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The Wise Investor May 2010 Sundaram BNP Paribas Asset Management

The Wise Investor May 2010 Sundaram BNP Paribas Asset Management

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Vol 4 - Issue 2 | May 2010 | Rs.3.

50

Shifts in market profile
sprinkling of what could be genuinely described as large-cap stocks. The most important takeaway for investors should be for asset allocation purposes. Today the top 50 stocks account for about 62% of the market cap on the NSE and the top100 stocks account for about 77%.This profile of the means It is important to have an allocation of between 65% – 80% in the large-cap space. Let us not forget that this part of the cap curve is less risky, more liquid, and less volatile, suffers to a lower degree in downward phases and is made up of more established and visible names with several possessing robust financials. The mid-cap space can, however, no longer be ignored. Even if we ignore stocks below the 300th by market-cap on the NSE (there are several decent names in the sub-300 category, too), there is today room for dedicated mid-cap and small-cap portfolios. As we move from the top 50 to the entire market, there is an increase of 3.5 percentage points in compounded annual return over a 10-year plus period. If you want to perform in line with the broad market, you cannot ignore a part of the cap curve that is almost 25% of the market. An investor should have exposures to this segment; the level will depend on risk appetite. Risks in this part of the market are higher, but across market cycles over the long term, returns should adequately compensate.This is clear even over the period covered in this analysis, which had at least four different cycles. The numbers presented here are relevant for the equity part of an investors’ portfolio and not the complete portfolio, which must have a sizeable fixed-income component.

The share of the top 50 stocks on the National Stock Exchange has declined by a massive 17.7 percentage points since December 2000.There has been an enhancement at every subsequent bucket of 50 and 100 stocks. The accompanying table provides a snapshot of what has happened between December 2000 and March 2010 on the NSE; a more detailed year-by-year analysis is available on page 27 of this publication. These shifts have important implications for investors. There has been a significant enhancement in market depth and breadth across the cap curve. In December 2000 – we were still unwinding from the tech/media/telecom boom that had a global footprint – it would have been a challenge to even think of a sizeable mid-cap allocation in a large-cap oriented portfolio. This is no longer the case. To have 100 large-cap stocks is an additional source of comfort for investors. This was not the case in 2000. Even the top 50 had only a

Major shift over the past decade-more depth across the cap curve except at the top end of the Indian market
Stock group by market cap First 50 Stocks Next 50 Stocks Top 100 Next 100 (# 101 - # 200) Stocks Next 100 (# 201 - # 300) Stocks Rest of the stocks (# 301 onwards) Total Market-Cap on the NSE Dec-00 Mar-10 CARG Rs Crore Rs Crore % 420667 50542 471209 31902 12027 11942 527081 3755582 901369 4656951 636904 305420 448846 6048121 26.7 36.5 28.1 38.2 41.9 48.0 30.2 Share in NSE Market Cap Dec-00 Mar-10 Change % % % Points 79.8 9.6 89.4 6.1 2.3 2.3 100 62.1 14.9 77.0 10.5 5.0 7.4 100 -17.7 5.3 -12.4 4.5 2.8 5.2

Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management
Sundaram BNP Paribas Asset Management: Investment Sundaram BNP Paribas Asset Management Manager for Sundaram BNP Paribas Mutual Fund / Portfolio Management Services: Sundaram BNP Paribas Portfolio Managers

Chart of the Month

Grantham’s Probability Tree
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Economy has a strong and sustained recovery, rates rise, market falls, but basically all is well

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No real market shocks, speculation and market prices rise to October 2011 to dangerous levels, then soon break with severe consequences

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P m oor on e av oi ths con di ng bre om lo ak ic d 0.3 ng s a at er ni a o -te m r rm al cri m spir sis ajo it in r b s, m ne ub ar xt bl ke few es t f all The Line of Least Resistance s,

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This exhibit, used with permission, is taken from Jeremy Grantham's 1Q 2010 quarterly letter. The letter can be read in full at www.gmo.com. The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Global Market Snapshot
A comparison in 2007 (close to peak), 2008 (close to bottom) & the present Market Cap ( $ Billion) Region/Country World United States Canada Brazil Mexico Chile United Kingdom France Germany Switzerland Japan Honk Kong India Australia China + Others End Apr 2010 47123 14482 1777 1270 389 245 2994 1758 1319 1062 3760 2262 1412 1280 13113 2009 49722 13748 1609 1326 363 229 2975 1900 1371 1076 3488 2268 1294 1253 16823 2008 31901 10455 992 565 247 130 1981 1480 1075 848 3268 1312 640 652 8256 2007 60880 17660 1749 1273 398 208 4051 2736 2208 1217 4545 2655 1813 1415 18952 Share in World Market Cap (%) End Apr 100.0 30.7 3.8 2.7 0.8 0.5 6.4 3.7 2.8 2.3 8.0 4.8 3.0 2.7 27.8
2

Returns (%) 2010 YTD -5.2 5.3 10.5 -4.2 7.3 7.1 0.6 -7.5 -3.8 -1.3 7.8 -0.3 9.1 2.2 -22.1 2009 55.9 31.5 62.2 134.7 46.8 76.0 50.2 28.4 27.5 26.8 6.7 72.9 102.3 92.1 103.8 2008 -47.6 -40.8 -43.3 -55.6 -37.9 -37.5 -51.1 -45.9 -51.3 -30.3 -28.1 -50.6 -64.7 -53.9 -56.4

2009 100.0 27.7 3.2 2.7 0.7 0.5 6.0 3.8 2.8 2.2 7.0 4.6 2.6 2.5 33.8

2008 100.0 32.8 3.1 1.8 0.8 0.4 6.2 4.6 3.4 2.7 10.2 4.1 2.0 2.0 25.9

2007 100.0 29.0 2.9 2.1 0.7 0.3 6.7 4.5 3.6 2.0 7.5 4.4 3.0 2.3 31.1

Distance from Peak (%) -22.6 -18.0 1.6 -2.3 17.8 -26.1 -35.7 -40.3 -12.7 -17.3 -14.8 -22.1 -9.5 -30.8

Data Source: Bloomberg;The last available figures for each year have been taken;Analysis: Sundaram BNP Paribas Asset Management. End December 2007 figures have been reckoned as a proxy for the peak as different countries reached the point on different dates.
Sundaram BNP Paribas Asset Management The Wise Investor May 2010

India View

Equity

Lacklustre trends
• Large foreign inflows could reduce inflation but could also cap market earnings growth as commodity companies’ and technology earnings suffer • Lower foreign inflows would on the other hand imply that inflation and fiscal deficit concerns would outweigh There are similarly, several other contradictory forces in the market which imply that there is a lack of clarity in any trend emerging. Further, India’s infrastructure project is not picking up as much as expected and performance in railways and highways leave much to be desired. The silver lining is that power projects in the private sector are gathering steam and there seems to be a higher degree of visibility in this segment. An early resolution of KG-D6 gas pricing would also pave the way for some more power output to come on stream. We are nowhere close to potential infrastructure spend or build out, as clearances still take time and the regulatory process complex. Consequently, we have seen delays in road projects. We could also witness higher foreign competition in infrastructure projects. As regards the European debt crisis, a risk of default still exists, as there are too many countries on the brink. There is a belief in the market that IMF can resolve this issue, but a default and a hair cut in debt would perhaps be the final resolution. Many of these countries have high borrowings with low earnings and high unemployment implying a resolution of this crisis in not a short one but could prolong for a sustained period of time. The silver lining, if there were one, is that this problem is within Europe, and is in a way a set off between the richer and poorer countries. The European crisis, should serve as a reminder that the “spend and get out of the slowdown” policy may boomerang for a variety of reasons, and that there is no substitute for fiscal prudence. The current government strategy to spend and subsidize could invoke a sharp uptick in borrowing costs impeding growth. These events occur suddenly and can impact market sentiments sharply. As of now, the Government’s plans to raise capital from 3G auctions and divestment are proceeding smoothly indicating that interest rates in the system will be under check. With overall government debt above 80% of GDP, there will be issues from time to time that the government needs to resolve. Consumption in India ended FY2010 on a strong note with record sales of cars, televisions, phones, bicycles on the back of a confluence of factorshigher farm incomes, lower interest costs, and pent up demand due to delay in purchases. Benefits of the Sixth Pay commission and other government schemes have resulted in this high growth. Will this sustain? Historically, our studies suggest that growth is sustainable albeit on a lower level. This is a year of some achievements – for the first time, two wheeler sales crossed bicycle sales. Penetration levels remain low for most consumer durables, as electricity is not available in most areas. With electricity becoming accessible, it would be reasonable to assume that the next consumption boom is shaping up.
3 The Wise Investor May 2010

Satish Ramanathan
Head-Equity Sundaram BNP Paribas Asset Management

Indian markets put up an uninspiring performance last month, and underperformed US markets as we had suggested it might as a near-term trend. That trend is expected to continue for some more time, as the earnings recovery in the US and improved economic data are yet to be factored in fully by markets. India continues to outperform China and Brazil. This is primarily because of lower levels of concern as compared to China and Brazil, whose economies are highly correlated on account of the Chinese commodity demand from Brazil. There is also the larger question of Europe’s smaller countries enmeshed in debt traps for which solutions seem difficult. Indian markets’ out-performance of peers in the emerging markets space has been on account of strong FII inflows as well as concerns about Chinese momentum swell. Further, local institutions have also bought into stocks on account of lower exposure to equities. This has kept market momentum going. Inflation in India remains high and is an area of concern, but there are indications that the monsoons this year will be better resulting in a higher crop output and lower prices. We are witnessing this trend in wheat and sugar already and may see this play out in other crops as well. India will remain short on edible oil and pulses and hence movements in currencies or changes in output of oil seeds will impact the price levels. There is an ongoing discussion that the level of subsidies for fuels needs to be limited implying that prices will have to be increased sharply by as much as 15-20%. Whether the government has the resolve remains to be seen. Should this take place then inflation will remain higher for a longer period of time, but government borrowing costs could drop quickly, enabling banks to outperform on account of their large portfolio of government bonds. The wheels-within-wheels suggest that the market will not perform on account of several contradictory factors –
Sundaram BNP Paribas Asset Management

India View

Equity

Distilled Wisdom
10 False Lessons from 2008 & 2009
Seth Klarman is the President of The Baupost Group, a Boston-based private investment partnership. The firm has achieved investment returns of 20% compounded annually over 25-plus years. He is also the author of Margin of SafetyRisk Averse Investing Strategies for the Thoughtful Investor. In his latest annual letter, Klarman describes 10 false lessons investors appear to have learned as of late 2009. 1. There are no long-term lessons – ever. 2. Bad things happen, but really bad things do not. Do buy the dips, especially the lowest quality securities when they come under pressure, because declines will quickly be reversed. 3. There is no amount of bad news that the markets cannot see past. 4. If you’ve just stared into the abyss, quickly forget it: - the lessons of history can only hold you back. 5. Excess capacity in people, machines, or property will be quickly absorbed. 6. Markets need not be in sync with one another. Simultaneously, the bond market can be priced for sustained tough times, the equity market for a strong recovery, and gold for high inflation. Such an apparent disconnect is indefinitely sustainable. 7. In a crisis, stocks of financial companies are great investments, because the tide is bound to turn. Massive losses on bad loans and soured investments are irrelevant to value; improving trends and future prospects are what matter, regardless of whether profits will have to be used to cover loan losses and equity shortfalls for years to come. 8. The government can reasonably rely on debt ratings when it forms programs to lend money to buyers of otherwise unattractive debt instruments. 9. The government can indefinitely control both short-term and long-term interest rates. 10. The government can always rescue the markets or interfere with contract law whenever it deems convenient with little or no apparent cost. (Investors believe this now and, worse still, the government believes it as well. We are probably doomed to a lasting legacy of government tampering with financial markets and the economy, which is likely to create the mother of all moral hazards. The government is blissfully unaware of the wisdom of Friedrich Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”) Klarman’s Message to Investors: To not only learn but also effectively implement investment lessons requires a disciplined, often contrary, and long-term-oriented investment approach, a resolute focus on risk aversion rather than maximizing immediate returns, as well as an understanding of history, a sense of financial market cycles, and, at times, extraordinary patience. Source: www.zerohedge.com (http://bit.ly/aAjdxN)
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets. 4 The Wise Investor May 2010

Market Outlook: There is an overwhelming consensus that markets will continue to head higher. Mid-caps continue to outperform large caps. Clearly, the signs of high liquidity are visible, in assets such as real estate, but inflows into equity from domestic investors is subdued. The expectation is that investors are sitting on the fringes and will be sucked in once markets move sharply upwards. Appealing as the logic may be, we remain concerned on the earnings outlook for Corporate India. Corporate India is currently operating at one of the highest margins on account of lower competition and trade restrictions. But margins can compress quickly as seen in the case of telecom. Capacities are coming up across many industries and could become operational when demand is actually cooling off. This is especially true in the auto industry. Similarly, a lot of competition is coming in the private unlisted space, where the pressure for short-term profits is low. India’s corporate profitability and ROE’s are among the best in the region on account of large supply constraints. Once this eases, profitability gets eroded for a long period of time. Hence, our concern is that volumes can keep going up for the industry as per capita consumption increases, but company profits may remain stagnant. The same holds true for refining and petrochemicals as well, as capacity additions were stalled on account of the credit crisis and are now nearing completion. This will have a more lasting effect of weak margins. To counter this trend of weaker margins, a number of mergers and acquisitions are being announced, especially in the commodities space. We will have to wait and watch if this indeed translates to superior pricing power when fresh capacities come along. We also remain worried on the amount of equity issuances that will take place globally as companies try to repair their balance sheets. China and India will continue to remain capital hungry markets and any change in risk perception could dent market sentiments sharply. On a medium-term perspective, we are more optimistic. We think India is becoming a more favoured destination, as money moves from some of the mature markets to India. Infrastructure development, although slow, will continue to become a larger theme in the private sector. We are also positive on the consumption theme which will play an integral role in economic development as better infrastructure is rolled out. While markets are expensive on a short term basis, they are not, when adjusted for the growth potential. We therefore recommend that investors continue to increase their equity exposure during this period of consolidation. Thanks to the slow rate of development in India, the potential for growth is bigger for longer. That is an opportunity for investors, as corporate profitability will be more secular and remain so longer rather than it getting competed away. From a portfolio perspective, we are now looking at growth stocks with sustainable cash flows rather than focus on companies where growth would entail equity raising.
Sundaram BNP Paribas Asset Management

India View

Bonds

Calibrated tightening likely
prices and oil prices. Also, there are considerable lags between the uptrend in international and domestic prices in the case of oil, steel etc, which may keep inflation elevated for a longer period.The endyear target of 5.5% however looks achievable, with the high base effect kicking in by then. INR has witnessed sharp appreciation in real terms and there is a degree of apprehension that the current trend may persist given the capital inflows and high interest rate differentials. The RBI has mentioned it as a growing source of worry, given that export growth is still nascent. Among recent developments, the Bank has announced MSS ceiling of Rs 50,000 crore for FY 2011. The RBI REER has now risen above the one standard deviation band of its 10-year average. Against this backdrop, there might be a few attempts on the part of the RBI to slow the pace of rupee appreciation. Clearly the RBI has launched itself onto a path of “calibrated” tightening; while policy rate hikes may be gradual and spaced out through the year, RBI may not go too aggressive on the process in order to not jeopardize growth. The central bank has assumed an 18% growth in deposits for the full year. Assuming the same and given the borrowing overhang, the system can support a credit growth of about 1717.5% comfortably. The indicative credit growth target is, however, higher at 20%. This would make CRR hikes undesirable in the second half of FY11 and may mean an upward trend in deposit rates in a bid to ramp up mobilization. Stance of Monetary Policy • Anchor inflation expectations, while being prepared to respond appropriately, swiftly and effectively to further build-up of inflationary pressures. • Actively manage liquidity to ensure that the growth in demand for credit by both the private and public sectors is satisfied in a non-disruptive way. • Maintain an interest rate regime consistent with price, output and financial stability. The expected outcomes of the actions are: • Inflation will be contained and inflationary expectations will be anchored • The recovery process will be sustained. • Government borrowing requirements and the private credit demand will be met. • Policy instruments will be further aligned in a manner consistent with the evolving state of the economy. Market participants were expecting a 25 basis points (a basis point is 0.01 per cent) hike in reverse repo, repo and CRR with a few anticipating a 50 bps hike in either one of them. This led to participants approaching the market with lot of caution. The 25 basis points uniform rate hike was thus received well by the market and led to a relief rally. The current 10-year benchmark was technically waiting to rally ever since a floating rate security was announced in the recent auction, with the policy action being the only hurdle.The comfort from the monetary policy announcement triggered and enhanced the upward movement in prices. Looking forward, the relief rally may shortlived. The demand-supply mismatches, deft management of the borrowing programme by the RBI and the sword of calibrated rate action (best case) will be back in focus and shall determine the levels at which the benchmark securities move. We expect the 10-year benchmark to move to a range of 8.25%-8.50% over the next couple of months.
The Wise Investor May 2010

K Ramkumar
Head – Fixed Income Sundaram BNP Paribas Asset Management

The Reserve Bank of India appears increasingly confident of growth per se and the overriding fear is that of inflation unbridled eating into growth. Inflation levels though elevated for over five months now were initially driven by food prices. Food prices are now receding and are expected to decline further, post the Rabi crop. Yet another bad monsoon year would be detrimental to inflation as well as the fiscal deficit. Expenditure estimates in the budget for FY 2011 are fairly optimistic and factors in flat food subsidies. As far as core inflation is concerned, though the absolute levels are not alarming as yet, the trajectory is that of a sharp upward move and prospects of further rise are increasing with excise duty hike, metal

RBI View on Growth & Inflation
Growth: Assuming normal monsoons and robust trends in the industry and services sectors, RBI pencils in 8% GDP growth in FY11, with an upward bias. Under risks to growth, the Bank lists a fresh dip in global growth as the first one. In this context RBI also mentions the possibility of buoyant capital inflows given the rising interest rate differential as a challenge. Robust inflows has already led to 15% appreciation of the Rupee in real terms in FY10 and is now a growing concern for exporters, whose fortunes are only beginning to turn, RBI warns. Other risks are in terms of a steep rise in global commodity prices, another bad monsoon-the latter would put fresh upward pressure on food prices, dent the rural consumption significantly and upset the delicate fiscal arithmetic, RBI cautions.
Sundaram BNP Paribas Asset Management

