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Ghost Protocol


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Ghost Protocol

  1. 1. Ghost Protocol; Volume 68 / February 2012 F IN A N C IA L A D V IS O R PRACTICE JOURNAL JOURNAL OF THE SECURITIES ACADEMY AND FACULTY OF e-EDUCATION SAFE UPDATES – KEEP INFORMEDThe Securities Academy and Faculty of e-Education Editor: CA Lalit Mohan Agrawal
  2. 2. Ghost Protocol; INDEXMonth: February 2012Title: Ghost Protocol – Will US Economy Save The World Again?Editor : CA Lalit Mohan Agarwal 68th Financial Advisor Practice JournalS.No. Section Name Topic 1.1 Editorial Preamble: Ghost Protocol Schadenfreude 1.2 Stock Markets Souring Sentiment On India 3rd Week of December: Sensex up 247 points Sensex to face many headwinds ahead 4th Week of December: Sensex down 284 points Sensex, Nifty plunge 24% in a ‘terrible’ year How could you allocate your assets in 2012? 1st Week of January: Sensex up 413 points India’s Sensex gains in New Year’s Eve 2nd Week of January: Sensex up 287 points Sensex posts highest weekly close in five weeks 3rd Week of January: Sensex up 584 points Sensex gains for 3 consecutive weeks 4th Week of January: Sensex up 495 points Rupee, Sensex climb to 11-week high 2.1 Indian Economy India Must Leave Inaction Behind 2.2 International US Dollar Regaining Ground Will the US economy save the world again? 2.3 Warning Signals Europe’s Vicious Spirals The Straits of America Emerging Markets: Will it fall in 2012? India’s Year of Living Stagnantly 3.1 Currency Market Address Basics 3.2 Commodity Market Duty hike on Gold 4 Financial Sector – Transforming Tomorrow World Economic Forum 4.1 Financial Advisors Beating the Burnout at Davos 4.2 Financial Planners The Great Transformation: Shaping New Models 4.3 Risk Management Consultants Taking Back Globalisation High Food Prices: A Blessing in Disguise? 4.4 Credit Counsellors Leaders slam eurozone foot-dragging on debt 4.5 Issues Of The Present Fallout from the crisis could last the rest of this decade At World Economic Forum, Fear of Global Contagion Dominates 5. Central Banks European Banking Authority Stress Tests 6. Inflation Inflation: Tackle it Effectively 7 Knowledge Resource India’s Anti-Corruption Contest The World’s Major Economies Share Many More Words From The Managing Trustee Vulnerabilities Than Is Commonly Supposed.
  3. 3. Ghost Protocol;Editorial preamble1.1 GHOST PROTOCOL 幸灾乐祸 The protracted financial and economic crisis discredited first the American model of capitalism, and then the European version. Now it looks as if the Asian approach may take some knocks, too. Coming after the failure of state socialism, does this mean that there is no correct way of organizing an economy? In the aftermath of the subprime crisis and the collapse of Lehman Brothers, fingers were pointed atthe United States as an example of how badly things could go wrong. The American model furtherweakened first by the Iraq invasion, and then by the financial crisis. Anyone who dreamed of theAmerican way of life now looked stupid.Immediately after Lehman Brothers’ collapse, German Finance Minister Peer Steinbrück put thisdiagnosis as a challenge not only to the US, but also to other countries – notably the United Kingdom –that had “Americanized” their financial system. The problem, Steinbrück argued, layin over-reliance on highly complex financial instruments, propagated by globalizedAmerican institutions.Criticism of America did not stop there. Steinbrück’s successor, Wolfgang Schäuble,persisted in the same tone, attacking “clueless” American monetary policy, whichwas supposedly designed only to feed the American financial monster.But such criticism ignores the problems faced by banks that did not use or deal in complex financialproducts. Bank regulators had long insisted that the safest possible financial instrument was a bond issuedby a rich industrial country; then the outbreak of the eurozone’s sovereign-debt crisis, with its roots in laxgovernment finance in some countries.Critics now had a new focus. Naturally, many conservative Americans weredelighted by the imminent failure of what they saw as Europe’s tax-and-spendmodel, with its addiction to a costly and inefficient welfare state. They were not theonly critics. The chairman of China Investment Corporation, Jin Liquin, commentedskeptically on a proposed Chinese bailout of Europe, which he called “a worn-outwelfare society” with “outdated” welfare laws that induce dependence and sloth.But such criticism captures only one small part of Europe’s difficulties. The fiscal problems of Greeceand Spain were also the result of spending a great deal on high-technology and high-prestige projects:facilities for the Olympic Games, new airport buildings, and high-speed train links. And Spain and Irelandbefore the crisis did not have a fiscal problem, owing to the rapid economic growth produced by a real-estate boom that seemed to promise a new era of economic miracles.One of the most widely used Chinese terms of recent years is 幸灾乐祸 (xìng zāi lè huò), best translatedas “schadenfreude”: to rejoice in other peoples misfortune.Asian critics looking at America and Europe could easily convince themselves that the Western model ofdemocratic capitalism was collapsing.
  4. 4. Ghost Protocol; But haven’t similar capital investments and soaring property prices also been an increasingly important part of China’s transformation since the 1990’s? Chinese citizens are now not only frustrated with the high-speed trains’ increasingly obvious imperfections and inadequacies, but are also wondering whether their government has set the right priorities.Shadenfreude comes in several flavors. Russia’s Prime Minister Vladimir Putinand Argentina’s President Christina Kirchner liked to think that their versions ofa controlled economy and society built in the aftermath of default on foreign debtoffered a more viable alternative to cosmopolitan international capitalism. Bothnow face major problems with disillusioned populations. In short, the world’s major economies share many more vulnerabilities than is commonly supposed. A response to global challenges based simply on schadenfreude may promote a short-term sense of well-being, as people often like to think how lucky they are to have escaped a mess that originated elsewhere. But soon they encounter their own problems; indeed, today’s global economy is a riot of slipping economic models. And tomorrow the cacophony will be even louder.So, is there any absolutely sure way of organizing economic life? If the quest is for a way of securingperpetual security or dominance, then the answer is “no.” In a market economy, however, competitionrapidly leads to emulation, and high profits associated with an original innovation turn out to betransitory. From a longer-term perspective, there are only temporary surges of relative wealth, just asthere are only temporary surges of apparent success in a particular way of doing business.During the Industrial Revolution in Western Europe in the late eighteenth and early nineteenth centuries,the pioneers and innovators in textiles, steel, and railroads were not, on the whole, rewarded withimmense riches: their profits were competed away. The late nineteenth and the twentieth centuryproduced a different sort of growth, because public policies and resources could be used to protectaccumulated wealth from the otherwise inevitable erosion stemming from competitive pressure.Underpinning comparisons of different models is the wish to find an absolutely secure way of generatingwealth and prosperity, and the belief that a sensibly ordered state could somehow capture and eternalizethe fruits of economic success.Like it or not, states cannot organize themselves in that way any more than individuals can.
  5. 5. Ghost Protocol;1.2 STOCK MARKETS Souring Sentiment on India India is definitely not in the good books of brokerages as Ruchir Sharma, MD & global head of emerging markets at Morgan Stanley points out, the sentiment on India is souring. In his book - Breakout Nations, Sharma says the focus must shift to other emerging economies beyond China and India. The operating assumption is that the bear market regime is still on. We know that the popular thing to ask just now is will 2012 be any different from 2011 and the key thing to remember here is that markets don’t care about calendar years. So just because a new year begins doesn’t mean a new trend is about to begin. The bear market regime looks most entrenched in emerging markets. The big surprise in 2011 is how resilient the US market has been and the factthat the Q4 of this year, the US economy in the midst of all this talk of a global slowdown is likely to posta GDP growth rate in the 3.5% to 4% range, which is an extraordinary performance.However, many emerging markets, which we thought were going to be the superstars, are beingquestioned. So, at this time last year, the big debate was that when will India overtake China as the fastestgrowing economy in the world, that debate is now being turned on its head which is that both India andChina are slowing down and the question is which economy will slow down even more in 2012?The trend reversals take place just when the conventional wisdom becomes verystrong. So, over the past decade, it became popular to say- the decline of the Westand the rise of the rest. That trend could well start showing some signs of reversal,the two economies showing the maximum resilience at this stage are US andGermany in the midst of this entire turmoil.In US and Germany even the expectations became very low and hence, thoseexpectations are now being easily surpassed. At the same time, in the emerging markets expectations gottoo high, in terms of what they could achieve, and those are now being undershot. Markets trade at themargin, in terms of what the rate of change is and the rate of change seems to be more positive in thosemarkets and more negative in emerging markets. On the US dollar I am more confident. The US dollar over the past decade, on an inflation adjusted trade weighted basis has lost one third of its value. We were looking at some of our long term charts and it shows that the US dollar now is at the cheapest level it has ever been in its history. So, it is competitive and a lot of the emerging market currencies have become quite expensive and so the big reversal is taking place.For many foreign investors a big part of the returns in emerging markets, over the past few years camefrom currency appreciation and that trend has exhausted itself. Hence, I think that in the US dollar todayis quite likely that the bear market we saw in the dollar, over the past decade where it lost a third of itsvalue is coming to an end and we are likely to see a higher dollar versus many currencies over the nextfew years. However, these currency trends take a long time to play out but that’s the sort of nature ofgame in currencies, where the trends tend to reverse.
