Get Ready for a Little Emerging Markets Inflation

Friday, March 12th, 2010

Today I was thinking about tightening cycles in emerging markets, and more specifically about those in China. Because let’s face it, China matters. China matters to the rest of Asia via competition for export income. China matters to Europe via competition for jobs. China matters to Brazil via domestic production via imports. China matters.

The inflation pressures are building in key emerging economies, especially in the BIICs (Brazil, India, Indonesia, and China) - see this previous post regarding my new acronym, and this article at the Curious Capitalist (curiously posted just shortly after my post), which leaves my omitted “R” but relays the intuition behind the second “I”.

Although the inflation is not prevalent in any BIIC except India, really, I wanted to comment about why it will build…quickly.

First round, the construction of consumer prices is heavily weighted towards food and energy costs across the BIICs. Indonesia, India and China are highly susceptible to food price shocks (either driven by shortages or demand growth). Expect this as a first-round driver of inflation as the global economy recovers further. It’s already  happening.

Second round, the BIICs are growing quickly and nearing, or are already at, potential. Annual industrial production growth has recovered or surpassed its pre-crisis rate in China, Brazil and India - 19%, 16% and 17%, respectively. This is expected, given the drop-off in world trade (an illustration can be found from this May 2009 post), but unsustainable as the output gap closes.

Third round, interest rate differentials. This year, the BIICs’ central banks are expected to raise policy rates. In fact, Brazil, China and India have already boosted reserve requirements. But with US rates expected to stay low for an “extended period”, international interest rate differentials will change and monetary flows will shift. Capital inflows can lead to inflation if not properly sterilised.

To date, inflows have not been properly sterilised, as evidenced by the ongoing accumulation of reserves and rising money-supply growth (again, I refer you to my previous post on M1 growth rates.

The chart above illustrates the one-year-ahead nominal interest rate differential between the two-year forward government rate for each respective BIIC country versus the two-year forward US Treasury rate. The forward differentials for China and India are on a steady upward trajectory, while those for Brazil and Indonesia are simply steady. I believe this appropriately represents the sterilisation efforts and monetary policy management on the part of the BIICs’ central banks: more managed in Brazil and Indonesia, not as much in China and India.

So where does this analysis leave us? With a very interesting policy mix in the emerging-market space. In fact, in my view this is the riskiest part of the emerging-market cycle: the recovery. If policymakers get this wrong, we could see a lot of price action, final goods and assets alike, on the horizon.

Source: Rebecca Wilder, News N Economics, March 11, 2010.

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

Tags: Acronym, Biic, BRIC, Capital Inflows, Central Banks, China, Curious Capitalist, Emerging Economies, Emerging Markets, Energy Costs, Export Income, Food Price, Gap, Global Economy, Illustration, India, India Indonesia, Indonesia, Inflation Pressures, Interest Rate Differentials, International Interest, Intuition, Jobs Brazil, Monetary Flows, Output Gap
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Mark Mobius: Q&A on Emerging Markets

Thursday, March 11th, 2010

A recent Q&A with Mark Mobius, Templeton Asset Management’s emerging markets guru, follows below, courtesy of the company’s Market Views newsletter.

What are the pros and cons of investing directly in emerging market equities and bonds as opposed to companies based in developed markets with emerging markets operations?

By directly investing in emerging market equities you obtain full exposure to emerging markets while with investing in developed market companies with emerging market operations, you don’t get that full exposure and you also get slow moving markets with lower growth potential mixed in. One advantage of some developed market companies is that they could have a global coverage thus giving the investor a more diversified coverage. Of course, there are also some emerging market companies that have that kind of coverage as well.

How probable is further tightening of monetary policy in China within the near future - and what would that step look like?

It is highly probable that there will be tightening of monetary policy in specific areas and not as a general policy. The Chinese have made it clear that they want to ensure that economic growth continues at a high pace and that means that they would want to keep liquidity and money supply at a high level with the proviso that if inflation increases then they would restrict lending and money supply to some degree. They will try their best to avoid taking any measures which would jeopardize the country’s growth and therefore any tightening will be specific and targeted to inflation in certain areas.

What is your outlook for Africa?

We believe that the outlook for Africa is very good for three main reasons: (1) abundant natural resources, (2) a young population, and (3) heightened interest from rich emerging market countries. Africa has some of the world’s greatest deposits of natural resources, and only a fraction of those resources have been tapped. In addition, it has a young and growing population who could improve their education and skills to become a major asset to expanded manufacturing and mining enterprises. These factors have stimulated the interest of countries like China and India, who require more natural resources for their growing economies, as well as countries like Russia and Brazil, who look to expand their enterprises into global operations. Countries around the world are showing growing interest in manufacturing within Africa for the African market, particularly emerging countries that have the capabilities to operate in challenging political and economic environments.

