Whew! Stockmarkets fell 12% on an average in the last 5 days across the world. Developing Countries are locked step in step with the developed countries. This remarkable correlation suggests that the recessionary pressures are now turning global.
The fall in the Dollar against the Yen and the fall of other major currencies against the Dollar are studies in contrast. The fall of USD/JPY represents the unwinding of carry trade (at an accelerating pace if one sees the vertical fall in the currency pair) and shows that money is now getting out of global markets at an increasing pace - all that money that seems to have got into those markets in the first place, from Japan. The fall in other currencies (excl the Yen, that is) was on a simple economic rationale - the recession in US was expected for some time and the recession in Europe was a little less predicted. Eventhough the steps from UK and the Europe were comprehensive their currencies were hit by the flow of funds into the US which has been usual at such times in the past. Such flow of money seeks out US Treasuries.
A question that must be answered by those countries is - what must they do such that they could attract money, especially at such times. Look at the situation - the US economy is getting into a recession (it has caused it in the first place), yet, in such a situation the Dollar strengthens!! This is more than a dillema because the world keeps its reserves (mostly) in the Dollar. Now, as the US takes steps out of the recession, over the next few years, it does not have to worry about the cost of funding itself!
The intertwining of equitities, currencies and GDPs comes out very well in this latest episode of dominoes. Those countries that have run their economies on exports are hit by recessionary worries and falling exports hit their GDPs and of course their exchange rates. Those economies that ran current account deficits and funded those from foreign investments (into capacity creation) are anyway hit because their current accounts worsen in such situation unless imports contract. Because of capacity addition (and consequently) their imports are inelastic. Thus their currencies suffer too.
I would like to pause here to ask - is this why we are running scared here in India? Isn't the dependence on exports in India relatively small?. Don't we continue to keep our borders closed?. A few aspects must be noted here - One aspect is the growing dependence on the West in case of services (IT for example). The dependence on FIIs to keep the stock markets booming - in hundreds of stocks FIIs hold large chunks, whether individually or collectively and there sales are now driving prices to absurd levels. Promoters are dependent on FDI and PE. So many industries have thrived due to these investments. Another aspect is the wholesale dependence on FII inflows in order to build reserves. As the inflow turns into outflow we have a hit of about USD 30 billion on account of FIIs on the Reserves of the Country. The withdrawal of FDI and PE will be worth another USD 15 billion. No wonder the Rupee has fallen to 50 units against the Dollar and is likely to fall further. As FIIs suck out money and the RBI sells dollars to control the exchange rate the impact has been on the liquidity. The impact has been so grave that the large cuts in CRR and other measures taken by the RBI which are worth about Rs 150,000 crores have been completely offset by the Forex depletion and banks have said that PLR cuts are unlikely.
While GDP may fall to 7 pct or below this year and a little more next year, it is the above impacts that are confusing the minds of markets. Most stocks have reached the levels seen in the years 2002/2003 from where this bull market started - inspite of the fact that many of them are financially so much stronger and the Indian economy is still going to grow at 7 pct!
These are buying times if you believe what you read above - there is insufficient reasons for PEs to fall further or for prices to go further below book values. Market seems to be waiting for better levels to buy and the headlong crash of stocks is thus on lower volumes. Eventhough I may be wrong by some hundreds of points on BSE or some scores on the NIFTY, I would start buying now when there is so much blood on the streets.
Sunday, October 26, 2008
Sunday, October 19, 2008
Dow, and FTSE - bottom formation? BSE - breaking down?
An eventful week - Central Banks and Treasuries have been playing a major role in calming markets in G7. Finally, markets have begun to take wobbly steps to comfort. Capital has become king and billions are being committed to strengthen balance sheets. Banks have been forced into accepting the funds and with it will come oversight with a vengeance - politicians will be forced to have some control/review.
It wont last long for sure, since that is human nature - to refuse oversight and to demand freedom.
The reemergence of full blown business will of course take time - first step would be complete capitalisation which is inexorably linked to shareholding issues + control issues. Eventhough a full control that results from nationalisation is unlikely, oversight will be intrusive - so we have an area of conflict that will take some effort before comfort returns.
Second step would be to offer depositor (and borrower) protection more widely. A few countries have offered this and now more will be forced into this necessary trap.
Third step would be unshackle the funding and credit markets. No data has still come out to give comfot to banks so that funding can again freely flow. Central Banks will have to concentrate on this, now that the first two issues have been handled.
Lending to non-banks may unfortunately have to come later - since recession plus market disturbances are going to hit corporate profitability and credit rating.