Inflation: The central bank appears worried about the level as well as the shifting composition of inflation, with non-food manufactured products inflation accelerating from 0.7% in Dec 2009 to 4.7% in March 2010. More disturbingly, the upside risks to inflation are on the rise, the RBI states. Despite the recently observed seasonal softening in food inflation, the bank suspects that structural shortages in certain commodities may limit the fall in prices. Secondly the RBI is apprehensive on the upward in global commodity prices as well as the return of corporate pricing power. Monsoon, oil prices as well as domestic demand pressures will be crucial to the inflation outlook, the Bank concludes. The year-end estimate for WPI inflation is placed at 5.5%.
5

Perspective

The outside view

Baby Steps in Accountability
to cover other institutions as well. What will come out of all these efforts is as yet unclear. Even if these are politically driven – the U S Congress is debating financial reform – they mark a much needed beginning. The financial reform under discussion is not completely of the required kind (for instance, the too-big-to-fail instructions will almost stay intact). Yet even this process is facing stiff resistance from Wall Street firms. The ground appears to have been set for a plethora of legal actions. Such moves and their consequences are likely to play out for years. The most surprising and annoying aspect of the global financial crisis, which has now officially rumbled on for almost three years, has been complete lack of accountability. The Federal Reserve Bank of New York (led by Timothy Geithner till he became Treasury Secretary) appears to have played a vital role in propping institutions, which is now under scrutiny. We have had the spectacle of governments and central banks across the developed world providing guarantees with gay abandon and with no concern as to costs for taxpayers. We have the U.S Federal Reserve now sitting on $1 trillion-plus of mortgagebacked securities, which if marked-to-market, will carry punishing losses for taxpayers. There was no semblance of even an investigation. Encouragingly, this has now started to change. Over the past month, the Securities and Exchange Commission has pressed charges against Goldman Sachs. Criminal investigations have also started against the firm. Others have also filed law suits seeking compensation for dubious transactions. The net appears to be widening
Sundaram BNP Paribas Asset Management

Infrastructure + EM Positive
In GREED & fear’s view the most exciting thing about the Indian macro and micro story right now is the growing likelihood that the next few years will see real progress made in reducing supply bottlenecks in terms of the build out of infrastructure, most particularly in the area of power and roads, via a combination of private and public sector financing. In this context the present Indian Five Year Plan calls for US$500bn of infrastructure investment through to March 2012. It appears that US$300-350bn of investment will happen during this period, implying a success rate well above the 50% norm during many past Plan periods. Most of the action is likely to be in power, roads and telecom where a 3G build-up will soon be under way. The incentive for the private sector is that with supply so limited in infrastructure, if execution can be achieved the returns on such projects can be very attractive if not enormous; particularly for those with “first-mover advantage” to use ghastly business school jargon. Christopher Wood, Managing Director & Strategist of CLSA Asia-Pacific, an independent research outfit and author of the weekly report GREED & Fear. Within my personal portfolio, I have a stronger preference for the already overpriced emerging market equities than do my colleagues at GMO, and actually more than I should have as a dedicated value manager.This is because I believe they will end up with a P/E premium of 25% to 50% in a few years, as outlined two years ago in “The Emerging Emerging Bubble” (Letters to the Investment Committee XIV, April 2008). The appeal of emerging market’s higher GDP growth compared with the slow growth of U.S. and other developed countries is proving as compelling as I suspected, and I would hate to miss some modest participation in my one and only bubble prediction. It is hard, though, for value managers like us to ever overweight an overpriced asset, so we struggle on the margin to find kosher ways to own a little more emerging in order to give them the benefit of the doubt. I recommend that readers do the same. The urge to weasel and own a little more emerging is a direct result of the lack of clearly cheap investment alternatives. Jeremy Grantham, Co-Founder and Chief Investment Strategist of GMO, in his latest quarterly report to investors published in the last week of April.
The Wise Investor May 2010

S.Vaidya Nathan
The Products Team Sundaram BNP Paribas Asset Management

The one part of the U.S government that has been relentless in its efforts from 2008 to objectively look into the causes for the financial problems - Special Inspector General for the Troubled Asset Relief Program (SIGTARP – www.sigtarp.gov) headed by Elizabeth Warren – has threatened to pursue the course of law against the New York Fed and men who were its leaders. In fact, Treasury Secretary Geithner tried in vain to get reporting jurisdiction over this body and was eventually forced to withdraw his application to the court on this issue following a robust defence by the SIGTARP Chief. SIGTARP’s efforts, too, could now have a deeper impact, as it is now accompanied by baby steps in action by multiple parts of the U S government. Only with accountability will any effort at financial reform have a semblance of meaning. Progress towards this end is important for the global economy and investors in India, too. We live in an inter-connected world and we escaped the consequences of the financial crisis only due to stellar work by the Reserve Bank of India. We may not always be so lucky.
6

By Invitation

From Financial Crash To Debt Crisis
default data going back only to 1980, when the underlying cycles can be half centuries and more, not just thirty years. Serial defaults & banking crisis: Exploiting the multicentury span of the data, we study role of repeated extended debt cycles in explaining the observed patterns of serial default and banking crises that characterize the economic history of so many countries—advanced and emerging alike. Serial default refers to countries which experience multiple sovereign defaults (on external or domestic public or publicly-guaranteed debt—or both). These defaults may occur five or fifty years apart; these may be wholesale default (or repudiation) or a partial default through rescheduling. most notably as was the case of the mortgage giants Fannie Mae and Freddie Mac in the United States. Indeed, in many economies, the range of implicit government guarantees is breathtaking. Many governments find in a crisis that they are forced to deal not only with their external debts (owed to foreigners) but those of private domestic borrowers as well. Famously, Thailand (1997), just prior to its financial crisis, hid its massive forward exchange market interventions, which ultimately led to huge losses. Hidden debt has loomed large in many sovereign defaults over history. At the time of this writing one only has to read the debacle in the financial press concerning Greece’s hidden debts conveniently facilitated by its underwriter Goldman Sachs. In principle, of course, lenders should realize the huge temptation for borrowers to hide the true nature of their balance sheet. Private information on debt can, in principle, be incorporated into models. The many different margins on which governments can cheat are a significant complicating factor. Default & back to bad practices quickly: Another noteworthy insight from the “panoramic view” is that the median duration of default spells in the post– World War II period is one-half the length of what it was during 1800–1945 (3 years versus 6 years). The duration of a default spell is the number of years from the year of default to the year of resolution, be it through restructuring, repayment, or debt forgiveness. A charitable interpretation is that crisis resolution mechanisms have improved since the bygone days of gun-boat diplomacy. After all, Newfoundland lost nothing less than her sovereignty when it defaulted on its external debts in 1936 and ultimately became a Canadian province; Egypt, among others, became a British “protectorate” following its 1876 default. A more cynical explanation points to the possibility that, when bail-outs are facilitated by the likes of the International Monetary Fund, creditors are willing to cut more slack to their serial-defaulting clients. The fact remains the number of years separating default episodes in the more recent period is much lower. Once debt is restructured, countries are quick to re-emerge.

Carmen M. Reinhart

Kenneth S. Rogoff
In the wake of the excess debt problems surrounding Greece immediately in the past couple of months, imminently facing more of the PIIGS group (Portugal, Ireland, Italy, Greece and Spain) in the next few years and also staring the likes of U.S and U.K in the face, we present edited extracts from a March 2010 report by Carmen M Reinhart & Kenneth S Rogoffthe authors of the renowned book This Time Is Different – Eight Centuries of Financial Folly. This time is different The essence of the This time is different syndrome is simple. It is rooted in the firmlyheld belief that financial crises are something that happen to other people in other countries at other times; crises do not happen here and now to us. We are doing things better, we are smarter, we have learned from the past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many previous booms that preceded catastrophic collapses (even in our country-U.S) is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story……. The economics profession has an unfortunate tendency to view recent experience in the narrow window provided by standard datasets. It is particularly distressing that so many cross-country analysis of financial crisis are based on debt and

Debt intolerance: This manifests itself in the extreme duress many emerging markets experience at debt levels that would seem quite manageable by advanced country standards. “Safe” debt thresholds for highly debt intolerant emerging markets turn out to be surprisingly low, perhaps as low as fifteen to twenty percent in many cases, and these thresholds depend heavily on a country’s record of default and inflation. Debt intolerance likely owes to weak institutional structures and a problematic political system that makes external borrowing a useful device for developing country governments to avoid hard decisions about spending and taxing and global investors rightly suspicious about the government’s motives. Simply put, the upper limit to market access is lower when governments suffer from an intolerance to repayment but not to borrowing. Hidden Debt: Our results here, as well a plethora of vivid examples from the accompanying chart book suggest that more attention needs to be paid to “hidden debt and liabilities.” In a crisis, government debt burdens often come pouring of out the woodwork, exposing solvency issues about which the public seemed blissfully unaware. One important example is the way governments routinely guarantee the debt of quasi-government agencies that may be taking on a great deal of risk,

Source: From Financial Crash To Debt Crisis by Carmen M. Reinhart and Kenneth S. Rogoff, National Bureau of Economic Research http://www.nber.org/papers/w15795. Sub-titles have been provided by the Editor of this publication to provide context, as the extracts are from a detailed 48-page report. The report is also recommended for insightful and quality charts.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets. Sundaram BNP Paribas Asset Management 7 The Wise Investor May 2010

Focus Topic

The $ 100 Billion Question
pollutant. Systemic risk is a noxious byproduct. Banking benefits those producing and consuming financial services – the private benefits for bank employees, depositors, borrowers and investors. But it also risks endangering innocent bystanders within the wider economy – the social costs to the general public from banking crises. Public policy has long-recognised the costs of systemic risk. They have been tackled through a combination of regulation and, at times, prohibition. Recently, a debate has begun on direct restrictions on some banking activities - in other words, prohibition. This is recognition of the social costs of systemic risk. Bankers are in uproar. This paper examines the costs of banking pollution and the role of regulation and restrictions in tackling it. In light of the crisis, this is the $100 billion question. The last time such a debate was had in earnest followed the Great Depression. Evidence from then, from past crises and from other industries helps define the contours of today’s debate. This debate is still in its infancy. While it would be premature to be reaching policy conclusions, it is not too early to begin sifting the evidence. What does it suggest? Counting the Systemic Cost: An important dimension of the debate concerns the social costs of systemic risk. Determining the scale of these social costs provides a measure of the task ahead. It helps calibrate the intervention necessary to tackle systemic risk, whether through regulation or restrictions. So how big a pollutant is banking? There is a large literature measuring the costs of past financial crises. This is typically done by evaluating either the fiscal or the foregone output costs of crisis. On either measure, the costs of past financial crises appear to be large and long-lived, often in excess of 10% of pre-crisis GDP. What about the present crisis? The narrowest fiscal interpretation of the cost of crisis would be given by the wealth transfer from the government to the banks as a result of the bailout. Plainly, there is a large degree of uncertainty about the eventual loss governments may face. But in the US, this is currently estimated to be around $100 billion, or less than 1% of US GDP. For US taxpayers, these losses are (almost
8

Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. exactly) a $100 billion question. In the UK, the direct cost may be less than £20 billion, or little more than 1% of GDP. Assuming a systemic crisis occurs every 20 years, recouping these costs from banks would not place an unbearable strain on their finances. The tax charge on US banks would be less than $5 billion per year, on UK banks less than £1 billion per year.2 Total pre-tax profits earned by US and UK banks in 2009 alone were around $60 billion and £23 billion respectively. But these direct fiscal costs are almost certainly an underestimate of the damage to the wider economy which has resulted from the crisis – the true social costs of crisis. World output in 2009 is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis. In the UK, the equivalent output loss is around 10%. In money terms, that translates into output losses of $4 trillion and £140 billion respectively. Moreover, some of these GDP losses are expected to persist. Evidence from past crises suggests that crisisinduced output losses are permanent, or at least persistent, in their impact on the level of output if not its growth rate. If GDP losses are permanent, the present value cost of crisis will exceed significantly today’s cost. By way of illustration, Table 1 looks at the present value of output losses for the world and the UK assuming different fractions of the 2009 loss are permanent - 100%, 50% and 25%. It also assumes, somewhat arbitrarily, that future GDP is discounted at a rate of 5% per year and that trend GDP growth is 3%.4 Present value losses are shown as a fraction of output in 2009. As Table 1 shows, these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK.
The Wise Investor May 2010

Andrew Haldane
Executive Director, Financial Stability Bank of England

What is the right size for banks? Do we need the kind of monster-sized banks we have today in the developed world – the ones that pushed the world to the brink, from which for now, governments appear to have pulled us back by risking trillions of dollars. Andrew Haldane has been one of the rare persons in central banking systems of the developed world who has outlined the problems as they are and the possible solutions; however unpalatable they are to the banks and their peers in the central banking system. In one such speech last month, Haldane showcases the $ 100 billion problem. We present the first part of edited extracts from his speech: The car industry is a pollutant. Exhaust fumes are a noxious by-product. Motoring benefits those producing and consuming car travel services – the private benefits of motoring. But it also endangers innocent bystanders within the wider community – the social costs of exhaust pollution. Public policy has increasingly recognised the risks from car pollution. Historically, they have been tackled through a combination of taxation and, at times, prohibition. During this century, restrictions have been placed on poisonous emissions from cars - in others words, prohibition. This is the recognition of the social costs of exhaust pollution. Initially, car producers were in uproar. The banking industry is also a
Sundaram BNP Paribas Asset Management

Focus Topic
Table 1: Present Value of Output Losses (% of 2009 GDP) Region Fraction of initial output loss which is permanent 25% UK World 130 90 50% 260 170 100% 520 350 higher the discount rate and the lower the trend growth rate, the smaller the losses. Second, this ratings difference has increased over the sample, averaging over one notch in 2007 but over three notches by 2009. In other words, actions by government during the crisis have increased the value of government support to the banks. This should come as no surprise, given the scale of intervention. Indeed, there is evidence of an up-only escalator of state support to banks dating back over the past century. Unsurprisingly, the average rating difference is consistently higher for large than for small banks. The average ratings difference for large banks is up to 5 notches, for small banks up to 3 notches. This is pretty tangible evidence of a second recurring phenomenon in the financial system – the “too big to fail” problem. It is possible to go one step further and translate these average ratings differences into a monetary measure of the implied fiscal a coin big enough, these would be the two sides of it. These results are no more than illustrative – for example, they make no allowance for subsidies arising on retail deposits. Nonetheless, studies using different methods have found similarlysized subsidies. For example, Baker and McArthur ask whether there is a difference in funding costs for US banks either side of the $100 billion asset threshold – another $100 billion question.8 They find a significant wedge in costs, which has widened during the crisis. They calculate an annual subsidy for the 18 largest US banks of over $34 billion per year. Applying the same method in the UK would give an annual subsidy for the five largest banks of around £30 billion. This evidence can provide only a rough guide to systemic scale and cost. But the qualitative picture it paints is clear and consistent. • First, measures of the costs of crisis, or the implicit subsidy from the state, suggest banking pollution is a real and large social problem. • Second, those entities perceived to be “too big to fail” appear to account for the lion’s share of this risk pollution. The public policy question, then, is how best to tackle these twin evils. As with size, the effects of liberalisation on banking concentration were immediate and dramatic. The share of the top three largest US banks in total assets rose fourfold, from 10% to 40% between 1990 and 2007 (Chart 2). (Editor’s note: It was about 60% at the end of 2009) A similar trend is discernible internationally: the share of the top five largest global banks in the assets of the largest 1000 banks has risen from around 8% in 1998 to double that in 2009. This degree of concentration, combined with the large size of the banking industry relative to GDP, has produced a pattern which is not mirrored in other industries. The largest banking firms are far larger, and have grown far faster, than the largest firms in other industries. With the repeal of the McFadden and Glass-Steagall Acts, the too-big-to-fail problem has not just returned but flourished. (To be concluded)

Source: Bank Calculations As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description. It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite. It could plausibly be argued that these output costs are a significant over-statement of the damage inflicted on the wider economy by the banks. Others are certainly not blameless for the crisis. For every reckless lender there is likely to be a feckless borrower. If a systemic tax is to be levied, a more precise measure may be needed of banks’ distinctive contribution to systemic risk. One such measure is provided by the (often implicit) fiscal subsidy provided to banks by the state to safeguard stability. Those implicit subsidies are easier to describe than measure. But one particularly simple proxy is provided by the rating agencies, a number of whom provide both “support” and “standalone” credit ratings for the banks. The difference in these ratings encompasses the agencies’ judgement of the expected government support to banks. Two features are striking. First, standalone ratings are materially below support ratings, by between 1.5 and 4 notches over the sample for UK and global banks. In other words, rating agencies explicitly factor in material government support to banks. The results are plainly sensitive to the choice of discount rate and trend growth rate. Other things equal, the

The systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. subsidy to banks. This is done by mapping from ratings to the yields paid on banks’ bonds; and by then scaling the yield difference by the value of each banks’ ratings-sensitive liabilities. The resulting money amount is an estimate of the reduction in banks’ funding costs which arises from the perceived government subsidy. For UK banks, the average annual subsidy for the top five banks over these years (20072009) was over £50 billion - roughly equal to UK banks’ annual profits prior to the crisis. At the height of the crisis, the subsidy was larger still. For the sample of global banks, the average annual subsidy for the top five banks was just less than $60 billion per year. These are not small sums. As might be expected, the large banks account for over 90% of the total implied subsidy. On these metrics, the too-big-to-fail problem results in a real and on-going cost to the taxpayer and a real and on-going windfall for the banks. If it were ever possible to mint

Source: Bank of England (www.bankofengland.co.uk) Speech link: http://bit.ly/cL4AKu
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets. Sundaram BNP Paribas Asset Management 9 The Wise Investor May 2010

Investing Environment

Asset Allocation

1

Asset allocation determines about 92 per cent of your portfolio performance
1.8% 4.6% 2.1% Asset Allocation Individual investments selection Market timing Others

Ask & Answer

• What are your investment objectives? • When do you need funds and how much
at each stage?

• What is your risk-taking ability? • Can you take losses, and, if so, to what
extent?

• What is your family income (investor and
spouse) available for spending and saving?