Africa is an interesting region. In South Africa, efforts by local companies to expand their international market share, as well as the presence of capable management teams, can assure investors of finding bargains here. Higher global demand for commodities, a recovery in domestic demand and the preparations for and hosting of the 2010 World Cup should further support economic growth this year.

In addition to South Africa, we have been taking a look at the lesser-known frontier markets in Africa, some of which are very large countries, such as Nigeria. Regional markets such as Egypt and Kenya are also beginning to look attractive, and we are seeing the growth of new markets in this region. Libya, for example, already has a stock market and is encouraging the privatization of state-owned enterprises - a development being repeated in a number of African countries.

Some commentators are saying that frontier markets represent some of the best contrarian investments at the moment - do you agree with this and why?

Yes, that is certainly the case. For example, many people would never invest in Nigeria or even might not even visit the country for fear of confronting violence but actually there are excellent investment opportunities. So there are opportunities simply because those opportunities are not attractive to other investors since they are not familiar with the possibilities.

Qatar, Kazakhstan and Nigeria are among those countries being cited as ones to watch this year - why do you think this is?

Those are some countries that are citied as being watched but we should add a number of others such as Vietnam, Romania and a number of others. Qatar, Kazakhstan and Nigeria are all being watched because of their natural resources: Qatar - gas, Kazakhstan - oil, and Nigeria - oil.

Are there any particular sectors within frontier markets that you think will perform better than others?

We employ a bottom-up, value oriented, long-term approach. As we look for investments, we focus on specific companies rather than sectors or regions. However, during our analysis, we also consider the company’s position in its sector, the economic framework and the political environment.

Our focus continues to be on two key themes: consumers and commodities. With rising per capita income and strong demand for consumer goods, the earnings growth outlook for these stocks is positive. Commodity stocks also look good because we believe commodity prices will trend upwards, partly because of weakness in the U.S. dollar, and also because we expect the global demand for commodities to outgrow supply over the long term.

Source: Mark Mobius, Franklin Templeton Investments - Emerging Markets Overview, March 10, 2010.

Tags: Abundant Natural Resources, Bonds, Diversified Coverage, Economic Growth, Emerging Market Companies, Emerging Market Countries, Emerging Markets, Full Exposure, Global Coverage, Guru, inflation, liquidity, Mark Mobius, Market Operations, Monetary Policy, Money Supply, Pros And Cons, Proviso, S Market, Templeton Asset Management
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Confessions of a Bull.

Tuesday, March 9th, 2010

This article is a guest contribution from John Thomas, madhedgefundtrader.biz, via ZeroHedge.com

Confessions of a Bull. Barton Biggs, founder of mega hedge fund Traxis Partners, spent an hour outlining his current investment strategy with me. Barton is a man of strong opinions, backed with intensive research, which he communicates with his characteristic gravel voice. I spent the better part of the eighties debating every pebble of the investment landscape with Barton. As I recall, “what to do about Japan?” was the topic of the day, and I was bullish.

Today, Barton can say with “real certainty” that large cap multinational equities are the cheapest they have been in 30 years using sophisticated models that analyze price/sales, price/free cash flow, price/earnings, and a whole host of other metrics. Looking just at price/book ratios, these stocks have been this cheap only three times in the last 120 years.

Big cap technology stocks, like Microsoft (MSFT), Intel (INTC), Cisco (CSCO), and Oracle (ORCL) are at the top of his list. Other multinationals with plenty of emerging market exposure are attractive, such as Caterpillar (CAT). The easy way in here is to simply buy the S&P 100 ETF (OEF). The market is now at a 15-16 multiple, discounting S&P 500 earnings for 2010 at $75/share. A stronger than expected economy will take that figure as high as $90/share, which the market is not expecting at all.

Microsoft Corpora - MSFT	29.27		+0.09
Intel Corporation - INTC	21.27		+0.02
Cisco Systems, In - CSCO	25.88		-0.09
Oracle Corporatio - ORCL	25.05		-0.09
Caterpillar, Inc. - CAT	60.36		+1.46
iShares S&P 100 - OEF	52.84		+0.00

The grizzled old Wall Street Veteran sees the US as half way through an economic recovery, and the main benchmark indexes could surprise to the upside, as they have such heavy big cap weightings. He would avoid domestic companies, such as those in real estate, as the environment for stocks generally is poor. He foresees a “new normal” of a lot of volatility in stocks for the next 4-5 years. Longer term he sees US GDP growth downshifting from the heady 3.8% annual growth rate of the last decade to only 2.5 % in this one. But big cap multinationals should be able to bring in a reliable 5%-6% annual return on top of inflation.

