Niveshak December Issue
My Dear Fellow Niveshaks,
As we are at the doorstep of a fresh new year which is supposed to provide a break from all the downward slopes, let us take a look over our shoulders at what this year has been and try to find out how the next year is going to be like. We woke up to the morning of 2009 with the nightmares of Sub-Prime still afresh in our minds only to find an Indian parallel to Enron & WorldCom. An Indian company Satyam had hogged the limelight for all wrong reasons. Then there have been several ups and downs in the stock markets across the globe but steadily all of them started on an upturn since March. Indian stock markets showed sudden spikes on the day of declaration of general election results in May but showed negative response to a much awaited budget in August. Corporate houses started showing profits and commodity prices spiralled up as positive sentiments about sovereign economies prevailed. Most of the worst affected financial institutions were among big bucks, clearing their TARP debts and again jumping back to the dirty business of paying hefty bonuses. When it seemed All izz well, stock markets around the world suffered a minor jolt by the so called bankruptcy declaration of Dubai World in November. Towards the fag end of an eventful year, we had a fizzed-out Copenhagen conference on climate change in December. There were numerous other interesting stories among several terrorist attacks. It has been quite an eventful year. But we will try to drag your attention to an altogether different story – the old Team Niveshak has chosen to make way for a new energetic team.
We started Niveshak in August of 2008 just as a Finance Club magazine of IIM Shillong. A very humble beginning indeed. Since then, 15 monthly issues have come out successfully, more than 400 articles have been written for us from 39 institutes and our 15 issues have been circulated in more than 50 top B-Schools of India. Niveshak today has achieved the feat of being the only monthly B-School finance magazine with the largest circulation base. A feat we had never dreamt of when we started. We had just assembled a few articles amongst ourselves and shared in our batch as Niveshak, a platform to share our knowledge. For a few months we preferred to stay indoors in terms of articles and circulation. We were pampered a lot by our fellow students and faculty members during our infancy. Niveshak will always remain indebted to some faculty members who encouraged and appreciated us for feats we were yet to achieve. Soon, we realised it is high time to live up to the expectations of the institute and test ourselves in the hostile (we felt at that time) territories of other B-Schools. A few members joined and Niveshak gained momentum in terms of content, quality & presentation. Amidst lots of apprehensions and scepticism, we sent our November 2008 edition to all B-Schools and invited them to write articles for us. The rest, as has been said several times, is history.
We got numerous appreciation mails, articles and Fin-Q entries from other B-Schools. We were overwhelmed by your response and there has been no looking back since then. We again felt we dint deserve the support and encouragement that other B-Schoolers had showered on us. Every moment we felt we needed to improve. Soon we came up with our own website and current affairs stories among many other improvements. On each of our baby steps, we got huge appreciations and response in terms of articles from our readers in esteemed B-Schools of India. Today, if someone asks me on the reason for success (you may question this) of Niveshak, undoubtedly it is the Finance Fraternity of all the 50 top Indian B-Schools who have supported us throughout the journey. When we asked for your articles for your magazine, you flooded our mail box. We salute your generosity.
It is because of the contributions of yours and your seniors that today Niveshak can be referred to as the Finance magazine of all B-Schools of India. We are extremely thankful to all our article contributors across all B-Schools and to all our subscribers who en¬couraged us through their appreciation mails and by increasing the count of our subscription. We are also thankful to Public Relations committees of all B-Schools of India who have circulated Niveshak among their participants. We are thankful to all our faculty members who inspired us during difficult times and whose support and encourage¬ment made us see this day. Most of all, we thank all the participants of IIM Shillong, without whom Niveshak would not have completed 15 glorious issues. On a more personal note, I was privileged enough to get an opportunity to work with some of the brightest brains like Amit, Nilesh, Sareet, Sarvesh, Sujal & Tripurari as a part of Team Niveshak. They filled the journey with passion, fun and learning. Niveshak would never have been the same without them.
But as time passes by, we choose to pass the baton to more deserving people who can match your expectations better. We have selected a team comprising of Bhavit, Bhavya, Durgesh Nandini, Hitesh, Sumit, Tanvi, Swarnabha & Upasna who we think can serve you better than we did. I just wish that this new team is fortunate enough to get the same love and support from you. Let us wake up to 2010 with the fresh new team, a fresh commitment and a hope to see the bull running on the streets of world finance markets.