• If you are self-employed, what are your
earnings, net worth and prospects for your business?

• At what age are you starting to invest? • How many years do you have to
9 91.5%
retirement or stage when you wish you to put your feet up?

What is Asset Allocation? Identifying investment options for deploying your funds to ensure suitable balance between lifetime goals, returns, risk, liquidity and diversification.
Graph Source: Financial Analysts Journal*

• What proportion of your income can you
invest?

• Do you have an inheritance available for
investing?

Lifetime goals demand financial planning
KEY LIFETIME GOALS

• Do you have elderly parents to support? • What is time plan for education and
marriage of children?

Managing current requirement & emergency Generate returns that are consistently higher than inflation

Wealth creation to enhance lifestyle

• What is time plan to own a home? • Have you optimized tax-related
investments?

• What proportion of current income will • At what age do you expect to complete
payment of home loans?

you need in retirement to maintain chosen life style?

Financing education of children

A comfortable life at retirement

• Do

you have a term insurance and disability insurance? equity investment?

• Do you have knowledge & time for direct
Owning a home Leaving a legacy of values and wealth
10

• What is your tax status? • Do you have a professional
advisor?

financial

Sundaram BNP Paribas Asset Management

The Wise Investor May 2010

India

RBI-Speak

Key issues facing India
on the reform agenda that are relevant to the Reserve Bank of India. The final thought that I want to leave with you as I finish is that the growth drivers that powered India’s high growth in the years before the crisis are all intact. The challenge for the Government and the Reserve Bank is to move on with reforms to steer the economy to a higher growth path that is sustainable and equitable. Capital flows Volatile capital flows have been a central issue during the crisis, and continue to be so now as the crisis is ebbing. Emerging market economies (EMEs) saw a sudden stop and reversal of capital flows during the crisis as a consequence of global deleveraging. Now the trend has reversed once again, and many EMEs are seeing net inflows - a consequence of a global system awash with liquidity, the assurance of low interest rates in advanced economies over ‘an extended period’ and the prospects of robust growth in EMEs. The familiar question of how EMEs can maximize the benefits and minimize the costs of volatile capital flows has returned to haunt the policy agenda. One little known aspect of capital flows, what could perhaps be called the law of capital flows, is that they never come in at the precise time or in the exact quantity you want them. Managing these flows, especially if they are volatile, is going to test the effectiveness of central bank policies of semiopen EMEs. If central banks do not intervene in the foreign exchange market, they incur the cost of currency appreciation unrelated to fundamentals. If they intervene in the forex market to prevent appreciation, they will have additional systemic liquidity and potential inflationary pressures to contend with. If they sterilize the resultant liquidity, they will run the risk of pushing up interest rates which will hurt the growth prospects. Capital flows can also potentially impair financial stability. How EMEs manage the impossible trinity – the impossibility of having an open capital account, a fixed exchange rate and independent monetary policy - is going to have an impact on their prospects for growth, price stability and financial stability.
11

India’s approach to capital flows India has followed a consistent policy on capital account convertibility in general and on capital account management in particular. Our position is that capital account convertibility is not a standalone objective but a means for higher and stable growth. We believe our economy should traverse towards capital convertibility along a gradual path - the path itself being recalibrated on a dynamic basis in response to domestic and global developments. Post-crisis, that continues to be our policy. We will continue to move towards liberalizing our capital account, but we will revisit the road map to reflect lessons of the crisis. India’s approach to managing capital flows too has been pragmatic, transparent and contestable. We prefer long term flows to short-term flows and non-debt flows to debt flows. The logic for that is self-evident. Our policy on equity flows has been quite liberal, and in sharp contrast to other EMEs which liberalized and then reversed the liberalization when flows became volatile, our policy has been quite stable. Historically, we have used policy levers on the debt side of the flows to manage volatility. This has been our anchor when we had to deal with flows largely in excess of the economy’s absorption capacity in the years before the crisis. This has been our policy when we saw large outflows during the crisis. And I believe this will continue to be our policy on the way forward. Tobin Tax The surge in capital flows into some EMEs even as the crisis is not yet fully behind us has seen the return of the familiar question - the advisability of imposing a Tobin type tax on capital flows. Both before and after the crisis, there are examples of countries, notably Chile, Colombia, Brazil and Malaysia, which have experimented with a Tobin tax or its variant. Even as there are some lessons to be drawn from the country experience, on the aggregate, it does not constitute a sufficient body of knowledge for drawing definitive conclusions. Critics of Tobin tax contend that the tax is ineffective, is difficult to implement, easy to evade and that its costs far exceed the potential benefits, and all this because financial
The Wise Investor May 2010

Duvvuri Subbarao
Governor Reserve Bank of India

India clocked average growth of 9 per cent per annum in the five years to 2007/08. That growth momentum was interrupted by the financial crisis which impacted India too, more than we had originally thought but less than it did most other countries. Despite falling below 6 per cent for one quarter, the growth for the full year 2008/09 was a resilient 6.7 per cent. Current estimates are that the economy had grown between 7.2 and 7.5 per cent for the just ended fiscal year 2009/10 and that growth for 2010/11 will be 8+ per cent. The quick turn in sentiment following the uncertainty and anxiety of the crisis period has seen the return of the FAQ: When will India get on to double digit growth? For policy makers, the FAQ translates to three nuanced questions: • In the short term, how do we restore the economy to its trend rate of growth while maintaining price stability? • In the medium term, how do we raise the trend rate of growth itself without compromising financial stability? • How do we ensure that growth is inclusive? An over-analyzed country India is such an over analyzed country that it is difficult to be original. The answers to all the three questions above are all out there in the open, and they involve moving on with a host of structural and governance reforms. I want to use this platform provided by the Peterson Institute to comment on a few issues
Sundaram BNP Paribas Asset Management

India
markets always outsmart policy makers. Supporters of the tax argue that if designed and implemented well, the tax can be effective in smoothing flows and that evading controls is not such a straight forward option as efforts to evade require incurring additional costs to move funds in and out of a country which is precisely what the tax aims to achieve. In India, given the overall thrust of policy, we are quite agnostic on the choice of different instruments. The stereotype view is that we have an express preference for quantity based controls over price based controls. A critical examination of our policy will show that this view is mistaken. For example, on bonds we impose both a limit on the amount foreigners can invest as well as a withholding tax. Similarly, our policy on external commercial borrowing employs both price and quantity variables. We have not so far imposed a Tobin type tax nor are we contemplating one but it needs reiterating that no policy instrument is clearly off the table and our choice of instruments will be determined by the context. Worldview changes on capital controls The recent crisis has clearly been a turning point in the world view on capital controls. The Asian crisis of the mid-90s demonstrated the risk of instability inherent in a fully open capital account. Even so, the intellectual orthodoxy continued to denounce controls on capital flows as being inefficient and ineffective. The recent crisis saw, across emerging economies, a rough correlation between the extent of openness of the capital account and the extent of adverse impact of the crisis. Surely, this should not be read as a denouncement of open capital account, but a powerful demonstration of the tenet that premature opening hurts more than it helps. Notably, the IMF published a policy note in February 20102 that reversed its long held orthodoxy. The note has referred to certain ‘circumstances in which capital controls can be a legitimate component of the policy response to surges in capital flows’. Now that there is agreement that controls can be ‘desirable and effective’ in managing capital flows in select circumstances, the IMF and other international bodies must pursue research on studying what type of controls are appropriate and under what circumstances so that emerging economies have useful guidelines to inform policy formulation. Not just an inflation fighter The Reserve Bank is not a pure inflation targetter. Some people have suggested that the economy will be better served if the Reserve Bank becomes a pure inflation targetter. The argument is that inflation hurts much more in a country like India with hundreds of millions of poor people and that the Reserve Bank will be more effective at combating inflation if it is not burdened with other objectives. This argument is contestable. Inflation targeting, characterized by a single target (price stability) and a single instrument (short term policy interest rate), has respectable academic credentials. An exclusive commitment to inflation enhances operational effectiveness and enforces accountability. The success of several developed economy central banks in maintaining price stability in the years before the crisis has also given it intellectual credibility. The unravelling of the ‘Great Moderation’ during the crisis has however diluted, if not dissolved, the consensus around the minimalist formula of inflation targeting. The crisis has shown that price stability does not necessarily ensure financial stability. Indeed there is an even stronger assertion - that there is a trade-off between price stability and financial stability, and that the more successful a central bank is with price stability, the more likely it is to jeopardize financial stability. Inflation targeting is neither desirable nor practical in India for a variety of reasons: • First, it is inconceivable that in an emerging economy like India, the central bank can drive a single goal oblivious of the larger development context. The Reserve Bank must be guided simultaneously by the objectives of price stability, financial stability and growth. Government’s fiscal consolidation Fiscal consolidation is important for a number of other weighty reasons apart from the inflation dimension. The Government has initiated action on the recommendations of the Thirteenth Finance Commission (TFC) on the revised road map for fiscal responsibility. In drilling down the road map, the Government should also keep in view two relevant objectives: • First, fiscal consolidation should shift from exclusive reliance on increasing revenues to focus on restructuring expenditures. The consolidation effort should target slashing recurring expenditures rather than one-off items.

RBI-Speak
• Second, it is important, even as targeting quantitative indicators, to pay equal attention to the quality of fiscal adjustment. Improving Policy Effectiveness The effectiveness of monetary transmission, the process by which the central bank’s policy signals influence the financial markets, is a function of both tangible and intangible factors. It depends on the depth and efficiency of the financial markets. It also depends on the overall confidence and sentiment in the financial system. Typically, monetary transmission in emerging economies tends to be slower, reflecting shallow financial markets and inefficient information systems. The monetary transmission mechanism in India has been improving but is yet to fully mature. There are several factors inhibiting the transmission process. • First, India has a government sponsored small savings programme characterized by administered interest rates and tax concessions. Operating through a huge network of post offices and field agents, the small savings scheme has an enormous and impressive reach deep into the hinterland. Banks are typically circumspect about reducing deposit rates in response to the central bank’s policy rate signals for fear of losing their deposit base to small savings.The government too has not adjusted the rates on small savings on a regular basis to offset their competitive edge. • Second, depositors enjoy an asymmetric contractual relationship with banks. When interest rates are rising, depositors have the option of withdrawing their deposits prematurely and redepositing at the going higher rate. On the contrary, when deposit rates are falling, banks do not have the option of repricing deposits at the lower rate because of the asymmetry of the contract. This structural rigidity clogs monetary transmission. Banks are typically unable to adjust their lending rates swiftly in response to policy signals until they are able to adjust on the • cost side by repricing the deposits in the next cycle. • Third, and importantly, monetary transmission is also impeded because of large government borrowings and illiquid bond markets.

Source: http://bit.ly/dkjVbM Edited comments from the speech titled India and the Global Financial Crisis-Transcending from Recovery to Growth by Dr. D. Subbarao, Governor, Reserve Bank of India at the Peterson Institute for International Economics, Washington DC, April 26, 2010.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets. Sundaram BNP Paribas Asset Management 12 The Wise Investor May 2010

Thoughts From The Frontline

Scanning the financial system
Separate traditional banking and investment banks. I want my commercial banks to be boring. You know, traditional lending to customers, services, that type of thing. CDS Threaten the System: What happened in the last credit crisis was that interlocking credit default swaps among so many banks made the ENTIRE system too big to fail. AIG basically sold naked options in the form of credit default swaps to all and sundry (in a unit basically created after Elliott Spitzer forced Hank Greenberg out, which allowed the unit to get out of control, yet another reason to not like Spitzer). And nothing has changed. We again have credit default swaps (CDS) growing, and no one knows who could be overextended. Once again, everyone could be dependent on everybody else, and we have no idea if there is a Bear, Lehman, or AIG in these woods. As I have been pounding the table about for years, we need to put CDS on an exchange. ASAP. I am not against CDS, per se. CDS are good things, just like futures. But they must go to a transparent exchange. There need to be position limits, just as there in futures and commodities. There needs to be very transparent pricing and commissions. And someone needs to monitor who owns them and what risks they are taking. Why hasn't this been done? In a word, money. Banks make huge commissions selling CDS, as much as 2-3%, I am told. If they were on an exchange the commissions would be $10 a round turn. An enormous profit center would get blown up. So, the banks hire lobbyists to persuade Congress not to regulate CDS. Dodd's bill basically says we will deal with them later. The good news is that there is some effort to regulate these derivatives in Congress. It should have been done a year ago, but the sooner the better. This shouldn't be all that partisan. It is common sense. Time for reform we can believe in: Casey Stengel, manager of the hapless 1962 New York Mets, once famously asked, after an especially dismal outing, "Can't anybody here play this game?" This week I ask, after months of worse than no progress, "Can't anybody here even spell financial reform, let alone get it done?" We are in danger of experiencing another credit crisis, but one that could be even worse, as the tools to fight it may be lacking when we need them. With attacks on the independence of the Fed, no regulation of derivatives, and allowing banks to be too big to fail, we risk a repeat of the credit crisis.
13

John Mauldin
Best-Selling Author, Recognized Financial Expert and Editor of Thoughts From The Frontline

Too Big To Fail Must Go: We have large banks that take massive risks, which allow them to pay huge bonuses to management and traders; and then if they have problems the taxpayer has to take the losses. I can see why the banks like it. I don't get this business model from a taxpayer's point of view. First, let me say that I thought, along with most of the world, that repealing Glass-Steagall was a good thing. OK, we tried that experiment and it didn't work out so well. Where is the movement to separate commercial banks from investment banks? And I must admit, Glass-Steagall is not really the problem. It is just a part of the problem. The problem is that parts of these large banks are essentially hedge funds, working with cheap commercial deposit money and putting the entire bank at risk. I make a lot of my income helping investors find hedge funds and alternative investments. I like trading and traders, and we have a lot of client money with them. There is good money to be made there, if you are riding the right horse. But we don't put money with big investment banks, just private funds, and there is the difference. If our funds go bad, taxpayers don't bail us out. When I put on my taxpayer hat, I don't want to be taking the risk so some big bank can have a trading desk and make large profits that only benefit their shareholders and management, and I have to pick up the pieces with my tax dollars when they fail.
Sundaram BNP Paribas Asset Management

The bank lobbyists are winning and it's time for those of us in the cheap seats to get outraged. (And while this letter focuses on the US and financial reform, the principles are the same in Europe and elsewhere, as I will note at the end. We are risking way too much in the name of allowing large private profits.) And with no "but first," let's jump right in. Last Monday I had lunch with Richard Fisher, president of the Federal Reserve Bank of Dallas. Mr. Fisher is a remarkably nice guy and is very clear about where he stands on the issues. My pressing question was whether the Fed would actually accommodate the federal government if it continued to run massive deficits and turn on the printing press. Fisher was clear that such a move would be a mistake, and he thought there would be little sentiment among the various branch presidents to become the enabler of a dysfunctional Congress. But that brought up a topic that he was quite passionate about, and that is what he sees

Separate traditional banking and investment banks. I want my commercial banks to be boring. You know, traditional lending to customers, services, that type of thing.

as an attack on the independence of the Fed. The Fed must be independent: There are bills in Congress that would take away or threaten the current independence of the Fed. I recognize that the Fed is not completely independent. Even Greenspan said so this past week: "There's a presumption that the Federal Reserve's an independent agency, and it is up to a point, but we are a creature of the Congress and if ... we had said we're running into a bubble and we need to retrench, the Congress would say 'We haven't a clue what you're talking about.'" Long-time readers know I do not have much time for Senator Chris Dodd. He has threatened the viability of the Fed by holding up appointments, actually risking the ability of the Fed to get an emergency quorum if the need arose. His current proposal to give the President the ability to appoint the president of the New York Fed is likewise a wrong-headed political power grab. He has openly proposed to have the presidents of the local districts appointed by the board of governors.These presidents are the only real check on the board.
The Wise Investor May 2010

Thoughts From The Frontline
Let's do a brief recap. There are seven Federal Reserve governors, including a chairman and vicechairman. There are twelve bank districts with independent boards that choose their district president. The Federal Open Market Committee oversees monetary policy and is composed of the seven governors and five of the district presidents. The president of the New York district is always one of the five, and the other four are rotated among the remaining eleven. Note that the seven governors are appointed by the President and must be approved by the Senate. Further, the board of governors appoints three members to each of the nine-member boards of directors of the local districts. Dodd wants to give the President the right to appoint the president of the New York District. My response is "Not no, but hell no!" The President (from whichever party) gets to appoint a majority as it is. I prefer a small token of independence. And while the selection of a district president is of course political, it is at least now local and not national politics. Further, when a local board narrows its choices for district president to a few candidates, it submits those choices to the national board of governors for comments, which are of course taken seriously. (There has been at least one occasion when a board submitted only one name and the governors asked for alternatives, and the local board reasserted that this was their only choice. The governors backed down.) A Fed governor is supposed to serve for 14 years, and the terms are staggered. That way, no President gets to appoint more than a few governors and cannot stack the board in favour of certain policies. That has changed with Obama. Dodd held up two nominations by Bush for several years, and with the resignation of ViceChairman Kohn, President Obama now gets to appoint four governors, and he has almost three years left in his term. Let me be clear. There are a lot of things not to like about the Federal Reserve System. I think it was Milton Friedman who said we would be better off with a computer determining monetary policy. In the next crisis, we will not have the tools available to stem the tide that we did the last time. Rates are already low. We are stuck with this system. But what would be far, far worse is a system that was directly controlled by Congress or the President, whether Republican or Democrat. Politicians think in very short election cycles. I do not want the same people who gave us Freddie and Fannie and now $400 billion in taxpayer losses, who pass entitlement bills that we cannot pay for, to have the power of the printing press. "Roll the dice," said Barney Frank, on Freddie and Fannie and low-income loans. How did that work out? Monetary policy is not something you roll the dice on. The key here is that any attempt to politicize the Fed any more than it already is must be resisted. (That does not mean, however, that they should not be more transparent, along the lines of my friend Ron Paul's bill. Sunshine is a good thing.) And This Thing About Leverage: The problem of too big to fail is ultimately one of leverage. If a small bank fails, no one really notices. If a giant bank fails and puts the system at risk, it costs us a lot. I have a simple proposal to mitigate the problem. Why not reduce the allowable leverage the larger a bank gets? This would clearly reduce their risk and encourage them to only make prudent bets (otherwise known as loans), as their risk capital would be limited. If they wanted to make more loans, then they could raise more capital or retain more earnings. Goldman Sachs is all over the news after being charged with fraud. The way I see it, this is essentially a charge that there was not full disclosure. And it appears to me that that is true. It also is true that Goldman will argue (or I think they will) that only very sophisticated investors who signed very lengthy offering documents were involved, and they should have known better. They were also reaching for yield. But this is just the tip of the iceberg. I was writing about these "CDOs Squared" in late 2006, and many of these were done in 2007. It was obvious to me (and others) that they were going to blow up. I often wondered who was buying the equity tranches of these synthetic CDOs. Last week I read a very interesting report from propublic.org about a hedge fund called Magnetar, which basically did the same trade as in the Goldman deal. And they did those deals with nine banks. You can read the whole article at http://www.propublica.org/feature/themagnetar-trade-how-one-hedge-fundhelped-keep-the-housing-bubble-going. The financial institutions are once again soaring on new profits, with almost 30% of total corporate profits and a huge proportion of the growth in profits coming in the last 12 months. Side bet: Goldman and at least 8 other banks are going to have serious litigation costs, if they don't actually have to eat the losses of the investors in these synthetic CDOs. Understand, these were not securitizations of actual mortgages. They were securitizations of derivatives that acted like these mortgages, and the worst tranches of them to boot. On top of their loan losses, there could be tens of billions of losses to investors in the CDOs they sold. This will play out over years. As ProPublica noted, the hedge funds did nothing illegal. If the housing market had continued to go up another year or two, most of them would have imploded while waiting for the market to break. More than a few funds did. It can be a difficult thing to bet on the end of the world and then have to wait. The issue is disclosure. I wonder if the ratings agencies knew. Would that have changed their views? I hope someone writes an in-depth investigative book about this. I'll buy it.. John Mauldin

Quick Thoughts on Goldman

In the next crisis, we will not have the tools available to stem the tide that we did the last time. Rates are already low.