Looking at the world as a whole, Barton thinks Asia is the place to be. A mammoth bubble may be developing in China (FXI), but it is at least 3-5 years off, and there will be plenty of money to be made until then. India (PIN) is another big pick because it is ten years behind China, and has yet to experience its big growth spurt. South Korea (EWY), Thailand (THD), Taiwan (EWT), H-shares in Hong Kong (EWH), and Turkey (TUR) are also lining up in Barton’s sites. Looking at a 1%-1.5% growth rate, things look grim for Europe, with the possible exceptions of Poland (PLND) and Russia (RSX). Traxis is short Brazil (EWZ), because it has already had a great run, and because the country still faces some severe social problems.

IShares Trust ISh - FXI	41.24		-0.11
BMO CHINA EQUITY - ZCH.TO	14.66		+0.03
ISHARES CHINA IND - XCH.TO	20.31		-0.16
TAO.TO - TAO.TO	0.00		+0.00
PowerShares Excha - PIN	21.85		-0.14
ISHARES S&P CNX N - XID.TO	20.26		-0.18
BMO INDIA EQUITY - ZID.TO	14.05		+0.00
iShares Trust (Ba - EWY	48.68		-0.27
iShares Trust iSh - THD	43.92		+0.47
iShares Trust (Ba - EWT	12.41		-0.03
iShares Trust (Ba - EWH	16.06		-0.07
iShares Trust iSh - TUR	52.34		-0.36
Market Vectors Po - PLND	25.17		+0.33
Market Vectors Ru - RSX	33.33		+0.14
iShares Trust (Ba - EWZ	73.23		-0.62

Commodities had their run last year, and won’t do much from here, but they aren’t going to crash either. He sees oil (USO) grinding up because the cost of new sources is becoming astronomically high. Barton avoids gold because it has no yield or PE, and would rather not be associated with the crazies that inhabit that space. Bonds (TBF) will be deflation driven for the next year, but are definitely not for your “Rip Van Winkle” investor, as they represent poor value for money. Real estate is dead money. To hear my interview with Barton at length on Hedge Fund Radio, please click at http://www.madhedgefundtrader.biz/Barton_Biggs.html

For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily.

Source: Zerohedge.com, March 9, 2010.

Tags: Barton Biggs, Cap Technology, Caterpillar Cat, China, Cisco Csco, Commodities, Downshifting, Emerging Markets, ETF, Free Cash Flow, GDP Growth, Gravel Voice, India, Intc, Intensive Research, Investment Landscape, Last Decade, Market Exposure, Msft, oil, Oracle Orcl, Price Earnings, Sophisticated Models, Street Veteran, Technology Stocks, Traxis Partners
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Chris Wood: The U.S. Will be the Endgame

Monday, March 8th, 2010

In this video interview, Chris Wood, CLSA’s Asia strategist and author of the top “Greed & Fear” newsletter, shares his views on global markets with CNBC.

Click here or the image of the report to read Wood’s full report that precedes his appearance on CNBC below.

Wood said: “My view is that there is an inevitable endgame as a result of all this massive spending of taxpayer money in the West and Japan to bail out bankrupt banking systems, so in my view unfortunately the end game will be systemic government debt crisis in the western world.

“It will probably happen in Europe and will climax in the US, and I am expecting on a five year view the collapse of the US Dollar paper standard … The key reason why that is the endgame is that this credit crisis we saw in the west in 2008 and 2009 has simply been deferred, because 95% of the so-called government policy solutions to deal with this crisis have simply been to extend government guarantees.

“So the problem has been transferred from the private sector to the public sector. It is just a matter of time before investors revolt against these sovereign guarantees … The crisis is going to happen first in Europe. The US will be the endgame.” (Hat tip for transcript: Zero Hedge.)

Source: CNBC, March 1, 2010.

Tags: Banking Systems, Clsa, Cnbc, Collapse, Credit Crisis, Debt Crisis, Emerging Markets, End Game, Endgame, Global Markets, Government Debt, Government Guarantees, Government Policy, Greed, Hat Tip, Matter Of Time, Policy Solutions, Revolt, Strategist, Taxpayer Money, Video Interview
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China PMI - canary in a coal mine?

Tuesday, March 2nd, 2010

China’s PMI numbers for February were released yesterday and received surprisingly little media attention. Although I am usually not keen to slice and dice single-month statistics too intensely, the latest suite of manufacturing indices does seem to warrant more than cursory attention.

Firstly, a summary of the numbers as provided by the China Federation of Logistics & Purchasing (CFLP) and reported by the Li & Fung Group.

PMI Report on China Manufacturing: February 2010

The rate of expansion of China’s manufacturing sector that accounts for more than 50% of the economy has moderated sharply, with the overall PMI falling to 52. Just on its own (excluding the non-manufacturing sector) it seems as if China’s year-on-year economic growth in the second quarter could slow to 10% and even less.

The following graph provides the same information, but over the longer term.

The manufacturing industry has started to shed excess inventories as stocks of major inputs indicate contraction. This does not bode well for metal prices in at least the short term.

