more funds for banks is easier said than done. "The government is yet to take a call on subscribing to the State Bank of India's rights issue primarily because of fiscal considerations," said an Indian banker.

Top software exporter Tata Consultancy Services surpassed Reliance Industries on the last trading day of the year to become the country's most-valuable firm, capping a gloomy year for shareholders of the energy major controlled by India's richest man Mukesh Ambani.

Reliance, for long the darling of Indian investors, was briefly knocked off its four-year long perch as the country's most-valuable company in August -- first by state-run Coal India and then by Oil & Natural Gas Corp -- before regaining it.

TCS, part of the salt-to-software Tata conglomerate, is the first private-sector company to overtake Reliance in market value.

Shares in Reliance, which owns the world's largest refinery complex, fell 2.7% on Friday to their lowest level since March 2009. The stock lost 34.5% in 2011, underperforming a 24.6% fall in the benchmark index.

At Friday's close, Reliance was valued at about USD 42.7 billion, while TCS commanded a market value of USD 42.8 billion, despite its shares closing 0.4% lower.

"This leadership game is becoming like a musical chair," said Jagannadham Thunuguntla, head of research at SMC Global securities in New Delhi.

"If the underperformance in Reliance shares continues, it will become difficult for them to regain the top position again."

Reliance's growth outlook has been marred by falling gas output from its huge KG D6 gas fields, off India's east coast, which has drawn criticism from the country's upstream regulator, investors and analysts.

A USD 7.2 billion deal to sell a 30% stake in 23 oil and gas blocks to BP Plc struck earlier this year failed to impress shareholders, who are also looking for more clarity on the company's move to enter new areas such as retail and telecoms.

"KG D6 has sort of become a drag," Thunuguntla said. "And also, they have somehow got into a long-gestation trap in all their businesses -- be it oil and gas, retail or telecom."

"They are sitting on a huge cash pile and need to deploy it at the right place. Holding cash is again not good," he said.

TCS, which competes with companies such as Infosys Ltd and Wipro in providing software services to western clients, saw its share price jump nearly 12% in the December quarter, compared with a 6% drop in the benchmark index. TCS has shed 0.4% on the year.

Global technology spending outlook remains uncertain with no easy fix seen to the euro zone sovereign debt crisis and concerns about the US economy, but a sharp fall in the Indian rupee helps these exporters who get most of their revenues in foreign currencies while bulk of their spends are in rupee.

Markets stop panicking when policymakers start panicking; year-end index 19,000
The good news is that we could get some positive returns in 2012 if policymakers take steps to reverse the economic slowdown. like a) aggressive rate cuts by RBI: we expect rate cuts from April 2012 (though slow given stick inflation); markets typically rally 3-6 months after the rate-cut cycle starts, and (b) policy reform by the Government.

Sector overweights: Pharma, autos and banks
We play a mix of defensives (through pharma rather than staples) and consumer-related rate sensitives through autos and private sector banks.

Initial unemployment claims hit lowest rate since April 2008, Consumer confidence perks up, house prices sag
First-time jobless claims in the U.S. declined last week by 4,000, to 364,000, the Labor Department said. That's the smallest total since April 2008. Improving labor market conditions lifted U.S. consumer confidence to an eight month high in December, but persistently weak house prices remain an obstacle to faster economic growth.

Optimism about U.S. economy keeps oil futures elevated
Oil futures are priced near a two-week high as traders speculate that the U.S. recovery is gaining strength and growth will stimulate demand for energy. In electronic trading on the New York Mercantile Exchange, crude oil for February delivery was worth $99.53 a barrel Tuesday. Futures gained 6.6% last week

Brazil replaces U.K. as world's sixth-largest economy
Brazil's economy is the world's sixth biggest, replacing Britain, the Center for Economics and Business Research reported. The research organization confirmed a forecast by the International Monetary Fund.

Spain will suffer another recession, official says
Spain's economy is contracting this quarter and will shrink further in 2012, sending the nation into recession, Economy Minister Luis de Guindos said. The nation's gross domestic product, fourth largest in the eurozone, will fall 0.2% to 0.3% this quarter and about the same in the first quarter, he said.

Feisty Italy union chief stands between Monti and reform
ROME - A formidable battle is taking shape over the future of Italy's labour market between Prime Minister Mario Monti, a detached, professorial economist and Susana Camusso, the pugnacious, chain-smoking leader of the country's largest trade union.

