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Markets Edition

EXCHANGE RATE USD (Rs / $) EURO (Rs / ) POUND (Rs / ) U.S. TREASURY 3-MONTH 12-MONTH 10-YEAR 30-YEAR VALUE 45.72 62.21 73.38 YIELD 0.12 0.16 3.7 4.75 Y TO Y (%) -2% -2% 1% Y TO Y (%) 9% -11% -1% 1% COMMODITY CRUDE OIL (BRENT) GOLD ($ per t oz) SILVER ($ per t oz) INDEX S&P 500 (Thursday) FTSE 100 (Thursday) NIKKEI 225 (Thursday) BSE SENSEX VALUE 101.34 1364.13 29.8 VALUE 1321.87 6020.00 10605.65 17463.04 YEARLY % CHANGE CHANGE 28.99 267.7 14.43 40% 24% 94%

YEARLY % CHANGE CHANGE 243.4 858.50 641.66 1310.45 18% 14% 6% 8%

Arab Democratic resurgence implications for India - Anandh Sundar With $3BN trade flows and $2BN FDI in 2009-10, Indo-Egypt trade is quite strong. Lured by the stability of Egypt (Western ally at peace with Israel), 300+ Indian companies established a presence in Egypt, many of them making it their MENA (Middle East North Africa) hub. In the wake of the jasmine revolution (sparked off by the Tunisian dictator being forced into exile, Kuwait/Jordan compelled to placate their citizens through subsidies), these companies may rue their decisions at least in the short run. Will the Egyptian Dictator Hosni Mubaraks imminent step down ensure paradigm shifts, or will there be only cosmetic changes? Will chaos persist or die down? The answer to this question will impact many Indian companies: Companies with regional offices in Egypt: Tata Motors, Aptech, Iflex, Essar Global Companies with manufacturing operations: Dabur (3% of revenues), Marico (8% of revenues), Essel Propack Other companies with 100% subsidiaries: Wipro, Ranbaxy, IFFCO, M&M, Tatas etc. Companies sourcing raw materials(oil and gas): GAIL

The regime change will not impact the long term geographical advantage of Egypt as a MENA hub for Indian companies but the rejuvenation of radical Islamic organizations like the Muslim Brotherhood opens a Pandoras Box of uncertainties. If this could happen to Egypt (a Western ally and that too at peace with Israel), what will happen in other African/Arab nations reeling under despots? The mere fear of other countries like Kuwait, Yemen and Saudi Arabia following suit, pushed Brent crude prices to $100+ a barrel. If this continues, India could see a negative impact on its growth. Indian Stock Market: Outlook - Kapil Singh Dhaka Recent performance: Amid fears of a restrictive monetary policy to curb the rising food inflation, the Indian stock indices have plummeted by around 15% in the year 2011. As of Thursday, 10th Feb. Sensex, which has dropped by more than 3000 point in 2011, was trading around 17500. The primary explanations given for the 15% drop are as follows:

Fear of a tightening monetary policy to curb food inflation: Currently the overall inflation is around 10% while the food inflation is around 15%. Market fears that as a spillover effect of high food inflation, the overall inflation would increase even more. This will hurt the bottom-line of companies. Lack of support from FIIs: After a record inflow of $28 billion during 2010, the FIIs have started selling due to concerns over high inflation and scams in the real estate industry. The strong performance of developed countries markets (Dow Jones has gone up by around 20% in the last 4 months) during the last 3 months has also induced many FIIs to move their money back to their home markets.