New orders are still expanding but at a significantly reduced pace. However, new export orders fell sharply from 53,2 to 50,3, indicating only marginal expansion. New orders and new export orders lead the Economist Metals Index by approximately one month. The drop in especially new export orders does not augur well for metal prices and downside pressure can be expected.

The roll-over in new export orders is particularly evident and the question is whether this could indicate a trend change.

The drop in both new orders and stocks of major inputs perhaps explains the weakness in the Baltic Dry Index. Imports of raw materials such as ores and metals have probably dropped significantly.

A major question is how the slowdown in China is going to affect the rest of the global economy. The contraction in China’s PMI for imports indicates that the US GDP-weighted PMI for exports could be negatively influenced in especially the second quarter of this year.

Likewise the US GDP-weighted PMI for imports could be under pressure …

The further austerity measures put in place recently by the Chinese authorities still need to rub off on China’s economy. As such the outlook for commodities, the US and global economy has possibly darkened somewhat.

Elsewhere, the PMIs of India and South Korea were also published, with both economies expanding at the fastest pace in nearly two years. There are already calls for India to suspend the stimulatory measures in order to cool the economy.

One swallow does not make a summer, but I will be monitoring the Chinese situation closely to try to gauge the possible impact of any cooling on the developed economies.

Note: The graphs in this post were provided by Plexus Asset Management (based on data from CFLP, ISM, I-Net Bridge and Dismal Scientist.

Tags: Baltic Dry Index, BRIC, Canary In A Coal Mine, China, China Manufacturing, Contraction, Cursory Attention, Downside, Economic Growth, Economist, Economy China, Emerging Markets, Excess Inventories, Export Orders, Global Economy, Manufacturing Industry, Manufacturing Sector, Media Attention, Metals Index, Raw Materials, Second Quarter, Slowdown, Us Gdp
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David Fuller (Fullermoney): Concentrate Long-term Investments in Low-Risk Countries

Sunday, February 28th, 2010

“There has been a great deal of discussion in the financial press about whether Greece will successfully navigate the crisis it now finds itself in, if the Eurozone will survive a sovereign debt default should one occur and if there is a risk of contagion for countries such as the UK, Japan and the US. These are all important questions which we will have definitive answers for in the coming months and years but to my mind there is a more important question that needs to be addressed first.

“All the issues facing these governments are in essence related to a problem with too much debt and leverage and not enough tax receipts to pay it down. The questions so far have focused on how one country or another might survive this crisis but from the perspective of a judge at an international beauty contest do we want to invest in these countries at all since there are plenty more where these problems are relatively minor if they exist at all?

“Commodity producers such as Australia and Canada have come through this crisis comparatively unharmed. Most of the others are primarily in the so-called emerging markets. Brazil is now a net creditor, China has the biggest foreign currency reserves in the world. Large numbers of countries in Latin America and Asia run trade surpluses. If we look at the world with a broader perspective we see clearly where risk and leverage are concentrated.

“The outcome of the major challenges facing the US, UK, Eurozone and Japan are crucial because of the effect they have on the global market. However, we do not have to invest in the debt, currencies or equities of these countries. Others are better equipped to deal with these issues from a position of strength. They have shown to be credible managers of their economies in a truly testing era and it is surely in these countries one should concentrate long-term investments.”

Source: David Fuller, Fullermoney, February 24, 2010.

Tags: Canada, Commodity Producers, Contagion, Countries In Latin America, Creditor, Currency Reserves, David Fuller, Debt Default, Definitive Answers, Emerging Markets, Eurozone, Foreign Currency, Fullermoney, Global Market, International Beauty Contest, Large Numbers, Leverage, Sovereign Debt, Tax Receipts, Term Investments, Trade Surpluses
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Emerging Markets Highlights (February 28, 2010)

Sunday, February 28th, 2010

Emerging Markets

Strengths

• Taiwan’s GDP grew 9.2 percent year-over-year in the fourth quarter of 2009, exiting a recession which started in late 2008. Not only were exports and investment on the rise, but private consumption registered the strongest quarterly increase in the last 20 years.
• Thailand’s fourth quarter GDP rose 5.8 percent from a year earlier, accelerating from a 2.7 percent contraction during the third quarter. The change came as private consumption and government spending more than offset still anemic investment constrained by political uncertainty.
• January wireless data for Brazil indicated net additions of 1.6 million and a 16 percent year-over-year increase in total subscriber base. Vivo accounted for 43 percent of new subscriber additions, followed by Claro (América Móvil) with 25 percent and Telecom Italia Mobile with 24 percent. Brazil wireless penetration currently stands at 92 percent compared with 76 percent in Mexico, 116 percent in Argentina, 98 percent in Chile, 81 percent in Colombia and 68 percent in Peru.
• Unemployment in Brazil rose to 7.2 percent during January, up from 6.8 percent in December due to a seasonal effect but was better than the market expected.
• According to Troika Dialog metals and mining analysts, Russian gold mining companies boast output growth that is among the highest on the global landscape, while appearing attractive on valuation grounds.

