I hail from India, and I want to tell my readers how business is conducted in markets in India.
I was seating at my acquaintance shop in textile market of my city, which is supposed to be the manufacturing hub of synthetic fibre in India because of its sheer volume. If you see the functioning of the market you will be amazed to find the length of operating cycles (i.e. No of days of receivables + No of days of Inventory at hand). It ran into months and with the kind of volumes a shopkeeper had, I was wondering how much capital these entrepreneurs might have invested; keeping in mind the low margin on capital employed. My uncle explained me the trade secrets.
Everyone in the markets get credit. And what is important is to honour your commitments on time in order to be operative in the markets. Once you default, then your all doors for credit are closed. But if a trader somehow manages the cycle he can arrange money by selling goods borrowed from another shopkeeper on credit and pay off existing dues. This cycle continues ....The essence is ultimately the bubble is going to burst. The cycle continues as long as there is a greater fool to sell him goods on credit so that everything is in place. The day, trader is unable to find goods on credit; his game will come to an end. And the final person to give credit will be one who will face brunt. And in order to keep confidences going, these traders are very smart; they come in chauffeur driven cars wearing Rolex watches trying to signal their creditors that everything is in place and their money is safe. So the rules are keep cycle going in, and send signals indicating your solvency and profitability. Because market usually sees what you show; it’s very simple to fool markets. !!!!! If somebody can manage to show affluence and somehow keep running the cycle market will tend to believe that the trader is a big shot and doing really good and their money is safe. This will boost their confidence and they will lend more goods on credit with the view of increasing their sales.
Now let us compare this situation to one of the biggest scandals in USA...Madoff is no different to the small entrepreneur I was referring above.
Madoff was one of the most reputable hedge fund managers in US. A hedge fund manager concentrates on absolute returns and has to deliver it even in turbulent times. If the Fund manager is successful then investors will reward him by increasing subscription his fund. One negative point about the hedge fund industry is that they are not under the obligation to report their performance or make disclosures. They might do so on voluntary basis and for fund to fund and it doesn’t apply to entire fund house. So there is presence of survivorship bias, the hedge funds usually overestimate their performance and promote their best funds to collect money from market and do not report performance of their funds which are bleeding and are cash starved.
Madoff was one of these crooks. He used fund inflows to keep the fund afloat and pay off redemptions and show healthy returns of around 12% even in turbulent times. When the wholesale markets were not in tragic stage, the cycle was running. New fund subscriptions were used to pay redemptions and inflate fund earnings and in fact in this case to hide losses. But within past few months, due to credit crisis, investors flows into hedge funds have considerably slowed down and many hedge funds have gone bankrupt; even Alternative Investment Vehicles floated by CitiGroup have gone bankrupt. Now, due to lack of enough capital flows the cycle of floating hats from one head to another couldn’t continue. And now no person was ready to wear the hat....So then finally who had to wear this hat...Mr.Madoff nobody is ready to accept your hat...The fund has gone bankrupt and Madoff has been accused of siphoning more than $50 billion of investors. The impact could be far reaching as many investors, trusts including charities; clients of banks like HSBC etc were invested into these funds. This could further aggravate the ongoing credit crisis. Now the impact will be investors will lose trust in lending their money. This will reduce the investment climate significantly and there will be a global slowdown.
The only difference I see between my entrepreneur and Madoff is each one plays according to his stature and size. The small entrepreneur had exposure of around $200000-500000 while Madoff had exposure of around $50 billion. And in both cases, the people who entered in the chain last were the ones who suffered the most.
Conclusion: - Don’t believe on your eyes. No one can make a quick buck in the markets. If someone gives you information that gold is lying on roads, please don’t be allured and become a prey to it.
Wednesday, 17 December 2008
Thursday, 11 December 2008
Science of Financial Markets- Can it explain the current Credit Crisis ?
I am suddenly nostalgic being in Asset Management class at Warwick Business School…I remembered my science classes in school.. In 10th grade we learned about the Big Bang Theory and the concept of black holes, white dwarf, etc.
These concepts I guess I can relate to what is happening now in financial markets. A Big Bang has taken place. And the financial markets are shrinking rapidly and are pulled towards their origin by the strong forces of greed, contamination and deregulation. This will result in creation of black holes. In this black holes, the gravity of these forces will be so strong that not a single ray of light can pass through it. I am not exaggerating the magnitude of financial crisis, I am trying to show its impact. Its more than just a financial crisis.
Probably not many people will believe that few people in the industry had predicted this Sub-Prime crisis as early as 2005-2006. Warren Buffet and other notable experts in the filed have recorded their statements that USD will depreciate in future and is in a long term depreciation trend. To add to this, I had presented a similar report in my college in 2005 on the same issue of Sub Prime crisis and tried to evaluate the housing market in USA and tried to identify the asset bubble in making,. In addition, I extended my framework to include gold as an asset class rather than an commodity and pointed out the possible scenarios where gold would outperform the other asset classes. In my report, I clearly mentioned that the spectacular credit growth which led to inflationary asset prices could not be sustained in future and would lead to creation of circumstances which will lead USA and the world economy into a vicious cycle of recession. It would lead to a combination of depreciating dollar, rising interest rates, high unemployment rates, defaults in housing market. And now, the results are in front of us.
Rationale:-Behind Crisis
The reason is very clear whenever anything rises at alarming levels it has to come down at similar periods. Again, I would like to relate this to Newton ‘s Gravity Theory. Issac Newton discovered the Gravitational Theory and concluded that any thing that goes up has to come down back to earth and the speed at which it comes down is faster than it goes up. So please remember these theories and concepts, it has indirect applications in finance. So if you scored well in science, you would score good in finance. In past four years, stock markets experienced spectacular Bull Run and the equities zoomed as if USA & Russia were releasing rockets from earth. But every bull run teaches its own lesson. In 1990’s after the dot com bubble, people became wary of high P/E multiples as high as 100-400 times which were allocated to dot com companies. In fact, for some time when the returns were generated and people who bought these stocks at 100 P/E ratio were able to see it to another fool for 300 P/E ratio, even investor like Warren Buffet was astonished and made public statement that for the first time his research was wrong and probably market was right in its judgement. Soon after he made his confession, in few months the dot come bubble took place and stocks went crashing. After 2008 crisis, people in future will understand the importance of identifying risk involved in asset, its payoff and associated cash flows.
Had government exercised effective regulation and control on the financial system and imposed stringent capital adequacy norms, the present situation would not have arose. Hedge Funds in US were completely unregulated and there was no check on their activities such as speculation, high leveraging etc. In fact, hedge funds used to go to havens like Bermuda, Mauritius etc to escape from regulation. In past decade, the financial markets made easy for I-Bankers, Hedge Fund managers to earn quick buck. Most of the analyst were new and just experienced the bull run and had never experienced bear run. Thus any stock selected by them performed well in the bull run because of systematic return ie correlation with the index. So they never actually knew how to pick growth and quality stocks, nor could they read off balance sheet items and secret reserves build by the company. People like Warren Buffet understood financial statements and made money. To add to this, when Warren Buffet was asked what do you think your successor should be good at ? He said that my successor needs to be able to analyze the financial statements and especially the off balance sheet items.
