Investeurs chronicles 14

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Investeurs chronicles 14

  1. 1. March 2011, Volume: 14Sensex  18174.09                  Nifty     5445.45                Dollar     45.24 Gold     20785        Silver 54200    Crude Oil ($)    113.26 Investeurs Chronicles<br /><ul><li>INSIDECurrent ChroniclesCover Story – Fiscal Deficit Target: Sensible? Audacious? Fool hardy?Open Forum – Eye on India Emerging MarketsOutlook – Swiss FrancFinancial Q In Focus – The trillion dollar economy Investeurs Consulting P. LimitedS-16, U.G.F, Green Park Ext. New Delhi-110016, www.investeurs.com.</li></ul>Berkshire Hathaway will distribute general insurance products in India through its online portal and tele-marketing arm. Berkshire will operate in India through Berkshire India, and has become a “corporate agent” of Bajaj Allianz General Insurance. Berkshire will invest around $10 million and put in place a call centre. More…..Fortis Global Healthcare has acquired a 28.6% stake in Lanka Hospitals Corporation Plc, a Colombo Stock Exchange-listed healthcare firm for Sri Lankan 397 crore or about 160 crore. Lanka Hospitals runs a 350-bed hospital is Colombo and is one of the largest hospital groups in Sri Lanka specializing in cardiology, neuro-sciences, orthopedics and complex urology and nephrology procedures. More…Current Chronicles<br />DoT plans to support ailing state-run BSNL and MTNL by giving an annual subsidy of about Rs 3,000 crore to sustain their operations. The subsidy amount to BSNL will be given to support its operations in rural and far-flung areas from the Universal Service Obligation Fund (USOF), while MTNL will be given support for its higher pension and other retirement payouts from the licence and spectrum fee, which both PSUs give to the government. More…Food inflation fell to the single digit at 9.52 per cent during the week ended February 26, raising hopes that the overall inflation might come down close to seven per cent by the end of this financial year, as projected by the finance ministry. However, elevated global crude prices will have to be watched in the coming weeks to exactly predict where the wholesale price index-based headline inflation is going. More…Industrial growth slowed to 3.7% in January, 2011, compared to 16.8% expansion in the year-ago period, dragged down by the poor performance of the manufacturing sector, particularly capital goods. The capital goods sector contracted by 18.6% in the month under review. The sector had posted a robust growth of 57.9% in January, 2010. However, production in the consumer non-durables segment grew by 6.9% during the month under review. More…Hero Investments has agreed to buy Honda Motors Ltd's 26% stake in Hero Honda Motors for around $851 million in a deal that will see the Japanese automaker exit its joint venture in India after more than 26 years. Hero Investments is buying the stake at Rs 739.97 a share. More…<br />Union Budget 2011-12 for India saw the sensex performing a historical feat. It jumped nearly 600 points on the growth and deficit figures optimism but handed back much of the gains once the bonhomie over the projections, especially fiscal deficit target, faded. It became apparent that this optimism was not backed by fiscal stringency.Given the conspicuous paucity of infrastructure and spending on social sector programmes, government’s eagerness on them appears justified but there is an equally important affordability issue. Hence, this budget stands out from its predecessors in both proposed severity on spending, and reduction in the ratio of public debt to GDP. However, the billion dollar question is if this target attainment is possible?Cracks in the wall The Budget claimed fiscal deficit was down this year to 5.1% of GDP against the targeted 5.5%, and would decline to 4.6% next year against 4.8% mapped out earlier. First things first. Starting with the 5.1% fiscal deficit target for the year 2010-11. Numerically. Amount of fiscal deficit for the current year has actually gone up by Rs.20,000 crores but fiscal deficit as a percentage of GDP has decreased. This miracle has happened on account of hyperinflation, the country had witnessed in 2010-11.As evident from the Economic Survey, higher growth aided by higher inflation takes nominal GDP for 2010-11 to Rs 78, 77,947 crore. This higher-than-anticipated denominator meant the target FD/GDP ratio for 2010-11 was in fact 4.8% after factoring in the higher GDP. Compare it with the revised estimate of 5.1% for FD/GDP ratio