Island Tax Haven Roils India's Ways

Island Tax Haven Roils India's Ways

China — Not Wall Street — Caused 2008 Crisis: Study

China — Not Wall Street — Caused 2008 Crisis: Study

Foreign Investors Pile Into Indian Shares

http://online.wsj.com/article/SB10000872396390444358404577608634101164246.html?mod=WSJINDIA_hpp_LEFTTopWhatNews

Is Indian equity market poised to enter into bull phase?

Is Indian equity market poised to enter into bull phase? The question appears every time we see a brief rally.  However, I think in most optimistic scenario this is too early to expect a bull rally from here. Even though I believe that certain names has the potential to see a rally.

Industrial growth remains weak--- and growth expectation revised downward

The seasonally adjusted purchasing managers' index (PMI) for the manufacturing sector dropped to 52.9 in July from 55 in June. New orders grew at the weakest pace since November 2011, with new export orders falling for the first time since October 2011 hurt by the lingering global economic slowdown. Same report indicated that orders decelerated faster than inventory accumulation, suggesting that the slowness in output expansion will continue in the months ahead. In another sign of cooling economy, India's merchandise exports fell 5.45% to $25.07 billion in June from a year earlier, while imports slid 13.46% to $35.37 billion, according to provisional data issued by the Ministry of Commerce. Now the short term potential growth target for Indian economy is 5.5% to 6%.

Inflation remains an issue specially after below normal monsoon

June inflation, at 7.3%, was below market consensus (7.6%). Primary articles inflation continues to be high at 10.5%, but there is little RBI can really do about it. The case for a RBI rate cut has surely strengthened with core inflation persisting at 5.0%.  However, Poor rains can push inflation to 10%. A study by Bank of America shows a 5% swing in agflation impacts inflation by 175bp. This will likely push up inflation to around 10% levels. Even though RBI can not combat a weather shock, poor rains may increase call of the RBI holding rate still in 2H12 to ward off any criticism about being 'soft' if poor rains fan inflation to 10%, especially if diesel prices are hiked as well. It is for this reason I expect that the window for the RBI to support growth will narrow in coming months.

Rates high; relief only by 3^rd Qtr

RBI raised its official policy rate by 375 basis points between March 2010 and October 2011 in order to restrain inflation, cut the rate by half a percentage point in April, to 8%. However, Inflation remains uncomfortably high, which will limit the scope for further reductions.

High lending rates are hurting loan demands, as per RBI report Indian banks' non-food credit growth slowed to 16.5 percent in May, compared with 21.9 percent in the year ago period. The deceleration in non-food credit was led by commercial real estate, where growth was only 2.8 percent, sharply down from 19.9 percent in the year ago. 

The growth in credit to industry, services, non-banking financial institutions, as well as personal loans, also declined in May. The sharp decline in loan growth is accompanied by the fastest rise in bad loans of Indian banks and incremental growth in their restructured loans, at least in the past four years.

The only sector that showed an increase was agriculture, where credit growth was 14.6 percent, compared with 12.8 percent a year ago, the data showed.  “The demand for credit has slowed down in line with the slowing economy, the demand for credit will revive only when the investment environment turns conducive,” Which I am expecting only 4^th qtr (January –March) onward, limiting the equity market rally.

In my opinion the below normal monsoon in India is the biggest challenge, as this not only restrain the monetary response but also increase the chances of social upheaval. When I say social upheaval it does not mean a coup but political response under which no party gets a mandate which can bring the structural change and policy measure necessary for growth.

“Them belly full but we hungry ...

… A hungry man is a angry man ...

… A hungry mob is a angry mob.”

—Bob Marley, 

US unemployment: Headline better than expected

WSJ interactive graph, US unemployment since 1948  (A comprehensive graph, give it some time to populate)

The U.S. economy added more jobs in July than in any month since February, but the unemployment rate ticked up to 8.3%, signaling that the U.S. recovery, while not headed for a stall, remains too weak to bring down high unemployment. Employers added 163,000 jobs in July, far above the 64,000 they added in June. In total non government non farm job creation was 172,000 better than expected (government sheded 9000). 

But the household survey showed some weakness and a slightly smaller than expected rise in avg hourly earnings points to a sluggish advance in July personal income. In fact, the aggregate weekly payrolls gauge -- which combines the impact of changes in employment, hours and hourly earnings -- rose only 0.2% in July. This follows on the heels of a solid 0.7% rise in June.

Most importantly, some of the upside in July payrolls appeared to be attributable to special factors. For example, a sizeable portion of the 25,000 rise in the manufacturing sector seems to be related to seasonal adjustment issues. Also, a 29,000 rise in the restaurant category is probably reflective of seasonal noise.

So why did the stock market sky rocketed today ? one easy explanation, animal spirit. A market which was lately devoid of any good news, first ECB then Fed disappointed market by building expectation and delivering far below the expectations. So the market as usual wanted just something to cheer itself up. As we say market can be irrational for some time but it correct itself in the long run. 

So given that actually this job number is kind of report which force Fed to sit on the side line, not good enough to pull the economy on itself and not bad enough to force Fed to announce QEIII. In my view the equity and commodity including gold is loser tough credit can be the beneficiary as we know a moderately growing economy can benefit credit. However there is still one more unemployment report before Fed meet. So my expectation is Fed will watch it before taking action and if the data disappoint, which is more likely than not then Fed will announce another round of QEIII in September.

Europe fearing a lost decade.

“We should not come away from the crisis thinking that expanding access to finance is bad. In general, expanding access is beneficial (just not before a crisis!), but finance is a powerful tool that has to be used sensibly. Access is good; excess is bad”  Raghuram Rajan

For my benefit I interpret “Access to finance” to narrowly defined term “Access to credit”, equities account for 55% of capital resources in both the U.S. and Europe, but European banks are much more important to the economy, accounting for about 70% of financial resources allocation (versus about 20% for U.S. banks). The key difference is that the U.S. has a deep, liquid and vibrant corporate bond market, which has also allowed companies to bypass the banking system to obtain financing at times of severe banking crises and credit crunches. This is a key reason why the U.S. economy has sprung back much more quickly from the 2008 Great Recession than either Europe or Japan, where economic activity is held hostage by banking retrenchment.

One fear is going forward, the credit crunch in Europe will get worse before it gets better. European banks are not as well capitalized, but much more leveraged than their U.S. counterparts, and the credit crunch in the euro area has barely begun. According to a Mckinsey study “Basel III could significantly change the composition of banks’ Tier 1 capital; risk weights, especially in trading books; and capital ratios. New McKinsey research estimates that the effect of these new rules on Europe’s banks would be a capital shortfall of about €700 billion" this mean either they raise capital of €700 billion or reduce assets by €7 trillion or a mix of both. What’s more, Basel III’s proposed new standards for liquidity and funding management would constrain funding severely. Mckinsey estimates that European banks may be required to hold an additional €2 trillion in highly liquid assets (LCR) and to raise €3.5 trillion to €5.5 trillion in additional long-term funds (NSFR). At present, European banks have only about €10 trillion in long-term unsecured debt outstanding.

Unlike in Japan, the European credit crunch will be compounded by severe public austerity (not only GIIPS but France, Netherlands and UK also), creating a potential downward spiral in output. According to often cited work of Reinhart and Rogoff “This time is different: Eight Century of financial folly” a country which enter into recession followed by financial crises sees on an average 86% increase in sovereigns’ debt/GDP ratio, and once an economy crosses debt/GDP ratio of 90% every it start losing 1% growth from its potential.

So the risk that Europe goes though its own version of a lost decade is not trivial.