Another reason is the unaccounted investments of Hedge Funds. This are specialized institutions that are willing to take risk and beat the market and generate excess return on investments and are looking to make a quick buck in short time. South East Asian Crisis is an example of how can these short term foreign inflows and outflows can distort the BOP of an economy. These funds invest money in un chartered territories and seek advantage of being first mover. Due to their high bulky investments, they attract market attention to that particular asset class. For instance, since 2005 the money flowed into the Equities, mortgage backed securities and other riskier assets. The result bull run in equities. Retail investors entered at peak and are in losses, while hedge funds exited at profits at peak. Then this money made way into commodities like Crude, Base metals, precious metals, agricultural commodities etc. And suddenly the commodities started experiencing a bull run. Crude rose from $70 per barrel and reached sub $150 levels in a short period of time. There were no fundamental reason that justified the magnitude of rise in such a short period of time. And as expected when on corrections, hedge funds were exiting and booking profits, retail investors entered and booked looses. Now the money has flown out of crude and will look at gold as its safe heaven. Gold., as in investment class will be looked upon by investors in next 2-5 years to beat inflation and for safety of capital. One of the reason for the large size of hedge funds was the sheer number of funds launched in short period of time. In Wall Street, any I-Banker with an Ivy League MBA could launch his hedge fund and within hours he would get several billions to start his fund. This unregulated industry presented data of its best fund to raise capital and the funds which failed were not reported at all and thus returns which were reported were biased and misled investors.
Another important reason for the crisis has been structured derivative products and its complexity. The main aim of the derivatives was to enable asset holder to hedge his risk. But the doctorates in physics, math, statistics and ones from engineering background created complex derivatives products whose pay off were not easily determinable and hence the clients-corporates could never understand the risk associated with the product and its pay off. Thus when markets reversed, as in case of Indian IT industry, on one hand they had windfall gain due to depreciation of ruppe on other hand losses from hedges. These left their balance sheet red. The creators of structured products themselves never understood the product and its implications and hence could not analyze the product because they lack the knowledge of financial concepts etc.
Impact of Credit Crisis
The impact of crisis can be measured from the following facts: Fed Reserve has injected 700 billion USD into the system, BoE has injected more than 400 Billion GBP into the system. Bear Stearns and Lehman Brothers have been bankrupt, AIG suffered huge losses and Fed Reserve had to intervene to protect counterparties which were predominantly pension funds, retirement funds etc. Iceland ‘s banking system has collapsed. Russia is seating on around 250 billion USD and is bailing out Iceland, but guess that wont be enough and Iceland is very angry as none of the Western Counterparts are willing to help. The reason is evident, Fed would handle its own economy or Iceland? ECB has asked its member nations to develop their own plans to bail out their domestic banks and central banks throughout the world have coordinated their monetary policy to ease the tight liquidity position in the money markets. The money markets have literally frozen. With LIBOR rising as high as 5%. Nobody is willing to lend in the money markets and after 2001 for the first time there have been such heavy withdrawals from money markets. The banks are trying to recapitalize themselves and holding every penny of money. This has adversely affected the expansion plans of quality corporates because the debt markets have literally frozen. Banks firstly don’t have enough money to lend and secondly they perceive the credit risk is too high.
Will Bail outs be effective? I doubt
I would like to point out that the bail out plans of Fed Reserve and BoE will not necessarily solve this issue. Market will take its own time to assess risk and adjust accordingly. In many of these financially important centers, the size of the banking system exceeds more than 5 times the size of the economy. Take for instance UK, the size of the banking industry is more than 5 times the size of the GDP. This means recapitalizing banking system by 1% requires 5% of GDP borrowing. Thus even a small 5% recapitalization plans would require more than 25% of GDP borrowing and that would take already high levels of Fiscal deficit to still higher levels leading to higher inflation and higher unemployment rates. So here one can see how much dependable these bail outs are. Moreover, higher levels of fiscal deficits would still requite high levels of taxes, which is not possible because slowing economy would reduce incomes and hence the tax collections. The more interesting part is to see how does government handle the defaults in newly nationalized banks like RBS. Will government exercise its right on the collateral to recover loans and ignore that it is responsible for the plight of its citizens.
The current situation relates to Liquidity trap as described in the Keynesian Economics. Eventually, the rate of interest will fall so low that this will lead to an infinite demand for money. As it has been in Japan, where the real rate of interest has been negative for more than a decade and property prices are at 40% of their peak in 1990’s. Until, the credit markets are not stabilized and the confidence levels are restored in the credit holders I don’t see any ray of light in the black hole. For the first time, have investors learned their lessons by not caring out proper risk identification. In last crash in 1987, only the equity holders lost money but the debt holders didn’t even when the bankruptcy was declared. So these were considered to be safe, for the first time has the write downs have been to such a large extent that they have completely wiped off bank’s balance sheets and curtailed their ability to raise capital. This has lead to default and for the first time will the credit holders will suffer losses on a wide scale. A research has even pointed out that sovereign bonds which are said to be risk free are essentially not risk free and more than 27 sovereign bonds have defaulted. Moreover, these carry interest rate risk, purchasing power risk, exchange rate risk for international investors etc. So essentially the concept of risk free rate does not hold true. And investors need to price in the extra risk premium. This will lead to re allocation of wealth among various asset classes. The rate of return required from a bond as compared to earlier (ceteris paribus) would rise significantly and this would have deep impact on the bottom line of highly leveraged companies and would render most of their projects unprofitable and may even force them to delay projects due to non availability of cheap and required capital. Thus only companies which have adequate capital to fund their expansion plans and have strong operating cash flows would survive. That’s why adage goes’ A money today is better than money tomorrow’ and every business should have enough cash to take advantage of market imperfections and opportunities.
Central Banks are cutting Discount rate steeply because they want to improve the liquidity in the system and ensure that there is enough capital in the system but it fails to realize that this money is just finding its way into the treasuries of banks and in reality wont be made available for lending. In fact, one school of thought believes that the rate interest should rise sufficiently to compensate the investors of credit and interest rate as well as purchasing power risk. Only when the rate rises significantly, will investors opportunity cost of money will rise and they part away with money. The speculative demand for money will reduce and money will be deposited with banks and made available for lending. The reason being that the demand for speculative money reduces as the rate of interest rises.
Paradigm Shift-From deregulation to nationalization
Few months back, inflation and rising crude prices was a big concern and suddenly the focus has shifted to more important events like nationalization of banks in UK, USA etc. See the irony, few months back developed economies like USA, UK, EU were advocating liberalization of financial services industry, free movement of capital, deregulation of financial services industry, denationalization of banks and privatization bla-bla . What has happened now? The same nations are now harping the tune of nationalizing banks and using tax payer’s fund to recapitalize national banks and save their banking system from collapsing. Few months back, London and New York were the teller counters of this world economy and whoever wanted money went to these counters and raised money; whatever may be the need speculative demand or investment or consumption demand.