This is your editor Biswadeep signing off for the last time. Merry Christmas and a very Happy New Year.
Happy Investing!
Biswadeep Parida
Editor-Niveshak
On Behalf of the Outgoing Team
(click on image or here to view)
Green Financial Products & Services
Posted by Team Niveshak
on
Monday, December 28, 2009
, under
specials
|
Vibhu Mishra
IIFT, Delhi
The field of finance has always been very dynamic and has evolved through the ages. Vagaries in world economy and the evolving global scenario has seen numerous innovations in financial engineering and hence, the genesis of new financial products. Bankers, insurers and asset managers are always receptive towards new products as that would provide impetus and growth to the market.
Why ‘Green’ needs to go Greener?
Green financial products were introduced into the financial industry so as to add value, build careers, boost talent pool across the globe and provide a platform for ethical and eco-friendly investment. Mature organizations realize that the environmental protection has direct relation with competitiveness and profitability. This drives financial institutions to see sustainable development as a long-term attractive business field, pushing them to develop "green" financial products, with the aim, besides cash in, of promotion of sustainable development.
Green Products & Services on Offer
Carbon Funds: A carbon fund purchases emission reduction credits like CERs (Certified Emission Reduction Credits) or ERUs (Emission Reduction Units). Thus, these funds are an attractive option for regulated private companies and also for traditional investors for cash returns. Through recent collaboration between multilateral development banks and private financial institutions, a variety of carbon funds have emerged to help finance GHG emission reduction projects.
Green Mortgages: Green Mortgages are special mortgages for new homes which comply with the benchmark green energy consumption standards. Usually, the interest rate for green mortgages is 1-2 % lower than the market rate. In Netherlands a person can also claim exemption from income tax if he has opted for green mortgage product.
Green Cards: A broad family of green products includes debit and credit cards linked to environmental activities. “Green” credit cards offered by most large credit card companies, typically offer NGO donations equal to approximately half a percentage point on every purchase, balance transfer or cash advance made by the card owner. Annual Percentage Rates (APR) for affinity cards normally range between 15-22%, and many of these include annual user fees. Over the past year, tying credit cards to an offset program has become increasingly popular among European financial institutions. As with other product offset schemes, this supplementary service can be implemented at little cost to the lender, while both tangible and non-tangible returns are potentially sizeable.
Securitization: A risk sharing arrangement for environmental projects. Financial institution represents a guarantor at the mezzanine level of risk, allowing client to transfer risk to bank. Eco-Securitization scheme will test the feasibility of financing “natural infrastructure” by linking sustainable management of resources with the funding capacity and requirements of asset-backed securitization. The long-term aim, under the Eco-Securitization, is to introduce a new debt instrument into the global financial mix that employs the full asset range of a sustainable forestry business as security, including carbon sequestration, biodiversity and water management credits.
Green Insurance: “Green” insurance falls under the latter and typically encompasses two product areas:
1) Those which allow an insurance premium differentiation on the basis of environmentally relevant characteristics; and
2) Insurance products specifically tailored for clean technologies and emissions reducing activities. Mileage-based insurance is offered to vehicle owners. Discount is offered for hybrid and fuel efficient vehicles. Bank can also choose to offset vehicle’s annual emissions. Green Building Replacement and upgrade coverage products. Product covers unique type of “green” risks related to the sustainable building industry.
Across the Globe:
| Product | Institutions | | | Markets | ||
| Home Mortgage | Dutch | Banks, | CFS, | HBOS, | | |
| | | | | | | |
| Home Equity Loan | Bank | of | Citigroup, | | ||
| | CFS, Vancity | | | | | |
| Credit Card | Robobank, Barclays, Bank of | Europe, | ||||
| | | | | | | |
| Securitization | IFS, DFID | | | | Global | |
| Bonds | BNP Paribas, Goldman Sachs | Global | ||||
There are some issues which impede the growth of Green financial products. Green products have still not been able to position themselves as an economically viable option as many lower cost products exist in the market. Unlike of what is happening today in Europe, where the market of "green" financial products & services is growing substantially, globally, even though the market appears to grow, it is in an early stage, with indefinite boundaries and without having gained unified characteristics, differentiating it from the traditional industries.