for 2010-11 and it becomes clear that far from doing better, we have actually fallen short of the goal! To take away the sheen further from the performance, deduct the booty from the 3G auction, and we are left staring at a disappointing 6.4% FD/GDP ratio for 2010-11! So, contrary to what projected. Finance minister’s fiscal discipline has actually taken a hit in 2010-11. Now, shifting focus to the next fiscal. Picture isn’t rosy here either. Though corporate tax income or excise or customs seem broadly achievable, expenditure would be attacked from two directions.One will be the immediate fallout of the sharp rise in global oil prices. The oil subsidy is projected to fall to 23,640 crore next year from 38,386 crore this year, but with rise in turmoil in the West Asia as also the excess liquidity created by the developed world, it seemsFiscal Deficit Target: Sensible? Audacious? Fool hardy?Cover Story<br />Cover Story Fiscal Deficit Target: Sensible? Audacious? Fool hardy?inexplicable as to how government will manage with lower provision for oil subsidy. In the scenario of high global oil prices, Indian government will be left with two choices: either pass on the increase to the customers or bear the brunt itself. For a start, the first option appears impossible. Hence, government has to bear the burden of oil price hike. In fact impact of rise in oil price will be two pronged on government finances. Apart from exerting pressure on subsidy bill, it will also affect growth. In a recent report, economists at RBS have estimated that at $120 a barrel, the oil price would shave off 1.5 percentage points off growth this year for Asia ex-Japan. From India’s perspective, GDP growth will nosedive to 6%! As such, growth had slipped to 8.2% in last quarter of 2010 from 8.9% in prior two quarters. In such a scenario, pinning too much hope on growth to bring down fiscal deficit is a risky preposition.Inclusive agenda for social sector is the second dimension of the two pronged attack on expenditure. Food subsidy for the next year has been kept virtually unchanged at Rs.60,000 crs. However, it will see a huge jump once the Food security bill comes in to play. Though, it has been postponed till 2012-13, it could be best seen as postponement of expenditure and not avoidance. Fertilizer subsidy bill is another weak link in the proposed fiscal discipline. It will go up before direct cash transfers are able to bring it down. Add just these three items and it runs to around 0.7 per cent of GDP. So, without assuming any revenue slippage, we are looking at a deficit of 5.3 per cent of GDP and fiscal consolidation of around 0.3 per cent of GDP. <br />Dismal historical recordAs if the calculations were not sufficient to cast a question mark on government’s promise to rein fiscal deficit, even previous record of government’s ability to keep expenses under control is murky. With the exception of 2005-06 when the government spent less than budgeted, and 2009-10 when it overshot its Budget estimates marginally, in every other year, expenditure has overshot the Budget estimates (see table). Coincidence or habit?YearBudgeted Estimate (Rs. in crs)Revised Estimate (Rs. in crs)2004-05477,829505,7912005-06514,344508,7052006-07563,991581,6372007-08680,521709,3732008-09750,884900,9532009-101,020,8381,021,5472010-111,108,7491,216,576On the revenue generation side, government’s record can be adjudged as mixed at bests. In last seven years, the government managed to garner more revenue than budgeted in four and fallen short in three. With the exception of the last year when revenues overshot the budgeted amount by a huge margin, in all the remaining three years, the difference was only marginal. What does it mean for India Inc.?India’s fiscal position has long worried foreign institutional investors (FIIs), the dominant players in the country’s stock markets. Any substantial deviation from the deficit target is sufficient to cast gloom over FII fraternity, which in turn is sufficient to have a big bang impact on the Indian markets.Another looming danger in case we might end up with a much higher fiscal deficit is a plethora of negativities, like high interest rates, crowding out of private investment and loss of investor faith. That would be the most serious flaw in Budget 2011-12.The only positive emanating from the proposed fiscal deficit target is its ambitious nature. If the government does not manage to stray within 50basis point then it would at least reflect the commitment of the government towards fiscal consolidation. Moreover, setting an ambitious target and failing is always better and safer than setting an easier target and still failing.