Weaknesses

• Initial public offerings launched by Chinese companies in the U.S. during the fourth quarter declined 4.8 percent on average in the first month of trading. The loss deteriorated to 6.7 percent for IPOs in January and February, the longest slump in five years, as investor continued to trim risk exposure and sentiment remained weak.
• Results from Brazilian toll road operator Companhia de Concessões Rodoviárias (CCR) came in weaker than anticipated due to higher costs.
• Murray and Roberts, the largest engineering firm from South Africa, provided a murky outlook for its operations. While the company was positive about its long-term outlook, its short-term future is foggy—particularly with respect to operations in the Middle East.
• Price expectations for residential buildings in Czech Republic remain stagnant even after a significant recession, according to Citi research. The chart shows realized prices significantly below offer prices, while expectations from a business survey point to further weakness.

Opportunities

• Expanded urbanization and regional development are expected to be confirmed as a major policy focus in China in the upcoming annual plenary session of the National People’s Congress. Supportive policies may be created to empower local governments to develop infrastructure and attract capital because of the role urbanization plays in promoting consumption. Indeed, even global luxury brands have spread their presence beyond coastal China into second- and third- tier cities to position for tomorrow’s growth.

• As uncertainty related to global policy actions in both the developed and emerging worlds continues to rise, Russia could become a spot of relative stability, according to Bank Credit Analyst research. The chart shows that equity valuations are still low compared with the emerging market universe.

Threats

• Domestic sugar prices in China have been on the rise so far this year as drought in southern China affected cane production. There are also news reports about labor shortages, especially in the Pearl River Delta area where some migrant workers chose not to return to work after the Chinese New Year because of unattractive wages compared with inland regions. There could be inflation going forward if these developments persist.
• Although an announcement of higher bank reserve requirements in Brazil had been expected, some market participants may view it as ambiguous with respect to the impact on the banks’ top and bottom lines. We do not expect a detrimental impact on the profitability of Brazil’s banks because they will still be earning interest on the reserves at the SELIC rate—the overnight lending rate set by Brazil’s central bank.
• Political tensions in Turkey have escalated this week following new arrests related to an alleged 2003 military coup against the ruling Justice and Development party. The uncertainty related to the outcome of a likely referendum on controversial judiciary reform may also contribute to further market volatility.

Tags: Ccr, Chinese Companies, Contraction, Emerging Markets, Engineering Firm, Fourth Quarter, Global Landscape, Gold Mining Companies, Initial Public Offerings, Political Uncertainty, Private Consumption, Quarter Gdp, Quarterly Increase, Risk Exposure, Seasonal Effect, Subscriber Base, Telecom Italia, Telecom Italia Mobile, Toll Road, Troika Dialog
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India - Markets give thumbs up to Budget 2010

Friday, February 26th, 2010

Markets give thumbs up to Budget 2010

Courtesy of Equitymaster.com

The Union Budget 2010 brought some cheers to the Indian markets, which had been reeling under fear for the past few days with respect to the government’s stimulus withdrawal. However, the Finance Minister did not tinker much with the stimulus but for partially rolling back some excise duty benefits. However, much of this seemed in line with what the markets had been expecting. Anyways, realty, auto, and metals stocks led today’s gains.

The BSE Sensex and NSE Nifty closed with gains of around 175 points (1.1%) and 65 points (1.4%) respectively. Mid and small cap stocks also closed with gains. The BSE Midcap and BSE Smallcap indices closed higher by 1.5% and 1.1% respectively. On the broader BSE, one stock lost today for every two that closed in the positive.

Among other key Asian markets, while China closed marginally in the red, Hong Kong (up 1%) and Japan (up 0.2%) were among the gainers. European markets have opened today on a positive note.

Apart from just a small rollback of the stimulus, one of the key reasons for today’s gains was the clear roadmap announced by the government with respect to reducing its fiscal deficit over the next 3-4 years. As against an estimated figure of 6.9% and 5.5% of GDP in FY10 and FY11 respectively, the rolling targets for fiscal deficit are pegged at 4.8% and 4.1% for FY12 and FY13 respectively. Also, as the Budget notes, taking into account the various other financing items for fiscal deficit, the actual net market borrowing of the government in FY11 would be around Rs 3,450 bn, which would leave enough space to meet the credit needs of the private sector.

Auto stocks gained strongly today, Key gainers here included Bajaj Auto, Tata Motors, and Ashok Leyland. A lower than expected rollback of excise duty seemingly enthused investors in these stocks. Then there was the lowering of personal income taxes that we believe might foster increased spending by consumers on discretionary items like automobiles. But for the increase in the ad valorem component of excise duty on large cars and multi-utility vehicles by 2% points to 22%, today’s was a positive budget for the auto sector as a whole. We also believe that the extension of R&D benefits will encourage more investments in the sector and will make it competitive in the long run.