Near to medium term Equity market expectation: As the Indian equity market has had a good correction of around 15% during the last the last one and a half months, right now the Index multiples ( P/E, Market value/ Book value etc ) are looking quite attractive. It is also believed that other factors such as scams, tighter monetary policy, and inflation expectations have already been discounted by the market players. After a steady rally of around 20% during the last 4-5 months, US market is also believed to be peaked in the short term. Hence we can expect a moderate inflow of FIIs in the near future. Also the overall GDP growth rate is projected to grow in 8-9% range during 2011. Hence, looking at a time horizon of one year, market should perform well. Monsoon expectation would be an important consideration for the medium term market movement. Monetary policy expectation: The RBI recently increased the base rate by 25 basis points. And in calendar year 2011, a cumulative 100 basis point increment is being expected. On Gold and Black Gold Abhimanyu Talwar Gold: Gold prices rose 29% in 2010 on the back of the following key reasons: 1. Concerns on sovereign health lead investors to hedge risks through buying gold. 2. Inflation caused by (a) signs of economic recovery, and (b) ample liquidity due to quantitative easing (QE) by central banks, led investors to buy gold. These forces are expected to maintain uncertainty in gold prices in the near future. Loose monetary policy in some developed countries, and inflation in countries like India which have recovered swiftly, might see investors using gold as an inflation-hedge. During Q3 2010, jewellery demand accounted for 57% of the total demand. Given that India and China, which together accounted for 45% of the jewellery demand in 2009, are set for high growth in 2011, one expects the jewellery demand component of gold demand to rise significantly. Together, growing investment and jewellery translate into a sustained demand for gold in 2011. - (References: Oil: The uncertainty in oil prices has been reflected in the elevated levels of the oil-VIX (volatility index). A high VIX means that oil option premiums would be higher. This uncertainty is due to two main reasons: 1. Political: Instability in the Middle East could disrupt oil shipments through the Suez Canal. This instability has been attributed for the recent rise in oil prices from around $85/barrel before the protests to around $92 a week ago. 2. Economic: A recent U.S. Dept. of Energy report noted that last week, the total U.S. crude inventories crossed the upper limit for the average range at this time of the year. This indicates a subdued demand for oil and will have a downward effect on oil. The issues discussed above will be a cause for uncertainty in the short-term. In the long-term, however, an eventual economic recovery will push the oil demand up. This, coupled with rising inflation (remember that oil is a hedge against inflation) due to the ample liquidity floating around because of QE operations may push the oil prices upward. - (References: Beggar thy neighbour: Currency wars - Aseem Gupta Prospects of competitive devaluation loom large as all countries battle with recession and fight their way out through monetary easing and export promotion. However, by nature of exchange rates, all countries cant devalue and some

currencies have to subsequently rise, leading to a zero sum game. To gauge the extent of crisis, Brazils finance minister himself said that an international currency war had broken out. The dispute finds root in wests contention of China (and other export-centric countries) maintaining an undervalued currency to create huge trade surplus with US. Recently, US responded with pressure on China through legislations approving high tariff on Chinese imports. Another issue is loose monetary policy followed by developed countries to prop up their economies, effectively buying up government bonds. Dollar dropped against Euro and other currencies with expectations of QE2, only to be later matched by Euro as concerns around sovereign default in peripheral Europe resurfaced. As a result, countries like Switzerland through 2009 and Japan in September 2010 have been forced to intervene in currency markets. An impact of quantitative easing has been flood of capital flows into emerging economies, which have intervened through either capital controls e.g. Brazil imposing tax on inflows, or buying foreign currency like China. A net result of these policy tussles has been high volatility in FX markets. As central banks dived into markets to and governments fiscal worries piled on, markets scrambled to predict the movements in exchange rates. The structural reason for the currency dispute remains global imbalances in trade. This issue can be addressed in long term only as the emerging economies start to spend more and developed countries save and get their house in order - (Source: Who picked my pocket: Global Inflation - Aseem Gupta Surge in price of onions in India has brought tears to many-an-eyes in India. Although this price rise was mostly caused by supply disruption, inflation across many commodities has been observed worldwide, as some signs of recovery from recession surface. Oil prices have crossed the $100 per barrel mark, though partly aided by unrest in Egypt. Copper prices have spiked at an all time high. Food prices increase across globe raise concerns of unrest across many developing economies. Inflation worries have shot up price of gold, which traditionally serves as an inflation hedge. This sharp rise in prices has risk of pushing world economy back into a downturn. The input costs for industries have risen and may hurt their business prospects. Persistent inflation raises risk of interest rates hike, thereby increasing cost of capital for firms. The loose monetary policy being followed in developed countries have flooded market with liquidity accompanied by a suppressed yield curves for these economies. This has the result of surge in speculative investment in commodities shooting up their prices. Strong performance in emerging economies has sustained the demand for these commodities while supply for some, like oil, may be approaching a plateau. Efforts to counter inflation have varied across countries. Developed countries, which still face a slight risk of deflation, have been reluctant to step in too early. On the other hand, potentially overheated emerging economies, which battle with potential asset bubbles and huge capital inflows, have been raising interest rates and trying other mechanisms for absorbing liquidity from market. For these economies, keeping inflation in control will be crucial to maintain competitiveness and avoiding any bubbles that may harm long term productivity. The Chinese Economy - Tanmay Sachan