Would that hurt earnings and shareholders and limit share prices? Yes. And I don't care. If I'm not getting the dividends, then I don't want to be made to pick up the tab if there is a crisis. The world of privatizing the gains and socializing the risks must become a thing of the past. What Happens If We Do Nothing?: What happens when we have the next credit crisis, when a major sovereign government defaults, as I think will happen? It will be a body blow to many banks, especially in Europe. Once again, we could have banks worried about lending to each other or taking letters of credit, which would be a disaster for world trade and the recovery we are now in. That we (and Europe and Britain) have taken so long to enact real reform has the potential to really put the world at risk. In the next crisis, we will not have the tools available to stem the tide that we did the last time. Rates are already low. Do you think we could pass another TARP? The Fed's balance sheet is already bloated. It could get much worse unless we get financial reforms that have some bite. All this debating about a consumer protection agency and where it should be and all the other trivia is wasting time. Fix the big things. Credit default swaps. Too big to fail. Leverage. Then worry about the details. And leave the Fed alone.

John@FrontLineThoughts.com Copyright 2009 John Mauldin. All Rights Reserved John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets. Sundaram BNP Paribas Asset Management 14 The Wise Investor May 2010

Perspective

Global

Weakness Begets Weakness: Banks to Sovereigns to Banks
number of hurdles that essentially guarantee nothing will happen until all other avenues of rescue are exhausted. Judging by the recent increase in yields on 10-year Greek bonds, Greece may soon need more than a loan package proposal to solve its fiscal problems. One aspect of the Greek situation that has been obscured by all the recent political wrangling is the crisis' impact on the Greek banks. Although the banks were supposed to be rock solid after all the governmentinjected capital they received (not to mention zero-percent interest rates and generous lending terms from the European Central Bank), data shows that Greek bank deposits have fallen 8.4 billion euros, or 3.6 percent, in two months since December 2009. With no restraints on capital flows within the European Union, Greek savers are free to transfer their assets elsewhere. Given that bank deposit guarantees in Greece are the responsibility of the national government rather than the European Central Bank, we suspect Greek citizens are pulling money out of their banks because they question their government's ability to honour its domestic deposit guarantees. We envision Greek depositors asking themselves how a government that can't raise enough money to stay solvent can then turn around and guarantee their bank deposits? It's a fair question to ask. The Greek bank stocks have been thoroughly punished throughout the crisis. An index consisting of the four largest Greek bank stocks shows an average decline of 47% since November 2009. The deposit withdrawals from these banks have been so damaging to their respective balance sheets (remember bank leverage?) that the Greek banks have asked to borrow 17 billion euros left over from a 28 billion euro support program launched in 2008. You see the connection here? Greece experienced a financial crisis, followed by a sovereign crisis, followed by another financial crisis. There is no doubt that the Greek crisis has helped drive the gold spot price to its recent
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all time high in euros. Gold is a prudent asset to own in times of crisis, and it's possible that a portion of the Greek deposit withdrawals were reinvested into the precious metal. The fact remains, however, that if the Greek government cannot stem the outflows of deposits soon, the EU will have no other choice but to undertake a real sovereign bailout with all its bells, whistles and arduous protocols. It's a vicious spiral from financial crisis to sovereign debt crisis to banking crisis, and there is no reason it can't spread to other European countries suffering from similar fiscal imbalances. With Spain and Portugal next in line with their own sovereign debt issues, we can expect depositors in these countries to make similar runs to the bank for their cash. "Guaranteed by Government" is truly

Eric Sprott

David Franklin
The Greek debt situation has been an interesting case study for students of the sovereign bond markets. If there's a lesson to be learned from Greece's experience thus far it's that sovereign bailouts are far more complicated than bank bailouts. They require more sophisticated negotiations and proposals and involve an extra layer of diplomacy that makes them especially difficult to accomplish. As we write this, the European Union has recently announced new lending terms to support the Greek government, with great efforts made to assure the markets that these new terms do not constitute a 'bailout'. The problem with the Greek situation is that an actual bailout would involve an almost impossible coordination among all the major powers within the EU. It would require the unanimous pre-approval of all the EU heads of state. It would involve the European Commission, the European Central Bank and the International Monetary Fund (IMF) all visiting Greece to perform financial assessments. And finally, it would involve at least seven EU countries affirming support through parliamentary votes - all of this before a single euro is spent. A true bailout involves an almost impossible
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You see the connection here? Greece experienced a financial crisis, followed by a sovereign crisis, followed by another financial crisis.

beginning to lose its potency in this environment. The International Monetary Fund (IMF) seems to be preparing for such a scenario with its recent announcement of a tenfold increase in its emergency lending facility. The IMF's New Arrangements to Borrow (NAB) facility is designed to prevent the "impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system." The NAB facility has grown from US$50 billion to US$550 billion with the mere stroke of a pen. Does the IMF know something that the market doesn't? Is this a pre-emptive measure to repel an attack by bond vigilantes' on Europe's fiscally-weakened countries? Sovereign Debt: In our examination of the Greek situation this past month, we kept coming across various sovereign credit
The Wise Investor May 2010

Perspective
ratings. In an effort to better understand the Greek situation, we decided to look at how the ratings agencies generate their actual rankings and built our own model to determine a country's credit risk. We used common metrics such as GDP per Capita, Government Budget Deficits, Gross Government and Contingent Liabilities, the inflation rate and incorporated a simple debt sustainability metric in order to generate our own sovereign ratings. What we discovered in the process was quite puzzling. It should first be noted that the rating agencies are in the business of offering their 'opinions' about the creditworthiness of bonds that have been issued by various kinds of entities: corporations, governments, and (most recently) the packagers of mortgages and other debt obligations. These opinions come in the form of 'ratings' which are expressed in a letter grade. The best-known scale is that used by Standard & Poor's ("S&P") which uses AAA for the highest rated debt, and AA, A, BBB, BB, for debt of descending credit quality. In our opinion, as they relate to sovereign debt, the ratings provided by the agencies are highly suspect. While these agencies claim to provide ratings that consider the business credit cycle, there appears to be very little forward-looking information actually factored into their credit models. In some cases, the agency ratings end up looking absurdly optimistic. This of course should come as no surprise we all remember the sub prime mortgages that were rated AAA that are now worth pennies on the dollar. While there were some similarities in our rankings (for example, our model ascribed AAA ratings to the local currency debt of Australia, Canada, Finland, Sweden, New Zealand which matched the ratings given by S&P), we found some glaring inconsistencies in the rating results for less fiscally prudent countries that left us scratching our heads. A good example is South Africa. The agencies currently rate South Africa an A+ entity, while our model calculated a 'BBB-' rating for its debt using our estimates. 'BBB-' is the lowest 'investment grade' rating for local currency sovereign debt - one level above junk. We arrived at this rating without having factored in South Africa's resource endowment. A significant contributor to South African GDP is derived from mining, particularly gold mining. While South Africa has been the largest producer of gold until very recently, their below-ground reserves have not been revised since 2001 when the country held 36,000 tonnes of gold (or about 40% of the global total). Recent stats from the United States Geological Survey (USGS) estimate that South Africa now has only 6,000 tonnes worth of economic gold reserves remaining. Further review by Chris Hartnady, a former associate professor at the University of Cape Town, using similar techniques to those of M. King Hubbert (the Peak Oil theorist), suggests that South Africa could have only half of the gold reserves estimated by the USGS. If these new estimates are correct, South Africa could have 90% less gold than claimed - and it's not even factored into our BBBrating! So what's South African debt really worth? An 'A+' from the ratings agencies

Global

revenue will be spent on the major entitlement programs and net interest costs by 2020." This is news! In less than ten years, using reasonable assumptions, there will essentially be no money left to run the US government - 93% of all tax revenues the US government collects will go to pay social security, Medicare, Medicaid and interest costs on their national debt. This implies no money left over for defense, homeland security, welfare, unemployment benefits, education or anything else we associate with the normal business of government. And the US government is rated AAA!? The historian Niall Ferguson recently wrote that, "US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941." It's hard not to agree given the foregoing statements by the GAO. The risk inherent to investors, of course, is what happens when the bond market begins to realize and react to this new level of risk. In a speech earlier this month, Jürgen Stark, who is a member of the board of the European Central Bank, stated, "We may already have entered into the next phase of the crisis: a sovereign debt crisis following on the financial and economic crisis." The activities of the IMF would confirm this statement. The question we must now ask ourselves is whether "backed by government" actually means anything anymore. In the depths of the 2008 crisis it was the governments that stepped in to provide a guarantee on financial assets. It was the governments that backed our savings accounts, money market funds, day-to-day business banking accounts, as well as debt issued by US banks. But what happens when confidence in the government guarantee begins to erode? We've seen what happened to Greece. Leverage inherent in the banking system elevated a bank run, equivalent to a mere 3.6 percent of deposits, into another full blown banking crisis. In our view it's time for investors to acknowledge sovereign risk. The ratings agencies can opine all they want, but it seems clear to us that the only true AAA asset to protect your wealth is gold

The ratings agencies can opine all they want, but it seems clear to us that the only true AAA asset to protect your wealth is gold

seems far too generous based on our cursory review of the country's fundamentals. The rating agencies' ranking of the United States is even more disconnected from reality. To believe that the US sets the benchmark for sovereign debt credit ratings is preposterous. While we have written ad nauseam about the excessive debt issuance by the United States, we found a recent update written by United States Government Accountability Office (GAO) to be particularly instructive. The update noted the US's budget deficit equivalent to 9.9% of GDP in 2009 - the largest 10 since 1945 - and stated that without significant policy changes the US government would soon face an "unsustainable growth in debt". This was not news to us. It goes on to state, however, that using reasonable assumptions, "roughly 93 cents of every dollar of federal

Authors: Eric Sprott & David Franklin: The authors are a part of Sprott Asset Management (www.sprott.com). Source: This article is reproduced (with permission) courtesy John Mauldin and InvetsorsInisght.(JohnMauldin@InvestorsInsight.com). Copyright 2009 John Mauldin. All Rights Reserved
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets. Sundaram BNP Paribas Asset Management 16 The Wise Investor May 2010

Economic Crisis Effects

Life in the time of the Great Recession
The title is not original. It is a take off from Love in the Time of Cholera by Gabriel Garcia Marquez, Nobel Prize winning author from Columbia, who was also recently selected as the most influential writer of the past 25 years for this book. Pardon that indulgence on our part, but we felt this best captures what you are about to read. Even as equity markets led by Wall Street have charted a major rally on the back of liquidity since March 2009, the ground reality on Main Street is different. Read this eleventh part of how the Great Recession is touching lives in many-a-different way.

Showdown with Monster Banks: “We are many and they are few -- and today they have to deal with us!" yelled an organizer at a San Francisco march and rally on Tuesday afternoon aimed at calling out Wells Fargo for its predatory lending practices. A crowd of a few hundred pissed-off consumers responded boisterously by repeating a catchy chant: "Hey, big banks, where's our dough? Working families have a right to know!" The San Francisco showdown at Wells Fargo was the first of a series of events to be held throughout the country this week, bearing down at the big banks' annual shareholder meetings to demand action on everything from foreclosure prevention, job creation and an end to predatory consumer practices. Added together, these protests will bring together the largest number of people yet in the fight against the too-big-to-fail banks that foisted the recession on consumers while reaping bailout money and facing little to no consequences for their misdeeds. The financiers who've captured the American economy are about to get more worried, however, as a broad coalition of community and labour groups have launched a series of rallies and marches calling for bank accountability. Businesses Embrace Move Your Money: Across the country, independent business groups that have been urging people to "buy local" are now making "bank local" an increasingly prominent part of their message, bringing new grassroots visibility and organizational infrastructure to the Move Your Money movement. "The message that big banks don't have our interest at heart and small, local banks do is really resonating," said Joe Grafton, executive director of Somerville Local First, a two-year-old coalition of independent businesses in Somerville, Massachusetts. This year, Somerville Local First devoted the back cover of its widely-distributed local business guide to a message that urges people to move their money and makes the case that switching to a local bank or credit union is an important way to support hometown businesses and your local economy. Support local economy & hometown business: This message will also be featured in posters that the
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group's member businesses (there are more than 150 of them) will hang in their storefronts in the coming weeks, as well as postcards scattered at cash registers and other spots around town. At Somerville Local First's annual street festival in June, local bankers will be on hand to answer questions and help people open new accounts. Somerville Local First is one of about 130 local business alliances that have sprung up over the last few years to counter the power of big corporations and urge people to choose locally made products and independent businesses more often. All together, these groups count more than 30,000 businesses as members, from farmers and retailers to builders and bankers, and there's growing evidence that their efforts are having a measurable impact on people's buying habits. Demand rises for support but donations are down: This winter, for the first time in at least 24 years, Muncie Mission's Attic Window clothing inventory was nonexistent. Zero, zip, nada. "This is the first year, literally, our clothing got down to zero," executive director Ray Raines said. "The first time we ever completely emptied our shelves, our surplus supply." The economy continues to keep demand high for used clothing, furniture and appliances. Donations, however, don't always match demand. Thrift store donations tend to be cyclical. People give more during warm weather. Now that spring is here, clothing donations at Attic Window are up and a surplus once again exists, but furniture and appliance donations still are down. Raines thinks this is just another example of people saving money by holding onto more expensive items longer instead of upgrading with newer replacements. Around the country, non-profit groups say the slumping economy has affected donations, especially in states that have been hit hardest by the recession. Bartering moves more to the mainstream: As recession drains bank accounts, people turn to bartering. Over the past 30 years, Columbia artist Jeff Donovan has bartered for artwork, tuition for his
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daughter's private school, a custom-made suit and, most recently, a couple of visits to the dentist. Bartering gives Donovan a way to use his talent _ instead of having to pay cash _ to get things he might never buy for himself. Bartering, trading goods or services rather than charging cash, is an ancient practice. But it's gained popularity during the economic meltdown that left many short on cash but rich in talent or treasures. The number of online barter ads has increased 100 percent since 2008, according to published reports. In 2008, about 250,000 North American companies conducted barter transactions worth more than $16 billion, according to the International Reciprocal Trade Association, based in Portsmouth, Va. businesses around South Carolina's capital also are using barter _ trading a meal for carpet cleaning or trophies for landscaping and painting. Homeless on streets & in shelters surge: Mayor Bloomberg is replacing the head of the Department of Homeless Services in New York as the number of homeless on the streets and in shelters continues to surge. Robert Hess took over the agency four years ago after a successful stint in Philadelphia and vowed to "fulfil the mayor's commitment to ending homelessness as we know it within five years." Since then, homelessness has surged as the economy tanked - and critics say Hess' plans to change homeless prevention efforts failed the people who needed them most. Bloomberg pledged to reduce homelessness by twothirds by offering new carrots and sticks to help the homeless live on their own. Many of those who got out of shelters were unable to keep their new apartments, however, and ended up needing more city help. New York counts more than 36,000 people in the shelter system, and had no place for all of them on some cold nights last winter when the number of homeless broke records. That doesn't include an estimated 3,111 sleeping on the streets. Bumper Crop of First-Time Food Gardeners: One of the healthiest by-products of the recession has been a nationwide bumper crop of first-time food gardeners. According to the country's leading seed company, W.
The Wise Investor May 2010

