Showing posts with label specials. Show all posts
Showing posts with label specials. Show all posts
Green Financial Products & Services
Posted by Team Niveshak
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Monday, December 28, 2009
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specials
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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
Sovereign Wealth Funds
Posted by Team Niveshak
on
Wednesday, November 25, 2009
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specials
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Santosh Anil Patil
IMT, Ghaziabad
Introduction
There has always been a debate on saving an economy in distress, which nearly went unanswered during the early 2000. But now there is a saviour for such economies. Developed economies did not realize the potential of developing ones, which formed funds of nations called Sovereign Wealth Funds (SWFs). These funds have flown to the rescue of capitalism’s finest. This established the flavour of a new type of investment fund, which otherwise would have gone unnoticed.
These funds have existed since 1950s, but their total size has increased dramatically over the last 10-15 years. In 1990s these funds probably held about $500 billion, but the current total is estimated about $3 trillion. SWF is a state owned investment fund composed of financial assets such as stocks, bonds, property or other financial instruments. SWFs are the most sought after funds these days and come to play to bring in market stability, liquidity and support in times of dire need and have comfortably taken place of central banks. SWFs have been around for years, created from national budget surpluses and huge reserves of oil and US treasury bills. The governments do not have an option since they cannot pump in the entire amount into their respective economies for the fear of inflation and they cannot just pile up the cash and stock it. So the alternative is SWF.
Concept
The idea that governments should mitigate the risk in the future has a long and respectable history. Kiribati, a pacific island country that mined guano for fertilizers set up the Kiribati Revenue Equalization Reserves Fund. Now the guano is long gone but the pile still remains and boosts the GDP of the island by a sixth. Many oil producers run similar schemes. Oil Producers have realized that it is too extravagant to spend everything in one go and it is wiser to save for times when oil prices are low or for the generations when oil production will start depleting. Kuwait Investment authority is also one amongst the oldest SWFs created in 1953 from oil revenues even before Kuwait gained independence from Great Britain.
Trading
SWFs trade using funds earned from
• commodity export revenues
• foreign exchange reserves
Commodity funds can be used
• For fiscal revenue stabilization
• As a check to prevent foreign exchange funds for fanning inflation
The non-commodity funds are used to make stand alone investments.
SWF – Relative Presence
Although SWFs make up only 2% of the world’s $165 trillion worth of traded securities, they come up with enormous potential having more equity than private equity and more funds than hedge funds. The growth
curve is fascinating with the expectation of SWFs crossing
$10 trillion dollar mark. But even with such a growth potential, the funds account for only 3% of global traded securities.
Leading Nations
Assets under management of SWFs increased by 18 % in 2007 itself. Most of this growth resulted from an increase in official foreign exchange reserves from Asian and Middle East countries. Amongst these funds, the top seven are classified as “Super Seven Funds” all of which have assets over 100 billion dollars. The Abu Dhabi Investment Authority, established in 1976, is the world’s largest sovereign fund. The Norwegian SWF is receiving great interest these days. The fund is acknowledged for its transparency ever since its inception in 1996. The fund has invested in low risk non-strategic assets and the investments aim to follow environmental and human rights standards. Along with these major funds, smaller funds are held by Azerbaijan, Trinidad and Tobago, Ecuador and Nigeria which account for around 100 billion dollars.
Investments Made
The SWFs can invest in each and every corner of this world and can function just as an independent investment fund. Since the investments are not revealed, it is always difficult to sense the strategies employed. But the reasonable assumption would be that Sovereign wealth funds invest towards long term investment strategies while at the same time speculating and gaining in the face of short term market volatility. These funds do not borrow money from investments and hence are not highly leveraged, which sets them apart from other funds.
Recently there have been investments in big businesses across many corners by various SWFs. China’s Investment Corporation (CIC) hit headlines recently for investments in major U.S financial firms. In 2005, a United Arab Emirates owned company, Dubai Ports World stirred a controversy in the United States by purchasing a British owned shipping company which gave it a control over certain parts of many US port facilities. Although Dubai Ports World is a state owned business and not a sovereign wealth fund, the incident reflects parallel concerns over the purchasing interest of the SWFs. Recently Singapore, Kuwait and South Korea aided in bailing out of two companies, Citigroup and Merrill Lynch which had lost their lifeline in the financial crisis that had plummeted the financial health of many big firms in America.
Future
The financial stability of a company entirely depends on the efficiency with which its assets are managed and here the investment strategies play a key role. This has become a trend in the recent developments of the financial world. But when it comes to Sovereign Wealth Funds, there is a lot to be known since very few countries publish the information about the investment strategies, assets or liabilities which causes a growing concern in the minds of people all over the world. The solution is simple in the form of transparency which would go a long way to ease the growing concerns. Disclosure of certain information about the investments or assets in one form or other will serve as a proving factor from the investors. Investments through other funds like hedge funds can mitigate the risks and provide a layer of protection against the money laundering schemes. The diversification can be achieved by investment across various indices anytime. Moreover a scandal of one sort or other is inevitable. When there are stakes of trillions, involving hundreds of fund managers who invest in hundreds of investments employing various strategies, there is every possible chance of a blunder as corruption or foolishness creeps in. Hence it is always advised to sense the risk involved in such profound investments and try to mitigate the risk of conflict in every possible manner. It always boils down to the decision of the sovereigns as to make these funds a future or a past, while staying out of controversies which can tarnish their brand image.