  6. 6. Ghost Protocol;There has been a lot of talk here about the rupees performance and how its one of the worst performingcurrencies in the world. We think it was high time that the rupee corrected. At our per capita income, weneed an undervalued currency not an overvalued currency to be able to grow.The rupee now has corrected for that. If you look at it on inflation adjustedbasis, on a three-year basis the rupee has virtually unchanged.So, this has really been an event of this year and markets always do that,which is that they don’t price something in for long time and then in a digitalmanner they price something in a very short span of time which is what hashappened with the rupee. Barring some sort of macro economic crisis, it does seem to me that the rupee’sbig decline is over but all the other emerging market currencies are still quite overvalued.The Indian stock market today is back to where it was in December 2005 in on inflation-adjusted terms. But, the behavior of the Chinese market is in fact more disturbing. The Chinese stock market today is basically where it was 5 years ago. It is even worse if one does an inflation adjusted return. But the real story here to me and the real risk could be China which is that people are so used to seeing China print growth numbers of 8-9% every year. If China grows at less than 7% even for a couple of quarters in 2012 that could really shock a lot of people because no one expects China to do that. Since1997, China has not recorded a growth rate of less than 8% in any single year. To see them adjust to thatrealty could be something, which could send a lot of tremors in the global market.China has accounted for about 50% of incremental oil demand over the past decade and 75% ofincremental oil demand over the past three years. If China has a bit of a wobble it may sort of contaminatethe whole emerging market universe. Then you end up getting a clearing out process, where some of thecommodities importing nations gain the new leadership and a new bull market begins on the back of this.But the market has been sensing much more trouble than what the analyst have let on. However, in emergingmarkets, the way we are positioning ourselves in the coming decade will be very different from the pastdecade. The leaders of the past decade included commodities, were all driven by the China growth story andwe think that in the decade going forward, it is bound to change as most things do once the decade is over. Sentiment about India has already soured quite a bit. And, there is no catalyst apart from lower commodity prices which gets us a sustainable bounce. We cannot have a bull market begin where every time the index in India goes up by 5-10% because of global factors; commodity prices led by oil also go up by 5-10% that becomes self defeating. We need that psychology to break for us to get a sustainable advance. Until then it’s hard to sort of get out of this bear market regime. In the previous bull market, which took place from 2003-2007, we were pretty clear about that, but that was due to global factors, including whathappened in India. However, what we got was that emerging markets had a terrible time in the 1990s andtheir balance sheets were cleaned out after that both at the corporate level and at the government.Valuations became very cheap and then from 2003 we have this flood of easy money, starting out fromthe US and booming demand in the developed world that shot up the emerging market growth rates.
  7. 7. Ghost Protocol;So, emerging markets till 2002 were averaging a growth rate of about 3.5%, from 2002 onwards thegrowth rate doubled to 7% and that was the average till 2007. What happened in India was exactly similarthat a growth rate was 5.5-6% and 2003 onwards our growth rate went up to 8.5-9%. Hence, everyone here in India thought this is about us, but in fact it was a rising tide that was lifting all boats and that boom came to an end in 2007, when in 2009 and 2010 we all used monetary and fiscal stimulus to try and revive that boom, which took place from 2003-2007 and we were able to carry that on for a short while. However, in the end whats happening in India is that the growth rate is coming back to its trend line of possibly around 6-7%.Some people tell that in India if you get a growth rate of 6-7%, it is still very good compared to what theglobal economy is going to see. However, the point here is few things need a major adjustment process. Alot of our companies, our macro economic finances are geared towards the growth rate of 8-9% and thatadjustment to a 6% growth rate or 7% growth rate really requires a lot of pain, especially at our sort of percapita income level.Also, the signaling process is not that strong currently. If you look at the priorities of the government, itsstill is very much about how to redistribute the pie rather than grow the pie. When that’s happening that isnot a very encouraging sign. The incentive is still to get something like a Food Security Bill passed ratherthan get any major new reforms passed. That’s what they did in 2003 to 2007 where they spent a lot, butthey were able to sustain because of high revenue growth. Now it’s the opposite, which is that they thinkthat this revenue growth slowdown is just temporary in nature and it will end soon and we can sustain thisspending. But, this growth rate is not going back to 8-9% any time soon and we can’t keep spending at theway that we did over the past five to seven years.That is a real disappointment to people like us who want the India story to shine out there. Investors are afickle minded lot and what they tell you today, you should not take too seriously because often in six-12months the views can change. But a lot of hype about India is deflating very quickly.
  8. 8. Ghost Protocol;3rd week of December 2011: Sensex up 247 points Daily review 16/12/11 19/12/11 20/12/11 21/12/11 22/12/11 23/12/11 Sensex 15,491.35 (112.01) (204.26) 510.13 128.15 (74.66) Nifty 4,651.60 (38.50) (68.90) 148.95 40.70 (19.85) Weekly review 16/12/11 23/12/11 Points % Sensex 15,491.35 15,738.70 247.35 1.60% Nifty 4,651.60 4,714.00 62.40 1.34%Sensex to face many headwinds aheadBSE gains over 1%, broader market down Indias benchmark share indices ended over 1% higher in the week to December 23. However, the broader market continues to remain weak as investors shunned investments in mid-caps and small-cap shares. For the week ended December 23, the 30-share Sensex ended at 15,738.70 up 247.35 points or 1.60%. The S&P CNX Nifty closed at 4,714 rising 62.40 points or 1.34%. On Monday, Markets ended lower for the fourth straight session, slumping to fresh 2-year lows in intra-day trades,after recent data vindicated that Indias economic growth is slowing down. The Sensex touched a fresh 28-month low of 15,191 and the Nifty touched a low of 4,560, the lowest level for both indices since21/08/2009. On Tuesday, share indices ended lower further for the 5th straight session.On Wednesday benchmark shares indices ended over 3% higher, snapping a five day losing streak. OnThursday, share indices ended higher again, led by banks after slump in food inflation to 4-year lows,rekindled hopes of rate cut by the central bank sooner than expected. Food inflation eased sharply to 1.8%in the year to December 10, from an annual 4.35% rise in the previous week. Food inflation fell sharply toa near four-year low as prices of essential items like vegetables, onion, potato and wheat declined.The RBI governor Thursday said that India’s GDP will be below 7.6%. In its second quarter review ofmonetary policy 2011-12 the central bank had revised the baseline projection of GDP growth for 2011-12downwards to 7.6% from 8% earlier. Indian stocks ended lower on Friday; on rising concerns that Indiasgrowth is likely to be lower than the central banks revised forecast of 7.6% for 2011-12.This week trading volumes were thin due to the upcoming Christmas holidays. The trend may continue inthe coming week as well with many markets shut for year-end holidays. For the Indian markets, nextweek will be important given the F&O expiry on Thursday. Markets will also be partly driven by thepolitical developments, as the parliament resumes after the Christmas break to debate the New LokpalBill. Focus may soon shift to January and outlook for New Year.Foreign institutional investors have been selling everyday in our market. They have been net sellers oflocal stocks worth more than $500 million so far in 2011, a far cry from record net inflows of more than$29 billion in 2010. The market sentiment also dampened after global equity research firm CLSA cut itsforecast for Indian economic growth to 6.7% for the current fiscal year from its earlier projection of 7.3%,as high interest rates take a toll, with policy inertia and corruption scandals hurting confidence.