Nevertheless, apparently a first level of support has emerged to support stock indices in G7 - the Dow and FTSE are marginally up this week. The picture for emerging economies is not that good - supports are being broken through. Which seems logical. The problem is essentially a G7 problem and of such intensity that a recession is now on the threshold. G7 countries have been most proactive too and have shown great resolve to come up with solutions. On the other hand emerging economies have felt that the waters of the tsunami would not wash onto their shores and have been blind. Now, it is clear that they will be forced to act. Korea is one shining example of the tsunami effect. The Pakistan Forex Reserves problem (which is similar to the Indian 1991 experience) suggests that some unlikely casualities are going to show up.
Meanwhile, the BSE has crashed through 10,000. However, Banking sector held up quite well. Since so many steps will come from RBI and finance ministry and since liquidity is king I am sure this sector will show good resilience for some time.
The time to accumulate on the Equity markets has begun as Warren Buffet has said. I am sanguine on this because - a)there is a coordinated approach to provide all forms of sops from all Countries b) certain markets and certain sectors have possiby been beaten unfairly and show good opportunities c) we are on the verge of entering into a low interest rate regime when funding gets cheaper and d)governments will now be forced to spend to keep away the demon of rising employment offering good demand conditions and high inflationary conditions that stock markets welcome.
It wont last long for sure, since that is human nature - to refuse oversight and to demand freedom.
The reemergence of full blown business will of course take time - first step would be complete capitalisation which is inexorably linked to shareholding issues + control issues. Eventhough a full control that results from nationalisation is unlikely, oversight will be intrusive - so we have an area of conflict that will take some effort before comfort returns.
Second step would be to offer depositor (and borrower) protection more widely. A few countries have offered this and now more will be forced into this necessary trap.
Third step would be unshackle the funding and credit markets. No data has still come out to give comfot to banks so that funding can again freely flow. Central Banks will have to concentrate on this, now that the first two issues have been handled.
Lending to non-banks may unfortunately have to come later - since recession plus market disturbances are going to hit corporate profitability and credit rating.
Nevertheless, apparently a first level of support has emerged to support stock indices in G7 - the Dow and FTSE are marginally up this week. The picture for emerging economies is not that good - supports are being broken through. Which seems logical. The problem is essentially a G7 problem and of such intensity that a recession is now on the threshold. G7 countries have been most proactive too and have shown great resolve to come up with solutions. On the other hand emerging economies have felt that the waters of the tsunami would not wash onto their shores and have been blind. Now, it is clear that they will be forced to act. Korea is one shining example of the tsunami effect. The Pakistan Forex Reserves problem (which is similar to the Indian 1991 experience) suggests that some unlikely casualities are going to show up.
Meanwhile, the BSE has crashed through 10,000. However, Banking sector held up quite well. Since so many steps will come from RBI and finance ministry and since liquidity is king I am sure this sector will show good resilience for some time.
The time to accumulate on the Equity markets has begun as Warren Buffet has said. I am sanguine on this because - a)there is a coordinated approach to provide all forms of sops from all Countries b) certain markets and certain sectors have possiby been beaten unfairly and show good opportunities c) we are on the verge of entering into a low interest rate regime when funding gets cheaper and d)governments will now be forced to spend to keep away the demon of rising employment offering good demand conditions and high inflationary conditions that stock markets welcome.
Saturday, October 11, 2008
The increasing sense of urgency - can markets survive?
During the week ending 12 October major Central Banks gave coordinated rate cuts of half percentage each. In the process, the ECB, FED had to give up their previous stances on the interest rate cuts.
The markets however, noted the significance of the move with derison - they promptly plunged deeper into fresh depths. Markets seemed confused as they were caught up in a global vicious cycle of competitive crash in equity indices, each index outdoing the other in the race to the bottom. Emerging Markets have crumpled too in this carnage. India was down 14%, Bovespa was down 20%, Thailand was down 23%. The markets in the West kept up quite well - Major indices were down atleast 20% this week.
The hand-in-hand march of indices during the last one month debunks most effectively the story put out by everyone during the last two years that the BRIC economies offered an alternative arena for investments and operated independently on their own strengths. The decoupled markets theory was developed in the last 5-6 years and sold to an "unsuspecting" west. During the carnage in the equity markets the developing countries have realised the "perils" of the globalisation and to their dismay found that markets were not decoupled - there was just a lag.