The development and penetration of "green" financial products is a dynamic procedure that renders the need for cooperation between all the parties involved. From a financial point of view, it requires encouragement of innovation and investment of resources (financial, human and technological) on their development, while from a business perspective, it requires adoption of instruments and methods (sustainability report, interrelation between environmental and financial efficiency etc) that will contribute to the rational assessment and evaluation of plans, projects and the company itself.
In this framework, the development of an innovative market partnership between financial organizations, consultancy firms and enterprises is proposed, since the interrelation between the parties involved (stakeholders), the co-operations developed and the fulfilment of specific market needs will promote the maturing of the market in the total.
Path of Economic recovery: Future Outlook in the light of past
Anirban Das
Shibasis Biswas
IIM Ahmedabad
When it comes to grading the current state of the world economy, most professors will brandish a C- (or whatever is the lowest grade in your B School). But the letters presently hogging the limelight in this space are – U, V, L and W, referring to the expected speed and shape of the economic recovery.
The Shapes
An economy in deep recession that drags on for a long period of stagnation, that is what an L shaped recovery signify. Chilling as it is, it is not unprecedented. The Japanese experience in the 90s provides such an example (Figure 1).
The shape we are more used to, and are certainly
hoping for is a V, with the upturn being as sharp as the downturn. Most recessions since 1940 have taken this shape, but with the housing and credit markets devastated, there is a certain sense of apprehension about the pace of recovery.
The data provided by a USA Today survey shows that 37% of the consumers actually expect the economy to take a U shaped path, making a longer arc of bottoming before recovering. This view is particularly important given the lack of similarity of present crisis with earlier downturns. That principally stems from the outsized role the financial system plays in today’s world economy, compared to the underlying sectors of the previous recessions. While Green Shoots are in vogue today, with most of the economies coming out of recession in 3Q, the concerns are still there about the sustainability of the upturn achieved on the back of unprecedented government stimulus.
The concerns in fact bring out the possibility of a completely new shape further down the alphabet – a W shaped recovery. Economists in this league believe that the recovery will lose steam in near term condemning the economy to another sharp downturn before finally picking up for good. Their logic lies in the means used to achieve the recovery – the Fed along with other central banks have printed money and kept interest rates to record low levels to somehow raise the consumer sentiment. The negative effects of these will most probably be manifested in inflationary pressure over-growing the upturn, and regulators being forced to fight it hard, as envisaged by JHU economist Steve Hanke. The resulting prospect of renewed banking losses and increased tax burden is highly likely to produce another dip.
The Economy in 2009 – Where do we Stand
Worst recession since the Great Depressions – GLOBALLY
The key aspect of the present crisis we are in has been the widespread nature of it. The worldwide linkage of the financial system and trade meant that the collapse of financial systems in the USA prompted a synchronized collapse in trading activities across the world. The very reason economists like Simon Johnson, former IMF research director, feels that we are into
a recession that is fundamentally different from previous ones. The United States in 1980s and Japan in 1990s were able to recover because demand from the other parts of the world allowed them to build recoveries based on exports. The pervasive nature of the present recession meant
the whole world was stuck in a deadlock, with everyone losing. Consumer confidence reached its lowest ebb; businesses were squeezed from both ends as credits dried out completely. Job losses reached unprecedented levels (estimated at 7.2 million by the latest Bloomberg data), stock markets crashed world over and the dollar climbed as investors withdrew money from markets to cover their losses and consumer savings rate increased to 5.2% in second quarter on 2009 from 1% before the crash (Bloomberg). Lehman became history, AIG, Citi and GM had to be bailed out by government interventions. In effect, the prides of the world’s largest economy came down crashing. All the talks of decoupling came out to be effective in theory only as the world’s biggest economies entered into recession one by one.
Government Actions
Unprecedented events call for unprecedented actions.
After initial stubbornness (by lettingLehman fail), the
proponents of Efficient Market theory had to come rush out to curb the mayhem that followed. Interest rates were brought down to unforeseen levels by the central banks, with the Fed leading the way with near zero rates (Figure 2). Bail outs became a common word as governments worldwide came out with massive stimulus packages to resurrect the economy (Exhibit 1). An end was not easy to come nevertheless, with all major economies contracting or at least slowing down for multiple quarters.
