Are the Developing markets the saviours for the global economy?

The developing markets were considered the poor cousins of the developed economies. However with the passage of time it was realized these countries had the potential to provide a fresh impetus to economic growth in world markets. The allure of these countries was further enhanced when economists from Goldman Sachs coined the term BRICS (Brazil, Russia, India and China).These countries had all the right ingredients-huge populations, rising income levels and low penetration of necessary services like banking which made them attractive investment avenues.

The potential of these markets was further magnified when noted fund managers like Jim Rogers and Mark Mobius, the "Indiana Jones" of the financial markets stressed the return potential offered by these markets to foreign investors. The emerging markets have well and truly picked up the baton of economic growth from the developed world and gone on from strength to strength. The pace of growth in these economies has been stunning, using an adjective like "bewildering" to also describe the pace of economic growth is not entirely misplaced.

A recent report released by the World Bank confirmed what most people in the investment fraternity have believed for long. World Bank estimates show a big dichotomy in growth expectations, which can be seen by the following table:








Its no wonder the top performing equity markets globally are the emerging markets. This can be attributed to expectations of these countries filling in for slumping demand from the developed world and helping the global economy extricate itself from possibly the sharpest slump in economic activity since World War II. The following table shows year to date performance of equity markets across different regions:














Source: Bloomberg, as of June 25 2009


However it is very easy to get carried away and extrapolate the growth prospects for these economies. One needs to be a bit more circumspect when evaluating returns potential. The BRIC countries have had their share of problems for example India grapples with a high fiscal deficit and is vulnerable to any spike in commodity prices, most notably crude oil. Uncertainty over the monsoon could slightly dampen expectations, it remains to be seen how the situation evolves over the next month or so. The latest move to bailout Air India could further widen the fiscal deficit. India can ill afford largesse like these.

The emerging markets hold tremendous growth potential and should continue to provide traction to the wheels of the global economy in the future.

Is it a new dawn for the global economy?

Well this question has been one which has the analysts community split right down the middle. I belong to the camp which believes there are still lower lows waiting to be hit across the spectrum of asset classes, be it stocks or commodities. The recent rally has made the sceptics camp look dumb, as a gush of liquidity led to a rocketting of prices across asset classes.

Are we really on the cusp of a rekindling of the growth story in the global economy? I think its too early to tow that line of thought. Albeit its emergin market economies have witnessed stellar runs, supported by enhanced liquidity and expectations of economies like India and China being the growth engines for the global economy. The fact that developed world economies like the US and the Euro zone are still plauged with problems tends to get overlooked. The US still faces the problems of a huge deficit, while the Euro zone is likely to encounter stress from problems emanating from its banking system.

Clearly, the basis for the present rally across asset classes has been injections of massive liquidity. Several global economies have witnessed stimuli from governments in one form or the other, which has helped arrest the decay in economic activity. The sustainability of the present rally remains questionable.

True the emerging markets have been at the forefront of this rally, but they still have their own vulnerabilities. Lets take the case of China and India. Though the dragon has well and truly stirred, China remains an export oriented economy. A significant share of its export trade is with the US, a cooling off in demand could lead to a slowdown in the chinese financial system. The Indian case is interesting, as the allure of the country has increased manifold after the thumping win for the Congress led alliance in the recent general elections. Its very easy to extrapolate expectations and re-rate asset classes. The Indian story looks to have seen a sustainably positive turn, however the rating of markets has been devoid of sanity as too much has been discounted too soon.

In my view, we could be on the verge of shocks. Markets have a tendency to surprise on the opposite side, much to the chagrin of investors. An example here can be the US Dollar. The whole world had a unanimously bearish view at the beginning of 2008, and what did the greenback do? It rose sharply through the year. Are we in for a dejavu? A couple of other indicators point to this too. Risk aversion which is represented by the VIX index looks to be in the process of forming a bottom. A sustained rise in the VIX is dangerous for stocks and commodities due to an inverse correlation. The Japanese Yen, another safe haven instrument in turbulent times could appreciate further and retest the low set at 86-87. The Dow Jones Index has been unable to convincingly breach key resistance levels, which suggests investors are cautious.

Where do we go from here? I believe stocks and commodities could retest their lows and even go lower from there. To cite an example of Crude Oil, i believe crude oil should test between USD 76-78 and then start falling. Purely on a technical basis, a new low could be in the offing. Or would it? Only time will tell....

Has the storm passed global markets?

It wouldnt be a surprise to think on these lines, as global financial markets especially Equities have settled in a range.Is this the lull after a storm or a lull before the onset of the next upheaval? I would argue its somewhere between the two. Financial markets seem to have priced in a lot of bad news already, which is a slightly comforting fact for investors. The not so comforting fact is, we could have the next storms beginning to take shape already.