Of course, the decoupling is true definitely atleast on one account - the credit crisis that has hit the developed markets has not landed on the shores of emerging economies. Half of this is possibly due to laziness of policy makers rather than an intelligent choice of action. Equally, it is true that the caution of Central Banks has not allowed the spawning and blooming of new products and the current crisis in the emerging economies.
The impact on the emerging economies is thus on account of the risk of evaporation of export markets, the withdrawal of liquidity from their markets and the resultant impact on their GDPs. These factors are enough to bring the equity markets down. Along with that countries with insufficient balance of payments strength are hit by currency weakness and tight liquidity (and tight rates). Their Central Banks are attempting to protect the economies from these sudden impacts.
Globally, markets need to get out of the panic mode now. The G7 action is directed at that - whether collectively or individually. The UK model of capitalisation of banks as well as offering funding (along with guaranteeing market funding) is likely to be adopted in one form or other by most countries. The US is already following in that direction.
The huge growth in volume of OTC and Exchange Traded contracts amongst financial market participants covering various products was much celebrated all these years as it created employment and wealth. The large volumes is itself a result of the growth of trade, commerce, international funds flow, commodity hedging, and debt and equity funding during the last few decades. Over the years the participants have also changed - there are now a lot of retail clients and wealth management clients. Much of the activity is possibly rightly described as speculative or leveraged. Given this change, The impact of this correction on savings and GDP is possibly underestimated at this stage.
With the stock markets hitting multi-year lows and PEs dropping to single digits after the 50% fall in global indices in the last one year (and the 20% drop this week) rationality may return soon. The new week will face the market's concerns on the settlement of Lehman Contracts, the state of Morgan Stanley and the lack of fresh steps from the G7. It would be interesting to see if the market will take comfort from the increasing frequency of action from Regulators and Governments. The action is clearly directed at staving off a collapse. The measures to fight the recession will come later if markets survive.
The setting in of a recession in developed markets has been accepted more or less. But equity markets cannot give up 20% every week. This parabolic action is mostly likely signifying the bottom is now within sight.
Therefore, I would say - Hang on! We are almost there!
The markets however, noted the significance of the move with derison - they promptly plunged deeper into fresh depths. Markets seemed confused as they were caught up in a global vicious cycle of competitive crash in equity indices, each index outdoing the other in the race to the bottom. Emerging Markets have crumpled too in this carnage. India was down 14%, Bovespa was down 20%, Thailand was down 23%. The markets in the West kept up quite well - Major indices were down atleast 20% this week.
The hand-in-hand march of indices during the last one month debunks most effectively the story put out by everyone during the last two years that the BRIC economies offered an alternative arena for investments and operated independently on their own strengths. The decoupled markets theory was developed in the last 5-6 years and sold to an "unsuspecting" west. During the carnage in the equity markets the developing countries have realised the "perils" of the globalisation and to their dismay found that markets were not decoupled - there was just a lag.
Of course, the decoupling is true definitely atleast on one account - the credit crisis that has hit the developed markets has not landed on the shores of emerging economies. Half of this is possibly due to laziness of policy makers rather than an intelligent choice of action. Equally, it is true that the caution of Central Banks has not allowed the spawning and blooming of new products and the current crisis in the emerging economies.
The impact on the emerging economies is thus on account of the risk of evaporation of export markets, the withdrawal of liquidity from their markets and the resultant impact on their GDPs. These factors are enough to bring the equity markets down. Along with that countries with insufficient balance of payments strength are hit by currency weakness and tight liquidity (and tight rates). Their Central Banks are attempting to protect the economies from these sudden impacts.
Globally, markets need to get out of the panic mode now. The G7 action is directed at that - whether collectively or individually. The UK model of capitalisation of banks as well as offering funding (along with guaranteeing market funding) is likely to be adopted in one form or other by most countries. The US is already following in that direction.
The huge growth in volume of OTC and Exchange Traded contracts amongst financial market participants covering various products was much celebrated all these years as it created employment and wealth. The large volumes is itself a result of the growth of trade, commerce, international funds flow, commodity hedging, and debt and equity funding during the last few decades. Over the years the participants have also changed - there are now a lot of retail clients and wealth management clients. Much of the activity is possibly rightly described as speculative or leveraged. Given this change, The impact of this correction on savings and GDP is possibly underestimated at this stage.
With the stock markets hitting multi-year lows and PEs dropping to single digits after the 50% fall in global indices in the last one year (and the 20% drop this week) rationality may return soon. The new week will face the market's concerns on the settlement of Lehman Contracts, the state of Morgan Stanley and the lack of fresh steps from the G7. It would be interesting to see if the market will take comfort from the increasing frequency of action from Regulators and Governments. The action is clearly directed at staving off a collapse. The measures to fight the recession will come later if markets survive.