Economic Crisis Effects
Atlee Burpee & Co., there were 7.7 million new gardeners trying their hand at growing vegetables in 2009. They were spurred to action by a desire to save money, as well as health and food safety concerns and possibly the widely publicized White House vegetable garden. George Ball, Burpee's chairman, predicts that 2010 will be another banner year for home-grown vegetables, due to a renewed interest in gourmet cooking and the introduction of exotic new varieties. Medical parole to cut California's prison expenses: The man in charge of upgrading the quality of health care in California's overcrowded prisons has an idea for taxpayers: medical parole. J. Clark Kelso, the federal court-appointed prison health receiver, suggests that California could stop spending millions of dollars a year if officials could grant parole to a handful of inmates who are comatose or otherwise severely incapacitated. "I am keenly aware, as are the courts," Kelso said, "that a dollar that we can save in the prison health care program is a dollar that can be spent on other important priorities for the state, such as education, money for children, the elderly, other health care programs." An aide in Kelso's office said that, conservatively, the prison system could save $213 million over five years by paroling just 32 inmates identified as severely incapacitated. Who & how many want to be a kennel helper: Searching For Jobs? Just How Bad Is It?: Want a job scooping poop? 260 people do. They applied for a job opening on Craigslist posted by Guy Palumbo, owner of Roscoe's Ranch, a 24-kennel outfit. Please consider Recession's untold story You want to be the kennel helper? You're on the hook for the poop. You'll spend part of every day scooping it up (if all digestive systems work as designed) or mopping it (when they don't). "Usually I get high-school kids applying. Or maybe a college kid for the summer. I've never seen anything like this." says Palumbo. Who now wants to be a dog-kennel assistant? • A laid-off graphic designer • A freelance photographer. • Two out-of-work teachers sent résumés. • Someone in their mid-40s who had worked as a financial controller at an environmental services company. • Past customer-service reps from WaMu, AT&T, J.C. Penney and Sprint. • Retail clerks and cashiers. • Out-of-work waiters. They may say the recession's over, on paper or on the nightly news. Palumbo's electronic stack of résumés says otherwise. "It's simply amazing to me, and I still can't believe it," he said, "that from age 14 up into their 60s this many people are dying to be a minimum-wage dog-kennel assistant." "Speeding 'Cushion' Dwindle, tickets rise: The recession may be claiming a new victim: the 5-10-mph "cushion" police and state troopers across the USA have routinely given motorists exceeding the speed limit. As cities and states scramble to fill budget gaps with revenue from traffic citations, "not only are the (speeding) tolerances much lower, but the frequency of a warning instead of a ticket is way down," says James Baxter, president of the National Motorists Association, a Wisconsin-based drivers' rights group that helps its members fight speeding tickets. "Most people, if they're stopped now, are getting a ticket even if it's only a minor violation of a few miles per hour," Baxter says. He cites anecdotal evidence of drivers being pulled over at slower speeds. L.A’s Services Shut Down Plans: After raising taxes and fees, again and again and again, the city is broke and "I did the best with what they (the county commissioners) gave me. If it wasn't enough, don't blame me, don't blame this department," said Sheriff Billy Johnson. Johnson said he is suing the commissioners to get a determination of whether he should use his limited budget to carry out obligations defined by law or put more patrol cars on the streets. "I just can't do it anymore," he said. "I have to have the court explain to the commissioners and to me what my statutory duties are." The Ashtabula County Jail has confined as many as 140 prisoners. It now houses only 30 because of reductions in the staff of corrections officers. All told, 700 accused criminals are on a waiting list to serve time in the jail. Ashtabula County is the largest county in Ohio by land area. Ashtabula County Common Pleas Judge Alfred Mackey was asked what residents should do to protect themselves and their families with the severe cutback in law enforcement. "Arm themselves," the judge said. "Be very careful, be vigilant, get in touch with your neighbours, because we're going to have to look after each other." Spurt in appraisal/valuation fraud: The Mortgage Asset Research Institute (MARI), whose subscribers represent 70% of the mortgage finance space, reports appraisal fraud is taking a larger proportion of trickery alleged in suspicious activity reports filed with the Financial Crimes Enforcement Network. In 2008, suspected appraisal/valuation fraud stood at 22% of mortgage fraud reports. In 2009, that jumped to 33%, said MARI. “It is not surprising given the current state of the housing market,” said Darius Bozorgi, CEO of Veros, an appraisal software provider to mortgage lenders and the secondary market. “Appraisal fraud was masked in the past by rapidly appreciating housing market,” added Bozorgi. “In a rapidly depreciating market, appraisal fraud is more apparent.” Homeownership at 10-year low though still above long-term average: Fewer Americans own homes in Q110 than in any quarter since the beginning of 2000, according to data from the Census Bureau. The seasonally adjusted homeownership rate fell to an average of 67.2% percent of qualifying Americans who own homes in Q110, dropping 1bp from 67.3% in Q 409. It was the lowest rate since the 67.1% mark in the first quarter of 2000. The rate reached its height in Q105 at 69.2%, according to the Census. In Q110, there were more than 19 million vacant homes in the US. Vacancies held off the market did cross 7,000 for the first time however, increasing 5% from the last quarter of 2009. Vacancies in rental housing had a more drastic change, increasing 10.6% nationwide in Q110 from 10.1% in the first quarter of 2009.

Homeownership rate dips for second Q in a row to 67.2%-still a ways to go before meanreverting to pre-bubble norm of 64%-David Rosenberg, Chief Economist, Gluskin & Sheff Mayor Villaraigosa is blaming the city council for not hiking fees yet again. Having run the city into the ground, Villaraigosa calls for shutting down some city departments amid budget crisis. Los Angeles Mayor Antonio Villaraigosa called Tuesday for all city agencies -- except for police, other public safety and revenue-generating departments -- to close for two days a week starting April 12 because of the city's continuing budget crisis. "We have to act, and we have to act quickly," Villaraigosa said at a press conference. Villaraigosa's call comes one day after executives with the city's Department of Water and Power said they would recommend not sending a promised $73.5million contribution to the city's beleaguered treasury because the City Council recently declined to grant a desired electricity rate increase. Arm Yourself, Depend on Neighbours, Judge’s advice: In the ongoing financial crisis in Ashtabula County, the Sheriff's Department has been cut from 112 to 49 deputies. With deputies assigned to transport prisoners, serve warrants and other duties, only one patrol car is assigned to patrol the entire county of 720 square miles.

Sources: Alternet, Financial Armageddon, The Star Press, McClatchy, NYC News, Mish Global Economic Analysis, The Los Angeles Times, Housing Wire
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets. Sundaram BNP Paribas Asset Management 18 The Wise Investor May 2010

Insight

The Magnetar Trade
How One Hedge Fund Helped Keep the Bubble Going? In late 2005, the booming U.S. housing market seemed to be slowing. The Federal Reserve had begun raising interest rates. Sub-prime mortgage company shares were falling. Investors began to balk at buying complex mortgage securities. The housing bubble, which had propelled a historic growth in home prices, seemed poised to deflate. And if it had, the great financial crisis of 2008, which produced the Great Recession of 2008-09, might have come sooner and been less severe. At just that moment, a few savvy financial engineers at a suburban Chicago hedge fund helped revive the Wall Street money machine, spawning billions of dollars of securities ultimately backed by home mortgages. When the crash came, nearly all of these securities became worthless, a loss of an estimated $40 billion paid by investors, the investment banks who helped bring them into the world, and, eventually, American taxpayers. Yet the hedge fund, named Magnetar for the super-magnetic field created by the last moments of a dying star, earned outsized returns in the year the financial crisis began. How Magnetar pulled this off is one of the untold stories of the meltdown. Only a small group of Wall Street insiders was privy to what became known as the Magnetar Trade. Nearly all of those approached by ProPublica declined to talk on the record, fearing their careers would be hurt if they spoke publicly. But interviews with participants, e-mails, thousands of pages of documents and details about the securities that until now have not been publicly disclosed shed light on an arcane, secretive corner of Wall Street. According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations -- CDOs. If housing prices kept rising, this would provide a solid return for many years. But that's not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail. Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs. Magnetar says it was "market neutral," meaning it would make money whether housing rose or fell. (Read their full statement). Dozens of Wall Street professionals, including many who had direct dealings with Magnetar, are skeptical of that assertion. They understood the Magnetar Trade as a bet against the subprime mortgage securities market. Why else, they ask, would a hedge fund sponsor tens of billions of dollars of new CDOs at a time of rising uncertainty about housing? Key details of the Magnetar Trade remain shrouded in secrecy and the fund declined to respond to most of our questions. Magnetar invested in 30 CDOs from the spring of 2006 to the summer of 2007, though it declined to name them. ProPublica has identified 26. An independent analysis commissioned by ProPublica shows that these deals defaulted faster and at a higher rate compared to other similar CDOs. According to the analysis, 96 percent of the Magnetar deals were in default by the end of 2008, compared with 68 percent for comparable CDOs. The study was conducted by PF2 Securities Evaluations, a CDO valuation firm. (Magnetar says defaults don't necessarily indicate the quality of the underlying CDO assets.) From what we've learned, there was nothing illegal in what Magnetar did; it was playing by the rules in place at the time. And the hedge fund didn't cause the housing bubble or the financial crisis. But the Magnetar Trade does illustrate the perverse incentives and reckless behavior that characterized the last days of the boom. Magnetar says it invested in 30 CDOs from the spring of 2006 to the summer of 2007. At least nine banks helped the hedge fund hatch these deals, and Merrill Lynch, UBS and Citi all did multiple deals. At least nine banks helped Magnetar hatch deals. Merrill Lynch, Citigroup and UBS all did multiple deals with Magnetar. JPMorgan Chase, often lauded for having avoided the worst of the CDO craze, actually ended up doing one of the riskiest deals with Magnetar, in May 2007, nearly a year after housing prices started to decline. According to marketing material and prospectuses , the banks didn't disclose to CDO investors the role Magnetar played. Many of the bankers who worked on these deals personally benefited, earning millions in annual bonuses. The banks booked profits at the outset. But those gains were fleeting. As it turned out, the banks that assembled and marketed the Magnetar CDOs had trouble selling them. And when the crash came, they were among the biggest losers. Some bankers involved in the Magnetar Trade now regret what they did. We showed one of the many people fired as a result of the CDO collapse a list of unusually risky mortgage bonds included in a Magnetar deal he had worked on. The deal was a disaster. He shook his head at being reminded of the details and said: "After looking at this, I deserved to lose my job." Magnetar wasn't the only market player to come up with clever ways to bet against housing. Many articles and books, including a bestseller by Michael Lewis have recounted how a few investors saw trouble coming and bet big. Such short bets can be helpful; they can serve as a counterweight to manias and keep bubbles from expanding. Magnetar's approach had the opposite effect -- by helping create investments it also bet against, the hedge fund was actually fueling the market. Magnetar wasn't alone in that: A few other hedge funds also created CDOs they bet against. And, as the New York Times has reported, Goldman Sachs did too. But Magnetar industrialized the process, creating more and bigger CDOs. Several journalists have alluded to the Magnetar Trade in recent years, but until now none has assembled a full narrative. Yves Smith, a prominent financial blogger who has reported on aspects of the Magnetar Trade, writes in her new book, "Econned," that "Magnetar went into the business of creating subprime CDOs on an unheard of scale. If the world had been spared their cunning, the insanity of 20062007 would have been less extreme and the unwinding milder’.

Authors: Jesse Eisinger and Jake Bernstein of ProPublica; Copyright & Source: ProPublica – Journalism in the public interest (www.propublca.com) Read the complete article at: http://bit.ly/9oonuP
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets. Sundaram BNP Paribas Asset Management 19 The Wise Investor May 2010

Insight

Can China save the world by consuming more? NO
Summary: Would an increase in Chinese domestic demand meaningfully improve US and European employment prospects? This column says that Chinese policy has a relatively small impact on developed economies' macroeconomic circumstances. It estimates that major reduction in Chinese saving would improve US employment by less than one quarter of a percentage point. “China is making all of us poorer” writes Paul Krugman in his blog at the New York Times (Krugman 2010). He is referring to the current account surplus of the Chinese economy draining aggregate demand from the rest of the world and leading to lower employment and income. Krugman is not alone in attributing extraordinary importance to economic developments in the Middle Kingdom. The savings glut hypothesis – the idea that high saving in China depressed world’s benchmark real long-term interest rates in 2006-07, thus contributing to a housing boom in the US and investors' purchases of securities backed by subprime mortgages in their "search for yield" – is another example of the view that developments in China have large macroeconomic impacts on the rest of the world. The economic logic behind these arguments is not at issue. High savings, whatever the source, do reduce demand and will therefore have a dampening effect on economic activity in the short and medium term. They also increase the supply of loanable funds and hence reduce real interest rates. Putting the two arguments together does lead to a dilemma, however. Suppose the Chinese authorities were able to steer the economy towards more "domestic-demanddriven economic growth" by encouraging domestic consumption. What would be the consequences for the rest of the world? Greater consumption in China would mean greater imports as some of the expenditures would surely fall on goods produced abroad. Exports of the rest of the world would increase leading to greater employment and incomes, as Krugman’s argument would have it. Another way of saying the same thing is that a reduction in saving in China, which is simply the flip side to the increase in consumption, would reduce the surplus in its balance of trade and hence represent an improvement in the trade balance of the rest of the world. The improved balance of trade would add to aggregate demand. But if the savings glut hypothesis is correct, then the reduced saving in China will lead to an increase in real interest rates in the world, potentially reducing investment and growth and making it more costly for governments to service their debt. With anaemic growth and growing fiscal deficits in many economies, these would not be a welcome development at present. In other circumstances, however, higher real interest rates might be desirable. To get a sense of the quantitative importance of policy changes in China on the rest of the world let us contemplate the consequences of China reducing its external saving/investment gap, i.e. its current account balance, by, say, 5% of Chinese GDP. As China’s GDP represents about 10% of the rest of the world’s GDP, the improvement in the current account balance for all other countries taken together would be 0.5% of GDP. Let us assume that each economy in the rest of the world will get an equal improvement in its current account balance (as a percentage of its GDP) as a result of the increased imports of China. How large will be the impact on GDP? Assuming a multiplier of 1.5 we would get an increase in US GDP by 0.75%.[ Although it obviously is helpful, it is hardly a change that will qualify as a major source of a recovery, especially since the improvement in the US current account would be phased in over several years. If we use Okun’s Law to calculate the effect on employment we would conclude that the unemployment rate in the US would decline by about 0.25% ((0.75/3), not much bigger than a rounding error. What about the offsetting effect of higher interest rates that would be the consequence of reduced savings in China? Similar arguments to those just made suggest that the offset is likely to be small because China is not yet big enough, relative to the world economy as a whole, for a plausible change in its savings to have a quantitatively important impact. A rebalancing of demand in the Chinese economy large enough to virtually eliminate its current account surplus would not make the rest of the world wealthy.The flip side of course is that the current deficit is not making us materially poorer. A more sophisticated estimate: It may be objected that the quantitative aspect of above analysis is too simple-minded, as it is based on an "Econ 101" Keynesian multiplier framework. So let us ask what a more sophisticated model would tell us. The model proposed in N’Diaye, Zhang, and Zhang (2010) is a multi-country model used by the IMF, among others, to study interactions between countries and regions of the world economy. What makes it particularly useful for our purposes is that it contains the US, the Eurozone, and China among the building blocks, the relative sizes of all economies are calibrated to actual data, and production and trade patterns (both in final and intermediate goods) reflect those found in the data. It shows that while the decline in saving in China will have a large impact on China’s own current account balance, the spillover effects on the other regions in the model are very small. In particular, the improvement in the current account balances of the Eurozone and US are each on the order of 0.1% of the corresponding GDP levels. Given the small spillover effects on current account balances, it should come as no surprise that the impact on GDP and employment are equally tiny. For example, the employment rate in the Eurozone increases by 0.33 percentage points and in the US by 0.11 percentage points. Similarly, the impact on real interest rates is negligible. Conclusion: Policies in China will not solve the income and employment problems in the Eurozone and the US. These problems have to be tackled principally by measures internal to these economies. Of course, Chinese authorities do have good reasons to take actions that increase incomes and consumption of Chinese households, thereby improving their standard of living. Indeed these are explicit policy objectives of the Chinese government. Author Background: Hans Genberg is an Adviser at the Representative office for Asia and the Pacific of the Bank for International Settlements, having previously been Executive Director, Research at the Hong Kong Monetary Authority, Director of the Hong Kong Institute for Monetary Research and Professor of international economics at the Graduate Institute of International Studies in Geneva, Switzerland. Wenlang Zhang is a Senior Manager in the Research Department of the Hong Kong Monetary Authority.

Hyperlink to this article: http://www.voxeu.org/index.php?q=node/4937 Source: www.voxeu.com (VoxEU.org is a policy portal set up by the Centre for Economic Policy Research (www.CEPR.org) in conjunction with a consortium of national sites)
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets. Sundaram BNP Paribas Asset Management 20 The Wise Investor May 2010

Blog Picks

Clarity on the state of l’affaire Goldman
Ten Things You Don’t Know (or were misinformed by Media) About The Goldman Case - I have been watching with a mixture of awe and dismay some of the really bad analysis, sloppy reporting, and just unsupported commentary about the Goldman Sachs case. I put together this list based on what I know as a lawyer, a market observer, a quant and someone with contacts within the SEC. (Note: This represents my opinions and no one else’s). # 1 This is a Weak Case: Actually, no. Its a very strong case. Based upon what is in the SEC complaint, parts of the case are a slam dunk. The claim Paulson & Co. were long $200 million dollars when they were actually short is a material misrepresentation-that’s Rule 10b-5, and its a no brainer. The rest is gravy. # 2 Robert Khuzami is a bad ass, nononsense, thorough, award winning Prosecutor: This guy is the real deal — he busted terrorist rings, broke up the mob, took down security frauds. He is now the director of SEC enforcement. He is fearless, and was awarded the Attorney General’s Exceptional Service Award (1996), for “extraordinary courage and voluntary risk of life in performing an act resulting in direct benefits to the Department of Justice or the nation.” When you prosecute mass murderers who use guns and bombs and threaten your life, and you kick their asses anyway, you ain’t afraid of a group of billionaire bankers and their spreadsheets. He is the shit. My advice to anyone on Wall Street in his crosshairs: If you are indicted in a case by Khuzami, do yourself a big favor: Settle. # 3 Goldman lost $90 million dollars, hence, they are innocent: This is a civil, not a criminal case. Hence, any mens read — guilty mind — does not matter. Did they or did they not violate the letter of the law? That is all that matters, regardless of what they were thinking or their P&L. # 4 ACA is a victim in this case: Not exactly, they were an active participant in ratings gaming. Look at the back and forth between Paulson’s selection and ACAs management. 55 items in the synthetic CDO were added and removed. Why? What ACA was doing was gaming the ratings agencies for their investment grade, Triple AAA ratings approval. Their expertise (if you can call it that) was knowing exactly how much junk they could include in the CDO to raise yield, yet still get investment grade from Moody’s or S&P. They are hardly an innocent party in this. # 5 This was only one incident: The Market sure as hell doesn’t think so — it whacked 15% off of Goldman’s Market cap. The aggressive SEC posture, the huge reaction from Goldie, and the short-term market verdict all suggest there is more coming If it were only this one case, and there was nothing else worrisome behind it, Goldman would have written a check and quietly settled this. Their reaction (some say over-reaction) belies that theory. I suspect this is a tip of the iceberg, with lots more problematic synthetics behind it. # 6 The Timing of this case is suspect. More coincidental, really. The Wells notice (notification from the SEC they intend to recommend enforcement) was over 8 months ago. The White House is not involved in the timing of the suit itself, it is a lower level staff decision. # 7 This is a Complex Case: Again, no. Parts of it are a little more sophisticated than others, but this is a simple case of fraud/misrepresentation. The most difficult part of this case is likely to turn on what is a “material omission.” Paulson’s role in selecting mortgages may or may not be material — that is an issue of fact for a jury to determine. But complex? Not even close. # 8 The case looks thin: What we see in the complaint is the bare minimum the prosecutor has to reveal to make their case. What you don’t see are all the emails, depositions, interrogations, and phone taps, to name a few, that the prosecutors know about and Goldman does not. During the litigation discovery process, this material slowly gets turned over (some is held back if there are other pending investigations into Goldman).