These concepts I guess I can relate to what is happening now in financial markets. A Big Bang has taken place. And the financial markets are shrinking rapidly and are pulled towards their origin by the strong forces of greed, contamination and deregulation. This will result in creation of black holes. In this black holes, the gravity of these forces will be so strong that not a single ray of light can pass through it. I am not exaggerating the magnitude of financial crisis, I am trying to show its impact. Its more than just a financial crisis.
Probably not many people will believe that few people in the industry had predicted this Sub-Prime crisis as early as 2005-2006. Warren Buffet and other notable experts in the filed have recorded their statements that USD will depreciate in future and is in a long term depreciation trend. To add to this, I had presented a similar report in my college in 2005 on the same issue of Sub Prime crisis and tried to evaluate the housing market in USA and tried to identify the asset bubble in making,. In addition, I extended my framework to include gold as an asset class rather than an commodity and pointed out the possible scenarios where gold would outperform the other asset classes. In my report, I clearly mentioned that the spectacular credit growth which led to inflationary asset prices could not be sustained in future and would lead to creation of circumstances which will lead USA and the world economy into a vicious cycle of recession. It would lead to a combination of depreciating dollar, rising interest rates, high unemployment rates, defaults in housing market. And now, the results are in front of us.
Rationale:-Behind Crisis
The reason is very clear whenever anything rises at alarming levels it has to come down at similar periods. Again, I would like to relate this to Newton ‘s Gravity Theory. Issac Newton discovered the Gravitational Theory and concluded that any thing that goes up has to come down back to earth and the speed at which it comes down is faster than it goes up. So please remember these theories and concepts, it has indirect applications in finance. So if you scored well in science, you would score good in finance. In past four years, stock markets experienced spectacular Bull Run and the equities zoomed as if USA & Russia were releasing rockets from earth. But every bull run teaches its own lesson. In 1990’s after the dot com bubble, people became wary of high P/E multiples as high as 100-400 times which were allocated to dot com companies. In fact, for some time when the returns were generated and people who bought these stocks at 100 P/E ratio were able to see it to another fool for 300 P/E ratio, even investor like Warren Buffet was astonished and made public statement that for the first time his research was wrong and probably market was right in its judgement. Soon after he made his confession, in few months the dot come bubble took place and stocks went crashing. After 2008 crisis, people in future will understand the importance of identifying risk involved in asset, its payoff and associated cash flows.
Had government exercised effective regulation and control on the financial system and imposed stringent capital adequacy norms, the present situation would not have arose. Hedge Funds in US were completely unregulated and there was no check on their activities such as speculation, high leveraging etc. In fact, hedge funds used to go to havens like Bermuda, Mauritius etc to escape from regulation. In past decade, the financial markets made easy for I-Bankers, Hedge Fund managers to earn quick buck. Most of the analyst were new and just experienced the bull run and had never experienced bear run. Thus any stock selected by them performed well in the bull run because of systematic return ie correlation with the index. So they never actually knew how to pick growth and quality stocks, nor could they read off balance sheet items and secret reserves build by the company. People like Warren Buffet understood financial statements and made money. To add to this, when Warren Buffet was asked what do you think your successor should be good at ? He said that my successor needs to be able to analyze the financial statements and especially the off balance sheet items.
Another reason is the unaccounted investments of Hedge Funds. This are specialized institutions that are willing to take risk and beat the market and generate excess return on investments and are looking to make a quick buck in short time. South East Asian Crisis is an example of how can these short term foreign inflows and outflows can distort the BOP of an economy. These funds invest money in un chartered territories and seek advantage of being first mover. Due to their high bulky investments, they attract market attention to that particular asset class. For instance, since 2005 the money flowed into the Equities, mortgage backed securities and other riskier assets. The result bull run in equities. Retail investors entered at peak and are in losses, while hedge funds exited at profits at peak. Then this money made way into commodities like Crude, Base metals, precious metals, agricultural commodities etc. And suddenly the commodities started experiencing a bull run. Crude rose from $70 per barrel and reached sub $150 levels in a short period of time. There were no fundamental reason that justified the magnitude of rise in such a short period of time. And as expected when on corrections, hedge funds were exiting and booking profits, retail investors entered and booked looses. Now the money has flown out of crude and will look at gold as its safe heaven. Gold., as in investment class will be looked upon by investors in next 2-5 years to beat inflation and for safety of capital. One of the reason for the large size of hedge funds was the sheer number of funds launched in short period of time. In Wall Street, any I-Banker with an Ivy League MBA could launch his hedge fund and within hours he would get several billions to start his fund. This unregulated industry presented data of its best fund to raise capital and the funds which failed were not reported at all and thus returns which were reported were biased and misled investors.
Another important reason for the crisis has been structured derivative products and its complexity. The main aim of the derivatives was to enable asset holder to hedge his risk. But the doctorates in physics, math, statistics and ones from engineering background created complex derivatives products whose pay off were not easily determinable and hence the clients-corporates could never understand the risk associated with the product and its pay off. Thus when markets reversed, as in case of Indian IT industry, on one hand they had windfall gain due to depreciation of ruppe on other hand losses from hedges. These left their balance sheet red. The creators of structured products themselves never understood the product and its implications and hence could not analyze the product because they lack the knowledge of financial concepts etc.
Impact of Credit Crisis
The impact of crisis can be measured from the following facts: Fed Reserve has injected 700 billion USD into the system, BoE has injected more than 400 Billion GBP into the system. Bear Stearns and Lehman Brothers have been bankrupt, AIG suffered huge losses and Fed Reserve had to intervene to protect counterparties which were predominantly pension funds, retirement funds etc. Iceland ‘s banking system has collapsed. Russia is seating on around 250 billion USD and is bailing out Iceland, but guess that wont be enough and Iceland is very angry as none of the Western Counterparts are willing to help. The reason is evident, Fed would handle its own economy or Iceland? ECB has asked its member nations to develop their own plans to bail out their domestic banks and central banks throughout the world have coordinated their monetary policy to ease the tight liquidity position in the money markets. The money markets have literally frozen. With LIBOR rising as high as 5%. Nobody is willing to lend in the money markets and after 2001 for the first time there have been such heavy withdrawals from money markets. The banks are trying to recapitalize themselves and holding every penny of money. This has adversely affected the expansion plans of quality corporates because the debt markets have literally frozen. Banks firstly don’t have enough money to lend and secondly they perceive the credit risk is too high.