Green Shoots Emerge – Emerging Economies Lead the Way
They did not come easy, but signs of bottoming out slowly started to emerge in the second quarter of 2009 as the stimulus reached some depth. For the first time since June 2007, economic outlook for the OECD countries were revised upwards compared to the previous issue in the June 2009 issue of the OECD Outlook (OECD). The arrest in the contraction was caused by inventory adjustments by businesses, recovery in non-OECD economies as well as the effect of the stimulus programs (OECD). The biggest effects were seen in the stock markets, with the S&P gaining as much as 47% from its March nadir. Dean Maki, Chief US Economist of Barclays Capital opines that while consumer savings rate will remain high, the excess return from investments should see at least moderate growth in spending. The signs are indeed there now, with Germany, Japan and the USA coming out of the recession in 3rd quarter 2009 (Bloomberg).
The other major part of the recovery story has been the performance of the emerging economies. The findings of the third Global Economic Conditions Survey by the ACCA (a Global body of professional accountants) note significant regional variances as Asia-Pacific, Africa and to some extent Central and Eastern Europe reported higher levels of business confidence and optimism compared to Western Europe and the Americas. The Asia Pacific region was in positive territory in all the major indices measured by the survey, strengthening the growing belief that these economies will pull the world out of the slump. Indeed, the economic data coming out of the new economies like China and India (Exhibit 2) have given rise to renewed hopes of a smooth recovery.
Back to Shapes of Recovery
The question therefore is no more about whether recovery has started; almost every economist agrees that it has. What is not certain though is the pace of the recovery, leading to the argument regarding recovery curve shapes as we defined before. Economists like Michael Mussa (former Research Director at the IMF) argue for the case of a V Shaped curve whereas their counterparts like Simon Johnson are much more pessimistic, predicting the gloomy possibility of a U, W or even a L shaped up-move.
The Optimists
The sources of sustainability are two-fold according to them –
• People’s confidence in government programs will translate into sustained spending as they believe that government interventions will rectify the market inefficiencies
• Analysis of previous recessions shows a clear trend of strong downturns followed by equally strong upturn. Economists like Mussa believe that slower recoveries result from lack of government intervention, which certainly has not been the case here
The growth in the USA is likely to come from –
• Producers moving to cover their largely depleted inventories in the wake of the double effect of huge inventory cuts and government stimulus programs (e.g. Cash for Clunkers) that raised sales suddenly
• Business investment in software and equipments have not risen in the up-move of the previous quarter, staying at a level of 22% cost cut from pre-recession levels.
These historically lag the upturns by a quarter, and is likely to take part in the recovery in
forthcoming quarters
• Housing prices have bottomed out in all probability. With increased facilities for house purchase (low mortgage rates for qualified buyers and low prices) and increased confidence that the worst is over, the housing market is likely to recover one-third of the lost ground since its 2005 peak
• The growth in exports is likely to remain modest, but past experiences (the Regan recovery of 1982-84) indicate that it is not expected to decline significantly during a recovery phase
The growth drivers for the rest of the world are given below:
The Naysayers
Primary arguments of this group remain that –
• The current slow-down is different from any previous recessions due to its global nature, raising the possibility of a global demand deadlock. The root cause of the recession being financial systems, the linkage is too strong for any sort of decoupling to work
• The psychological effect of losing one’s place to stay is likely to haunt the consumer
sentiment for years to come. Even when the prospects look up, spending is not expected to rise to levels from where it can sustain the government spending induced recovery
Indeed, supporting evidence exists in quite a few areas –
• The US fiscal deficit has risen to a historically unforeseen level at $1.75 trillion (Fiscal).