No Criminal Charges
Blogger reacting to CBS story on `No criminal charges in AIG collapse: Do you think the paper shredders and 'delete keys' were working overtime? Do you think the Justice Department was highly motivated to nail the guy who could probably implicate the biggest of the TBTF banks and their enablers in the government? Do you think the American President was just playing you when he said, "I did not run for office to be helping out a bunch of fat cat bankers on Wall Street." Do you think Joe knows where a lot of the bodies are buried - on Wall Street and in London and Washington? Do you think it pays to be a 'Friend of Lloyd' and a feeder source of campaign contributions to most of the Congress? Do you think the people are just itching to vote out every incumbent in November? Do you think the spineless lack of serious investigation and reform is setting the US up again for another, even bigger, financial scandal and crisis? You might be right. Blog: Jesse Café Americain Blogger: Jesse (Arthur Cutten) Source: http://bit.ly/aIVjwh The prosecutor in this case is Robert Khuzami. His legal reputation is that he is a very thorough, very precise, meticulous litigator. If he decided to recommend bringing a case against the biggest baddest investment house on Wall Street bank, I assure you he has a major arsenal of additional evidence you don’t know about. Yet. # 9 This case is Political: I keep hearing that phrase, due to the SEC party vote. It is incorrect. What that means is the case is not political, it means it has been politicized as a defense tactic. There is a huge difference between the two. # 10 I’m not a lawyer, but . . . Then you should not be ignorantly commenting on securities litigation. Why don’t you pour yourself a tall glass of ….up and go sit quietly in the corner. Blog: The Big Picture Blogger: Barry Ritholtz Source: http://bit.ly/cAq1Li

The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets. Sundaram BNP Paribas Asset Management 21 The Wise Investor May 2010

Blog Picks
Absent: Ethics, Fiduciary Responsibility, Separation of Duty I gave an example a while ago where fund managers at two large broker dealers told me they do not collect fees if client positions are in cash. Thus, whether or not those managers I spoke with thought that being invested was the correct thing to do, there was intense pressure to invest client money not only from the manager holding cash, but also from upper management at these firms. That my friends is the origin of "you can't time the market, so be 100% in 100% of the time, for the long haul." Over the long haul, Wall Street wants you all in all the time so it can collect fees. Worse yet, clients are steered to speculative products because those are the ones that make the broker dealers the most money. The corruption, greed, and lack of ethics in the industry is appalling. Where is the Fiduciary Responsibility? I am tired of ethics (or lack thereof) that allows front running and betting against clients whether legal or not. I am tired of corporations talking about "walls" between their proprietary trading units and their investment groups. In practice the walls are invisible, if they exist at all. Moreover, I am tired of accounting rules that allow hundreds of billions of dollars of assets to be held off balance sheets (Citigroup had $1 trillion in off balance sheet assets at one point), and I am tired of mark-to-fantasy pricing (Goldman has more level 3 assets than anyone else). In client relationships, the first and most important thing is to never do or advise a client in any way that is not in their best interest. Instead, we have ethics that allow (even encourage), making profits at client expense. We need a complete ethics overhaul but we will not see it until people are thrown into prison and corporations have to choose which business they want to be in as opposed to the current state of affairs where anything for a profit is acceptable. • • • • • • • Firms give advice based on how much profit the firms will make on it Firms trade their own books to the detriment of clients Firms make upgrades and downgrades after they take positions themselves Firms front-run trades Firms engage in dark pools Firms deemed too big to fail take advantage by upping leverage Firms like Goldman Sachs have access to Fed funds at low interest rates to do whatever the hell they please

Being Wrong Vs. Being Early
Todd - You've been cautious on the market since the summer. Yes, you could very well be right and early. However, when something you think would happen does not, it begs the question why? Is it because the parties holding the keys have a different motivation and agenda? Are they able and willing to continue or change course? What are other factors that have so far been ignored, which could have contributed to a different conclusion? We, as reactors, have our own decisions to make. That is where I am at this point—trying to make a decision based on confusing information. What I think should have happened has not. Should I wait for the situation to become clearer? Or should I be "early" and take the action, and accept possibility of risk and being "wrong?" It is a philosophical question as well as a practical one. You are very much aware of the cost of being "early" or "wrong". That is why I am interested in your opinion.- Minyan A Minyan A- Very well said; the context of time is correct, as is the multilinear equation of the markets, human emotion and intellectual agility. We used to say the destination we arrive at pales in comparison to the path that we take to get there. For me, I attempt to execute against that dynamic with my trading portfolio. In my long-term bucket -- which has been in cash since well before the crisis began when equity markets were 30+% higher -- I'm comfortable with that posture as it's a longer-term nest egg I cannot afford to lose. The only difference between being wrong and early is whether you're there to collect on your bet, even if the bet is not making a bet. Opportunity cost is the other side of discipline; that doesn't sugarcoat the 'miss,' but if I’ve learned anything over the course of my career, it’s that opportunity cost is a lot easier to make up for than losses. There is a scenario where the big picture concerns don't manifest for a few years. That's what corporate credit markets are telling us but I believe the crisis has evolved into the socioeconomic spectrum. I wince at the notion of being branded a dire wolf—take me at my word, I've bet big on the upside over the course of my career. Some of the smartest people I know are raging bulls and that fact isn't lost on me. The unknown variable is amorphous, dependent on social mood, risk appetites and struggling sovereign nations around the world. Not sure if this makes sense but I most certainly hope it helps. Have an awesome holiday stretch.- Todd Blog: Minyanville Blogger of this post: (of mid-December 2009) Todd Harrison, CEO of Minyanville Source: http://bit.ly/aOTsOn

Sadly, this business screws the client for a fee time and time again because there is no ethics, no sense of fiduciary responsibility, and no walls on separation of duty to prevent fraud. Instead, we have rules, procedures, and bailouts by taxpayers designed to make sure the playing field is not level. This is not a free-market concept and desperately needs to change. Blog: Mish Global Economic Analysis Blogger: Mike Shedlock Source: http://bit.ly/b4rfBU

The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets. Sundaram BNP Paribas Asset Management 22 The Wise Investor May 2010

The Book of Choice

China Shakes The World
possible only in a nation that is driven by a dictatorial political system. This is true today, too. And that is what vests China Shakes The World with context that could be relevant through the next decade, too. The book - an easy read – could leave the reader in awe. While there is much to admire in the China growth story, do not, however, fail to note the political context. Also do not miss the fact that for all the hoopla over its 10%-plus growth rate in GDP, Chinese stocks offered a compounded annual return of just 6.9% between 2000 and 2009. Here are a few edited anecdotes from the book: # 1 - By the time I got there, there was only the scar. A scar of ochre earth twenty- five times the size of a football field. A dozen excavators pawed ponderously at the soil as if absently searching for something lost. The place where one of Germany’s largest steel mills had stood since before World War Two was now reduced to a few mounds of twisted metal scrap. I approached a man in worker’s overalls by the side of the road. He was hoisting a huge metal segment of a pipeline onto the back of a truck. After he had settled it in place, I called over to him. He said he had dislodged, lifted and loaded fourteen segments like this already and now there were only three left, enough for another week’s work. Then it would all be over. I asked him where the pipeline was going. He straightened his back and made as if to throw something in a gentle arc far into the distance. `China’ he said. # 2 - According to ThyssenKrupp, the Horde plant would have been closed regardless of whether a buyer for it had been found. But others have had their doubts. The Chinese pounced so quickly on the purchase, signing to buy it just one month after the plant was idled, that some in Horde suspected a behind-the scenes deal. Whatever the truth, it was not the Chinese acquisition so much as the events that were to follow that stunned the local population. As if out of nowhere, nearly a thousand Chinese workers arrived. They dosed down in a makeshift dormitory in a disused building in the plant and worked twelve hours a day throughout the summer. Seven days a week. Only later, after some of the German workers and managers complained, were they obliged to take a day off out of respect for local laws. # 3 - So when the profit margins on Lifan’s motorbike business were squeezed, Yin’s response was not to retreat but to attack. He branched out into buses, mineral water, paint thinner, imported wine, newspapers, duckdown jackets and a successful Chinese football team that bore his company’s name. He had been reading management books by Jack Welch, the then CEO of General Electric, whose photograph could be seen on the cover of pirated translations of his books selling all over China. Diversification, he said, helps company weather downturns in the business cycle. Nevertheless, it was clear that if his core business of motorbikes was to survive, he would need to find a new source of revenue and sales growth. The answer was obvious: exports. Any company that could survive in the cauldron of Chinese competition surely had a chance overseas. His selected battleground was Vietnam, where Lifan came face to face with Honda. The Japanese company’s market share was around 70 per cent in Vietnam when Lifan made its first forays, but Yin had the obvious advantage of price. His opening salvo was to offer bikes that looked virtually identical to those of Honda but cost one-third as much. It proved a powerful lure and within three years, Lifan had outstripped its old rival. # 4 - A month or so later we were back in Haagen-Dazs and she informed me that the deliberations on joining the WTO were proceeding. When I asked her when and how they had resumed, she replied that they had never stopped. ‘We are prepared to make concessions to benefit ourselves in the long run,’ she said. It is this flexibility and pragmatism, visible in China’s transformation over and over again, that supplies the counter-argument to future scenarios full of doom and gloom. China is perhaps too much wedded to the world, too deeply insinuated into its organizations and treaties, and too dependent on others to bite the hands that feed it.

The news is dominated by Greece and China. One is in a mess – a similar fate may eventually beckon several developed world nations of the west & Australia, too, through this decade), the other is rocking on the back of massive government spending. Yet there are concerns that China is entering bubble territory. Irrespective of what view one takes of the Chinese equity and real estate markets, as an economic player, China has taken its place at the top table. There have been several books on China in the past year or so – it is obviously a thriving business, given the interest overseas in the country. We have, however, featured this month a book that dates to 2006. In China Shakes The World- The Rise of a Hungry Nation, author James Kynge takes us through the emergence of China as a major player in the global economy through several anecdotes from different parts of the world. In a book that is notable for the depth of ground-level research, Kynge provides manyan-example of the various ways in which the rising economic prowess of China has emerged and how it has impacted people/towns/cities/industries/finances in different parts of the world. What this showcases is a relentless and coordinated process at work, obviously

Book: China Shakes The World – The Rise of a Hungry Nation. Author: James Kynge Paperback: 256 pages Publisher: Phoenix ISBN-10: 0753821559 ISBN-13: 978-0753821558 Price: Rs 428 at www.flipkart.com (a discount of 15% and free delivery in India). Comment and pick of extracts by S.Vaidya Nathan
Sundaram BNP Paribas Asset Management 23 The Wise Investor May 2010

Taking note of

Greece & Goldman
Civil and criminal investigations stalk Goldman’s ‘God’s Work’ A few months ago, the CEO of Goldman Sachs, Lloyd Blankfein had in an interview (http://bit.ly/1TPRAO) with The Times of London in November 2009 suggested that his firm was doing God’s Work. Now its reputation is on the line. It battles an SEC civil suit charging the firm with selling to investors, assets, which had been shorted with the firm’s help by a hedge fund. Criminal investigations have also been commenced by different arms of the U.S government. The stock has shed about 20% of its market-cap following the twin announcements last month. Goldman’s approach in selling such products and its consequences were superbly captured in a cartoon `If Goldman Sachs made cars” – Peter Bagley at comics.com (Check it at out at this link http://bit.ly/97c5Hw of Investment Postcards from Cape Town - Prieur du Plessis’s international investment blog) A German bank has become the first to stop dealing with Goldman after these developments. The moves are likely to lead to more law suits in the years ahead and this is a story that could potentially run for years. This story may not also be confined just to Goldman and there are indications that other big firms are also under investigation. These moves mark a welcome first baby-step towards accountability for perpetrating the financial crisis and Bailed-out Greece could eventually default The EU and IMF have announced a 110 billion euro - roughly $146 billion - rescue plan for Greece, attached to an austerity plan that unions immediately denounced as "savage”. Greece is a beautiful country, but its economy is not a model of flexibility. Anecdotally, having been, in my earlier years, among a train full of passengers tossed out near a field in the middle of the night upon arriving at the Greek border, hoofing it in the dark to the nearest town, bumming a ride to Thessaloniki, and eventually hiring a taxi to drive the full length of the country to Athens with five chainsmokers who refused to crack a window, while every other form of transportation was on a nationwide strike, I suspect that budget discipline to the extent required will not be easily implemented, and may be so hostile to GDP and tax revenues as to make default inevitable in any event. John Hussman – CEO, Hussman Funds (www.hussmanfunds.com)
Sundaram BNP Paribas Asset Management 24

its attendant woes. For a pithy comment that captures the situation nicely, take note of this view: American taxpayer: With all the bail-outs and help homeowners programs and misfiring unemployment plans, you have very precious little money left. And if you believe in God, you should heed this warning going forward: If Goldman Sachs is doing God’s work, then the American people can’t afford God’s work anymore. The Automatic Earth (http://bit.ly/cqvgYp) Poetic Fit, too: There is a neat fit in our picks this month. When Greece was trying to become a member of the Euro Zone, Goldman Sachs helped it hide the true state of its finances by structuring instruments that made Greece’s finances look better than what they were and made it possible for the country to `comply’ with the norms for entry into the Euro zone. Greece is in a mess today and Goldman may be headed towards a like denouement, at least in terms of damage to its reputation.
The Wise Investor May 2010

Voices
It is a malaise and the end of an era. We have created a hunger just to make money, speculative money and damn the consequences almost – we are either all investing in houses or stocks, soon to be Chinese stocks. But, it has also created a Pavlovian response where every crisis was an opportunity to buy more. I think time is receding, it is passing, and it is leaving us behind. My difficulty is that I do not sell dreams. I live in the real world. Hugh Hendry, hedge fund specialist and a co-founder of investment boutique Eclectica The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits. Happily, there's a ready-made and time-tested solution. If their bank fails, let the bankers themselves fail. James Grant, publisher of the Grant’s Interest Rate Observer I never lose sleep with my big gold position, but I do lose sleep when I have a big dollar position. I always see pullbacks in gold as buying opportunities because what I’ve discussed are the big forces really moving things. There are very few people on this planet that understand the big macro picture behind the movement to gold. We’re now in a 10-year bull market in gold. We ran a twenty-year bear market, so it might be a twenty-year bull market. Fred Hickey, author of the High-Tech Strategist newsletter This decline after the August peak should be far more serious and we believe it will be the start of a major market rout continuing into the middle of 2011, at a minimum. The deflationary recession that will accompany this market collapse, at least in the developed world, will put extreme pressure on the Eurozone and the EMU structure. The second half of this decade will witness a very different world. John Taylor, CIO of FX-Concepts, the world's biggest FX fund. I still have a deep, deep concern about the leverage in the banking system. I look at the inability of governments who are spending vast amounts of money to generate much growth in GDP. I can give the example of running a $1.5 trillion deficit last year and GDP goes up $200 billion. So we are not getting much bang for the buck but we still owe the buck at the end of the year. I also worry about what's going on in China. Eric Sprott, CEO & Senior Portfolio Manager, Sprott Asset Management I have stated openly that I expect the UK 1970s experience of almost 30% inflation to be repeated in my lifetime. I also expect this to be reached in countries that got nowhere near this 30% rate in the 1970s. But despite my belief that we will see a paradigm change over the next decade or so, I continue to retain our heavy overweight for government bonds.We are now only one cyclical failure from falling into outright deflation. Albert Edwards, Strategist at Societe Generale who saw the crisis coming. The financial world is on the wrong track and that we may be hurtling towards an even bigger boom and bust than in the credit crisis. The success in bailing out the system on the previous occasion led to a super bubble, except that in 2008 we used the same methods. Unless we learn the lessons, that markets are inherently unstable and that stability needs to the objective of public policy, we are facing a yet larger bubble. George Soros, Chairman of Soros Fund Management. Well, always with these things, we're often early and it appears we're early here (on China) too. But the good news for office building bubbles is that they're pretty tangible. So when you see the apartments stop selling, when you stop seeing foundations being laid, and holes in the ground, when you see the cranes not going up anymore, buildings being half-complete - that'll tell you you're at the end. Jim Chanos, President, Kynikos Associates & famed short-seller. At some point the bubble will burst. Hopefully for all our sakes its sooner rather than later. The longer we are forced to wait, the bigger the bubble will be and the more horribly damaging the bursting process will be. And if we are forced to wait and the bubble gets anywhere like the one that went pop in late 2007 I have ZERO idea who will credibly be able to bail us all out the next time round - certainly not our governments. Bob Janjuah, Chief Market Strategist, Royal Bank of Scotland & early caller on ongoing crisis Things look a lot grimmer when one gets two hours outside of Tokyo to places like Hokkaido. As the government’s fiscal position has steadily weakened, the jobs have become far scarcer. True, there are beautifully paved roads all around, but they go nowhere. As the population ages and shrinks, more people will retire and start selling government bonds they are now lapping up. At some point, Japan will face its own Greek tragedy. Kenneth Rogoff, Author of This Time is Different, Eight Centuries of Financial Folly.
Source: Investment Week, Washington Post, Financial Times, Wall Street Cheat Sheet, Zero Hedge, CNBC, The Economist/Reuters, Business Insider, Project Syndicate. Note: Andrew Odlyzko of the University of Minnesota has produced a couple of fascinating new papers* on contemporary forecasting during the British railway booms of the 1830s and 1840s. Sundaram BNP Paribas Asset Management 25 The Wise Investor May 2010