  9. 9. Ghost Protocol;4th week of December 2011: Sensex down 284 points Daily review 23/12/11 26/12/11 27/12/11 28/12/11 29/12/11 30/12/11 Sensex 15,738.70 232.05 (96.80) (146.10) (183.92) (89.01) Nifty 4,714.00 65.00 (28.50) (44.70) (59.55) (21.95) Weekly review 23/12/11 30/12/11 Points % Sensex 15,738.70 15,454.92 (283.78) (1.80%) Nifty 4,714.00 4,624.30 (89.70) (1.90%)Sensex, Nifty plunge 24% in a ‘terrible year The BSE Sensex closed 0.6% lower on Friday and posted its first annual fall in three years as a combination of near double-digit inflation, high interest rates, slowing domestic growth and policy inaction turned off investors already shaken by global headwinds. The benchmarks fall in 2011 was only the second annual decline in a decade. The Sensex ended down 0.57% at 15,454.92 on Friday.‘Terrible and ‘peculiar is how market-men described calendar 2011.The benchmark indices fell 24 per cent and the Indian market wasamong the worst performer in the world during the year.Market experts are of the opinion that high interest rates, rising inflation,leadership crisis, slower GDP growth rate and the depreciating rupeestill continue to be major concerns.The year started with rising crude oil prices due to political turmoils inoil-producing countries such as Libya. By then Europe had alreadybecome a worry with countries like Greece and Ireland having run uphuge debts. But what triggered the fall in the markets was the Augustdowngrade by Standard & Poors of the US ratings. Soon, markets theworld over lost ground. Indian markets followed suit.The depreciation of the rupee was the last straw for the Indian markets. The falling rupee accompanied byrising crude oil and fertiliser prices, squeezed profit margins of companies. The BSE Bankex fell 32 percent this calendar year, while IT and pharma indices fell 15.62 per cent and 13.2 per cent respectively.The BSE FMCG index, the best performing sector for the year, grew about 9.3 per cent during the year.Volumes in the cash market dropped through the year while that of the derivatives market increased.There was not good news in the IPO market either. According to estimates, a total of Rs 14,000 crore wasmobilised through IPOs. IPOs finished up the wealth of the investors. Retail investors were caught at thefag end of the bust. Most of the scrips are trading 70-80 per cent below their listing prices.This year was terrible for our markets. Next year may also start on shaky ground. Corporate earnings needto grow, only then will the confidence among the investors come back.
  10. 10. Ghost Protocol; Yearly/Quarterly Review Month December December December December March June Sept. December 2007 2008 2009 2010 2011 2011 2011 2011 Sensex 20,206.95 9,647.31 17,464.81 20,509.09 19,445.22 18,845.87 16,453.76 15,454.92 Points Base (10,559.64) 7,817.50 3044.28 (1,063.87) (599.35) (2,392.11) (998.84) % Base (52.26%) 81.03% 17.43% (5.19%) (3.08%) (12.69%) (6.07%)Dalal Street sheds 24.64% in 2011 on interest rates, inflation, rupee fall, global uncertaintiesThe bellwether BSE Sensex shed 24.64% in 2011 in the wake of high inflation, higher interest rates,depreciating local currency, slowing domestic growth and global uncertainties. This is the first annual fallin the Sensex in the last three years. Seven out of 13 sectoral indices on the BSE have done worse than theBSE Sensex in 2011, while only the fast-moving consumer goods (FMCG) index bucked the trend andended the year with positive returns of over nine per cent.The Sensex had reflected the general negative sentiment, when it closed 0.57% or 89 points down at15454.92 points on the last day of 2011 on Friday. For the full year, the Sensex shed 5,054 points from its2010 close of 20,509.09 points.However, in dollar terms the fall of the Sensex is even steeper at 36.74%. A depreciating rupee, usually,erodes the take-home value of foreign institutional investors (FII) investments. The Dollex-30 index ofthe BSE, which captures the dollar value of Sensex, slid from 3,761.83 points at the end of 2010 to2,379.90 points on Friday. The fall in the Dollex-30 could be attributed to a steep fall of about 16% in therupee against the dollar in 2011. The rupee, which touched Rs 43.85 per dollar on July 27, closed at Rs53.01 on Friday.
  11. 11. Ghost Protocol;How could you allocate your assets in 2012? Its that time of the year when investors ask what the coming year will hold for them. If only the markets go by predictions, we could all be rich. Since they dont, it is not a great idea to reallocate assets based on the market view alone. Taking a market view means tuning the allocation to macro realities so that losses are reduced. The tactical asset allocation exercise is,therefore, about risk assessment of risk factors, and the agility to rework if assumptions dont materialise.The negative run in the equity market has made everyone anxious. Bad news comes in every day and themarkets are enveloped by pessimism. Many see 2012 as a lost yearfor equity since the much-needed economic reforms, may nothappen. Corporate profitability has taken a hit and lower industrialproduction numbers point to lower growth in sales. There is alsolittle hope of foreign investors returning to India with a highallocation since the macro-economic fundamentals do not look good.There are two points to consider before deciding on equity allocationin 2012. First, the equity markets lead the changes in the economiccycle. This means that the markets will bottom out much before all the indicators turn positive. To waitfor things to improve before making an investment means to make a late entry, this also translates into adelayed participation in the next up cycle. Second, bear markets require an acute eye for a bottom-upinvesting, choosing companies carefully for their ability to bounce back. Investors were enamoured in 2011 by the high returns on short-term debt and deposits. In 2012, if the interest rate policy eases due to a lower inflation level and the need to support economic growth, these products will be the first to respond to such changes. The return in short-term debt will directly map where the policy rates are and will come down with it. Fixed maturity plans and deposits may begin to offer lower interest rates, and slowly, move down in the popularity stakes.Gold has been the default choice for investors who did not like the riskof the equity markets and high rates of inflation. As we look at 2012, itis obvious that the circumstances that pushed up gold prices may notcontinue in the future. If no new shocks are expected, gold can begin itslong-awaited correction. Any contraction in the economic cycle is not good news for real estate or commodities. At the turn of the cycle, both real estate and commodities tend to suffer a correction, many a times doing so ahead of the cycle. Allocating assets means acting on the basis of information we now have, and making decisions in the present after making reasonable assumptions about the future. The focus needs to be on risk, notreturn alone. We will then know what to look for and the kind of adjustments to make in the future.
  12. 12. Ghost Protocol;1st week of January 2012: Sensex up 413 points Daily review 30/12/11 02/01/12 03/01/12 04/01/12 05/01/12 06/01/12 Sensex 15,454.92 63.00 421.44 (56.72) (25.56) 10.65 Nifty 4,624.30 12.45 128.55 (15.65) 0.30 4.15 Weekly review 30/12/11 06/01/12 Points % Sensex 15,454.92 15,867.73 412.81 2.67% Nifty 4,624.30 4,754.10 129.80 2.81%India’s Sensex Gains in New Years Eve Indian stocks advanced this week on hope that 2012 will be different from 2011 and the central bank may cut borrowing costs to stoke economic growth as inflation slows. The BSE India Sensex rose 2.67 percent to 15,867.73 this week, the most since the period ended Dec. 2. The S&P CNX Nifty rose 2.81 percent to 4,754.10. Globally, Tim Condon of ING Financial Markets believes that it is going to be another year of ranged trading for risk assets. "The data has come in prettysolidly out of the US and that’s helping sentiment to some degree, but the situation in the eurozoneremains very difficult and investors are going to be dealing with uncertainty on the European debt crisis atleast into the beginning of the year. So, choppy conditions are probably going to prevail."2nd week of January 2012: Sensex up 287 points Daily review 06/01/12 09/01/12 10/01/12 11/01/12 12/01/12 13/01/12 Sensex 15,867.73 (34.08) 350.37 10.77 (138.35) 117.11 Nifty 4,754.10 (4.10) 106.75 11.40 (29.70) 34.75 Weekly review 06/01/12 13/01/12 Points % Sensex 15,867.73 16,154.62 286.89 1.81% Nifty 4,754.10 4,866.00 111.90 2.35%BSE Sensex posts highest weekly close in five weeksThe BSE Sensex rose to its highest weekly close in five weeks on Friday, on hopes renewed policyreforms by the government and easing inflation will give a much needed boost to the countrys slowingeconomy. "There is a growing consensus that we are going to see good news on the policy front by thegovernment. Secondly, one is getting more comfortable with the way macroeconomic indicators havebehaved in the last few days.India formally eliminated restrictions on foreign investment in its single-brand retail sector, opening thedoor to the likes of Swedish furniture giant IKEA to open stores in Asias third-largest economy. Thegovernment is also drawing up plans to allow foreign airlines to invest in its hard-pressed airline sector.