Year 2010
Chinese economy grew 10.3% in 2010, the fastest since the global financial crisis. Its CPI rose 3.3% (exceeding the 3% govt. target) as food prices reached new highs. The economy surpassed Japan's as the world's second largest (first being US.) With rising inflation, Chinese investors started investing heavily in gold resulting in a net import of 209 tonnes putting it on track to become the worlds largest importer of gold.

China tried to slow down its rapidly growing economy and stem a flood of liquidity so as to curb inflation. Property prices were rising at a fast rate. To curb lending, the Central Bank raised interest rates twice since October along with increasing the banks required reserves. The Economic Stimulus Plan in 2009 focused on increasing affordable housing, easing credit restrictions for mortgage and SMEs, lower taxes, more public investment into infra development (such as rail, roads and ports), and started showing intended results by 2010 end. The outside observers now believe that China is well poised to move from export dependency to an internal market development. The wages are rapidly rising in almost all sectors and the Chinese leaders have called for increased living standards. The government also decided (upon pressure from the US and other Western economies) to "proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility", which will allow the Renminbi, to appreciate against the dollar.

Year 2011
China ended 2010 with a $6.1 trillion GDP regular exchange economy or $7.5 trillion if we include the underground economy as well. With the new policy changes, it is expected to have an 8-10% growth in GDP, 4-5% inflation and 4-10% currency appreciation. The government has vowed to continue reforms and emphasized the need to increase domestic consumption to make the economy less dependent on exports for future GDP growth. Two economic problems that China will face are inflation and local government debt which swelled as a result of stimulus policies, and is largely off-the-books and potentially low-quality. A stronger-than-expected headline inflation rise may trigger selling in the Chinese stock market on fears of more tightening. But a strong reading could also encourage residents to shift more money from their bank accounts to assets like property and precious metals as a way to manage negative real interest rates. The PIGS Story Manpreet Singh Greece: Suffering from high fiscal deficits, troubles of Greece were aggravated by downgrading of its rating to junk status. Due to increasing risks, debtors demanded increased premium leading to worsening of the situation. In May 2010, Eurozone and IMF agreed to provide a bailout package of 110 billion. Currently the country is facing stringent austerity measures devised by Eurozone and IMF. Greece is struggling from strikes and unrest in the public. Ireland: Ireland, unlike Greece, didnt have any structural issues. It was struck mainly by costs of rescuing banks. It initially opposed taking bailout packages fearing the austerity measures it would be forced to take, but had to relent to the pressure of IMF and Eurozone and accept a bailout package to the tune of 100 billion. The austerity measures were again opposed by the public, more so because the bailout package was in some sense forced on Ireland. Portugal: Portugal, struggling with heavy debt, is an economy similar to Greece and Ireland in terms of size (around 2% of Eurozone). After the bailout of Greece and Ireland, Portugal was the next in line. Eurozone was planning to offer a third bailout package of around 60 billion. However, the concerns are alleviated by fact that Portugal was able to sell more than 1.2 billion of long term debt in January 2011. Spain: Spain is the first big economy of Eurozone in trouble and bailout for Spain will bring the whole existence of Eurozone in question. Spain is hit mainly by the bursting of real estate bubble. However, sentiments have improved after the improvement of conditions in Portugal.

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