On the whole, Sovereign wealth funds have been in the spotlight in the 21st century having set their footprints right into the heart of wealthiest nations and the gargantuan businesses in not more than a decade. The flow of investments with an unregulated ease backed up by the global rise in the economy is a clear indication of their growth. However, with lots of speculation surrounding these funds on ethical issues and the influence of Middle East, the future of SWF remains a mystery. Nevertheless the opportunities that lie ahead are growing at such a pace that these funds can be on top of all funds by 2050.
Value Investing: An Inside Perspective
Posted by Team Niveshak
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Friday, November 6, 2009
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Neha Katyal
IMT Nagpur
Value Investing relates to selecting stocks which are under-valued in the stock markets. This under-valuation necessarily means stocks which are selling at less than their estimated fair price and not just any stocks selling at low price.
History
Benjamin Graham is regarded by many to be the father of value investing. The concept of value investing was given by Benjamin Graham and David Dodd in 1934.
Analysis Done for Value Investing
The indicators used for value investing, as given in “Security Analysis” by Benjamin Graham and David Dodd, 1934, are:
1. Price to Earnings ratio (P-E Ratio) should be at least double the AAA bond yield
2. PE ratio of the stock should be less than 40 percent of the average PE ratio for all stocks over the past five years
3. Dividend Yield > Two-thirds of the AAA Corporate Bond Yield
4. Price is less than Two-thirds of Tangible Book Value, where tangible book value is calculated as difference between total book value and value of intangible assets such as goodwill
5. Price is less than Two-thirds of Net Current Asset Value (NCAV), where net current asset value is defined as liquid current assets including cash minus current liabilities
6. Debt-Equity Ratio (Book Value) has to be less than one
7. Current Assets > Twice Current Liabilities
8. Debt is less than Twice Net Current Assets
9. Historical Growth in EPS (over last 10 years) > 7%
10. No more than two years of declining earnings over the previous 10 years
Other investors may indulge in estimation of future growth and cash flows. All these indicators help to identify the under-valued stocks which may be used for value investing. These are the stocks defying the efficient market hypothesis, that is, their market prices do not reflect all the information, existing or new, about the stocks in their market price.
En-cashing Upon the Opportunity
People using the value investing technique make money by buying the stocks of these specific companies when the market price is deflated and selling in the better times. As the intrinsic value of these stocks is higher than the price at which there are trading, these are available at a discount, the discount which later translates into the profit.
People without much experience in investing in the stock markets can use the value investing technique to their advantage by observing the P-E ratios and other indicators. As the stocks are available at less than their fair value, the novice investors can use the value investing technique to their advantage as in this they are able to keep a higher margin of safety, for probable errors. This defensive investment in stocks trading below the fair value acts as a safeguard to adverse future developments common in the stock market.
Precautions while using Value Investing
The investor may wrongly consider an under priced stock as undervalued as well leading to loss of investment. In a bear market, the price of all stocks are low, but that does not have to mean that all of them are undervalued as well and have high earnings potential over the investment horizon.
Value Investing in Current Scenario
The financial sector crisis in the US has seen stocks around the world tumble to levels, which were unthinkable less than a couple of years ago. In a market when most people would agree that the best strategy to play the stock market right now is to stay away from it, value investors, have a different view. The value investing philosophy suggests that the current condition provides an excellent opportunity to pick up shares at very cheap prices. Talking in Graham’s language, this could be one of the times when the market is unjustifiably pessimistic on a large number of stocks. This however, does not imply that all stocks should be bought just because they are trading at way below the bull-run highs. In every bear run, although there are stocks which fall due to genuine falls in their values, there are many which decline simply because of the widespread pessimism among investors. Obviously, the intrinsic value of the company does not swing with the mood of the investors. A large number of stocks consequently end up taking a huge beating without any rational reason and hence trading at huge discounts to their intrinsic value. Thus, every bearish phase brings about some excellent opportunities for the value investor to capitalize upon. In the later part of this article, we will evaluate the performance of some such opportunities provided at the end of the dot-com bust, over the subsequent boom in the Indian stock markets.
Conclusion
In practice, value investing is similar to deriving gains through arbitrage pricing theory, in that, it involves finding stocks which are under priced in a certain market. Using the value investing technique for creating a portfolio of stocks is a better option than buying only a few stocks. The creation of a portfolio may be done by a novice investor as well to reap the benefit of having a higher margin of safety and the obvious benefit of diversification of risk.
For using the value investing technique, the investor must ensure that proper valuation techniques have been used and no extra optimism has been shown. The evaluation may be done using simple fundamental analysis techniques such as Economy-Industry-Company analysis (EIC), estimating future discounted cash flows or may be studied in relation to the market using techniques such as Capital Asset Pricing Model (CAPM).
An assumption made while using the value investing technique is of the marketability of the security. It is assumed that the stock would be easy to sell at the end of the desired investment holding period as the prices of the stock would have risen, making it easy to book profits.