  13. 13. Ghost Protocol;3rd week of January 2012: Sensex up 584 points Daily review 13/01/12 16/01/12 17/01/12 18/01/12 19/01/12 20/01/12 Sensex 16,154.62 34.74 276.69 (14.58) 192.27 95.27 Nifty 4,866.00 7.90 93.40 (11.50) 62.60 30.20 Weekly review 13/01/12 20/01/12 Points % Sensex 16,154.62 16,739.01 584.39 3.63% Nifty 4,866.00 5,048.60 182.60 3.75%Sensex gains for 3 consecutive weeks,Up 8% on FII money The market showed excellent performance for the third consecutive week led by strong inflow of money, tracking positive global cues. Gradual easing of funding problems in the eurozone, improvement in the economic data of United States, appreciation of rupee and October-December quarter earnings helped the market to rally nearly 8% in three weeks. Indian markets were among the top gainers in Asia. The Nifty jumped 3.75% for the week while the Sensex added584 points or 3.63% in the last five trading sessions.Foreign institutional investors stepped into India with strong footing, taking exposure to about Rs 6,000crore worth of equity shares since the beginning of 2012, very encouraging as compared to net sellers ofRs 3,642 crore in 2011. The BSE index, which slumped almost a quarter in 2011, has risen nearly 8percent since the New Year began.Morgan Stanley said it expects the Sensex to rise 14 percent in 2012 on the likelihood of better returns oninvestments and attractive valuations on an absolute basis.Neeraj Dewan, director at Quantum Securities said, "The Vodafone (VOD.L) judgment is also good formarket... it will boost foreign investment in India." The Supreme Court ruled on Friday that the countrystax office has no jurisdiction over Vodafones (VOD.L) purchase of mobile assets in India, which comesas a relief to the telecom giant that has been fighting a $2.2 billion tax bill in a long-running dispute.“First, the global markets are supporting and then we are hoping that some action will be taken byReserve Bank of India (in the policy review next week)," Dewan said.Indias headline inflation slowed in December to a two-year low as food price pressure easeddramatically, but manufactured products inflation edged up from November.The rupee notched up a third consecutive week of gains, rising 2.41 percent. It was the biggest weeklyrise since last week of October, according to Thomson Reuters data.
  14. 14. Ghost Protocol;4th week of January 2012: Sensex up 495 points Daily review 20/01/12 23/01/12 24/01/12 25/01/12 26/01/12 27/01/12 Sensex 16,739.01 12.72 244.04 81.41 Republic 156.80 Nifty 5,048.60 (2.35) 81.10 30.95 Day 46.40 Weekly review 20/01/12 20/01/12 Points % Sensex 16,739.01 17,233.98 494.97 2.96% Nifty 5,048.60 5,204.70 156.10 3.09%Rupee, Sensex climb to 11-week highSensex ends above 17K this week The Sensex rose for a sixth straight session on Friday to a 11-week high as foreign investors continued to buy local stocks on indication of a policy shift towards reviving growth, with an increase in global risk appetite also aiding sentiment. Foreign funds have pumped in more than $1.5 billion into beaten-down Indian shares this month, in sharp contrast to net outflows of about $500 million in 2011. Reliance Industries and Infosys led the rise. Reliance rose 3.7%, while Infosys jumped 2.2% The Federal Reserve surprised financial markets by saying it expected to leave U.S. benchmark borrowing costs at effectively zero until at least late 2014, considerably later than some investors had expected. And at home, an unexpected cut in the cash reserve ratio (CRR) by the Reserve Bank of India boosted investors sentiments in the market. The RBI in its third quarter policy review cut the CRR, the amount against deposits which commercial banks have to keep as liquid assets such as cash, by 50 basis points to 5.5% from 6%. This step will release Rs 320 billion into the system.The main 30-share BSE index closed 2.96% up at 17,233.98, its highest closing level since November 9.Jagannadham Thunuguntla, head of research at SMC Investments and Advisors said, "I think its becauseof loads and loads of liquidity and above that the Fed statement that probably they will keep interest rateslow till late 2014. Its value taking plus liquidity support."The benchmark has added about 11 percent so far this year. It had shed nearly a quarter last year, makingit one of the worst performers in the world."This is tomfoolery. We were the worst performing market last year and the best performing market thisyear. What has changed? Nothing," said Arun Kejriwal, a strategist at Research firm KRIS. He saidforeign institutional investments, an improved rupee and ground-level pessimism of last year have driventhe stocks up this month.The rupee touched an 11-week high on Friday on the back of dollar inflows with a growing number offoreign exchange dealers and treasury officials saying that the local currency is on course to gain furtherin the coming weeks. The rupee rose 1.5% from Wednesdays close of 50.11 against the dollar to end theday at 49.31 to the USD, with the gain fuelled partly by exporters selling dollars after being caught on thewrong foot in terms of the direction of the currency.
  15. 15. Ghost Protocol;2.1 INDIAN ECONOMY India Must Leave Inaction Behind Many Indians are entering 2012 with a sense of unease. The economy is slowing, infrastructure remains terrible, poverty is ever-present, and corruption seems an intractable problem. These are all legitimate concerns. But, please, take a step back and look at the big picture. And take another step back and look at the really big picture. For most of the past 2,000 years, wealth and power wereconcentrated in those parts of the world with the largest populations - that is, the civilisations of what istoday India and China. Then, around 500 years ago, the countries of Europe began their dominance. Theindustrial revolution allowed, for the first time in human history, small states to accumulate wealth andpower out of proportion to their populations.With the 21st century well underway, it is becoming clear that the past 200 years have been a deviation.The big nations - China and India - are making a comeback, and we are now returning to the historicalnorm. But size itself does not automatically confer either wealth or power. A big state still has to take theright steps to maximise its natural advantage.So, when we ask if this will be a good century for India, we are really asking what India is doing toconvert its size into increased wealth and power. The answer is: so far, not much. Look at what China hasaccomplished in the past three decades. It has transformed from an agriculture-driven to a manufacturing-driven economy. Its per capita GDP has grown ten-fold. It has built over a thousand universities,achieving the fastest increase in university enrolment in the history of mankind. Life expectancy at birthhas increased from 66 to 73 years, and the infant mortality rate has decreased by 60%. Chinese checkers Chinas economic strength has funded an increasingly forceful foreign policy. It is building a world-class navy, striking long-term deals for resources in Africa and South America, and - closer home - securing potential strategic footholds in Indias backyard. China is busy constructing commercial ports in Pakistan,Myanmar, Bangladesh and Sri Lanka in what analysts have called a "string of pearls"strategy. If commercial ports one day lead to basing rights for Chinas navy, this string ofpearls could well strangle India.Looking out from Beijing, Chinas leaders see around them a host of weak states, and only one thingstanding between them and complete domination of the entire Asian continent: a powerful India. Enter the Elephant India has several important advantages over China. If it uses them correctly, it can credibly challenge Chinas would-be supremacy in Asia. First, India has demographic tailwinds that China can only dream of. Chinas disastrous one-child policy has turned that country (1.8 births per woman and 20% of the population under the age of 15) into the demographic
  16. 16. Ghost Protocol;equivalent of a Western European nation. India, by contrast, is not only large like China, but also young(31% of population under 15) and growing (2.7 births per woman). Second, Indias corporate sector is far stronger than Chinas. Indian businesses, led by English-speaking management of global calibre, will conquer global markets, just as American businesses did in the second half of the 20th century. Most companies in China, where domesticpower derives from connections with the state and where export cost advantages depend on an under-valued currency, lack the capacity to become true multinationals. Third, India has the most talented base of technology workers in the world. Currently they are under-utilised in the outsourcing sector. India must take them out of the back office (where they use their minds to develop intellectual property for overseas clients) to the front office(where they will develop intellectual property for Indian firms). Indian firms that move from back officeto front will capture far more of the global value chain in technology than they do currently.These are just some of the advantages that can give Indias economy thesustained growth it needs to fund a more aggressive foreign policy againstChina. Already India has begun to replace its ageing military hardware.Only a strong economy can ensure India has the capacity to match Chinasongoing defence build-up. Only a strong India can halt and roll backChinas incursions into the Indian Ocean area.Above all, India has one more thing that China does not: a relationshipwith the US bolstered by shared values. The two democracies have comea long way since the US slapped sanctions on India following the 1998nuclear tests. Now they consider themselves strategic partners, and arecooperating across a wide range of matters, from trade to military training to intelligence sharing.But the US and India need to do more. They need to develop an alliance that is as broad, deep and strongas the Anglo-American alliance was in the 20th century. Just as the US and the UK worked together topreserve freedom last century, so must the US and India this century.As the great nations of Asia re-emerge from centuries of economic stagnation, China has gotten a bighead start. If the 21st century is to be a good one for India, it must leave inaction behind and begin on thepath to global power. 2012 would be a good time to start.