I would equate the present climate in global markets to the US hurricane season of 2005, which was the most active hurricane season on record when 15 hurricanes were recorded. Where i draw a resemblance is, global markets have been hit by bad news at regular intervals. No sooner one crisis eases, another seems to creep up. First it was the subprime crisis, then it was the credit crisis. Even as the world still recuperates from these twin blows, even bigger problems could be in the pipeline.

The news of a $50 bn fraud by a hedge fund run by the former chairman of the Nasdaq Bernard L Madoff is a huge setback for investor confidence in hedge funds. The hedge fund industry has been on course to post the worst year on record, as they have been hit by redemption pressures as investors sought to reduce risk. This news could potentially become a huge problem, how it affects markets remains to be seen.

Another potential problem area is commercial real estate. An article on the Dow Jones Newswires said data from Standard & Poor's shows nine large banks hold about $121.1 bn in commercial real estate loans. These loans have to be marked to market. The three biggest holders are Citigroup, Merrill Lynch and Barclays, which each hold more than $ 20 bn of related investments. A next wave of write off could be around the corner.

Credit cards could be in line as well. Rising unemployment is bound to hamper the repayment capacity of borrowers and in turn create headaches for the lenders. An article in the Wall Street Journal quoting te Nilson report, a newsletter that follows the industry stated JP Morgan Chase, Bank of America and Citigroup had nearly 60% of the $ 724.44 bn in outstanding loans at the 10 biggest card issuers in the US as of June 30. One need not be a rocket scientist to do the arithmetic. Writeoffs on credit cards could be huge....thats not an understatement by any stretch of imagination.

Well, the markets seem hell bent on giving us analysts a tough time even in 2009. For now, i await the onset of a much needed break at the year end. I hope 2009 will not be as bad as 2008, but all i can do is hope, wait and watch.

A fightback from the Samurai?

If there has been a symbol which represents Japan, it is the medieval Samurai. I have cited the exmaple of a Samurai, as i believe the Japanese yen has the potential to stage a fightback against major currencies, most notably the US Dollar.

The Yen is a currency which has always been very attractive from the view of a carry trade i.e. borrowing money in Japan converting it to Dollars and investing it in the US. The trade is settled by reversing the sequence of transactions. The interest rate differentials between the two countries made this a very lucrative trade, as Japan is one of the few countries where real interest rates are negative. Interest rates in the US were much higher, which increased the lure of the "carry trade". Well things are changing now. The interest rate differential between the two countries is much narrower, as the US Federal Reserve has cut interest rates aggressively. Trades which were entered into earlier are no longer as attractive, in fact would'nt be wrong to say are a loss making proposition presently due to the shift in interest rates.

The imminent reversal of carry trades is likely to lead to a stronger Yen, which ironically isnt in Japan's interest as the country is an export oriented economy. Another important fall out is, Japan has been one of the favored destinations to borrow loans taking yen denominated loans will become more difficult. This will reduce the amount of capital flowing from Japan into global financial markets.

I believe we could witness a sharp rally in the Yen. Markets have a tendency to surprise, the rally in the US Dollar through most of 2008 being a prime example. Given the problems the US experiences in terms of its current account deficit and labor market, it is difficult to believe the rally in the US Dollar will sustain over the next 9-12 months. In the present markets getting the direction right is a herculean task by itself, getting the timing right would be impossible.

A rally in the Yen is potentially the surprise trade of 2009, I believe there is a possibility the rally might last longer than expected. My thoughts have already started to drift to 2009, as i await the end of what has been a tumultous, crazy and a very eventful year.

This is WAR

I bet this is the thought in each and every Mumbaikar's mind, even as the dust settles on what has been the most audacious terrorist attack on India. Having been a resident of Mumbai all my life, even i have been used to such attacks as the city has witnessed numerous such attacks in the past. But this time its clearly different, the water seems to have passed over the head. The words spirit and resilience of Mumbai are often brought up after such acts, i believe these words are abused, as it is economic compulsion which compels most people to be back on the job soon after such disasters. And the calamity was something Mumbai has never witnessed in the past, as hotels which were the icons of Mumbai were chosen as targets and the primary aim seemed to be taking foreigners hostage.



The scale of planning involved in the operation illustrate the intention of the terrorists. A huge cache of explosives, automatic assault rifles, detailed knowledge of the topography all helped the terrorists wreak havoc in the city. The Mumbai Police, which was the first to rise against the threat had to face highly trained and motivated adversaries, put up a brave fight losing fourteen men in the process. It seemed the city was brought to its knees, until the Government sent out an SOS to the elite forces. Clearly it was time to switch gears. The Army and Rapid Action Force was deployed. Additionally, units of the National Security Guards (NSG) popularly known as the Black cats, the crack Marine Commandos (MARCOS) were called in and soon took charge of the situation. It was time to fight fire with fire, the heavily armed and well trained commandos responded in earnest to the threat which had India's financial capital in its grip. It was almost 60 hours before the entire operation could be completed, Mumbai could breathe freely again.