Will Bail outs be effective? I doubt
I would like to point out that the bail out plans of Fed Reserve and BoE will not necessarily solve this issue. Market will take its own time to assess risk and adjust accordingly. In many of these financially important centers, the size of the banking system exceeds more than 5 times the size of the economy. Take for instance UK, the size of the banking industry is more than 5 times the size of the GDP. This means recapitalizing banking system by 1% requires 5% of GDP borrowing. Thus even a small 5% recapitalization plans would require more than 25% of GDP borrowing and that would take already high levels of Fiscal deficit to still higher levels leading to higher inflation and higher unemployment rates. So here one can see how much dependable these bail outs are. Moreover, higher levels of fiscal deficits would still requite high levels of taxes, which is not possible because slowing economy would reduce incomes and hence the tax collections. The more interesting part is to see how does government handle the defaults in newly nationalized banks like RBS. Will government exercise its right on the collateral to recover loans and ignore that it is responsible for the plight of its citizens.
The current situation relates to Liquidity trap as described in the Keynesian Economics. Eventually, the rate of interest will fall so low that this will lead to an infinite demand for money. As it has been in Japan, where the real rate of interest has been negative for more than a decade and property prices are at 40% of their peak in 1990’s. Until, the credit markets are not stabilized and the confidence levels are restored in the credit holders I don’t see any ray of light in the black hole. For the first time, have investors learned their lessons by not caring out proper risk identification. In last crash in 1987, only the equity holders lost money but the debt holders didn’t even when the bankruptcy was declared. So these were considered to be safe, for the first time has the write downs have been to such a large extent that they have completely wiped off bank’s balance sheets and curtailed their ability to raise capital. This has lead to default and for the first time will the credit holders will suffer losses on a wide scale. A research has even pointed out that sovereign bonds which are said to be risk free are essentially not risk free and more than 27 sovereign bonds have defaulted. Moreover, these carry interest rate risk, purchasing power risk, exchange rate risk for international investors etc. So essentially the concept of risk free rate does not hold true. And investors need to price in the extra risk premium. This will lead to re allocation of wealth among various asset classes. The rate of return required from a bond as compared to earlier (ceteris paribus) would rise significantly and this would have deep impact on the bottom line of highly leveraged companies and would render most of their projects unprofitable and may even force them to delay projects due to non availability of cheap and required capital. Thus only companies which have adequate capital to fund their expansion plans and have strong operating cash flows would survive. That’s why adage goes’ A money today is better than money tomorrow’ and every business should have enough cash to take advantage of market imperfections and opportunities.
Central Banks are cutting Discount rate steeply because they want to improve the liquidity in the system and ensure that there is enough capital in the system but it fails to realize that this money is just finding its way into the treasuries of banks and in reality wont be made available for lending. In fact, one school of thought believes that the rate interest should rise sufficiently to compensate the investors of credit and interest rate as well as purchasing power risk. Only when the rate rises significantly, will investors opportunity cost of money will rise and they part away with money. The speculative demand for money will reduce and money will be deposited with banks and made available for lending. The reason being that the demand for speculative money reduces as the rate of interest rises.
Paradigm Shift-From deregulation to nationalization
Few months back, inflation and rising crude prices was a big concern and suddenly the focus has shifted to more important events like nationalization of banks in UK, USA etc. See the irony, few months back developed economies like USA, UK, EU were advocating liberalization of financial services industry, free movement of capital, deregulation of financial services industry, denationalization of banks and privatization bla-bla . What has happened now? The same nations are now harping the tune of nationalizing banks and using tax payer’s fund to recapitalize national banks and save their banking system from collapsing. Few months back, London and New York were the teller counters of this world economy and whoever wanted money went to these counters and raised money; whatever may be the need speculative demand or investment or consumption demand.
Emergence of ASIA-Middle East
I think soon the Economic power will shift to Asia (including Japan) and Middle East Region specifically. I would like to be say that in future I see Dubai, Egypt, Hong Kong, Singapore and Mumbai as the upcoming international financial centers. And among these specially Dubai, Singapore and Hong Kong. The cash rich OPEC countries are spending heavily on tourism and infrastructure. UAE has completely transformed itself in last decade, and is making most of its windfall gains from high crude prices. It is targeting itself to be one of the most sought after tourist destinations in the world. Most of the I-Banks and other industries are increasing concentrating on Dubai as its base to cater to the Middle East countries. They are hiring in a big way in Middle East and soon the senior management would handle the company affairs from Middle East base.
I think investing in Indian Stock markets are better than its Asian peers. I know, many of you may say I am wrong and China is the place. Please bear and give me a chance to justify my answer. China like other Asian economies viz Singapore, Malaysia etc is export oriented economy. India on other hand is a domestic consumption driven economy. It still has high Balance of Payments deficit, reason it imports crude in high volumes. And in addition, its exports don’t match its imports. Off late, the deficit in current account has been matched with surplus in the capital account, thanks to the FII and booming stock markets. But again, with FII withdrawing money, rupee has depreciated vis-à-vis dollar and foreign kitty has been reduced. But still, I feel rupee is in a long term appreciation trend and once the unwinding in the credit markets is done with, dollar will depreciate further. What makes India an attractive destination to me is its young population. It has a high proportion of its population who are in their middle ages and are spending high proportion of their income on luxuries and other consumer durables, making India less affected by slowing demand from export markets. The other thing, which has recently turned into India’s favour is 123 agreement. Since long, the shortage of energy has withheld the development of rural areas and there are power cuts in many parts of India and many areas have no access to electricity. Nuclear energy is a clean and green energy and will reduce India’s dependence on crude to some extent and make the demand for crude from inelastic to elastic in long run. Though the advantages of this deal will take 3-4 years to start accruing but it’s a positive step and this is Manmohan Singh’s greatest achievement I guess. He took a tough decision and even risked his Chair. He will be remembered as a man who single handedly turned Indian Economy, which was in a terrible state in 1991 to India which is looked upon by world as the fuel for the growth of world economy. Economics always says that the impact of policy decisions will accrue in the long run. His financial sector reforms in 1991 set the stage for growth in 2000’s and now 123 agreement will provide new impetus to growth in India.
I think investing in Indian Stock markets are better than its Asian peers. I know, many of you may say I am wrong and China is the place. Please bear and give me a chance to justify my answer. China like other Asian economies viz Singapore, Malaysia etc is export oriented economy. India on other hand is a domestic consumption driven economy. It still has high Balance of Payments deficit, reason it imports crude in high volumes. And in addition, its exports don’t match its imports. Off late, the deficit in current account has been matched with surplus in the capital account, thanks to the FII and booming stock markets. But again, with FII withdrawing money, rupee has depreciated vis-à-vis dollar and foreign kitty has been reduced. But still, I feel rupee is in a long term appreciation trend and once the unwinding in the credit markets is done with, dollar will depreciate further. What makes India an attractive destination to me is its young population. It has a high proportion of its population who are in their middle ages and are spending high proportion of their income on luxuries and other consumer durables, making India less affected by slowing demand from export markets. The other thing, which has recently turned into India’s favour is 123 agreement. Since long, the shortage of energy has withheld the development of rural areas and there are power cuts in many parts of India and many areas have no access to electricity. Nuclear energy is a clean and green energy and will reduce India’s dependence on crude to some extent and make the demand for crude from inelastic to elastic in long run. Though the advantages of this deal will take 3-4 years to start accruing but it’s a positive step and this is Manmohan Singh’s greatest achievement I guess. He took a tough decision and even risked his Chair. He will be remembered as a man who single handedly turned Indian Economy, which was in a terrible state in 1991 to India which is looked upon by world as the fuel for the growth of world economy. Economics always says that the impact of policy decisions will accrue in the long run. His financial sector reforms in 1991 set the stage for growth in 2000’s and now 123 agreement will provide new impetus to growth in India.