The journey, over 30 years, of Rs 100 invested in the Sensex
Years
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979

Jan
13176 7591 14216 11350 7990 5281 4588 2618 2667 3485 4193 2671 2597 2725 2362 2915 3224 2159 1855 791 550 547 356 446 482 232 200 179 177 118 100

Feb
13234 7162 14159 10421 8353 5408 4565 2645 2869 3421 4388 2605 2918 2942 2732 2756 3452 2266 2280 983 545 535 330 443 529 245 202 176 184 129 103

Mar
14118 7820 12601 10529 9086 5230 4503 2456 2794 2903 4028 3012 3136 2707 2712 2627 3044 1837 3451 941 629 575 321 411 462 285 198 170 175 140 104 100

Apr
14143 9185 13925 11174 9700 4957 4555 2384 2689 2835 3752 2679 3227 3094 3082 2524 3017 1709 3131 995 640 629 380 386 482 312 190 173 182 150 102 102

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

11780 13222 11715 8376 5409 3834 2562 2518 2925 3571 3193 2969 3025 3000 2700 3079 1766 2421 1053 645 557 467 372 504 322 194 191 184 143 101 100

11674 10843 11801 8546 5794 3863 2905 2614 2784 3825 3335 2618 3428 3071 2616 3292 1794 2481 1023 685 638 470 350 488 385 201 191 171 170 98 101

12622 11563 12526 8654 6150 4165 3055 2406 2682 3447 3659 2587 3468 2849 2728 3397 1875 2174 1315 832 577 486 394 480 415 204 190 174 168 104 93

12619 11731 12339 9423 6287 4182 3419 2562 2614 3606 3945 2363 3122 2831 2696 3696 2121 2442 1447 1005 591 478 389 442 377 201 192 172 156 113 94

13795 10359 13928 10032 6955 4497 3587 2409 2265 3295 3838 2499 3143 2609 2814 3448 2183 2655 1519 1144 603 534 362 474 350 214 190 184 165 108 96

12804 7884 15979 10441 6357 4569 3952 2376 2408 2989 3580 2265 3063 2548 2758 3439 2154 2278 1522 1043 601 527 363 464 384 216 191 179 168 105 100

13634 7324 15597 11032 7079 5022 4063 2601 2648 3220 3723 2264 2868 2328 2412 3322 2604 2028 1533 964 556 570 347 403 400 209 193 184 173 113 93

14068 7771 16341 11105 7570 5318 4703 2720 2628 3199 4032 2461 2947 2485 2505 3165 2708 2107 1538 844 627 537 356 422 425 219 204 190 183 119 96
Analysis: S Vidhya

Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management Sundaram BNP Paribas Asset Management 26

The Wise Investor May 2010

Analysis

Growth Across The Cap Curve
The Cap-Curve Over The Past Decade - Market cap of different parts of the NSE-listed stocks
Stock group by market cap Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 March-10 Change Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Times Market-Cap Threshold (Rs Crore) 50th Stock 100th Stock 200th Stock 300th Stock First 50 Second 50 Top 100 Next 100 (# 101 - # 200) Next 100 (# 201 - # 300) Rest (# 301 onwards) Basket of NSE Stocks # of NSE Stocks Average Market Cap Per Stock 1650 636 160 87 420667 50542 471209 31902 12027 11942 527081 674 782 1197 432 141 66 360550 36857 397407 23563 9356 9283 439609 699 629 1803 622 198 88 440036 49977 490012 35262 14042 10596 549912 628 876 4270 1598 507 247 857785 128229 986014 88556 34934 27286 1136790 648 1754 6454 2272 838 403 1116723 187160 1303883 131575 59316 53968 1548742 710 2181 8936 3733 1446 807 1542520 286343 1828863 219309 109921 123882 2281975 826 2763 13192 5389 2093 1235 2232901 417539 2650440 340934 156962 208574 3356910 949 3537 28330 11269 4625 2577 4023795 851703 4875498 694419 341971 539752 6451640 1162 5552 10767 4742 1645 854 1959009 374882 2333891 268354 119713 173305 2895264 1279 2264 24993 9224 3838 1934 3664004 811167 4475171 579526 279142 406243 5740082 1310 4382 26033 11040 4187 2179 3755582 901369 4656951 636904 305420 448846 6048121 1351 4477 15.8 17.4 26.1 25.1 8.9 17.8 9.9 20.0 25.4 37.6 11.5 2.0 5.7

The Cap-Curve Over The Past Decade - Share in market cap of different parts of the NSE-listed stocks
Stock group by market cap First 50 Second 50 Top 100 Next 100 (# 101 - # 200) Next 100 (# 201 - # 300) Rest (# 301 onwards) Total Dec-00 % 79.8 9.6 89.4 6.1 2.3 2.3 100.0 Dec-01 % 82.0 8.4 90.4 5.4 2.1 2.1 100.0 Dec-02 % 80.0 9.1 89.1 6.4 2.6 1.9 100.0 Dec-03 % 75.5 11.3 86.7 7.8 3.1 2.4 100.0 Dec-04 % 72.1 12.1 84.2 8.5 3.8 3.5 100.0 Dec-05 % 67.6 12.5 80.1 9.6 4.8 5.4 100.0 Dec-06 % 66.5 12.4 79.0 10.2 4.7 6.2 100.0 Dec-07 % 62.4 13.2 75.6 10.8 5.3 8.4 100.0 Dec-08 % 67.7 12.9 80.6 9.3 4.1 6.0 100.0 Dec-09 % 63.8 14.1 78.0 10.1 4.9 7.1 100.0 March-10 Change % P-Points 62.1 14.9 77.0 10.5 5.0 7.4 100.0 -17.7 5.3 -12.4 4.5 2.8 5.2 -

The Cap-Curve Over The Past Decade - Growth in market cap of different parts of the NSE-listed stocks
Stock group by market cap First 50 Second 50 Top 100 Next 100 (# 101 - # 200) Next 100 (# 201 - # 300) Rest (# 301 onwards) Total Dec-00 % Dec-01 % -14.3 -27.1 -15.7 -26.1 -22.2 -22.3 -16.6 Dec-02 % 22.0 35.6 23.3 49.7 50.1 14.1 25.1 Dec-03 % 94.9 156.6 101.2 151.1 148.8 157.5 106.7 Dec-04 % 30.2 46.0 32.2 48.6 69.8 97.8 36.2 Dec-05 % 38.1 53.0 40.3 66.7 85.3 129.5 47.3 Dec-06 % 44.8 45.8 44.9 55.5 42.8 68.4 47.1 Dec-07 % 80.2 104.0 84.0 103.7 117.9 158.8 92.2 Dec-08 % -51.3 -56.0 -52.1 -61.4 -65.0 -67.9 -55.1 Dec-09 % 87.0 116.4 91.7 116.0 133.2 134.4 98.3 March-10 % 2.5 11.1 4.1 9.9 9.4 10.5 5.4 CAGR % 26.7 36.5 28.1 38.2 41.9 48.0 30.2

Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management
Sundaram BNP Paribas Asset Management 27

Analysis: Satish Mahadevan
The Wise Investor May 2010

Best & Worst Performers Global
Month/Year/Category Apr-10 Mar-10 Feb-10 Jan-10 Dec-09 Nov/09 Oct/09 Sep/09 Aug/09 Jul/09 Jun/09 May/09 Apr/09 Mar/09 Feb/09 Jan/09 Dec/08 Nov/08 Oct/08 Sep/08 Aug/08 Jul/08 Jun/08 Dec'07 Best Worst Best Worst Best Worst Best Worst Best Worst Worst Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst MSCI Emerging Market 1020 1010 936 934 989 953 914 914 839 844 761 773 663 570 499 530 567 527 571 787 956 1042 1087 1246 MSCI World 1199 1201 1133 1119 1168 1149 1106 1127 1086 1045 964 970 893 805 751 839 920 893 957 1182 1345 1367 1402 1589 2009 YTD Indonesia China Indonesia Taiwan Gold Taiwan Russia Brazil Brazil Dow Jones Brazil Japan Indonesia U.S (Dow) Indonesia Gold Indonesia US (Dow) Indonesia UK Crude UK Russia US (Dow) Brazil US (Dow) Crude Dax Gold Mexico Crude South Africa Gold Russia Gold Russia Gold Russia Gold India Crude India Crude India Crude India Brazil Japan One Month Indonesia Honk Kong Turkey Gold Crude Turkey Turkey Brazil Turkey Gold Gold Japan Crude Korea Brazil Japan Turkey Hong Kong Indonesia Commodity Indonesia Russia India US (Nasdaq) Russia Gold Korea Gold Taiwan Korea Crude South Africa Indonesia Crude Gold Crude UK Indonesia Gold Russia Turkey Russia Turkey Russia Gold India India China Three Months Turkey Russia Turkey Taiwan Japan China Turkey Honk Kong Crude Korea Brazil Japan Russia Japan Russia Crude Turkey Russia India Gold India Gold Russia Gold Russia Gold Crude Dax Gold Mexico Gold Russia Gold Crude Gold Russia US (Dow) Russia US (Dow) Russia Crude India Crude India Crude India India Japan Six Months Indonesia Honk Kong Mexico Taiwan Russia Japan Russia Honk Kong Indonesia Japan Indonesia Japan Indonesia Japan Indonesia Crude Indonesia Gold Indonesia Gold Crude UK Indonesia US (Dow) Indonesia Crude Gold Crude Gold Russia Gold Russia Gold Russia Gold Russia Gold Russia Crude Russia Crude India Crude India Crude India India Japan One Year Indonesia Japan Indonesia Gold Indonesia Gold Indonesia Gold Brazil Dow Jones Indonesia Japan Indonesia US (Dow) Indonesia Commodity Gold Russia Gold Russia Turkey Russia Gold Russia Gold Russia Gold Russia Gold Russia Gold Russia Gold Russia Gold Russia Gold China Crude China Crude Europe Crude Europe Crude Europe Brazil Japan Three Years Gold Japan Gold Japan Gold Japan Gold Japan Gold Japan Gold Japan Gold Japan Brazil UK Brazil Russia China Russia China Russia Brazil Japan Gold Russia Gold Russia Gold Russia Gold Russia Gold Russia Gold Russia Gold Japan Gold Japan Brazil Europe Brazil Europe Brazil Europe Brazil US (S&P 500) Five Years Brazil Japan Brazil Japan Brazil Japan Brazil Japan Brazil S&P 500 Brazil Japan Brazil US (Nasdaq) Brazil US (Dow) Brazil US (S&P 500) Brazil US (Nasdaq) Brazil UK Brazil Japan Brazil Japan Brazil Taiwan Gold Taiwan Gold Taiwan Gold Taiwan Brazil Taiwan Brazil Taiwan Brazil Taiwan Brazil US (Dow) Brazil US (Dow) Brazil US (Dow) Brazil US (Dow) Analysis: A Preetha
The Wise Investor May 2010

Europe: MSCI Europe; Commodity: S&P GSCI Index; Rank based on returns in $ terms.Date Source: Bloomberg
Sundaram BNP Paribas Asset Management 28

Best & Worst Performers India
Month/Year/Category Apr-10 Mar-10 Feb-10 Jan-10 Dec-09 Nov/09 Oct/09 Sep/09 Aug/09 Jul/09 Jun/09 May/09 Apr/09 Mar/09 Feb/09 Jan/09 Dec/08 Nov/08 Oct/08 Sep/08 Aug/08 Jul/08 Jun/08 Dec'07 Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst Best Worst S&P S&P CNX Nifty CNX 500 5278 4368 5249 4922 4882 5201 5033 4712 5084 4662 4636 4291 4449 3474 3021 2764 2875 2959 2755 2886 3921 4360 4333 4041 6139 4313 4128 4156 4329 4145 3853 4119 3840 3764 3470 3580 2663 2295 2113 2209 2296 2093 2226 3059 3489 3457 3203 5355 2009 YTD Consumer Durables Realty Consumer Durables Realty Consumer Durables Realty Consumer Durables Realty Metals FMCG Metals FMCG Metals FMCG Auto FMCG Auto Healthcare Metals Healthcare Metals FMCG Auto Consumer Durables Auto Consumer Durables Auto Realty Auto Realty Oil & Gas Realty FMCG Realty FMCG Realty FMCG Realty FMCG Realty Healthcare Realty Healthcare Realty Healthcare Realty Power IT One Month Consumer Durables Oil & Gas Metals Public Sector Consumer Durables Realty Consumer Durables Realty Small-Cap FMCG Metals Reality FMCG Realty Banks FMCG Realty FMCG Auto Capital Goods IT Realty Realty FMCG Realty FMCG Metals FMCG Auto Realty Oil & Gas Realty Realty IT FMCG Realty IT Realty FMCG Realty Banks Small-Cap Public Sector IT Capital Goods Realty Consumer Durables Capital Goods Three Months Consumer Durables Public Sector Consumer Durables Realty Consumer Durables Realty Small-Cap Realty Metals Realty Metals Reality Healthcare Realty Small Cap FMCG IT Oil & Gas Realty Oil & Gas Realty FMCG Auto Consumer Durables Auto Consumer Durables Auto Realty Auto IT Power IT FMCG Metals FMCG Realty FMCG Realty Public Sector Metals Healthcare Realty Healthcare Realty Healthcare Realty Small-Cap IT Six Months Consumer Durables Realty Metals Realty Metals Realty Small-Cap Realty Auto Capital Goods IT Reality Metals Oil & Gas Realty FMCG Realty FMCG Metals FMCG Metals FMCG Power Consumer Durables Power Consumer Durables FMCG Realty FMCG Realty FMCG Realty FMCG Metals FMCG Realty FMCG Realty Healthcare Realty Healthcare Realty Healthcare Realty Healthcare Realty Metals IT One Year Consumer Durables Oil & Gas Metals FMCG Metals FMCG Metals FMCG Metals FMCG Metals FMCG Metals Oil & Gas Auto Oil & Gas Auto Capital Goods Auto Realty Public Sector Realty FMCG Realty FMCG Realty FMCG Realty FMCG Realty FMCG Realty FMCG Realty FMCG Realty FMCG Realty FMCG Realty Healthcare Realty Oil & Gas Realty Oil & Gas Realty Power IT Three Years Metals IT Metals IT Metals IT Metals IT Metals IT Metals IT Oil & Gas IT Oil & Gas IT Oil & Gas IT Oil & Gas IT Banks IT Oil & Gas Consumer Durables Oil & Gas Consumer Durables Oil & Gas Small-Cap Oil & Gas Consumer Durables Oil & Gas Small-Cap Oil & Gas Auto Oil & Gas Auto Oil & Gas Small-Cap Oil & Gas Small-Cap Oil & Gas Small-Cap Capital Goods Auto Capital Goods Auto Capital Goods Healthcare Five Years Capital Goods Healthcare Capital Goods IT Capital Goods Healthcare Capital Goods Healthcare Capital Goods Healthcare Capital Goods Healthcare Capital Goods Healthcare Capital Goods Healthcare Banks Healthcare Capital Goods Healthcare Capital Goods Healthcare Capital Goods Healthcare Capital Goods Healthcare Capital Goods Auto Capital Goods Metals Capital Goods Auto Capital Goods Metals Capital Goods Metals Capital Goods Metals Capital Goods Healthcare Capital Goods Healthcare Capital Goods FMCG Capital Goods FMCG Capital Goods IT Analysis: A Preetha
The Wise Investor May 2010

Rank based on returns in INR terms. Sector Information is based on BSE Indices; Data Source: Bloomberg; Analysis: Sundaram BNP Paribas Asset Management
Sundaram BNP Paribas Asset Management 29

Performance Tracker Global
Index S&P 500 Dow Jones Nasdaq Composite Nikkei 225 Dax FTSE 100 S&P GSCI Index Spot MSCI World MSCI Europe MSCI Asia ex-Japan Crude Gold Year-To-Date Return 6.4 5.6 8.5 4.8 3.0 2.6 4.8 2.6 2.1 2.9 11.4 7.5 One Month Three Months Six Months One Year Three Years Five Years Rank 23 21 18 25 15 20 14 22 24 12 10 4 Rank Return Rank Return 9 11 5 12 15 17 13 18 19 16 2 7 1.5 1.4 2.6 -0.3 -0.3 -2.2 3.7 -0.2 -1.4 1.9 5.8 5.9 12 13 8 18 17 24 6 16 23 10 3 2 10.5 9.3 14.6 8.4 9.4 7.0 13.1 7.1 5.2 9.6 22.0 9.1 Rank Return Rank Return Rank Return 10 14 4 17 13 21 7 20 24 12 2 15 14.5 13.3 20.3 10.2 13.3 10.1 10.7 8.4 9.3 10.1 15.6 12.8 9 10 4 17 11 18 16 21 20 19 8 12 36.0 34.8 43.3 25.3 28.6 30.9 50.3 34.2 29.0 48.3 75.1 32.8 16 18 14 25 24 22 12 19 23 13 4 21 -19.9 -15.7 -2.5 -36.5 -17.2 -13.9 15.9 -24.0 -33.1 5.0 28.4 73.8 Rank Return 21 19 12 25 20 17 8 22 24 10 4 1 2.6 8.0 28.1 -89.9 46.6 15.7 55.5 6.7 -0.7 72.1 74.3 171.5

Emerging Markets (MSCI Indices)

BRIC Brazil Russia India China Korea Taiwan Singapore Honk Kong Indonesia Mexico South Africa Turkey