<br />Cover Story Fiscal Deficit Target: Sensible? Audacious? Fool hardy?<br />This is not the first time that the Dutch multinational corporation has attempted to move down the value chain. In 2009, it had worked on a wood stove that could be sold in villages.But pilots run in some parts of the country showed that the price points needed to be brought down further. Philips’ engineers have taken the stove back to the drawing table to knock off some costs. The bottom line is that Philips is ready to lend its name to low-tech products.What this shows is that the Indian market has truly arrived on the radar screen of global corporations like Daimler and Philips. So much so, they don’t mind a desi twist to their brand. A brand is a huge asset on any company’s balance sheet. Forward-looking companies constantly get their brands valued. Almost all protect it with a lot of zeal. It’s the job of every brand manager that the brand is seen in the right company and context. That multinational corporations are willing to adapt to Indian conditions shows clearly the country’s importance in the new economic order.Daimler, the world’s largest truck maker by sales, a few days ago announced a new brand for India called BharatBenz. It will be one of Daimler’s five brands worldwide. The German truck maker will invest Rs 4,400 crore in a new facility near Chennai, which will help it take on local rivals like Tata Motors and Ashok Leyland as well as global ones like Navistar (with Mahindra & Mahindra), Volvo (with Eicher) and Man (with Force Motors).The market for trucks, a good indicator of economic activity, has grown six to seven per cent per annum in the last decade. This has made India the third-largest truck market in the world. In this fast-growing but crowded market Daimler perhaps needs a brand that connects well with the value-conscious Indian transporter and tells him that its trucks are designed just for him. BharatBenz makes sense.Sometime towards the end of March, Philips, the leader in the market for bulbs, tubes and CFLs, will hold an offsite in Goa. It plans to unveil some new products to its employees and associates which could extend its reach in the mass category. The company doesn’t want to call these initiatives bottom-of-the-pyramid but says the prices would be irresistible for the rural markets. The products are under wraps, though it is known that the company has developed a solar lantern.Open Forum<br />One could argue that this is not the first time that global brands have Indianised. Honda let Hero get added to its name, just like Suzuki took on TVS and Maruti. But those collaborations were formed in a different era. Honda and Suzuki had no option but to go with local partners; hence the hybrid brands. Things have changed since then. Honda has come on its own and will soon shed the Hero tag altogether. Suzuki has shaken off TVS. Its cars, earlier badged Maruti Suzuki, now sell under the Suzuki logo.It would also be worth recalling PepsiCo was let in to the country as Lehar Pepsi. But the prefix has been all but dropped — packs still carry the full name, but in small print. (PepsiCo sells namkeen under the Lehar brand, though.) Bausch & Lomb too had agreed to add to Ray-Ban in India because the production of foreign brands was not allowed. But the need for that did not arise because the rules soon got liberalised. (The eyewear brand has since been sold to Luxottica of Italy.)Notable exceptions have been companies like Hindustan Unilever. Though most multinational corporations in the fast-moving consumer goods space like to have one portfolio for the whole world, Hindustan Unilever has adapted well to Indian conditions. For example, it had introduced Nihar in the hair-oil market, though hair oil is a product used only in the Indian subcontinent, and no multinational corporation wants hair oil in its portfolio. Nihar got sold to Marico. Hindustan Unilever tried again to crack open the market, this time with the Sunsilk brand.Open ForumThings have moved at a fast pace in recent times. Multinational corporations have seen the pot of gold here, and are, therefore, eager to get off their high horse. American Express, for instance, is planning a huge expansion into the mass market. At the moment, it is positioned at the premium end — to hold an American Express card, you need to have annual household income of at least Rs 8,00,000. But now it