China and Japan move to reduce dependence on U.S. dollar
China and Japan signed a deal to allow direct trading of their currencies. The arrangement is part of the nations' move to scale back exposure to the U.S. dollar. China and Japan are the world's second- and third-largest economies, respectively.

India - Economy and Market
Record foodgrains production in 2011 facilitates Food Security Bill
The agriculture sector performed exceedingly well in 2011, with record foodgrains production of over 240 million tonnes.

Nov infrastructure output up 6.8 pct y/y
NEW DELHI - India's infrastructure sector output grew 6.8 percent in November from a year earlier, sharply higher than the annual growth of 3.7 percent in November last year, government data showed on Monday.

Short on revenue, government may go for larger market borrowings
The government is finding it difficult to meet direct tax target due to industrial slowdown and may go in for larger market borrowings.

Import of sensitive items up 40 per cent in April-September
Led by edible oils, import of sensitive items shot up 39.9 per cent to Rs 48,274 crore in the April-September period of this fiscal.

Pulses imports result in Rs 1,201 crore loss to state firms: CAG
State-owned agencies - MMTC, STC, NAFED and PEC has suffered losses of Rs 1,201 crore on import and sale of pulses between 2006 and 2011.

European financial woes likely to cut apparel exports by 15%
Orders from Italy and Spain have almost become nil and could reduce India's total apparel exports by 15%

National Highways Authority of India set to roll out ETC system from next year
National Highways Authority of India (NHAI) plans to roll out the Electronic Toll Collection (ETC) system pan-India from next year.


NHAI to garner Rs 10,000 crore from market for projects ,NHAI to award Rs 15,000 crore order in FY13

NHAI plans to award construction orders worth up to 15,000 crore in the next fiscal, deviating from its strategy of awarding projects through PPP route.

The National Highways Authority of India will raise Rs 10k cr through public issue of "Tax Free Secured Reedeemable Non-Convertible Bonds"

India's roads sector seems headed for consolidation
India's roads sector seems headed for consolidation, with smaller and more aggressive bidders piling up orders that have run into viability issues.

Technology News –
Tata Communications bets big on cloud technology
Tata Communications is betting big on cloud technology to help clients increase productivity and cut costs on the back of solutions.

BT Group to exit from Tech Mahindra, directors resign
BT Group owns a little over 23% equity in Tech Mahindra and contributes 37% to company's revenue.

IT majors to see lower Q3 revenue growth, says brokerage
Brokerage firm Edelweiss Securities has revised it Q3 revenue growth forecast for the top four IT companies downwards to 2-3% from an expectation of 5% at the beginning of the quarter.

Snapdeal, the e-commerce site has broken growth records in 2011; What next?
There are key issues plaguing e-commerce & Snapdeal is no exception. How will it differentiate services from competitors?

E-governance project helps check grassroot pension fraud in Bangalore
A bank correspondent will now be sent to each pensioner's house with a card-reader where the pensioner would swipe his smart card.

Social media site Facebook tops search charts
Popular social media site Facebook was the most searched for word on the internet during 2011 for the third year running, according to a new research.

Online shopping jumps 16.4 pct on Christmas Day
A growing number of shoppers in the U.S. apparently need only the briefest of breaks before diving back in, especially if they can log in to shop.

Samsung eyes 15 per cent rise in handset sales next year: Report
South Korea's Samsung Electronics aims to raise its global handset sales by 15 percent next year by boosting its smartphone sales.

Samsung Electronics Co. buys out Sony's stake in LCD joint venture
Samsung will pay 1.08 trillion won ($935 million) in cash for Sony's stake in S-LCD Corp., a venture formed in 2004, the Suwon.

Intel prepares to launch smartphones powered by its chips
After decades at the bleeding edge of PC technology, Intel is in race to design the brains of a new crop of tablets and smartphones.

2011 Year of tech, tweets, tablets and telecom
Most of the action happened in telecom, with 3G and other milestones. IT crossed a landmark, too. Here are five top tech trends of 2011.

An Indian stock broker watches his computer screen at brokerage company at the Mumbai Stock Exchange.
Previously, foreign nationals were limited to investing in India's equity market through indirect routes such as mutual funds, or through institutional vehicles.