  17. 17. Ghost Protocol;2.2 INTERNATIONAL US Dollar Regaining Ground Portuguese-speaking concierges have of late been much in demand in New York hotels. A record number of Brazilians are floating around the city on shopping expeditions and could do with all the local help possible. The people of a country with one of the most expensive currencies in the world are flocking to a nation where the currency is about as cheap as it has ever been. Adjusting for relative inflation differentials, the US dollar by mid-2011 was at the lowest level against currencies of its trading partners in itsfloating rate history, which dates back to the end of the Bretton Woods system in the early 1970s.While the Brazilian real is an extreme case, lying at one end of the valuationspectrum, the multilingual cacophony on Fifth Avenue suggests touristsfrom other parts of the world too are finding the US a bargain. Tourism onits own hardly dictates a currencys trend but other data - from US exports toforeign direct investment, or FDI, inflows - reaffirm the greenbacks highlycompetitive position. After steadily declining for many decades, the US share of global exports is beginning to tick higher from a low of 8% in 2008. FDI inflows have picked up meaningfully over the past decade and are currently running at 1.5% of US GDP compared to the mere 0.5% share in 2002. These flows are all working to narrow the US current account deficit from a peak of nearly 7% of GDP at the height of the US consumption boom in 2007 to 3% now.The long-talked-about trade imbalance should narrow even more in the years ahead as the US import bill forenergy falls further and some manufacturing moves back home. These trends are already in progress but areyet to be recognised by the conventional wisdom.From a low of 68% in 2005, the US is now 78% self-sufficient in termsof its overall energy needs. The ramp up in production of shale gas withnew technological breakthroughs has played a meaningful role in cuttingdown the US import bill for energy. Perhaps more surprisingly, USimports of oil too have declined over the past five years, not just due toweak demand but also on account of an onshore production boom inplaces such as North Dakota, higher efficiency as well as greater use ofbiofuels and unconventional liquids such as shale oil.Meanwhile, a recent report by the Boston Consulting Group, or BCG, suggests that the US manufacturingsector is set for a major revival. China used to be the clear choice to build a manufacturing plant forglobal suppliers because of its low-cost labour, cheap currency and significant government incentives toattract foreign investment. But over the past five years, the renminbi has appreciated 20% against thedollar and Chinas annual inflation rate has averaged 1% more than that of the US inflation. Pay andbenefits between 2005 and 2010 rose 19% annually for the average factory worker in China while the costof employing US labour increased by only 4%.
  18. 18. Ghost Protocol;BCG estimates that by 2015, manufacturing in the US will be just as economical as in China for many goodsmade for North American consumers. With multinationals likely to bring some production work for the North American market back to the US, the countrys trade deficit could further narrow. The situation was very different a decade ago when China was just joining the WTO and the US dollar was in the midst of a powerful bull market. Between 1991 and 2001, the greenback appreciated by more than 30% on a trade-weighted and inflation-adjusted basis. That undermined the competitiveness of the manufacturing sector and contributed to the record widening of the US current account deficit. The dollar bear market of the past decade more than reversed the earlier gains with currencies of many emerging markets rising the most instead.The Brazilian real appreciated by more than 200% against the dollar overthe past decade, followed by other commodity-exporting currencies suchas the Russian rouble and the Chilean peso that more than doubled invalue during that period. Booming exports, surging capital inflows andstable to falling inflation rates, all abetted the trend of emerging marketcurrency strength. However, as is the nature of markets, the pendulum swung too far and is probably now retracing its path. Many emerging market currencies have depreciated significantly against the dollar over the past few months. The popular explanation is that the currency weakness is a function of heightened risk aversion arising from troubles in euroland. That can explain some of the volatility, but the bigger story may well be that the dollar is on a comeback trail as many of factors that led to its decline and the rise of emerging market exchange rates have exhausted themselves.Some of the worlds weakest currencies in 2011 belonged to thosecountries running a large current account deficit and with inflation ratesmuch higher than the US. The South African rand, the Turkish lira andthe Indian rupee fell by 15-20% against the greenback. The currentaccount deficits of these economies ran at anywhere between 3% and9% of GDP while inflation was close to double digits in India andTurkey. Similarly, the Brazilian real, the Chilean peso and Polish zlotydeclined by around 10% largely due to their current account deficitpositions of 2.5-5% of GDP though all of these countries had less of aninflation problem.To be sure, if capital flows return with the sort of fervour seen in many years of the past decade, then thelarge current account deficits will get funded easily and not be a drag on the currencies. However, riskappetite is unlikely to get anywhere near as high as in the heydays of the 2000s. The psychological scarssuffered during the serial financial crises take a long time to heal, and so will keep risk-seeking behaviourin check. Further, the domestic fundamentals of many emerging markets are deteriorating now after thevast improvements from the low expectations base of a decade ago.
  19. 19. Ghost Protocol;Traditional metrics such as inflation rate differentials and current account positions that long dictatedexchange rate movements but were forgotten in the last decades mad rush to chase growth in emergingmarkets are back on the ascendant and that situation is likely to persist for the foreseeable future. Valuationhas never been a good timing tool on the currency marketplace and deviations from fair value can persist foryears at a run. Usually, some catalyst is needed to correct the misalignment, and once the process begins, itcan happen in very quick time.In this regard, the sharp weakness of many emerging market currencies overthe past few months and, conversely, the sudden strength of the dollar is notstrange behaviour. Interestingly, while the rupees recent fall appears dramatic,on a three-year basis, the Indian currency is, in fact, unchanged on aninflation-adjusted and trade-weighted basis.While the rupee now appears to have more than made for its past overvaluation, currencies such as theBrazilian real still have a very expensive feel about them. Relatively high commodity prices arepreventing a bigger decline of the real. When commodity prices come unhinged due to a likely fall-off in commodity demand from China, the real will correct rather abruptly. The real story here is that the dollar appears to have turned the corner after a decade of underperformance. Its fundamentals are improving as evident in the narrowing current account gap and the underlying US economy is more competitive than it has been in a long time. On the other side of the equation, many economies from those in Europe to the big emerging markets are grappling with all sorts of local problems and theirexchange rates are no longer that competitive. Markets always price in any change at the margin and thedollar could be in a bull market for the next few years as its fundamentals improve relative to the rest ofthe world. Fifth Avenue may yet again become a primarily English-speaking zone.