is ready to move down the value chain and tap the opportunity in financial inclusion. It wants to come out with prepaid cards for lower-income groups. The debit card could be an all-new brand created just for India.Plans are afoot to come out with electronic payment terminals for small retailers. American Express also wants to get into remittances between commercial hubs and villages in the hinterland. This would take American Express off high-street addresses to the poor parts of the country which export labour to other states. But American Express is aware of the upside. Similar problems of inefficient non-electric payments exist in several other parts of the world. If a workable solution can be put together in India, it could be taken to the rest of the world as well.Source: Business Standard<br />Wall Street bankers hired by Moscow to help it become financial centreA roll call of the world's most famous business figures have been recruited by the Russian government to help establish Moscow as a leading financial centre.Wall Street bankers including Jamie Dimon, chief executive of JP Morgan, Vikram Pandit, chief executive of Citigroup and Goldman Sachs chief Lloyd Blankfein are among those chosen to advise the Kremlin as it tries to reduce the country's dependence on natural resources.Moscow was ranked 68th of 75 cities in the Global Financial Centres Index commissioned by the City of London in 2009. Russia Plans $10 Billion Fund to Attract Global Buyout FirmsThe Russian government is setting up a $10 billion fund aimed at boosting investment by overseas buyout firms in the country, two people with knowledge of the matter said.Russia’s VEB development bank is working with Goldman Sachs Group Inc. on the fund, which will invest in partnership with overseas private-equity firms, said the people, who declined to be identified because the plan hasn’t been disclosed yet. The government is seeking to lure buyout firms such as Blackstone Group LP and Carlyle Group LP to invest in one of the nations where they are least active, one of the people said.Brazil raises interest rates to 11.75%Brazil's central bank has raised its key interest rate to 11.75% in a bid to hold down inflation in one of the world's fastest-growing economies. The rise, from 11.25%, is the second half-point increase since the start of the year.Inflation was 5.91% last year and is forecast to remain above 5% in 2011.The rate rise came on the same day as news of a modest rebound in Brazilian industrial production, which increased by 0.2% in January from the previous month.Although the rate rise may help to curb inflation, it risks sucking in foreign money, increasing upward pressure on the already overvalued Brazilian real. Capital inflows from outside Brazil have soared as investors flee record-low rates in more developed countries.South Africa: Gordhan orders Libya assets freezeFinance Minister Pravin Gordhan said on Friday he had instructed financial institutions to not do business with or provide support to the Libyan government and individuals named in a United Nations Security Council resolution.The Reserve Bank would also ensure that Libyans are not allowed to repatriate any funds from South Africa.SA lobbies against EU long-haul taxesTourism Minister Marthinus van Schalkwyk has warned that long-haul destinations like SA would be negatively affected unless certain eurozone countries stop imposing taxes on travel to these destinations. He also warned of job losses at a media briefing.Although the meeting was initiated by Van Schalkwyk, the representatives all shared serious concerns that arbitrary taxes imposed by certain European countries could adversely affect travel to long-haul destinations - just as global tourism arrivals were showing signs of resuscitation after the recessionMalaysia- Anwar calls for movement against Pahang rare earth plantThe RM700 million rare earth refinery being built near Kuantan is set to be a major election issue with Datuk Seri Anwar Ibrahim now calling for a campaign to alert residents there about the dangers of radiation pollution.The massive earthquake in Japan and the resulting tsunami has also added fears about the plant in Malaysia’s east coast which faces the Pacific Rim’s ring of fire, the world’s active volcanic region.Emerging Markets<br />The euro zone sovereign debt crisis was one of the major stories of 2010. As the difficulties of the region carried over to 2011, the Swiss franc seems to be a major beneficiary of risk averse investors, as Switzerland, unlike