GLOBAL PORTFOLIO-THE NEW TREND OF THE DECADE
Date: 2 April 2007
Europe which was an earlier sign of slow growth rates, heavy government regulations and witnessed slow growth rates is slowly changing its image. The clear evidence of which can be drawn out from the following facts and figures , the euro is trading at almost all time highs, 1 euro is equivalent to 2$. Even the European economy is expected to grow faster than the US economy.
The dependence on US and US$ is slowly and slightly losing it luster and in the coming decade the European Economy and Euro will be a major share of all the global portfolios and foreign kitty’s. German DAX Stock index has returned a whopping 11% which translates into 14% return for US investors, as compared to it the S&P 500 US Stock Index has returned merely 3.8%. A positive trend to be noticed is the upsurge in the German Economy. As many as 50 small and medium sized German stocks have picked up by top US funds and have given a return of 22% in the past year 2006. Further looking at the German Funds it has been found that many funds have returned 35% during the past year , 38% annualized during the past three years and 27% per annum in past five years. The world economy will be fuelled by growth from other developing economies BRICS and from developed markets of Europe. In the coming years despite of strong appreciation of Euro currency and hike in the interest rates by BUNDESBANK of Germany, the central bank is quite optimistic of its growth being comparable to other developing and emerging market economies. This will create an opportunity in the near future for bullish investors in trading in Euro currency. Moreover the world economy is expected to grow at around 3% in the coming decade and growth seems to be more on balanced side. US economy slowing down can be well seen from the data shown in G7 meeting, earlier the US investors which were non stop shoppers. The imports from China are at 9 year lows and the trade deficit has also narrowed from $58.9 billion to $58.4 billion.
Global Portfolios and Country Mix is used by fund houses to hedge country specific risks. The same thing can be seen happening in Indian markets as well where Fidelity Management has recently launched its Fidelity International Opportunity Fund. The trends to be determined are its investing style. It plans to invest 65% of its equities in Indian corporate and the remaining 35% in overseas markets particularly the Asian Giants like China, Japan, Singapore, Hong Kong, Malaysia, Korea and others. But the cause of worry is the positive correlation between the Stock Markets in Asia. An evidence of it is the fall in Indian and other stock markets due to a fall in Chinese markets on Feb 27 2007. Similarly due to buoyant spirits and sustained capital inflows to other Asian economies, the Indian markets also went up. So it doesn’t make sense to diversify such a risk by investing in Asian economies which have positive correlation with India. Moreover Asian economies like Japan, China and Singapore are highly reliant on US exports for growth and with US economy taking a soft landing; it seems to be more profitable to include some European stocks especially of Germany and take long positions in Euro currency. A quick look at the performance of the MSCI Index shows that its returns were 26.6% CAGR in the last four financial years which is low as compared to returns sported by BSE 200 at 43.2%. Moreover most of the International Funds have taken high exposures in the Indian Markets primarily due to factors like strong domestic consumption, low reliance on US exports, large section of English speaking population, strong middle class represented with high earnings and spending capacity, streamlining of Indian taxation systems , continued Pension and financial sector reforms, capital account convertibility. In the past global asset mix was possible only for FI and FIIs but now with launch of global funds like Fidelity IOF, even the retail investors could benefit from investment overseas. In the coming years we see individual investors using their $50000 limit every year to invest abroad and this limit extends to $3 billion a year for Mutual Funds.
ELEPHANT ‘S GROWTH IS THREATENING THE DRAGON AND GIANTS LIKE USA, UK AND JAPAN.
DATES:-7 May 7, 2007
After the boom in all sectors like InfoTech, metals, telecom, engineering and others it’s now turn for FMCG and organized retail. India’s favorable demographics is already creating ax express high way for retail growth. Mc Kinsey report shows that in India middle class families having income between 2-10 lakhs will grow from 50 million to 583 million by 2025 registering an all around growth of 15% thanks to the rising salaries in the Indian markets. This population segment will be twice the population of USA and will form third largest country by its size. The income is set to rise from Rs.113744 to Rs.318896 in 2025 at a CAGR of 5.3%. Thus the PCI works out to be $7600 which looks meager but its PPP stands at $40000 which looks every attractive. India has been witnessing vast changes in its demographics. Firstly the number of earners per family is on a rise with women liberalization and becoming a part of the workforce. Secondly in India the number of dependents will fall drastically and ensure a larger income is available for spending. Moreover the major stimulant of growth is the rising income. Law of economics says once the basic needs are satisfied the consumers are willing to spend their rest of income on branded luxury and comfort and leisure goods because they provide higher marginal utility. Thus future is very bright for consumer durables and luxury goods manufacturers. Slowly and steadily the organized retailing will expand at the cost of unorganized retailers. The study by McKinsey also indicates that though the overall expenditure on food, tobacco and beverages will drop from 45% to 25% the reason being cited above. But FMCG companies will continue to grow at 4.5% annually creating a huge pie for them to cater to. India will continue to its robust spending to reach to 5th largest consumer in world after Japan, USA, UK and China. India’s consumption will rise more than 4 times from Rs.1500000 cr to Rs.70, 00,000 cr ($1.5 trillion). If PPP is considered India’s consumption will reach $8.2 trillion far ahead then US consumption which stands at $7.8 trillion. Economic reforms show results and often have a time lag of more than 10-15 years. For instance China made reforms in 1990s and its results started showing in the millennium. In India the reforms have already been introduced and their results will start showing in coming years. Further reforms being introduced will only hasten pace of growth but even if the process remains irreversible India is poised to benefit heavily from the sustained growth rate up to 2025.
Thus considering all these companies in the FMCG, autos, leisure and recreation and consumer durables are set to benefit. So one could consider investments in these sectors taking a long term cue. A correction of 5-10% in coming months should be looked as a buying opportunity especially in auto segment from a long term perspective of 3 years. The slow down has already been factored in prices and after a correction this stocks looks attractive. Moreover companies like Dabur and Marico in midcap space look attractive. These companies should use strategies for creating their brand name to survive in brand war against them posed by retail giants like HLL, Colgate Palmolive, P&G, Wal-Mart, Carrefour and others. A new kind of branding has already started taking place consider the brand creation process undertaken by MIAL (Mumbai International Airport Pvt Ltd). They have created their unique logo and creating vast retail outlets in airport vicinity to cater to vast population of 20-25 million clients visiting airport. These will house all International Brands and will help airport earn its revenues and reduce dependence from flight operations to 55%. Thus around 50% of its revenues will come from leasing out retail spaces at airports which will offer huge markets to retailers. As soon as one enters the airport, the airport brand will attract them, and only when the customer enters a shop the individual brand will takeover from airport brand. This brand will be given adequate promotions through bill boards, advertisements etc and could be looked as revenues by leasing them out to giant retailers.