"The central government has decided to allow qualified foreign investors to directly invest in (the) Indian equity market in order to widen the class of investors, attract more foreign funds, and reduce market volatility," the government said in a statement.

Analysts said the decision to allow foreign nationals to invest in Indian equities was a positive move but it was unlikely to result in an increased flow of overseas funds in the near-term due to weak market conditions.

"At a time when the foreign institutions are reducing their exposure to India, it would not be prudent to expect foreign individuals to start investing in our markets," said Jagannadham Thunuguntla, research head at brokerage SMC Global Securities.

"We can see some impact of this decision when the stock market conditions improve," he said.

In the past 20 years India has gradually opened its economy to foreign cash. The economy is now faltering after growing at an annual average of about 8 percent for several years.

The rupee shed 24 percent of its value against the dollar last year and the current account deficit is widening.

Many economists predict growth below seven percent for the fiscal year that ends on March 30.

Indian shares posted their first annual fall in three years in 2011 as a combination of near double-digit inflation, high interest rates, slowing domestic growth and policy inaction turned off investors already shaken by global headwinds.

Foreign fund inflows, a major driver of Indian stocks, dried up with net outflows of about $380 million as of Wednesday, a far cry from record inflows of more than $29 billion in 2010 that had powered a 17 percent rise in the benchmark index, following an 81 percent surge in 2009.

Almost $6.3 trillion was erased from global stock markets this year as the euro zone financial crisis reverberated across the world in the latter half of 2011, calling into question the future of the world’s largest currency bloc.

Global stock market capitalization dropped 12.1 percent to $45.7 trillion according to Bloomberg data, while the euro ended the year as the worst performing major currency after finally starting to succumb to the continent’s financial and economic woes in December.

The euro had proved resilient for much of the year – burning hedge funds that bet on a steeper decline – but on Friday touched a 10-year low against the Japanese yen, and is near lows against the dollar last touched a year ago.

“Investors were more optimistic at the start of the year, but as the year progressed they were forced to come to grips with the debt levels in the western world,” said Navtej Nandra, the international head of Morgan Stanley’s asset management arm.

The S&P 500 is flat this year while the FTSE 100 has only dropped 5.5 percent. But the Eurofirst 300 gauge of blue-chip European companies has lost 11 percent, led by the French and Italian exchanges. The MSCI Emerging Markets index has shed a fifth of its value despite strong growth in China and other emerging markets.

Asian equity markets were hit particularly hard with Japan’s Nikkei index losing 17.3 percent this year, Hong Kong’s Hang Seng index 20 percent and the Shanghai Composite 22 percent.

Assets considered to be relative havens amid the turmoil have fared better. UK government yields hit a record low on Friday and gilts were the best performing major government bonds in 2011 – notching up 17 percent returns, compared with US Treasuries’ 9.8 percent returns and 10 percent for German Bunds.

Despite efforts by policymakers to shore up the euro zone, analysts and bankers expect next year to start on a glum note, as Europe continues to grapple with its debt crisis.

One of the biggest immediate tests will be the hundreds of billions of euros worth of government and bank debt that comes due in the first three months of the year.

Countries on Europe’s periphery, on the other hand, face funding costs that remain at near record highs, despite a series of summits that have unveiled various measures to restore investor confidence in the euro zone.

There is more than 457 billion euros of euro zone government debt due to be repaid in the first quarter of 2012, according to calculations by Citigroup. Italy has to repay almost 113 billion euros in the first three months of next year – at a time when its funding costs remain elevated.

“Markets would love to think that this will be solved swiftly, but dealing with all these problems will take time,” said Philip Poole of HSBC Asset Management. “Bond yields will remain high until it’s clear how deep the euro zone recession will be and austerity packages are more fully implemented.”

The European Central Bank lent 489 billion euros to more than 500 banks earlier this month to ease concerns over bank funding, but has so far fought pressures to more actively buy euro zone government bonds directly.

While the US economy is showing signs of recovery and most emerging market countries are still growing at a healthy clip, some investors fear that China’s economy could be facing a “hard landing” next year, posing yet another danger to the fragile global economy.

The real estate market in India is an ideal example of the subversion of demand-supply economics.