Realty stocks were amongst the biggest gainers on the broader markets today. The BSE-realty index closed up by almost 3%. Key gainers here included HDIL, DLF, and Unitech. These gains were on the back of some relief provided by the Budget to real estate companies. As the Finance Minister announced, with a view to provide one time interim relief to the housing and real estate sector that was impacted by the global recession, the government has allowed pending projects to be completed within a period of five years instead of four years for claiming a deduction on their profits. The Budget has also proposed to relax the norms for built-up area of shops and other commercial establishments in housing projects to enable basic facilities for their residents. The realty firms couldn’t have asked for more!

This is given that these companies have already been amongst the biggest beneficiaries of the government’s fiscal stimulus programme that has helped them restructure their strained balance sheets. The interesting thing is that these realty companies have come back to their greedy ways by not lowering property prices by keeping them artificially inflated through hoarding. Some like Deepak Parekh of HDFC have come out heavily on these companies’ tactics. But now, given that the Finance Minister has allowed them some more time to relax, real estate companies and their investors are making merry.

Key India Budget Highlights

Courtesy of L&T Mutual Funds, India, here are the budgetary highlights for FY11.

• Total expenditure proposed for FY11 stands at Rs.1108749 cr (US$239.6-billion) up by 8.6%. Plan expenditure up by 15%. Non plan expenditure up by 6%.Fiscal Deficit estimated at 5.5% for FY11 (from 6.9%FY10), 4.8% in FY12 and 4.1% in FY13.Direct tax proposals in form of lower income tax slabs would lead to a loss of Rs.26,000cr. (US$5.6-billion)
• Indirect tax proposals would lead to a gain of Rs.46,500 cr. (US$9.8-billion)
• Total tax revenue and other receipts would lead to Revenue Gain of Rs.20,500cr. (US$4.4-billion)
• Corporate Tax: MAT increased from 15% to 18%
• Surcharge on corporate tax reduced from 10% to 7.5%.
• Need to review stimulus, move to fiscal prudence, says FM
• Partial withdrawal of fiscal stimulus measures through roll back of excise duties
• Excise duty on all non oil products increased from 8% to 10%.
• GST and DTC to be introduced together by April 2011.
• Service Tax rate retained at 10%
• Subsidy to oil companies to be given in cash and included in budgetary estimates.
• Subsidy on Fertilisers to be reduced.
• Divestment receipts expected to be more than Rs.25,000 cr (US$5.39375-billion) in FY10. Disinvestment targets for FY11 to the tune of Rs. 40000 crs. (US$8.63-billion)
• To provide Rs 165 bln (US$3.58-billion) to PSU (Public Sector Undertaking, or State-run) banks
• Infrastructure spending pegged at Rs. 1,73,552 crs (US$37.4-billion), which is 46% of plan outlay.
• Net borrowing for FY11 set at Rs 3,45,000 cr (US$74.4-billion) ; Gross borrowing at Rs 4,57,000 cr (US$98.6-billion)

Equity View

• Hike in excise duty has been on expected lines.
• Increase in MAT would impact some corporates.
• Increase in tax slabs for individuals will give more in hand of consumers, key positive as it would enhance consumption.
• Hike in petrol prices by ~Rs. 2.50 on account of increase in duties would lead to inflation spike in near term.
• Overall we believe budget would push higher consumption and over period private capex would pick up. Economy would thrive without the requirement of large government expenditure over medium term.

Fixed Income View

• Net borrowing number of Rs 3.45 lakh crores (US$74.4-billion) a reasonable number. Bond markets expected to take it positively.
• However divestment and 3G auction revenue estimates on higher side for FY11. There could be risk of not meeting these targets as planned. Risk of fiscal deficit slippage (increasing from budgeted 5.5%) exists.
• Discontinuing practice of issuing bonds for oil and fertilizer companies and giving cash a positive fiscal consolidation measure. Will reduce interest burden in the long run.
• Fuel price hike due to increase in duties lead to inflationary effect and negative for bonds
• Continued support to PSU banks through capital infusion to help maintain their credit quality for issuance of CDs and Bonds.

Tags: Ascii, Ashok, Ashok Leyland, Asian Markets, Auto Stocks, Bse Sensex, Cambria, Div, Emerging Markets, Enough Space, European Markets, Excise Duty, Finance Minister, Fiscal Deficit, Font Definitions, Font Format, Footer, Gainers, India, India Markets, Indian Markets, Lt, Midcap, Mso, Orphan, Panose, Paper Source, Personal Income Taxes, Pitch, Props, Rollback, Sans Serif, Small Cap Stocks, Smallcap, Stimulus, Style Definitions, Style Name, Style Type, Tata Motors, Theme Font, Times New Roman, Union Budget
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Barry Ritholtz Sticks with Stocks, Especially Emerging Markets

Friday, February 26th, 2010

“As long as the Fed is going to make money free … it’s hard to find a short,” said blogger and FusionIQ CEO Barry Ritholtz. According to Yahoo Finance - Tech Ticker, he is not as bullish as he was last March when he called the market bottom, but Ritholtz is sticking with stocks. “The easy thing to do now would be to go to cash,” he said, “[But] I rarely find the easy trade is the one that makes you money.”