EVERY DARK CLOUD HAS A SILVER LINING
DATE:-5 MAY 2007.
Indian rupee is continuing its rally against US$ and is at its 9 year high of Rs.40.60. It has appreciated more than 8% since 2007. The effect of appreciation in rupee can be seen in terms of lower export earnings and affecting the profitability and margins of companies heavy reliant on exports, and it also translates into a lower sales. DSP estimates a 5% rise in Rupee translates into 3.3% hit in revenues on export earnings.
There is an old cliché that ‘every dark cloud has a silver lining’. The same cliché holds true here as well. The companies heavily reliant on foreign borrowings and which have increasing resorted to overseas borrowing and have taken route of ECB, FCCBs will benefit from this strong rally against US$. Companies such as Reliance Communications, Sun Pharma, Ranbaxy, and Bharat Forge as these companies have to make repayments of principal and interest payments in appreciated rupee. This will in turn result into a lower liability and thus boost the earnings, OPM. The rising rupee will help in reducing our import bill also , this will reduce cost for crude oil translating into a higher profits for oil refining companies and PSU like IOC, HPCL, BPCL and refinery giant Reliance Industries but it will hit export earnings of RIL as well. Strong rupee also means negative factor for global commodities and software companies. Commodity producing companies like Hindalco, RIL, Tatas and others may take a hit on profitability. Even software companies like Infosys, HCL, and Wipro will suffer. But software companies have taken huge exposures in forex market to hedge against rising rupee. Moreover software companies like Infosys and TCS have increased their exposure to non US territories and believe increased turnover will help in reducing impact of stronger rupee. Even software companies believe once the inflation is brought under control, RBI will step into the forex market to prevent rupee from rising further and prevent exporters from being hit. So once the monsoon sets in and the supply side measures start showing results inflation will tend to decline and will also ease problems for exporters.
Thus the market is totally awaiting the good news and high agricultural produce and low inflation figures, which would give a green signal to RBI to step into the market to stop rupee rally northwards and come to the rescue of exporters.
‘LONG TERM INVESTING’- THE FUNDAMENTALS RETURN BACK
DATE: 22 APRIL 2007
Seen the volatility in the stock markets , investors may feel that the returns from stock markets in the long run may not seem to be impressive . But before we make our conclusions it is necessary to consider the returns of Mutual funds in the past few years.
Firstly, it can be noticed that the past five year inflation can be expected to be around at 3%. However, more than 4000 MF operating in US have been posting impressive returns. The last five years have shown a handsome return of more than 11%. Thus the fundamentals, equity markets are the best earning asset in the long term is true.
Emerging Markets diversified funds have been the winners of the day, and have posted returns as high as 24% y-o-y since April 2002. Even the Mutual funds in the arena of real estate and natural resources have shown good performance by giving an annualized return of around 20%. The only losers have been bear market funds down 9.5% in their pursuit to profit from market declines. Apart from it the hedging funds have returned a return of 5% annually. Looking 5 years back , when the stock markets were crashing for two consecutive years and the good times for bears was still expected to come , an commitment of 5 years seem t be demanding a lot. The US economy was in a suppressed mood with growth seen at 0.8% and the growth in coming years was also not expected to be more than 1.6%. This was further emphasized by Standard and Poor’s 500 where the earnings ratio stood at 45 to 1, which further emphasized the bear taking controls. Even the future was not expected to be bright primarily attributed to geo political situations like US-Iraq war and business scandals in MF industry.
The net inflows to equity funds declined from whopping $310 bn to a negative $27 bn in 2002 due to pessimism prevailed in the economy. But the positive point was the amount already invested stayed around estimated at $2.7 trillion down from $4 trillion 2 years back. From this it can be clearly noticed that long term investors possess no knack foe buying at the bottom or getting out of the markets at the top. It’s a game of endurance and not quickness or agility. Even the Indian markets have delivered a return of more than 15% since inception. Thus in the long term from 5-10 years equity led investments will always be ahead of other investment classes.
‘SMALL IS BEAUTIFUL’
DATE:2 April 2007
“Small is beautiful” is a famous saying of Economics. But over here it means increasing the proportion of valued and growth mid cap stocks in the portfolio. At a birds eye view the reason for it can be seen that the midcap stocks are available at cheaper PEs rather than blue chip companies which are currently running at PE of around 21. If one excludes heavyweights like ONGC SBI the mammoths that have a heavy weight in SENSEX and are Navratnas trailing at single digit PE, suddenly SENSEX looks overvalued against the midcap stocks. When markets fell, the midcap started facing declining trend, and the worst was these stocks had beta of more than 1 which meant for every Ruppee1 correction in SENSEX these stocks fell more than Rs1. So this downward trend in past has made mid caps attractive to clients who prefer high risk and high returns. Studies of technical charts also suggest that when markets fall, mid cap face more brunt. But once the markets become favorable the mid cap stocks offer higher returns because of their strong fundamentals and robust earnings and growth potential. A look in the past can give us an evidence of the fact. In 2006 when markets reached 8000 levels, the mid cap corrected more than 38% and their PE was as high as 28-29 more than their parent stocks. But in the current year, with renewed buying seen in blue chip stocks, mid cap may be seen rising further. Moreover these stocks have recently made new highs; despite of this fact they are trialing at PE of around 20 which means there have been an increase of around 40% in combined earnings. Moreover, the results are not biased as companies have low weight as low as less than 2%, as compared to SENSEX where ONGC, SBI, RIL have huge weights. So overall the mid cap segment has performed well and will sustain its robust earnings. And coming back to Beta in rising market again, these stocks will rise more than Rs 1 for every Re1 increase in SENSEX stocks. So, one could certainly look these as buying opportunities into mid cap segment, as the stocks are at very low levels and cannot be expected to decline further . However one has to cautiously select the scrip’s to invest in, and one should avoid random picking and select only those companies which have sound track record, growth potential and dynamic management.
STRONG CONSUMER DEMAND EYED BY SOUTH EAST NATIONS TO COMPETE WITH ASEAN TIGERS ‘ INDIA’ & ‘CHINA’.