Everyone knows the real demand for both residential and commercial real estate is currently low. Inventories are piling up with builders and not even half of new launches are being sold in major cities. But prices still remain stubbornly high.

According to the makaan.com property index, prices have nationally dropped by around 1 percent last month, with cities like Mumbai, Ahmedabad, Bangalore and Hyderabad seeing bigger falls.

But one needs to follow the trend for a longer period to figure out if there is going to be any meaningful price correction where demand materialises. In all probability, it won’t happen.

On the one hand, consumers are not ready to buy at the given price and if prices fall, investors will likely default on their payments.

Samantak Das, research head at property firm Knight Frank, tells us why. “The basic reason is this: the real estate market is driven mainly by investors and not end-users or consumers.”

Investors comprise of 50-52 percent of total absorption. So when a builder is building 100 flats, he could sell 50 flats at one go to an investor at, say, Rs 5,000 per sq ft. Now even if his other flats are not getting a good response he cannot afford to bring prices below Rs 5,000, for it would mean negative returns for the investor, on whom his maximum sales depend.

And these investors are not generally you and me buying a second flat for investment, but non-resident Indians or even politicians channelising their black money into the sector. “Their lobby is so strong that negative returns on their investments by pulling down prices simply cannot be done,” says Pankaj Kapoor, managing director of property research firm Liases Foras.

Says Kapoor: “Indian realty is in a Catch-22 situation where, on the one hand, consumers are not ready to buy at the given price. And if prices fall, investors will likely default on their payments.”

So why have the prices risen so much in the first place? The answer mostly lies in foreign capital entering Indian markets. Foreigners are not directly allowed to buy land, but the foreign money entering the housing sector is used for nothing else but buying land.

Construction costs constitute just 10-20 percent of a property’s price, with land accounting for the major balance — depending on where the property is located. Now, in residential buildings, customers themselves pay in phases, funding their own construction, which means the initial investment by the builder or private equity fund goes into buying the land. Between the financial year 2008 and till September this around, more than Rs 43,000 crore of foreign investment has flown into the housing sector.

Such capital flows have pushed prices up, with the weighted average price of a flat in Mumbai now being more than Rs 1 crore. Liases Foras estimates that even if interest rates come down to 9 percent from the 14-15 percent at present, the realty market needs to undergo a 33 percent price correction to go back to 2009 levels.

When a developer calculates returns on a flat, he has a certain velocity of sales in mind, which means he estimates the flats will be sold in a given timeframe. When the private equity investor is roped in, their margins increase the prices. When prices are held high, the sales velocity is bound to go down. The return on equity for the private equity investor falls and the consumer is hurt because of high prices.

In fact, private equity funds worth $3 bn-$5 bn are expected to exit real estate investments in 2012, Jones Lang LaSalle says. But the returns could be really low, hovering around even 2-3 percent, says Kapoor. So if both consumers and funds are losing, who is pocketing the gains is a question that needs to be answered.

The second question: if so much money has been transferred to the sector, what is the asset creation? Liases Foras estimates suggest that incremental construction floor space has gone down over the last two years in all major cities except Pune. Kapoor explains: “This tells us that land has almost been treated as a derivative that is traded with. It changes hand from owner to builder to PE funds and rises in value through the process. But nothing is created. With all capital being lost, realty has become the mother of all scams.”

Third, there have been controversial deals for floor space index (FSI) where a higher number of floors has been allowed for a single apartments. In such cases, the cost per flat must come down as the cost of the land remains the same. But this benefit has not been passed on to the customer, thus inflating the total value of the land.

In all this, common people have lost out. In the last 10 years, the percentage of Mumbai population living in slums has gone up from 55 percent to 70 percent. If one looks at it closely, almost the whole of the incremental population has gone to slums because of unaffordable housing. Are not foreign funds and direct investments supposed to do exactly the opposite?

What we have today is a system only for investors, who can get full tax exemptions on interest if they rent the property out. But a first time buyer has exemption only up to Rs 1,50,000 on interest payments. A new regulator for the realty sector is welcome — which is now being promised by the Real Estate Regulation and Development Bill, which must bring under its purview all the stake holders in the realty story.

If the regulator turns out to be a toothless tiger who is hand-in-glove with politician and builder lobbies, no good will come of it. India needs structural changes in its opaque realty sector to give its people what should be a basic right: a roof over one’s head.