0.4 -1.8 5.9 6.7 -2.2 8.6 -1.4 1.1 -0.7 16.6 7.6 4.7 9.5

21 24 10 8 25 4 23 20 22 1 6 14 3

-0.5 -1.3 -0.8 1.8 -0.6 5.6 2.5 3.0 -2.9 6.0 -0.1 0.6 3.9

19 22 21 11 20 4 9 7 25 1 15 14 5

8.5 10.3 3.4 12.7 7.1 14.1 5.5 7.6 6.1 14.3 14.7 10.6 28.4

16 11 25 8 19 6 23 18 22 5 3 9 1

7.2 7.5 11.9 19.6 0.7 18.5 11.2 11.7 -0.2 27.0 20.6 15.7 22.4

23 22 13 5 24 6 15 14 25 1 3 7 2

56.1 63.2 65.3 81.9 38.3 53.8 35.8 52.4 33.8 95.2 67.6 52.2 77.2

8 7 6 2 15 9 17 10 20 1 5 11 3

14.1 44.7 -28.6 18.5 20.5 -1.7 -3.3 -14.5 -3.1 55.4 -6.3 -3.4 19.9

9 3 23 7 5 11 14 18 13 2 16 15 6

155.1 244.2 65.8 179.3 153.6 73.4 17.7 40.5 32.8 213.0 114.0 78.6 116.0

5 1 13 3 6 11 19 16 17 2 8 9 7

Top Performer Worstt Performer

Indonesia China

Indonesia Honk Kong

Turkey Russia

Indonesia Honk Kong

Indonesia Nikkei 225

Gold Nikkei 225

Brazil Nikkei 225
Analysis: A Preetha

Source: Bloomberg; P/E: Price-to-Earnings ratio; P/B: Price-to-Book ratio; 12-M: 12 Months; Returns is in percentage and in U.S. Dollar terms for each period and not on an annualised basis. Sundaram BNP Paribas Asset Management 30

The Wise Investor May 2010

Performance Tracker India
Index Cap-Curve Indices BSE Sensitive Index (Sensex) S & P CNX Nifty Nifty Junior Nifty 100 CNX Mid-Cap BSE Mid-Cap BSE Small-Cap BSE 100 BSE 200 BSE 500 S & P CNX 500 0.5 1.5 6.7 2.3 8.5 7.0 10.2 1.6 2.3 2.9 0.9 18 16 6 12 4 5 3 14 13 11 17 0.2 0.6 2.9 0.9 4.6 5.6 8.4 0.8 1.4 1.8 1.3 20 18 7 15 6 4 2 16 13 10 14 7.3 8.1 11.0 8.6 11.9 10.4 11.8 7.7 8.0 8.2 5.1 16 12 7 10 5 9 6 14 13 11 19 10.5 12.0 21.0 13.4 22.5 19.5 30.4 12.6 13.6 14.7 13.4 17 16 8 13 5 10 2 15 12 11 14 54.0 51.9 109.8 59.4 108.8 104.5 133.6 61.6 66.5 70.1 64.0 19 20 5 17 6 7 3 16 13 12 14 26.6 29.1 47.2 31.8 53.7 24.0 31.6 33.4 33.9 32.6 29.3 19 185.3 18 177.4 6 175.4 15 — 8 11 12 — 10 18 17 9 13 14 16 Year-To-Date Return One Month Three Months Six Months One Year Three Years Five Years Rank Rank Return Rank Return Rank Return Rank Return Rank Return Rank Return

5 181.0 21 135.6 16 139.8 13 183.1 12 171.6 14 169.8 17 158.7

Sector Indices

BSE Auto BSE Banks BSE Capital Goods BSE Consumer Durables BSE FMCG BSE Healthcare BSE IT BSE Metal BSE Oil & Gas BSE Public Sector BSE Power BSE Realty

4.9 11.2 -0.6 22.7 3.1 6.5 3.3 1.5 -5.2 -4.4 -0.6 -9.5

8 2 20 1 10 7 9 15 22 21 19 23

1.7 4.7 -0.4 10.1 1.6 0.3 2.3 -1.7 -2.3 0.8 2.8 6.6

11 5 21 1 12 19 9 22 23 17 8 3

12.2 15.5 6.9 22.3 5.6 12.2 7.6 10.7 -0.2 -3.8 3.6 -0.3

3 2 17 1 18 4 15 8 21 23 20 22

23.7 19.5 9.0 38.7 2.4 22.1 21.1 26.7 5.2 8.5 8.8 -8.8

4 9 18 1 22 6 7 3 21 20 19 23

123.0 96.2 77.4 164.3 37.4 74.2 101.2 156.5 22.0 55.4 50.1 63.9

4 9 10 1 22 11 8 2 23 18 21 15

56.0 62.1 42.0 26.0 59.8 44.3 6.0 79.6 39.1 42.3 45.3 —

4 201.7 2 218.3 10 326.8 20 195.6 3 158.8 8 120.1 22 127.5 1 220.9 11 238.5 9 128.3 7 222.7 — —

6 5 1 7 15 21 20 4 2 19 3 —

Top Performer Worst Performer

Consumer Durables Consumer Durables Consumer Durables Consumer Durables Consumer Durables Realty Oil & Gas Public Sector Realty Oil & Gas

Metal IT

Capital Goods Healthcare

Source: Bloomberg; P/E: Price-to-Earnings ratio; P/B: Price-to-Book ratio; 12-M: 12 Months; Returns is in percentage for each period and not on an annualised basis. Sundaram BNP Paribas Asset Management 31

Analysis: A Preetha
The Wise Investor May 2010

Equity Chart Book
MSCI World
1600 1400 1200 1000 800
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

MSCI Emerging Markets
1600 1400 1200 1000 800 600 400
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Jan-09

600

Open 1422

High 1682

Low 689

Close 1199

Open 496

High 1338

Low 246

Close 1020

MSCI Brazil

MSCI Russia

1600

4300
1100

2300
600

Jan-00

Jan-01

Jan-02

Jan-05

Jan-07

Jan-08

Jan-03

Jan-04

Jan-06

Jan-09

Jan-10

Jan-00

Jan-02

Jan-04

Jan-05

Jan-07

Jan-08

Jan-01

Jan-03

Open 874

High 4728

Low 278

Close 3558

Open 223

High 1642

Low 139

Jan-06

Close 843

MSCI India
780 680 580 480 380 280 180
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

MSCI China
100

50

80

0
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Open 160

High 694

Low 701

Close 500

Open 34

High 104

Low 13

Close 63

The horizontal in each graph indicates the average level of the respective index since January 2000 Sundaram BNP Paribas Asset Management 32

Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management
The Wise Investor May 2010

Jan-10

300

100

Jan-10

200

%

4

6

8

10

12

14

% 9

USD Million

11

13

15

3
Dec/01 Jun/02 Dec/02 May/03 Nov/03 May/04 Nov/04 May/05 Nov/05 May/06 Nov/06 May/07 Nov/07 May/08 Oct/08 Apr/09 Oct/09 Apr/10

5
Jan/00 Jul/00 Dec/00 Jun/01 Dec/01 Jun/02 Dec/02 Jun/03 Dec/03 Jun/04 Dec/04 Jun/05 Dec/05 May/06 Nov/06 May/07 Nov/07 May/08 Nov/08 May/09 Nov/09

7

Open 8.05

130000

190000

250000

310000

370000

10000

70000

Open 11.23

Open 35.1 High 13.91 High 11.77

High 316.2

Sundaram BNP Paribas Asset Management

Low 4.99

Low 4.80

10-Year G-Sec Yield (%)

1-Year AAA Corporate Bond Yield (%)

India Forex Reserves ($ billion)

Low 34.7 Close 8.05 Close 8.01

Jan/00 Jul/00 Jan/01 Jul/01 Jan/02 Jul/02 Jan/03 Jul/03 Jan/04 Jul/04 Jan/05 Jul/05 Jan/06 Jul/06 Jan/07 Jul/07 Jan/08 Jul/08 Jan/09 Jul/09 Jan/10

Close 279.4

Fixed-Income Chart Book

33
bp

%6 4 8

0
Dec/01 Jun/02 Dec/02 May/03 Nov/03 May/04 Nov/04 May/05 Nov/05 May/06 Nov/06 May/07 Nov/07 May/08 Oct/08 Apr/09 Oct/09 Apr/10

2

365 325 285 245 bp 205 165 125 85 45 5

Open 126

Open 210

10

12

14

-2

100.0

190.0

280.0

370.0

10.0

Open 3.55 High 423

High 341

G Sec 1-10 Year Spread (basis points)

High 12.82

WPI Inflation (%)
Low -16

Low -64

Low -1.01 Close 70

5-Years G Sec AAA Bond Spread (basis points)

Jan/00 Jul/00 Jan/01 Jul/01 Jan/02 Jul/02 Jan/03 Jul/03 Jan/04 Jul/04 Jan/05 Jul/05 Jan/06 Jul/06 Jan/07 Jul/07 Jan/08 Jul/08 Jan/09 Jul/09 Jan/10

Jan/00 Jul/00 Dec/00 Jun/01 Dec/01 Jun/02 Dec/02 Jun/03 Dec/03 Jun/04 Dec/04 Jun/05 Dec/05 May/06 Nov/06 May/07 Nov/07 May/08 Nov/08 May/09 Nov/09

Close 290

Close 9.90

The Wise Investor May 2010

Source: Bloomberg

Commodities Chart Book
Crude Oil
170 150 130
$/bbl

Gold
1200 1000
$/oz

110 90 70 50 30 10

800 600 400 200
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Apr-09

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Open 23.9

High 145.7

Low 16.6

Close 86.9

Jan-10

Open 288.0

High 1215.7

Low 255.6

Close 1179.2

Baltic Freight Index
21700 18700 15700 12700 9700 6700 3700
Jan-03 Jan-04 Jan-05 Jan-00 Jan-01 Jan-02 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

LME Metals Index
5000 4500 4000 3500 3000 2500 2000 1500
Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-08 Apr-06 Apr-10 Apr-07

700

1000

Open 1782

High 19687

Low 830

Close 3936

Open 1254.2

High 4556.6

Low 958.3

Close 3512.5

S & P Goldman Sachs Commodity Index
1000 900 800 700 600 500 400 300 200 100

S&P Goldman Sachs Agflation Index
700 600 500 400 300 200

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Open 194.5

High 890.3

Low 162.0

Close 910.1

Open 162.8

Sundaram BNP Paribas Asset Management

34

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

100

High 499.2

Low 149.6

Close 310.1
Source: Bloomberg

The Wise Investor May 2010

Jan-10

Relative performance
MSCI World
140 120 100 80 60 40 20 0 MSCI World MSCI Emerging Markets
300 250 200 150 100
40.5

MSCI Emerging Markets
MSCI Emerging Markets MSCI World
247.1

50
May/00 Aug/00 Dec/00 May/01 Aug/01 Dec/01 May/02 Aug/02 Dec/02 May/03 Sep/03 Dec/03 Apr/04 Aug/04 Dec/04 May/05 Aug/05 Dec/05 May/06 Aug/06 Jan/07 May/07 Aug/07 Jan/08 May/08 Sep/08 Dec/08 May/09 Sep/09 Dec/09

Both indices re-based to 100 for January 2000 and expressed as MSCI World relative to MSCI Emerging Markets to reflect relative performance

May/00 Aug/00 Dec/00 May/01 Aug/01 Dec/01 May/02 Aug/02 Dec/02 May/03 Sep/03 Dec/03 Apr/04 Aug/04 Dec/04 May/05 Aug/05 Dec/05 May/06 Aug/06 Jan/07 May/07 Aug/07 Jan/08 May/08 Sep/08 Dec/08 May/09 Sep/09 Dec/09

0

Both indices re-based to 100 for January 2000 and expressed as MSCI Emerging Markets relative to MSCI World to reflect relative performance.

MSCI Brazil
250 200 150 100 50 0
May/00 Aug/00 Dec/00 May/01 Aug/01 Dec/01 May/02 Aug/02 Dec/02 May/03 Sep/03 Jan/04 May/04 Sep/04 Jan/05 May/05 Sep/05 Jan/06 May/06 Sep/06 Jan/07 May/07 Sep/07 Jan/08 May/08 Sep/08 Jan/09 May/09 Sep/09 Jan/10

MSCI Russia
191.9

MSCI Brazil MSCI Emerging Markets

400 350 300 250 200 150 100 50 0

MSCI Russia MSCI Emerging Markets
181.2

Both indices re-based to 100 for January 2000 and expressed as MSCI Brazil relative to MSCI Emerging Markets to reflect relative performance

Both indices re-based to 100 for January 2000 and expressed as MSCI Russia relative to MSCI Emerging Markets to reflect relative performance

MSCI India
190 170 150 130 110 90 70 50
Apr/00 Aug/00 Dec/00 Apr/01 Aug/01 Dec/01 Apr/02 Aug/02 Dec/02 Apr/03 Aug/03 Dec/03 Apr/04 Aug/04 Dec/04 Apr/05 Aug/05 Dec/05 Apr/06 Aug/06 Dec/06 Apr/07 Aug/07 Dec/07 Apr/08 Aug/08 Dec/08 Mar/09 Jul/09 Nov/09 Mar/10

MSCI India MSCI Emerging Markets

144.7

130 120 110 100 90 80 70 60 50

Both indices re-based to 100 for January 2000 and expressed as MSCI India relative to MSCI Emerging Markets to reflect relative performance
Sundaram BNP Paribas Asset Management 35

Both indices re-based to 100 for January 2000 and expressed as MSCI China relative to MSCI Emerging Markets to reflect relative performance Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management
The Wise Investor May 2010

Apr/00 Aug/00 Dec/00 Apr/01 Aug/01 Dec/01 Apr/02 Aug/02 Dec/02 Apr/03 Aug/03 Dec/03 Apr/04 Aug/04 Dec/04 Apr/05 Aug/05 Dec/05 Apr/06 Aug/06 Dec/06 Apr/07 Aug/07 Dec/07 Apr/08 Aug/08 Dec/08 Mar/09 Jul/09 Nov/09 Mar/10

Apr/00 Aug/00 Dec/00 Apr/01 Aug/01 Dec/01 Apr/02 Aug/02 Dec/02 Apr/03 Aug/03 Dec/03 Apr/04 Aug/04 Dec/04 Apr/05 Aug/05 Dec/05 Apr/06 Aug/06 Dec/06 Apr/07 Aug/07 Dec/07 Apr/08 Aug/08 Dec/08 Mar/09 Jul/09 Nov/09 Mar/10

MSCI China
MSCI China MSCI Emerging Markets

91.2

In a lighter vein
• Depression-proof dept: The Institute for Mortuary Research reports there were 417,611 US deaths in Q1, up 8%, over YoY; populous industrial regions are also spending more on funerals than last year. Recently, one car maker reported that its only profitable division last year was hearses and ambulances. • A well known restaurant chain is experimenting to see whether people order according to taste or price, particularly during depressions. After breakfast, every meal is 60 cents regardless of choice (meals include appetizer, main dish, and dessert). Statistics will be compiled to determine what people will order when price isn't a consideration. Incidentally, business at that restaurant increased 60% on the first day of the experiment. • Letter from an Oklahoman to his banker: "It is impossible for me to send you a check in response to your request. My present financial condition is due to the effects of federal laws, state laws, county laws, corporation laws, by-laws, brother-in-laws, mother-in-laws, and outlaws ... These laws compel me to pay a merchant's tax, capital stock tax, income tax, real estate tax, property tax, auto tax, gas tax, water tax, light tax, cigar tax, street tax, school tax, syntax, and carpet tax. The government has so governed my business that I do not know who owns it. I am suspected, expected, inspected, disrespected, examined, reexamined ... boycotted, ... held up, held down, and robbed until I am nearly ruined; so the only reason I am clinging to life is to see what the hell is coming next."
Source: http://newsfrom1930.blogspot.com/ - A daily summary based on reading of The Wall Street Journal from the corresponding day in 1930.

BackPage
1 Drachma used to be the currency of which country? 2 What is the maximum exposure a fund / fund house can have in the equity of a company? 3 Who is author of ECONned?

Investment Quiz
Compiled by S. Vaidya Nathan Design and layout by Spark Creations: +91 044 45510041

4 The secret recipe of Coca Cola has remained stashed for several decades in the safe vault of a bank. Name the bank? 5 Which has been the longest closed-end fund in India?
P R I Z E

Answers must be mailed to iq@sundarambnpparibas.in The first 25 responses with correct answers to all questions will receive a prize. Please mention your mailing address in your e-mail. Employees of Sundaram BNP Paribas Asset Management, its Sponsors and Associates & Group Companies of the Sponsors shall not be entitled to prizes even if they participate and mail correct answers.

Answers for April 2010 Quiz
1 Name the mutual fund scheme with the longest track record in India? Mastershare 2 In which year was the SEBI regulations for mutual funds put in place? 1996 3 Marc Faber publishes a renowned monthly report. What is it called? The Gloom, Boom & Doom Report 4 Name the first Sharia-compliant fund launched in India? Tata Select Equity 5 In which country would you be traveling if you were spending cash in real? Brazil

Disclaimer
Mutual fund investments are subject to market risks. Please read the Statement of Additional Information of Sundaram BNP Paribas Mutual Fund and Scheme Information Document of Sundaram BNP Paribas Mutual Fund carefully before taking an investment decision. Risk Factors: All mutual funds and securities investments are subject to market risks. There can be no assurance or guarantee that a scheme's objective will be achieved. NAV may rise or decline, depending on factors and forces affecting the securities market. There is risk of capital loss and uncertainty of dividend distribution. General Disclaimer: The Wise Investor, a monthly publication of Sundaram BNP Paribas Asset Management, is for information purposes only. The Wise Investor is not and should not be construed as a prospectus, scheme information document, offer document, offer solicitation for an investment and investment advice, to name a few. Information in this document has been obtained from sources that are reliable in the opinion of Sundaram BNP Paribas Asset Management. Opinions expressed by authors do not necessarily represent that of Sundaram BNP Paribas Mutual Fund or Sundaram BNP Paribas Asset Management or Sundaram BNP Paribas Trustee Company or the sponsors. Statutory: Mutual Fund Sundaram BNP Paribas Mutual Fund is a trust under the Indian Trusts Act, 1882 Sponsors (Collective liability is limited to Rs 1 lakh): Sundaram Finance Limited & BNP Paribas Asset Management. Investment Manager: Sundaram BNP Paribas Asset Management Company Limited. Trustee: Sundaram BNP Paribas Trustee Company Limited. Past performance of Sponsors/Asset Management Company/Fund does not indicate or guarantee future performance.
Published by Sunil Subramaniam on behalf of Sundaram BNP Paribas Asset Management Company Limited, from its office at Sundaram Towers, II Floor, 46, Whites Road, Chennai 600 014. Printed by R. Velayudhan at Paper Craft, No.25, C.P.Mudali Street, Pudupet, Chennai 600 002. Editor: Sunil Subramaniam.

Toll Free 1800 425 1000 SMS SFUND to 56767
Sundaram BNP Paribas Asset Management 36

www.sundarambnpparibas.in E-mail service@sundarambnpparibas.in
The Wise Investor May 2010

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