DATE:2 April 2007
South East Asean economies are expected to grow at around 6% in 2007 as compared to 5.8% last year, thanks to identification of new markets and increased sales in Middle East and within Asean, despite of falling exports to US, Europe and Japan. World Bank and ADB expect the world trade to grow by around 7.5-8% in 2007 as compared to 9.8% in 2006. Asean economies are trying to strike a balance between their growths by trying to boost their domestic demand to compensate for slowing exports demand. The Asean economies are twice more reliant on exports as compared to their counterparts, especially on developed markets like Japan, US, Europe. They can be seen concentrating on improving the trade relations amongst themselves. The trade amongst Asean nations has reached $300 billion mark and constitutes more than quarter of the total Asean trade which stands at $1.44 trillion. Moreover with rising crude prices, the Middle East nations have experienced an increase in income, which can be translated into an increased opportunity of exports to these nations. The same trend can also be seen happening in China where the Government has recently renamed its International Export Fair as International Import and Export Fair, the focus of the Asean nations is to increase the volume of imports and exports amongst themselves to pick up the upcoming slack. Markets like – Abu Dhabi, Qatar, Dubai, Kuwait and Saudi Arabia are cash rich markets and have tremendous potential. However the facts that the economies dependent on exports to US will see their sales declining very rapidly in the current year can’t be declined. Some of the factors dampening the growth are increase in crude prices which may compel the central banks to hike interest rates, as a result the investment and consumer demand may suffer. Moreover an avian disaster may also seriously cause harm to growing tourism in the economies. Asean economies need to improve their resistance towards terrorism and other environmental disease otherwise there will be run on confidence. Investments in these south east nations have declined since financial crisis in 1997-98, but gradually they are on a rise and were estimated to be $40 billion in 2006 and are expected to grow by 15% in the current year. However these nations will have to match their performance to strong Asean economies India and China, because of their huge attractive markets size. So the south east nations have to boost their domestic demand to attract investments and to maintain their growth rate.
Real Estate-- Issues in India
RESEARCH REPORT:5 DATE:4 MAY 2007
REAL ESTATE TO INVEST OR TO SHY AWAY?
The housing industry in India has been struggling along since independence the government has to be blamed for the current plight of the industry, but the role of real estate developers and builders was also not conducive. Several groups and experts like McKinsey Group have proposed many changes and plans for rescuing the ailing industry. India needs to implement these changes strongly and immediately. This in turn will give an impetus to the Indian Economy and help in posting a double digit growth rate. If all these reform are implemented, we could see growth rate in the economy at 10% in the coming decade.
Real Estate Issues
URBAN LAND CELING REGULATION ACT(ULCRA):
The central government has repealed this Act in 1999/2000 but the state governments also need to follow the directions. States like Rajasthan, Gujarat, UP, MP, Haryana have already repealed it. But on other side states like Maharashtra, Kerala, Karnataka, West Bengal, Orissa need to act upon it. It is very essential to release the huge land banks with government and semi government bodies to reduce the land cost which constitutes around 50% of the price of the real estate property in India which is unlikely as compared to developed countries like USA the land cost is around 37% and material and labor costs at 30%. The government needs to release land to reduce speculative demand due to shortage of land.
CLEAR TITLES:-
In India one of the drawbacks is the fact that 90% of lands in India do not have clear titles, which is barring the entry of foreign capital. This is due to poor record keeping and complicated slow and outdated processes. All updated records must be computerized to facilitate transparency and attract foreign and domestic capital. Fast track courts needs to be set up to clear the disputes to release land and reduce the shortage. This will also help in reducing costs as the prices of real estate will lower, due to increase in supply.
STAMP DUTY AND REGISTRATION FEES:-
The other factor dampening the growth is high stamp duty charged around 10% to 5% or lower. This will encourage actual valuations and discourage under valuation and thus create conducive environment for FDI in this sector. Some states have already lowered duty to increase revenues and attract FDI. The registration process should also be made quick and transparent and simple.
RECOGNITION OF HOUSING AS AN INDUSTRY:-
The GOI should realize that housing needs to be given its due weight and recognized as an industry. The direct impact of recognition to this industry will help in attracting FDI, tax incentive, easy access to capital, which will help in getting good growth in the sector. The GOI can also provide other incentives such as lowering tax rates, larger depreciation and increased equity support from HUDCO and NAREDCO.
INFRASTRUCTURE:-
Infrastructure is one of the key areas needs to be addressed. In developed markets like Mumbai and Delhi, people need to shift away from cities to other smaller areas near cities, but this calls for great infrastructure in terms of gas, sewage, drinking water, schools, power, and especially public transport and roads to reach workplace from these places fast and at low cost like in developed cities of Shanghai, New York or London. Privatizing municipal corporations and state electricity boards is very essential. The government can consider levying infrastructure cess provided it is used for promoting the infrastructure and increasing the growth rate. Moreover, when India is looking to disinvest from public sector it is very essential for government to
promote growth by spending on infrastructure and essential on PPPs and BOOT.
FDI CONDUCIVE POLCY:-
Loads of money is waiting outside the country to enter and develop the real estate market. The government needs to introduce FDI conducive policies and a sense of stability in the future. This would reduce their perception of risk and help them to invest in Indian markets at lower returns expectations. FDI will help in providing real estate developers with needed capital and technology and expertise. GOI needs to address issues of REIT, mortgaged backed securities and real estate mutual funds. In the future with government reducing constraints on limits the investment in real estate could flow in Western corridor especially from Japan where more than 50 companies have signed MOU with government to develop real estate in India.
DEVELOPMENT AND PLANNING:-
Another area needs to be issued is the new cities and integrated townships must be developed and ensure that all these are endowed with all modern state of the art facilities. Professional services must be used for planning and execute all developments plans for cities and towns, with the future development in mind. The government should focus on zonal development as it is easy to channelise efforts on one area as compared to whole of India. This strategy has been followed in developed economies like Malaysia, Japan. Similarly in India we see Western corridor capable of being the industrial hub in future. States like Gujarat, Rajasthan, Haryana, Maharashtra, and Punjab could benefit from it.
RENTAL LAWS:-
Two major sources of income from real estate investments are in form of rents and capital appreciation. In India one of the major concerns is the lack of power to raise the existing rent levels for the existing tenants. The rental laws must be amended to protect the owner and his property from tenants. The GOI should ensure support for termination of old tenancies, remove increase on restrictions on increasing rentals and empower owners to reclaim their properties without any court proceedings which are time consuming and costly. Once these amendments are made, we could see huge FDI flowing into real estate especially commercial sector. The owner must be given chance to earn the market rate of rent on his investments.
FORECLOSURE LAWS:-
Though the level of foreclosures for the housing finance companies(HFC) are relatively low at around 1.5-2%, the foreclosures law must be revised and made up date to suit the current situations. The laws for non payment of EMI and consequent foreclosure and repossession of the property must be revised, so that the financing companies have the final rights on the property, which is the collateral for the housing loan. Once enacted, these laws must be enforced. This will further boost the housing finance business.
Summary:-The present contribution of housing construction industry in India is small when compared to developed economies. This sector contributes only 1% of GDP in India as compared to 3-6% in other economies. If these issues are addressed India could reach and sustain a growth rate of 10% on the coming decade. The housing sector would grow at 14% and create over 3.2million jobs over the next 10 years.
Some insights!!! ---Read to make quick buck!!