many other countries in Europe, has a relatively low debt level. Its economic recovery has outpaced that of the US and its economy is far less dependent on oil.Swiss economy unexpectedly gained fresh momentum in the final quarter of 2010 as goods exports defined the record high franc, which helped economy to grow by 0.9 percent in the fourth quarter as compared to the previous quarter. The growth is continuing in 2011, as major concern of Switzerland, i.e. jobless rate eased to 3.4 percent for the month of February from 3.5% in the previous month.. Country’s manufacturing and non- manufacturing sector also rising modestly. As a result, franc rose against all of its 16 traded counterparts.In the second half of February, the Swiss franc rose against the euro and touched a fresh record against the greenback on March 2 but it has eased somewhat since then.Now, crude oil prices slipped below $115, political issues seems to dominate FX market and euro trading in particular. Because of that, risk aversion behavior of investors is taking back seat. As a result, franc is dropping against euro. The franc is trading at 1.293 per euro on 9th march and expected to reach 1.32 per euro by the end of first quarter and weakening to 1.35 by the end of the second quarter in an environment of euro zone weakness, with demand for the Swiss Franc remaining high as a safe haven. This 2 percent (approx) in currency is expected even though inflation dynamics are increasing but Switzerland is protected from that to a certain extent.Franc is also expected to weaken against the dollar, falling to 1.04 by the middle of the year though it has spiked 20% against the dollar since June.Outlook on Swiss FrancOutlook<br />Call Rates as on 11th March 2011 5.95%-6.80%CommoditiesAluminum (1 kgs) 112.60Copper (1 Kg) 417.45Zinc  (1 kg)102.15Steel (L) (1000kg)29350.00As on 11th March 2011ForexForward Rates against INR as on March, 2011Spot Rate1 mth3 mth6 mthUS45.3445.6546.1646.87Euro62.4062.8163.4464.28Sterling72.5373.0073.7674.78Yen55.1455.5356.1857.10Swiss Franc48.5148.8649.4350.21Source: Hindu BusinessLineLibor Rates as on March 11, 2011Libor %1 mth3 mth6 mth12 mthUS0.260.310.460.78Euro0.851.121.441.88Sterling0.610.801.111.58Yen0.130.190.340.57Swiss Franc0.140.190.350.57Forward Cover % as on March 11, 20111 mth3 mth6 mthUS 8.32%7.33%6.84%Euro7.99%6.76%6.11%Sterling7.88%6.88%6.29%Yen8.61%7.65%7.21%Swiss Franc8.78%7.69%7.11%Source: Hindu BusinessLine<br /><ul><li>The Trillion$ dollar economyValue of derivative market is quoted in?Which sector contributes highest percentage in India’s GDP?Which bank operates on behalf of SBI in Nigeria, and was established in 1981?In the heyday of nationalization, which PSU emerged from the amalgamation of ESSO and Caltex?The Dynatac made in the1970's was the first of its kind. What is this product which became extremely visible in India only in the mid 90's?Tidel Park, yet another of those prestigious complexes housing software firms, is associated with which city?What internationally famous sports apparel company was started in the 1930's by a champion tennis-player of France?What was the epoch-making book written in the 60's by Rachel Carson, which awakened the world to the dangers of environmental pollution but incurred the wrath of industrial giants like Dupont?In the heyday of nationalization, which PSU emerged from the amalgamation of ESSO and Caltex?With what product would you associate the well-known designs such as 'American Tank' and 'Tank Francaise'?India is all set to join the coveted club of economies whose national income, or gross domestic product (GDP), exceeds $2 trillion. According to recently released data, India’s nominal GDP is expected to grow at 14 per cent in 2011-12, to reach Rs 90 lakh crores, which translates to $2 trillion at a dollar exchange rate of 45. India’s nominal GDP crossed the $1 trillion mark in 2007-08, which implies GDP has doubled in four years. Applying the ‘rule of 72’ would mean India’s average annual growth rate of nominal GDP during the period is a stupendous 18 per cent! That it was achieved in a milieu of pervasive economic gloom makes the feat even more impressive.In FocusFinancial Q</li></ul>Answer of Quiz: 12(1) Sansui (2) 1999 (3) Bank of Sweden (Sveriges Riksbank)(4) Sir Bengal Rama Raju (5)Sheep/Pig (6) Enron Scandal (7) First Trading Bank in the World (8) John Bogle (9) Merrill Lynch (10) Andean Common Market covering Bolivia, Chile, Colombia, Ecuador, Peru and Venezuela<br />

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