The setting in of a recession in developed markets has been accepted more or less. But equity markets cannot give up 20% every week. This parabolic action is mostly likely signifying the bottom is now within sight.
Therefore, I would say - Hang on! We are almost there!
Sunday, October 5, 2008
End of Bearish Road? - A short-term recovery in sight?
Over this weekend confusion has set in on the rescue package that was "finalised" last week regarding the troubled Hypo Real Estate Bank. Europe is now desperately trying to find a strong fix to the problems arising in its zone. In the US the TARP is likely to roll out in the next 7-10 days after its successful legislation.
The accomplishment of TARP passage represents a turnaround of the legislative opinion and a willingness to challenge public opinion. But, the true size of the problem is now becoming clear to all. Banks are panicking and have hoarded liquidity (whatever is with them) and have been borrowing/lending for overnight tenor at atrocious rates.
The steps taken by various Central Banks have not yet addressed the fear factor of banks. Already Central Banks and their Governments have forcefully merged weak entities with stronger entities, guaranteed liabilities of banks, worked on bail-out funds and considered capitalisation of banks. Serious thought is being directed at giving up the Mark-to-Market accounting.
Out of all, the last one is the most simple to achieve. That is being mistaken for effectiveness. In the current panic conditions, when markets have all but closed down, prices are not representative of the unwind values or cash value of assets. The volume available for a price is very low and hence such prices are not representative of the liquidation value of assets of any respectable size.
Enough reasons exist for giving up the MTM accounting, but this is turning logic on its head - wasn't MTM accounting introduced in the first place such that Lenders could make their lending decisions with full information to determine the liquidation value of a firm? If liquidation value is not available any longer then are lenders to assume atleast full liquidation value of assets? Everyone knows what is happening to asset values now. So, on what logic would MTM accounting be removed? Would all banks now carry a guarantee from Central Banks/Treasuries that they would repay borrowings on time?
It is unclear to me whether lenders would prefer to lend blindly to borrowers after the withdrawal of MTM accounting? Would this lead to freezing of the system or greasing of the system? And when the MTM accounting is reintroduced would banks show up stronger or weaker?
The desperation to withdraw MTM accounting represents the extent of the problem. Central Banks will now have to play an increasingly direct role to ensure that liquidity returns to the markets. A coordinated approach across continents is still lacking. It is quite clear that the approach would have to cover capitalisation (including a debt/equity swap), funding, lowering capital ratios, putting weaker banks under special liquidity oversight. It appears that the withdrawal of MTM accounting is one esential ingredient in the solution to improve capital of banks.
It is quite clear that a complex solution would have to emerge.
Meanwhile, evidence of recession is emerging across the US and Europe. Banks are hibernating and unless the markets restart and credit flows again, a deep rooted recession will set in across countries. Stock markets are collapsing and the Dollar is holding on as more countries begin to be hit. The strength of Dollar is the hope that the US will have a short recession (as compared to other countries and in keeping with the record of last few decades) whereas other countries will flounder and will take longer to get out of recession. Since the problem is inexorably linked to the US and hence the Dollar, funding of those losses would have to be in Dollars and hence the big demand for the currency has led to the destruction of the interest rate parity across so many curreny pairs.
Indian Markets -
The NIFTY has rested at 3818.30 on 3 October 2008 very close to the low of 3816.70 seen on 16 July 2008. The ongoing crisis of confidence is likely to bring the NIFTY to 3626.85 last seen on 7 March 2007. I think this is where support will potentially emerge for the short to medium term. However, since negative news for the Indian economy is starting to filter in only in the last few months, I would not be surprised if the Index falls towards the 2550-2600 zone. That zone may be reached over some months if a deep recession sets in. Invariably, to meet that target, it is necessary that demand destruction happens in India over the next 3-6 months coinciding with a furthering of the pain and correction overseas.
The Rupee is also now reaching a potential support zone. It may be noted that the level of 47.40-47.60 is a potential zone of reversal, never mind the worsening external account. At this stage RBI should be expected to use its reserves to protect the exchange rate of Rupee. It will also be necessary to introduce other steps to control the depreciation of the Rupee. How about opening of more sectors for FDI? or increase in the limits for FDI in the various sectors?.