Ritholtz is now favoring emerging markets that will withstand a weak US economy, including the likes of South Korea, Brazil, Taiwan and Singapore.

Source: Yahoo Finance - Tech Ticker, February 25, 2010.

Tags: Barry Ritholtz, Blogger, Brazil, Ceo, Economy, Emerging Markets, Market Bottom, Money, Singapore, South Korea, Stocks, Taiwan, Yahoo, Yahoo Finance
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Carry Trade Withdrawal Gives China Safe Opportunity to ‘Talk’ Tightening

Tuesday, February 23rd, 2010

Chinese stocks, commodities, and global markets, for that matter, are not correcting due to the anticipation of reduced demand from China, as a result of its squawking about tightening. In fact, last year’s profitable trades are correcting because the U.S. dollar is climbing against the falling euro, and adding to that climb is short covering of the dollar as its carry trades of the last year are unwound.

With or without China’s ‘talk’ of tightening – i.e. reining in credit, suspending new loans, raising the value of the yuan, raising its interest rates, and past hikes in its Required Reserve Ratio – China’s stock markets would have corrected simply because carry trades tied to its market and commodities are being sold off.

What better opportunity, then, is there, than a technical global correction, to talk about the very thing, tightening, that is, which would bring about a correction in its own markets?

Read the whole article here.

Pierre Daillie (AdvisorAnalyst.com), GlobeAdvisor.com, February 22, 2010.
http://www.globeadvisor.com/advisoranalyst/aa20100222.html

Tags: Anticipation, China, Chinese Stocks, Commodities, Dollar, Emerging Markets, Euro, February 22, Global Markets, Globeadvisor, interest rates, Loans, Opportunity, Profitable Trades, Reserve Ratio, Stock Markets, Yuan
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China, The Countervailing Force

Monday, February 22nd, 2010

If the by-products of the western credit crisis - tight credit, stimulus and quantitative easing, zero-percent interest rates,  winning trades in risk - are elemental to the prevailing trend, then China, with its massive $586-billion spending program, its $1.35 trillion in new lending, and its (too?) rapid recovery, should be viewed as a significant balancing concern.

China is the countervailing global economic force, the antithesis of America, its cash-rich economy cantilevered against the weight of its debt-laden counterpart. Whether we believe it or not, China’s decisions do affect us, either balancing in our favour or not.

In a decade, China has amassed the bulk of it $2.4-trillion (U.S.) foreign exchange reserve, making it the lead financier of the spendthrift U.S. economy, owing to blockbuster exports growth to consumers seeking cheap manufactured goods.

In 2008, however, the credit crisis hollowed out the export sector as credit, the global shipping business, and consumption froze, and it’s growth engine seized. China’s reaction was, forcibly, to fix its exchange rate, and subsequently embark on a bold and massive $586-billion spending plan.

Read the full article here.

Pierre Daillie, (AdvisorAnalyst.com), GlobeAdvisor.com, February 21, 2010.
http://www.globeadvisor.com/advisoranalyst/aa20100221.html

Tags: Antithesis, Blockbuster, Cantilevered, China, Counterpart, Credit Crisis, Economic Force, Emerging Markets, Exchange Reserve, Export Sector, Financier, Global Shipping, Globeadvisor, Hollowed, Prevailing Trend, Rapid Recovery, Rich Economy, Shipping Business, Spendthrift, Stimulus, Tight Credit, Zero Percent
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Gold and Euro: A New Tango For 2010

Sunday, February 21st, 2010

By Dian L. Chu,  Economic Forecasts & Opinions

The U.S. dollar rose, commodity prices dropped and stocks fell last Friday after the Federal Reserve unexpectedly lifted an emergency lending rate for the first time since the financial crisis.

The dollar hit an eight-month high against a currency basket, while gold prices rose as investors bought the metal to hedge against paper currencies and debt default risks in Europe. Gold futures ended on Friday with a weekly gain of 3.1% at $1,122.10 an ounce.

Gold’s Retreat

Gold had rallied to a record of $1,218.30 an ounce on Dec. 3, 2009, as near-zero U.S. interest rates and government spending weighed on the dollar and countries including India and China boosted gold reserves.

However, bullion in the spot market has declined more than 6% since December, as the U.S. dollar benefited from the unfolding debt crisis in Dubai, Greece and the rest of southern Europe.