Government’s ability to push in further stimulus is limited
• The unemployment claims have not followed the upsurge of the last few months. New unemployment claims have fluctuated to some extent over the last few weeks, but have stayed at historically high levels (Figure 3)
• Trade is still contracting at double dig
it rates in OECD countries (Figure 4)
• Concerns about the banking system remain (as demonstrated by the high bank Credit Default Swap rates) in spite of the recent improvements in financial system (Figure 5)
• Valuations in stock markets seem to overgrow the up turn, raising clouds of another bubble in the making
Conclusion – What is in Store
The breadth and depth of the present global contraction makes it a unique situation where each and every step by the major participants can assume significant proportion. There is a possibility of underestimating the growth in consumer sentiments, as has been the case with previous recessions. At the same time, the downside risk of overestimating the confidence level is also significant. On the positive side, US GDP rose at 3.5% in Q3, bringing in cheers from all over the globe. But further scrutiny reveals that 1.66% of growth was from Cash for Clunkers (one time effect), while inflationary estimate was 0.8 – 1.5% leaving us with a more realistic estimate of around 1% growth, even in time of unprecedented government boost(Reuters). While predicting a W shaped recovery might seem too pessimistic, emergence of a new world order where growth rates are steady but moderate is a much more probable. For developed countries, this rate may range from 1.5-2% as compared to the 3-3.5% during previous boom times.
While we all would like to see a V shaped recovery, the possibility of that is by no means certain. Role of governments and regulators assume primary importance here, as they need to balance the critical requirements of growth and inflation. A key decision will be the time to withdraw from the stimulus programs, as global markets still seem to be short of reaching the self-sustaining confidence level. Already though, the Australian and Norwegian central banks have raised rates indicating exit fromthe stimulus program. Sooner or later, other governments will have to follow suit, but the timing and manner of those phase outs will determine the course of recovery. Cut-backs must be gradual, and not of sudden nature. The path to recovery is still fraught with dangers; we must tread with extreme caution as the world possibly can’t sustain a recurrence of the worst recession since the great depressions
The Week That Was:-30th Nov - 4th Dec
Posted by Team Niveshak
on
Monday, December 7, 2009
, under
TWTW.news
|
MARKET WATCH:
The strong GDP figures at the beginning of the week brought good news for the market. Also, it helped to pacify the investors troubled by the Dubai debt fiasco. Though the week had its own share of ups and downs at both the major indices, the markets closed with a gain of 2.8 percent on Sensex and 3.4 percent on NIFTY.The BSE Sensex saw the intraday highest at 17,361 in past six weeks. It settled at 17,102 an increase of 470 points as compared to last week. The NIFTY closed at 5109 points as it soared up by 167 points from last week.
GDP grows by 7.9%
The gross domestic product (GDP) for India grew by 7.9% in July-September 2009 as compared to 6.1% of the previous quarter.Not only did this rise beat market expectation but also the anticipation of the Finance Minister, Mr. Pranab Mukherjee who had envisaged it to be around 7% for this fiscal year. These figures are in line with the ones before the slow down period of July-September 2008. It gives an indication towards the revival of country’s economy.Although the agriculture sector saw a growth of less than 1% in its output but it was compensated by the other sectors like community services, mining and quarrying, boarding and lodging etc which had a considerably large increase in the last quarter for FY 2009-10.But the financial analysts speculate the third quarter to be critical as the agricultural GDP is expected to be negative. These improved growth figures is also increasing the anxiety of the industry regarding the government’s action for the stimulus packages.
Wal-Mart finalizes three retailers in India
Wal-Mart has chosen Infosys Tech, Cognizant Tech Solutions and UST Global as its vendors for handling their operations in India.These companies would be signing a contract worth over $600 million which would help them earn around Rs 250 crore to Rs 300 crore, annually for first few years. With Wal-Mart following the practice of in-house production, it would heighten the IT outsourcing scenario in India. Infosys and Cognizant would get a larger share of the pie as they would be looking after the application development for Wal-Mart which would be tested by UST Global, as per the contract.
US banks still feel the heat of loans
The number of closed downs for US banks increased to 130 as 6 more banks were seized by the FDIC regulators this Friday.Though the general economy is showing positive signs still the banking industry is slow to recover as FDIC speculates closing down of small banks for another year.
The bank failures in the state of Georgia numbered to 24 with three more being unable to bear the burden of loans last week. The other three were in Virginia, Illinois and Ohio.
The AmTrust Bank of Cleveland, Ohio, had the assets of $12 billion. The other 5 were holding assets of even less than $1 billion. The major reason of the failure of small banks is the fact that real estate was one field where they were actually at par with larger banks during the boom period.The FDIC would receive help of about $45 billion as the banks would prepay it the three years’ industrial assessment.