  20. 20. Ghost Protocol;Will the US economy save the world again? Just when it seemed the end was near, Uncle Sam seems to be coming back, staggering to his feet like Bruce Willis in one of the old Die Hard movies. In case you missed them, the plots are all roughly the same: despite a hangover and a bit of flab, armed with just a revolver and a pack of cigarettes, Bruce saves the day - no matter how many machine guns and explosives the baddies have, or how muscular they might be. A number of the latest indicators suggest that after years of beating, theres a chance that Uncle Sammay be on the verge of just this kind of last reel Hollywood comeback.Certainly there are plenty of reasons we shouldnt expect Uncle Sam to come tottering out of the flamesnow, if ever. Although the Iraq war is purportedly over, an endless, expensive war in Afghanistancontinues - at least $113 billion in 2011 alone. Between wars and social spending, the massivegovernment deficit keeps getting more massive. The expensive yet inadequate health-care system eats13% of GDP and seems likely to grow even more expensive as the Baby Boomers get older.Nor are things much better outside the government; Over 1.5 million homes are in foreclosure, andanother 3.5 million homeowners are late with their mortgage payments. Unemployment is officially 8.6%but unofficially some economists say it may be nearer to 20%. Even, Americans themselves arent veryoptimistic about the situation. Yet almost despite itself, the American economy seems to be looking up. The endless euro crisis is one reason. In investing as in most of life, its always the alternative that counts, and right now, in comparison with Europe, the US looks positively stable. With a euro collapse still a real possibility, many investors have been looking West.S&P may now say Treasury bonds are just AA+, but the investment world evidentlydisagrees - or at least thinks the other alternatives are worse. Treasuries rose nearly30% this year, bid up in part by investors seeking a safe haven. All that demand hashelped push yields on the 10-year bond down to just 1.9%, making them essentiallyzero after inflation. In September, they dropped even further, to 1.67%, their lowest level since 1945. US stocks had a good year too - relatively. Most of the worlds major stock exchanges fell a quarter or more in 2011, making the S&P 500s flat performance (actually a decline of .003%) seems like a sort of triumph. Some of these numbers were driven by fear, but other homegrown indicators are also positive.Private sector hiring is up in the US - 325,000 new jobs in December, much higher thanthe forecast number of 178,000 jobs. Layoffs seem to be bottoming out.
  21. 21. Ghost Protocol; Construction and manufacturing are both up, slightly. Perhaps most positively of all, demand for steel is actually higher now in the US than in Europe or Asia.US oil imports have tumbled in the past few years, thanks in part to the rapidgrowth of natural gas production. Imports have declined from 60.3% in 2005 to49.3% in 2010, driven by a rise in biofuel production and new drilling in the Gulfof Mexico. At the same time, the discovery of vast deposits of shale gas is leadingsome analysts to predict that the US will eventually become a net natural gasexporter. At present, government analysts estimate that there is enough gas aroundnow to sustain the country at present rates of consumption for more than a century- double their reserve estimates just two years ago. US companies are also sitting on at least $2.1 trillion in cash - some of it retained profits, some of it loan proceeds - all of it waiting to be ploughed into something. These iron mountains might seem prudent at the moment, given fears of a new credit crash, but between restless shareholders, leveraged-buy-out buccaneers, and legislators hungry for cash, the situation wont last forever. The United States of America is the richest economy in the world. There are any numbers of great universities, a solid corporate legal structure,fabulous logistics networks, and as an added bonus, wages that havent really risen in 40 years.Historically, too, investors should be reassured by the US. No matter how hard times might be or howstrongly anti-business the rhetoric gets, the government has almost always found a place for business inthe lifeboat. For better and worse, commercial interests have been looked after by virtually everypresident since the early days of the Republic.
  22. 22. Ghost Protocol;2.3 WARNING SIGNALSEurope’s Vicious Spirals The euro crisis shows no signs of letting up. While 2011 was supposed to be the year when European leaders finally got a grip on events, the eurozone’s problems went from bad to worse. What had been a Greek crisis became a southern European crisis and then a pan-European crisis. Indeed, by the end of the year, banks and governments had begun making contingency plans for the collapse of the monetary union. None of this was inevitable. Rather, it reflected European leaders’ failure to stop a pair of vicious spirals.The first spiral ran from public debt to the banks and back to public debt. Doubts about whethergovernments would be able to service their debts caused borrowing costs to soar and bond prices toplummet. But, critically, these debt crises undermined confidence in Europe’s banks, which held many ofthe bonds in question. Unable to borrow, the banks became unable to lend. As economies then weakened,the prospects for fiscal consolidation grew dimmer. Bond prices then fell further,damaging European banks even more.The European Central Bank has now halted this vicious spiral by providing thebanks with guaranteed liquidity for three years against a wide range of collateral.Reassured that they will have access to funding, the banks again have theconfidence to lend.Cynical observers suggest that the ECB’s real agenda is to encourage the banks to buy the crisiscountries’ bonds. But that would only further weaken the banks’ credit portfolios at a time whenEuropean regulators are desperate to strengthen them. The ECB’s decision to provide the banks withunlimited liquidity does not solve governments’ debt problems, nor is that its intent. But it at leastprevents the debt problem from creating banking problems, which, in turn, worsen the debt problemwithout end.Europe’s second vicious spiral runs from fiscal consolidation to slow growth and back to fiscalconsolidation. Tax increases and cuts in public spending are still needed; there is no avoiding this reality.But these demand-reducing measures also reduce economic growth, causing deficit-reduction targets to bemissed. Getting fiscal consolidation back on track then requires more spending cuts, which depressgrowth still further, causing budget performance to worsen even more.At some point, recession and unemployment will provoke a political reaction.Angry electorates will boot out austerity-minded governments. And uncertaintyabout what kind of governments come next will not reassure investors or positivelyinfluence growth.Interrupting this second vicious spiral will require jump-starting growth, which, under currentcircumstances, is easier said than done. The external environment is not favorable. Economic growth inthe United States is still weak, and growth in emerging markets seems poised to slow.So what are Europe’s policymakers to do? Nothing is guaranteed. But Europe can still escape its viciousspirals if everyone does their part.
  23. 23. Ghost Protocol;The Straits of America Macroeconomic indicators for the United States have been better than expected for the last few months. Job creation has picked up. Indicators for manufacturing and services have improved moderately. Even the housing industry has shown some signs of life. And consumption growth has been relatively resilient. But, despite the favorable data, US economic growth will remain weak and below trend throughout 2012. Why is all the recent economic good news not to be believed?First, US consumers remain income-challenged, wealth-challenged, and debt-constrained. Disposable income has been growing modestly – despite real-wagestagnation – mostly as a result of tax cuts and transfer payments. This is notsustainable: eventually, transfer payments will have to be reduced and taxes raised toreduce the fiscal deficit. At the same time, US job growth is still too mediocre to make a dent in the overall unemployment rate and on labor income. The US needs to create at least 150,000 jobs per month on a consistent basis just to stabilize the unemployment rate. Indeed, firms are still trying to find ways to slash labor costs. Moreover, the recent bounce in investment spending (and housing) will end, with bleak prospects for 2012, as tax benefits expire, firms wait out so-called “tail risks” (low-probability, high-impact events), and insufficient final demand holdsdown capacity-utilization rates. And most capital spending will continue to be devoted to labor-savingtechnologies, again implying limited job creation.At the same time, even after six years of a housing recession, the sector is comatose.With demand for new homes having fallen by 80% relative to the peak, the downwardprice adjustment is likely to continue in 2012 as the supply of new and existing homescontinues to exceed demand. Up to 40% of households with a mortgage – 20 million –could end up with negative equity in their homes. Thus, the vicious cycle offoreclosures and lower prices is likely to continue.Given anemic growth in domestic demand, America’s only chance to move closer to its potential growthrate would be to reduce its large trade deficit. But net exports will be a drag on growth in 2012, for severalreasons: · The dollar would have to weaken further, which is unlikely, because many other central banks have followed the Federal Reserve in additional “quantitative easing,” with the euro likely to remain under downward pressure and China and other emerging-market countries still aggressively intervening to prevent their currencies from rising too fast. · Slower growth in many advanced economies, China, andother emerging markets will mean lower demand for US exports.
  24. 24. Ghost Protocol; · Oil prices are likely to remain elevated, given geopolitical risks in the Middle East, keeping the US energy-import bill high. It is unlikely that US policy will come to the rescue. On the contrary, there will be a significant fiscal drag in 2012, and political gridlock in the run-up to the presidential election in November will prevent the authorities from addressing long-term fiscal issues.Given the bearish outlook for US economic growth, the Fed can be expected toengage in another round of quantitative easing. But the Fed also faces politicalconstraints, and will do too little, and move too late, to help the economysignificantly. Moreover, a vocal minority on the Fed’s rate-setting Federal OpenMarket Committee is against further easing. In any case, monetary policy canaddress only liquidity problems – and banks are flush with excess reserves. Most importantly, the US – and many other advanced economies – remains in the early stages of a deleveraging cycle. A recession caused by too much debt and leverage (first in the private sector, and then on public balance sheets) will require a long period of spending less and saving more. This year will be no different, as public-sector deleveraging has barely started.Finally, there are those tail risks that make investors, corporations, and consumers hyper-cautious: theeurozone, where debt restructurings – or worse, breakup – are risks of systemic consequence; the outcomeof the US presidential election; geo-political risks such as the Arab Spring, military confrontation withIran, instability in Afghanistan and Pakistan, North Korea’s succession, and the leadership transition inChina; and the consequences of a global economic slowdown.Given all of these large and small risks, businesses, consumers, and investors have a strong incentive towait and do little. The problem, of course, is that when enough people wait and don’t act; they heightenthe very risks that they are trying to avoid.