We all owe a deep sense of gratitude to the heroic efforts of the elite commando teams, who lost two of their own in the daring operations. The sense of professionalism imbided in the commandos was exhibited as a news reporter spoke to them after the completion of the operation. The reporter repeatedly thanked them for their bravery, to which the commandos replied it was their duty and they wouldnt spare any one who posed a threat to this country. Brave men indeed....saludos, my head bows in respect for these men and their deeds. It is very reassuring to know, we have such capable men to fall back upon in times of adversity. I also feel a deep sense of loss, as so many innocent people have lost their lives in this seemingly mindless act. The efforts of the staff at the Taj and the Oberoi, in what was seemingly a hopeless situation, stand out.



The other overwhelming emotion i have is anger,which is directed at politicians. Though it would be harsh to paint everyone with the same brush, it wouldnt be wrong to say we have a bunch of useless corrupt politicians governing us. And this is true across the political spectrum, irrespective of party affiliations. How could one explain political parties attacking each other for votes, even as the anti terror operations were on in Mumbai. Its a pity the NSG, which was raised as a anti hijacking and anti terror force is now primarily responsible for security of politicians. What a waste of the best and bravest of our forces!!!!!


This time, it is upto us people to ensure the politicians are made accountable for the horrible mess we find ourselves in. Even as i am writing this post, the news of several changes in the bureaucracy and the cabinet have started coming in. I hope these are just the beginning of sweeping changes in our system. I am pretty sure, the ordinary citizen is not going to remain a mere statistic and will stand up to be counted. The political establishment has to dish out some real tough answers, the goings on in Mumbai are only likely to reinforce calls for swift and decisive action with a view to protect the ordinary populace.

The party's over....a "real" bubble pops

The party seems to be well and truly over for Real Estate. The ongoing global credit crunch has not spared India, which has caused a tightening of lending by banks. A bigger worry for the real estate sector is an absence of buyers due to a combination of high prices and the almost prohibitive cost of availing a home loan. The writing was on the wall (pun intended) , a fall in rentals in Bandra Kurla Complex in Mumbai now acknowledged as the benchmark for commercial property rates, suggested the wheels of the industry were losing traction.

It wasnt difficult to see this coming, as real estate companies have been reluctant to lower prices. The liquidity squeeze has led to companies disposing properties to raise cash, a notable example being Unitech. News reports have also suggested companies are offering discounts for bulk purchases, subject to the payment of a cash component upfront. Friends wouldnt believe when i had told them about six months or so the next market to witness a correction could be real estate. However, I have to admit i was wrong when i expected the big well established players to survive the oncoming consolidation. Even the well entrenched players like Unitech & Emaar are struggling, it seems the whole industry is struggling to come to terms with the slowdown in demand.

Does it mean housing becomes more affordable for the common man? Well for a start, the process has been initiated as developers have agreed to cut rates by 5-10%. But i would argue for a sustained revival in demand prices would have to be cut more aggressively, lower interest rates for home loans will also make things easier for investors looking to buy new homes. I sincerely do hope the froth in the real estate market is cleansed, an ominous example are the Investment banks an industry which has witnessed a shakeout akin to nothing ever seen before. I continue to wait and watch closely as i hope getting that dream house becomes a little easier.

The brakes have been slammed....big time.

The statement pretty much sums up how the auto industry feels at the moment. The present travails of the auto industry are not surprising considering auto loans are the second largest liability most people have, the biggest being a housing loan. The carnage brought about by the subprime mortgage meltdown in conjunction with the credit crisis has well and truly rewritten the archives of financial markets. Now comes the second leg of pain, as shrinking loan availability from banks has deterred buyers.

The extent of the problem being faced presently can be gauged from the fact that General Motors has said it might run out of cash before the end of the year. The clamour for a investment bank style bailout has been rising in the US, considering the importance of the big three i.e. General Motors, Ford and Chyrsler to the US economy. Sadly, the present state of affairs are likely to culminate in either one of these big three filing for Chapter 11 bankruptcy protection.

Whether the US government bails out the auto industry remains to be seen, one thing is for sure. The pain is being felt from Detroit to Stuttgart and even Tokyo. Some of the biggest names in the industry Nissan, Toyota, BMW, Honda have all issued profit warnings for 2009. Is there bigger trouble in store? My fear is, should the freeze in credit continue, its only a matter of time before credit cards become a problem area. The credit crunch seems to be easing as Libor has cooled off sharply from the highs, however confidence is a key ingredient which seems to be missing in global financial markets these days. From the way things look presently, we could be yet some way off before things start to improve for the better.