Recent stories going in the markets suggest that more than $50 billion are to be invested in the North Western sector to create country’s biggest industrial hub, freight lines, integrated townships and growth zones. So in coming years we could see a lot of capital appreciation in this corridor. States like Gujarat, Rajasthan, Haryana, Maharashtra, Delhi, is going to benefit. But more than 2/3 of benefits will be cornered by Gujarat and Rajasthan. Gujarat is expected to get 2 ports, one 4000MW ultra power project and 6 airports. Moreover it is also benefit from Golden Quadrilateral and highway expansions and also from ICD and container traffic. More than 50 Japanese companies have signed MOU with Indian government for the same purpose. But it should be noted that one cannot time the current downside going on. Real Estate is high risk and high reward Investment Avenue and one should have at least a time horizon of 4-5 years if one looks for investment in this sector and correctly evaluation the properties will help a lot. Moreover one could consider more investment in areas near highways because they will be demanded for industrial purposes and for creating new cities and townships and as they are cheap.
REAL ESTATE TO INVEST OR TO SHY AWAY?
The housing industry in India has been struggling along since independence the government has to be blamed for the current plight of the industry, but the role of real estate developers and builders was also not conducive. Several groups and experts like McKinsey Group have proposed many changes and plans for rescuing the ailing industry. India needs to implement these changes strongly and immediately. This in turn will give an impetus to the Indian Economy and help in posting a double digit growth rate. If all these reform are implemented, we could see growth rate in the economy at 10% in the coming decade.
Real Estate Issues
URBAN LAND CELING REGULATION ACT(ULCRA):
The central government has repealed this Act in 1999/2000 but the state governments also need to follow the directions. States like Rajasthan, Gujarat, UP, MP, Haryana have already repealed it. But on other side states like Maharashtra, Kerala, Karnataka, West Bengal, Orissa need to act upon it. It is very essential to release the huge land banks with government and semi government bodies to reduce the land cost which constitutes around 50% of the price of the real estate property in India which is unlikely as compared to developed countries like USA the land cost is around 37% and material and labor costs at 30%. The government needs to release land to reduce speculative demand due to shortage of land.
CLEAR TITLES:-
In India one of the drawbacks is the fact that 90% of lands in India do not have clear titles, which is barring the entry of foreign capital. This is due to poor record keeping and complicated slow and outdated processes. All updated records must be computerized to facilitate transparency and attract foreign and domestic capital. Fast track courts needs to be set up to clear the disputes to release land and reduce the shortage. This will also help in reducing costs as the prices of real estate will lower, due to increase in supply.
STAMP DUTY AND REGISTRATION FEES:-
The other factor dampening the growth is high stamp duty charged around 10% to 5% or lower. This will encourage actual valuations and discourage under valuation and thus create conducive environment for FDI in this sector. Some states have already lowered duty to increase revenues and attract FDI. The registration process should also be made quick and transparent and simple.
RECOGNITION OF HOUSING AS AN INDUSTRY:-
The GOI should realize that housing needs to be given its due weight and recognized as an industry. The direct impact of recognition to this industry will help in attracting FDI, tax incentive, easy access to capital, which will help in getting good growth in the sector. The GOI can also provide other incentives such as lowering tax rates, larger depreciation and increased equity support from HUDCO and NAREDCO.
INFRASTRUCTURE:-
Infrastructure is one of the key areas needs to be addressed. In developed markets like Mumbai and Delhi, people need to shift away from cities to other smaller areas near cities, but this calls for great infrastructure in terms of gas, sewage, drinking water, schools, power, and especially public transport and roads to reach workplace from these places fast and at low cost like in developed cities of Shanghai, New York or London. Privatizing municipal corporations and state electricity boards is very essential. The government can consider levying infrastructure cess provided it is used for promoting the infrastructure and increasing the growth rate. Moreover, when India is looking to disinvest from public sector it is very essential for government to
promote growth by spending on infrastructure and essential on PPPs and BOOT.
FDI CONDUCIVE POLCY:-
Loads of money is waiting outside the country to enter and develop the real estate market. The government needs to introduce FDI conducive policies and a sense of stability in the future. This would reduce their perception of risk and help them to invest in Indian markets at lower returns expectations. FDI will help in providing real estate developers with needed capital and technology and expertise. GOI needs to address issues of REIT, mortgaged backed securities and real estate mutual funds. In the future with government reducing constraints on limits the investment in real estate could flow in Western corridor especially from Japan where more than 50 companies have signed MOU with government to develop real estate in India.
DEVELOPMENT AND PLANNING:-
Another area needs to be issued is the new cities and integrated townships must be developed and ensure that all these are endowed with all modern state of the art facilities. Professional services must be used for planning and execute all developments plans for cities and towns, with the future development in mind. The government should focus on zonal development as it is easy to channelise efforts on one area as compared to whole of India. This strategy has been followed in developed economies like Malaysia, Japan. Similarly in India we see Western corridor capable of being the industrial hub in future. States like Gujarat, Rajasthan, Haryana, Maharashtra, and Punjab could benefit from it.
RENTAL LAWS:-
Two major sources of income from real estate investments are in form of rents and capital appreciation. In India one of the major concerns is the lack of power to raise the existing rent levels for the existing tenants. The rental laws must be amended to protect the owner and his property from tenants. The GOI should ensure support for termination of old tenancies, remove increase on restrictions on increasing rentals and empower owners to reclaim their properties without any court proceedings which are time consuming and costly. Once these amendments are made, we could see huge FDI flowing into real estate especially commercial sector. The owner must be given chance to earn the market rate of rent on his investments.
FORECLOSURE LAWS:-
Though the level of foreclosures for the housing finance companies(HFC) are relatively low at around 1.5-2%, the foreclosures law must be revised and made up date to suit the current situations. The laws for non payment of EMI and consequent foreclosure and repossession of the property must be revised, so that the financing companies have the final rights on the property, which is the collateral for the housing loan. Once enacted, these laws must be enforced. This will further boost the housing finance business.
Summary:-The present contribution of housing construction industry in India is small when compared to developed economies. This sector contributes only 1% of GDP in India as compared to 3-6% in other economies. If these issues are addressed India could reach and sustain a growth rate of 10% on the coming decade. The housing sector would grow at 14% and create over 3.2million jobs over the next 10 years.
Some insights!!! ---Read to make quick buck!!
Recent stories going in the markets suggest that more than $50 billion are to be invested in the North Western sector to create country’s biggest industrial hub, freight lines, integrated townships and growth zones. So in coming years we could see a lot of capital appreciation in this corridor. States like Gujarat, Rajasthan, Haryana, Maharashtra, Delhi, is going to benefit. But more than 2/3 of benefits will be cornered by Gujarat and Rajasthan. Gujarat is expected to get 2 ports, one 4000MW ultra power project and 6 airports. Moreover it is also benefit from Golden Quadrilateral and highway expansions and also from ICD and container traffic. More than 50 Japanese companies have signed MOU with Indian government for the same purpose. But it should be noted that one cannot time the current downside going on. Real Estate is high risk and high reward Investment Avenue and one should have at least a time horizon of 4-5 years if one looks for investment in this sector and correctly evaluation the properties will help a lot. Moreover one could consider more investment in areas near highways because they will be demanded for industrial purposes and for creating new cities and townships and as they are cheap.
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