  25. 25. Ghost Protocol;Emerging MarketsWill Emerging Markets Fall in 2012?Emerging markets have performed amazingly well over the last seven years. In many cases, they have faroutperformed the advanced industrialized countries in terms of economic growth, debt-to-GDP ratios,countercyclical fiscal policy, and assessments by ratings agencies and financial markets.As 2012 begins, however, investors are wondering if emerging markets may be due for a correction. TheWorld Bank has just downgraded economic forecasts for developing countries in its 2012 GlobalEconomic Prospects, released this month. For example, Brazil’s annual GDP growth, which came to ahalt in the third quarter of 2011, is forecast to reach 3.4% in 2012, less than half the 7.5% rate recorded in2010. Reflecting a sharp slowdown in the second half of the year in India, South Asia is slowing from atorrid six years, which included 9.1% growth in 2010. Regional growth is projected to decelerate further,to 5.8%, in 2012.Three possible lines of argument – empirical, literary, and causal, each admittedly tentative and tenuous –support the worry that emerging markets’ economic performance could suffer dramatically in 2012.The empirical argument is simply historically based numerology: emerging-market crises seem to comein a 15-year cycle. The international debt crisis that erupted in mid-1982 began in Mexico, and thenspread to the rest of Latin America and beyond. The East Asian crisis came 15 years later, hittingThailand in mid-1997, and spreading from there to the rest of the region and beyond. We are now another15 years down the road. So is 2012 the year for another emerging-markets crisis?The hypothesis of regular boom-bust cycles is supported by a long-standing scholarly literature, such asthe writings of the American economist Carmen Reinhart. But I would appeal to an even older source: theOld Testament – in particular, the story of Joseph, who was called upon by the Pharaoh to interpret adream about seven fat cows followed by seven skinny cows.Joseph prophesied that there would come seven years of plenty, with abundant harvests from anoverflowing Nile, followed by seven lean years, with famine resulting from drought. His forecast turnedout to be accurate. Fortunately, the Pharaoh had empowered his technocratic official (Joseph) to save grain in the seven years of plenty, building up sufficient stockpiles to save the Egyptian people from starvation during the bad years. That is a valuable lesson for today’s government officials in industrialized and developing countries alike.
  26. 26. Ghost Protocol;For emerging markets, the first seven-year phase of plentiful capital flows occurred in 1975-1981, withthe recycling of petrodollars in the form of loans to developing countries. The international debt crisis thatbegan in Mexico in 1982 catalyzed the seven lean years, knownin Latin America as the “lost decade.”The turnaround year, 1989, was marked by the first issue ofBrady bonds (dollar-denominated bonds issued by LatinAmerican countries), which helped the region to get past thecrisis.The second cycle of seven fat years was the period of recordcapital flows to emerging markets in 1990-1996. Following theEast Asia crisis of 1997 came seven years of capital drought.The third cycle of inflows occurred in 2004-2011, persistingeven through the global financial crisis. If history repeats itself, itis now time for a third “sudden stop” of capital flows toemerging markets.Are a couple of data points and a biblical parable enough to takethe hypothesis of a 15-year cycle seriously? Perhaps, if we havesome sort of causal theory that could explain such periodicity tointernational capital flows.Here is a possibility: 15 years is how long it takes for individualloan officers and hedge-fund traders to be promoted out of theirjobs. Today’s young crop of asset pickers knows that there was acrisis in Turkey in 2001, but they did not experience it first hand.They think that perhaps this time is different.If emerging markets crash in 2012, remember where you heard itfirst – in ancient Egypt.
  27. 27. Ghost Protocol;India’s Year of Living Stagnantly Will 2012 prove to be a year of renewal for India, or another annus horribilis? No country progresses unerringly, but India cannot afford another politically and economically torpid year like 2011. For India, last year is a year best forgotten. India has been so deeply mired in political paralysis that the Nobel laureate economist Amartya Sen recently said that the country has “fallen from being the second best to the second worst” South Asian country, and that it is currently“no match for China” on social indicators. This is a damning comment on a country that held suchpromise just a short time ago.In early January, the American social critic James Howard Kunstler described India as “a nation with onefoot in the modern age and the other in a colorful hallucinatory dreamtime.” Kunstler’s view is harsh, butperhaps prophetic: India’s “climate-change-related problems are doing heavy damage to the food supply.Their groundwater is almost gone. The troubles of the wobbling global economy will take a lot of pep outof their burgeoning tech and manufacturing sectors.”Indeed, suddenly, India’s economy has begun spinning out of control. Last year, the country’s GDPgrowth slowed, manufacturing plummeted, and inflation and corruption grew uncontrollably. Elected andunelected government officials alike, including cabinet ministers, members of parliament, and civilservants, were implicated in corruption scandals. For the first time ever, India’s government failed toenact even a single piece of legislation, much less undertake any economic reforms, restore price stability,or address widespread civil disorder.As the Indian business analyst Virendra Parekh has observed: “The second fastest-growing economy inthe world now has the unenviable distinction of having the fastest falling financial markets in Asia.”Moreover, “the fortunes of the rupee are….tightly linked with the euro, which is in the throes of anexistential crisis...” Furthermore, weaknesses in agriculture, energy, infrastructure, and governance haveall contributed to India’s current crisis, and the crisis will most likely continue in 2012.Another concern is nuclear power. In 2008, the United States and India agreed to a civil nuclear deal thatwould allow India to expand its nuclear-power capability. In 2010, India’s parliament passed the CivilLiability for Nuclear Damage Bill, a precondition for activating that agreement.But, following Japan’s Fukushima nuclear disaster in March 2011, safety concerns surrounding nuclearpower are large and mounting.Local farmers, fishermen, and environmentalists have spent months protesting a planned six-reactornuclear-power complex on the plains of Jaitapur, south of Mumbai. In April, the protests turned violent,leaving one man dead and dozens injured. India will certainly see more anti-nuclear clashes in 2012.At the heart of India’s current malaise is a paradox: rapid growth in real income has not been matched bygenuine advances in living standards. If the country’s fundamental problems are to be addressed, Indianeeds a government with the determination, integrity, and intelligence to meet the complex demands ofmodern governance in the twenty-first century.
  28. 28. Ghost Protocol;3.1 CURRENCY MARKET Address Basics The recent depreciation of the rupee to historic levels has created a near- panic situation. Various solutions are being proffered: from interventions by the RBI to curbs on forex outflows. A calmer assessment of the situation makes it clear that the panic is misplaced and what is needed is deeper introspection. We need solutions rather than knee-jerk reactions and short-term fixes. But, markets are like a pressure cooker. Every one hears the whistle and heads for the door. Very few people actually see the pressure building. The pressure has been building because the macroeconomic situation over the last couple of years has turned adverse and we have not taken enough steps to address the issue early enough.All the ingredients for the rupee fall have been there for some time: for the last year, portfolio flows haveslowed down or even partially reversed, our current account deficit will shoot beyond the 3% target, theEuropean crisis has reduced global liquidity, a lot of borrowings from 2007 are due for repayment now,our inflation has been high and FDI has slowed down significantly. So, rather than handle the rupee fall,we should try and manage the underlying causes that have led to rupee falling.Most of the underlying causes - inflation, euro crisis, repayments, etc - are beyond our control. So whatneeds to be done is: (a) give growth impetus as inflows will increase the moment confidence in ourgrowth is back, (b) boost inflows, especially long-term flows, and (c) reduce foreign exchange volatility.For getting growth back, the script is becoming clearer: we need fiscal control and easier interest ratescenario. There seems to be a consensus that if interest rates are hiked any more, it will start affectinggrowth. This means that the responsibility of tackling inflation now rests with the government with fiscalmeasures. It needs to reduce the fiscal deficit and, at the same time, initiate supply-side reforms. This willget confidence in growth back.We also need to boost inflows - rather than impose curbs on foreign exchange outflow. Inflows areusually in three forms: short term, medium term and long term. Short term is usually debt and quasi debt.The RBI has already eased the curbs on such short-term lending to boost inflows. The medium-term forexreserves essentially consist of portfolio inflows in the Indian stock markets. Last year has been bad for FIIinvestments as we have seen net outflows. But once growth returns, so will the FIIs. FDI represents thelong-term forex reserves. These can improve only if we start taking hard decisions about foreigninvestments – Because foreign investment without allowing majority controlling stakes is equal toportfolio investments. So far, policy ambiguity has led to investors postponing FDI investments.Lastly, we need to ensure that rate adjustments are continuous and not have the kind of sharp volatility wehave witnessed. This can be done by classifying our forex reserves in more granular terms and having alot more information around kinds of flows, the composition of reserves, etc. More information anddiscussion would mean quicker short-term adjustments rather than a huge pressure build-up and a largeadjustment in one quarter.No doubt these are tough times. And alot of the above is easier said than done. But we should use therupee fall as a catalyst to address deeper economic issues and get India on the growth path once again.But the margin for error is now small and getting smaller. We need to act now!