Interest Rates have also reached a possible peak in India. Here, while the positives have been very well noted by all I wonder if possible risks have been noted too. What about risks such as withdrawal of liquidity via the FII route? Would RBI provide liquidity through a CRR cut or a SLR cut? I don't think so. What about potential for larger issuance of securities by the Central and State Governments to fund deficits in revenues (due to the weak economy)? Nevertheless rates have possibly very little upside left.
I wonder if a recovery is at hand? See you next week!
The accomplishment of TARP passage represents a turnaround of the legislative opinion and a willingness to challenge public opinion. But, the true size of the problem is now becoming clear to all. Banks are panicking and have hoarded liquidity (whatever is with them) and have been borrowing/lending for overnight tenor at atrocious rates.
The steps taken by various Central Banks have not yet addressed the fear factor of banks. Already Central Banks and their Governments have forcefully merged weak entities with stronger entities, guaranteed liabilities of banks, worked on bail-out funds and considered capitalisation of banks. Serious thought is being directed at giving up the Mark-to-Market accounting.
Out of all, the last one is the most simple to achieve. That is being mistaken for effectiveness. In the current panic conditions, when markets have all but closed down, prices are not representative of the unwind values or cash value of assets. The volume available for a price is very low and hence such prices are not representative of the liquidation value of assets of any respectable size.
Enough reasons exist for giving up the MTM accounting, but this is turning logic on its head - wasn't MTM accounting introduced in the first place such that Lenders could make their lending decisions with full information to determine the liquidation value of a firm? If liquidation value is not available any longer then are lenders to assume atleast full liquidation value of assets? Everyone knows what is happening to asset values now. So, on what logic would MTM accounting be removed? Would all banks now carry a guarantee from Central Banks/Treasuries that they would repay borrowings on time?
It is unclear to me whether lenders would prefer to lend blindly to borrowers after the withdrawal of MTM accounting? Would this lead to freezing of the system or greasing of the system? And when the MTM accounting is reintroduced would banks show up stronger or weaker?
The desperation to withdraw MTM accounting represents the extent of the problem. Central Banks will now have to play an increasingly direct role to ensure that liquidity returns to the markets. A coordinated approach across continents is still lacking. It is quite clear that the approach would have to cover capitalisation (including a debt/equity swap), funding, lowering capital ratios, putting weaker banks under special liquidity oversight. It appears that the withdrawal of MTM accounting is one esential ingredient in the solution to improve capital of banks.
It is quite clear that a complex solution would have to emerge.
Meanwhile, evidence of recession is emerging across the US and Europe. Banks are hibernating and unless the markets restart and credit flows again, a deep rooted recession will set in across countries. Stock markets are collapsing and the Dollar is holding on as more countries begin to be hit. The strength of Dollar is the hope that the US will have a short recession (as compared to other countries and in keeping with the record of last few decades) whereas other countries will flounder and will take longer to get out of recession. Since the problem is inexorably linked to the US and hence the Dollar, funding of those losses would have to be in Dollars and hence the big demand for the currency has led to the destruction of the interest rate parity across so many curreny pairs.
Indian Markets -
The NIFTY has rested at 3818.30 on 3 October 2008 very close to the low of 3816.70 seen on 16 July 2008. The ongoing crisis of confidence is likely to bring the NIFTY to 3626.85 last seen on 7 March 2007. I think this is where support will potentially emerge for the short to medium term. However, since negative news for the Indian economy is starting to filter in only in the last few months, I would not be surprised if the Index falls towards the 2550-2600 zone. That zone may be reached over some months if a deep recession sets in. Invariably, to meet that target, it is necessary that demand destruction happens in India over the next 3-6 months coinciding with a furthering of the pain and correction overseas.
The Rupee is also now reaching a potential support zone. It may be noted that the level of 47.40-47.60 is a potential zone of reversal, never mind the worsening external account. At this stage RBI should be expected to use its reserves to protect the exchange rate of Rupee. It will also be necessary to introduce other steps to control the depreciation of the Rupee. How about opening of more sectors for FDI? or increase in the limits for FDI in the various sectors?.
Interest Rates have also reached a possible peak in India. Here, while the positives have been very well noted by all I wonder if possible risks have been noted too. What about risks such as withdrawal of liquidity via the FII route? Would RBI provide liquidity through a CRR cut or a SLR cut? I don't think so. What about potential for larger issuance of securities by the Central and State Governments to fund deficits in revenues (due to the weak economy)? Nevertheless rates have possibly very little upside left.
I wonder if a recovery is at hand? See you next week!
Subscribe to:
Posts (Atom)