New Inverse Tango with Euro

Since gold is primarily a hedge against the dollar and inflation, it typically has the strongest inverse correlation with the US dollar. In the last month, however, the trend has broken with gold trending inversely with the euro and positively with the dollar (Fig. 1). The euro has now taken center stage in dictating the price of gold as it pertains to the fiscal health of Greece and other eurozone countries.

Fears over the outlook for the euro have been driving investors out that currency, and lifted both bullion and the dollar as alternative assets. The euro has declined, particularly against the dollar and gold, almost 5% against the dollar, and gold in euro terms is up 4.2%, so far in 2010.

Mariachi - PIIGS & The Fed

The new trend between the euro, dollar and gold is expected to continue amid fiscal challenges in the UK and Eurozone, PIIGS (Portugal, Iceland, Italy, Greece and Spain) in particular. Uncertainty over the details of any financial rescue package for Greece will likely keep the mood in the markets nervous, and the currency markets volatile in the near term.

In addition, the Fed’s discount rate hike signals that other central banks will likely follow suit in exiting from stimulus measures, while the eurozone, UK and Japan will likely lag behind. This view has partly triggered selling of the euro against the dollar, and some other currencies to seek a positive yield and perceived safety.

These two factors will likely continue to be the major forces driving the euro’s direction for the rest of Q1, and may spill over into Q2 depending upon solutions to the Eurpoean Union`s debt problems and dearth of future growth opportunities.

Technicals - Short-term Mixed

Technically speaking, the short term indicators of gold are mixed and still trending bearish as gold prices remains in the lower part of its recent trading range.

Technical analysts have widely diverging views as well. For instance, Chartered Market projects gold to reach about $1,400 within 12 months as long as the $1,000 level holds; whereas Barclays Capital considers a “fair value” for gold around the $700 to $800 an ounce level.

Meanwhile, Nouriel Roubini, economics professor at the Stern School of Business, New York University, says that there is a bubble in commodities, and that the price of gold should be no higher than $1,000 an ounce given the current market conditions.

Techincal levels of significance would be a breakout above the $1150 level, which would be bullish; and breakout below the $1050 level of support, which would be bearish for the commodity.  (Fig. 2)

Vulnerable to Rapid Unwind

According to the Commodity Futures Trading Commission (CFTC), NYMEX gold futures open interest increased 3.2% in January. Commercial traders increased their long positions, while holding net short positions. Non-commercial speculators held net long positions but increased their short positions. Overall, about 54% of the participants held net long positions in January. (Fig. 3)

Gold has attractions for those managers of private institutional funds. Many investors from George Soros to John Paulson have been buying gold as lower interest rates and continued money-printing could devalue the U.S. dollar in the long term.

Billionaire fund manager George Soros, for instance, told the financial elite at Davos that gold represented the “ultimate asset bubble”; however, data from SEC filing showed his fund more than doubled the stake in the SPDR Gold Trust (GLD) three months earlier. In fact, the gold trust is now his fund’s biggest investment, valued at $663 million.

The large number of long speculators playing in the Gold market could leave the market vulnerable to a rapid unwinding when sentiment changes – the crowded trade scenario. One can only speculate that Mr. Soros could be seeking to exploit this market vulnerability with his seemingly uncharacteristic and contradictory actions.

Other Market Factors

Furthermore, the gold price direction also hinges on several events about to unfold within the next few months:

1) Greece’s borrowing needs are covered only until mid-March, and is set to launch a new bond offering of $7 billion in coming days – Eurozone/euro could stand or fall on the success or failure of this bond sale.

2) European finance ministers gave Greece a one-month reprieve to show its deficit reduction plan was being rolled out effectively.

3) Dubai World will present a proposal to creditors in March to restructure about $22 billion of debt.

4) The IMF’s phased open-market sales of the remaining 191.3 tons of gold it planned to sell last year as there are no more official buyers – Bearish for gold, unless another central bank steps up.

5) The Federal Reserve will end a $1.25 trillion program of mortgage-debt purchases in March – Gold-bearish as it reduces liquidity.

As ever gold thrives on financial, economic and monetary uncertainty, there is certainly plenty of that in the world today.  Sovereign risk will likely remain the main theme for 2010, and possibly 2011.  This all sets the stage for the next five years of monetary and fiscal policy decisions around the globe which will ultimately define the future for this precious metal from an investment standpoint.

Disclosure: No Positions

Tags: Alternative Assets, China, Commodity Prices, Currency Basket, Debt Crisis, Debt Default, Economic Forecasts, Emerging Markets, Euro Dollar, Europe Gold, Eurozone Countries, Fiscal Challenges, Fiscal Health, Gold, Gold Bullion, Gold Futures, Gold Prices, Gold Reserves, India, Inverse Correlation, Italy Greece, Paper Currencies, Price Of Gold, Southern Europe
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