  29. 29. Ghost Protocol;3.2 COMMODITY MARKET Duty Hike on Gold Consumers will have to shell out more for gold and silver jewellery, bars and coins. The cash-strapped government on raised import and excise duties on gold and silver, hoping to mop up about 600 crore in additional revenue and contain its burgeoning current account deficit as the financial year draws to a close. Platinum and diamonds, too, will now attract an import duty of 2%. A government notification said customs and excise duties would be levied on the value of gold and silver instead of a fixed amount. This will allow the government to benefit from the rise in gold prices. Ad valorem duty, which rises automatically when the value of a product goes up, is preferred from the point ofview of tax policy as its facilitates easier credit besides capturing value addition at each stage.While the import duty on gold has been fixed at 2% of the value instead of the earlier Rs 300 per 10grams, that on silver has been pegged at 6% against Rs 1,500 per kg. Excise duty on gold has been fixedat 1.5% of the value against the earlier rate of Rs 200 per 10 grams. Silver will attract excise of 4%compared to Rs 1,000 per kg earlier.At a 2% rate, the import duty on gold will double to over Rs 540 per 10 grams at current prices. The oldrates were fixed four to five years ago. In the last few years, prices have increased substantially so thechange has been made to bring duties in line with market prices.India is the worlds largest importer of gold. The metal is the third-largest import itemafter crude oil and capital goods. In 2010, about 92% of Indias gold demand was metthrough imports and the rest from recycled gold and other sources. "Gold importsalone have contributed nearly 40 basis points to the 130-basis-point increase in Indiascurrent account deficit between FY08 and FY11," global research firm Macquarie saida recent report. In first three quarters of FY12 alone, India imported $45.5 billionworth of gold and silver, up 53.8% over the year-ago period."The move is possibly aimed at easing the negative balance of payments position as gold and silverimports have grown despite prices rising," said Madan Sabnavis, chief economist at Care Ratings. "Unlikeother raw materials like machinery and fertilisers, gold and silver dont add to economic productivity asthey are stashed away in bank lockers or cupboards."Indias bullion traders stayed away from placing fresh orders after a nearly 90 percent hike in gold importduty was announced. In the short term traders and consumers may hesitate to buy into higher prices, theincreased duty is unlikely to have significant impact on Indias gold appetite in the longer term, tradersand analysts said. Some time later people will digest the price rise. India is the world’s largest importer of gold and its households have the largest holdings of the metal, according to data from the World Gold Council. Gold is popular for cultural, historical and financial reasons. Gold is seen as a safe haven that will preserve a family’s wealth over generations. There is more trust in gold bullion than paper assets such bank deposits, stocks and bonds as they have protected people throughout the world from periods of deflation (banks and governments can go bust) stagflation (papermoney and bonds lose value), and hyperinflation (paper money and bonds really lose value).
  30. 30. Ghost Protocol;4. FINANCIAL SECTOR: TRANSFORMING TOMORROW World Economic ForumAs per a Call for Action report published by Geneva-based World Economic Forum (WEF) ahead of itsannual summit in Davos, Switzerland, "The world faces significant and urgent challenges that weighheavily on prospects for future growth and on the cohesion of our societies." Among the major challengesfor 2012, the report listed out issues like decelerating global growth and rising uncertainty, highunemployment and potential protectionist policies of different countries.The call to tackle these challenges has been made by the 11-member Global Issues Group (GIG) of theWEF, which comprises of IMF Chief Christine Lagarde, World Bank President Robert Zoellick, WTODirector-General Pascal Lamy, OECD Secretary- General Angel Gurria, among others.4.1. FINANCIAL ADVISORS:Weigh impact on investors:Beating the Burnout at Davos Burnout is a condition associated with exhaustion, stress, pessimism, cynicism, withdrawal and a bunker mentality. These symptoms are worrying in an individual, but can be disastrous in world affairs. In the run-up to the annual meeting of the World Economic Forum in Davos, there is a distinct sense of burnout in the air. I hope that this years meeting will help to form a new model of leadership capable of overcoming this malaise. After a year characterised by major upheavals, many feel likewe are watching a global system disintegrate: financial and debt crises, unemployment, political paralysis,social inequality, food and energy crises, and the list goes on. Faced with so many simultaneous andinterrelated problems, our leaders are stretched to their limits.At the same time, the systems and safeguards that underpin our existence as aglobal community are struggling to cope with todays complex set of risks. Theusual reaction to all this is to call for stronger leadership. Yet, events during thepast year have shown, time and again, the limits of leadership in its traditionalform. Preoccupied with domestic concerns, rushing from one crisis to the next, leaders have made little tangible progress. Instead, we have mainly witnessed short-term fixes in a rapidly unravelling world. No wonder, then, that ordinary people are losing trust in our leaders. The various Occupy and Spring movements around the world are signs of this understandable frustration and distress.There is an urgent need to act. As well as finding new models to collaborativelyaddress all our globalchallenges, we also need to form a new-model of leadershipthat is effective in the modern world: leadership that emphasises both vision andvalues in order to overcome the current challenges. It is this combination that canprovide leaders with a compass to guide their decision-making.
  31. 31. Ghost Protocol; Vision is needed to interpret and deal effectively with a globalised world. Technological progress, interconnectivity and the dispersion of power have all contributed to a complex new reality, which requires clear-sightedness. Vision is also vital to enable leaders to glimpse the opportunities that lie ahead and rigorously pursue them, rather than succumbing to the paralysis of burnout. Values areneeded to create trust and underpin any action taken. But the values of true leadership must go deeperthan short-term shareholder profit or the next election poll; only then will there be a real connection andmeaningful interaction, between the people and their leaders.In todays world, both power and information are widely dispersed, and, therefore,decisions can only be implemented if people understand the rationale behind them.Vision provides the long-term reason and values provide direction and purpose. It is telling that, despite the dire economic outlook, we have reached record participation numbers for our 2012 annual meeting in Davos. This demonstrates the fact that leaders feel the need to come together in order to collectively and collaboratively address the daunting global challenges that lie ahead of us. Davos provides a real opportunity for leaders from business, government and civil society to hone a collective vision and build collaborative values.This annual meeting, in particular, will be important if we are to replace our currentradar system of short- term, situational crisis management, with a compass providingclear direction and guidance based on long-term values. The main topic on the top ofeveryones minds in Davos will inevitably be the rebalancing and deleveraging that isreshaping the global economy.But let us not forget that the purpose of the annual meeting is also to ensure that leaders exercise theirresponsibilities with moral integrity, and that the entrepreneurial spirit is harnessed for the public interest.The theme of this years annual meeting is The Great Transformation: Shaping New Models, preciselybecause we are in an era of profound change that urgently requires new ways of thinking instead of justmore business-as-usual.Leadership based on vision and values will go a long way to regaining trust and beating the burnout, butonly if leaders themselves can prove through concrete actions that social responsibility and moralobligations are not just empty words.