Showing posts with label December. Show all posts
Showing posts with label December. Show all posts
Niveshak December 2016
Posted by Team Niveshak
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Monday, January 9, 2017
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2016,
December,
IIM Shillong,
Niveshak,
NIveshak Investment FUnd
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Happy New Year!
The last month was mainly abuzz by the effects of demonetization seen by the Indian public. Owing to the deadline of 30th December to exchange old currency notes, the banks and ATMs across the country continued to see long queues of people. The limitations on the withdrawal from the ATMs and Bank accounts were removed post December 30.
RBI also came up with its credit policy for the year and rendered most of the key rates unchanged at 6.25%, while the CRR restrictions imposed on deposits worth Rs.3.2 lakh crore were called off from December 10. The month also saw some other interesting news like the introduction of Interest Rate Option by RBI, the fall in India’s Forex reserves for quarter ending September 2016, and the jumps in Sensex and Nifty50 as 2016 came to a close.
On the magazine front, we have covered Tata Motors for our Equity Research report. Our cover story talks about the economic blockade in the north-eastern states of Manipur & Nagaland. It tries to dig a bit into the history of the issues and how the ongoing unrest is having a financial impact as well. The article of the month talks about Abenomics in Japan and its success factors. The author has thrown light on the concept, while also trying to create a scorecard in terms of its success in various fields like economic development, labor market, etc. For FinGyaan, the author talks about how Payment banks are the future of Indian Financial System and the related pros and cons. In the FinSight section, the author has studied the possible impacts of the election of Donald Trump as the US president on various facets of global economy.
In the FinaFame section, we have looked at Dr. Manmohan Singh, the former Prime Minister of the country, as well as a well-known economist and politician. The Classroom section explains the concept of Open Interest, which essentially means the number of contracts or commitments outstanding in futures and options trading on an official exchange at any one time. For FinView, we
have brought the interview of Mr. Mitez Sheth, Global Head - Treasury & Operations at Amicorp Group and Board Member at Amicorp Community Foundation.
Finally, we would like to thank our readers for their immense support and encouragement. You remain our prime motivating factor that keeps our spirits high and gives us the vigor and vitality to keep working hard. We hope you had a great month and wish you the best for the new one.
Thank you. Stay invested!
Niveshak December 2015 Issue with Page Flip version
Posted by Team Niveshak
on
Thursday, December 31, 2015
, under
2015,
December,
Finance Club,
IIM Shillong,
NIveshak Investment FUnd
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Dear Niveshaks,
The month of December started on a positive note with GDP growth accelerating to 7.4% in September quarter and with the expectation that the government would meet its fiscal deficit target for this fiscal, although the Seventh Pay Commission’s recom¬mendation would put burden on the government. The RBI also kept its Repo Rate unchanged, which was as expected, and the governor said he would be pushing for the new base-rate calculation formula.
The month also saw heated debate over GST with the Opposition demanding scrapping down the 1% inter-state sale levy and capping the GST rate to which the government has partly agreed to by including it into in the law. Also the e-commerce companies lobbied to the government to keep them outside of the GST purview.
With the upcoming 4G services, companies like Samsung and Micromax, largest smartphone sellers in India, have shifted their focus on the devices which run faster on 4G network. To strengthen its sellers’ network Flipkart announced that it will give small working capital loans to all its strong network of 80,000 merchants.
The five-year high 9.8% IIP number for October was a big positive for the economy which showed that the economy may be finally out of glut and rising. After two-weeks of negotiations, India finally made it clear in Paris that due to its development agenda it cannot turn back on the coal, though the country is committed to increase its dependence on renewable energy by seven-fold by 2022.
The month also saw the most awaited move by Federal Reserve which raised its rate by 25 bps for the first time in a decade. This ended the uncertainty in the market. Finance Minister Arun Jaitely introduced Insolvency and Bankruptcy in Parliament which will help in winding up of failed business in 180 days and is in line with the global practices.
The cover story is an analysis of the Federal Reserve rate hike and its impact on the Indian market. The Article of the Month (AOM) discusses about the inclusion of Yuan in the IMF Reserve Currency basket. It talks about the growth of Yuan and the effect of the inclusion on the Chinese economy as well as world economy.
FinGyaan talks about the Derivative market and how it functions and what could be its implication. While the FinSight section analyses the reason as to what led to the delay in the growth of India.
This time around we have incorporated a new section named FinRewind which will talk about the major financial happenings of the past. This section will try to analyze the situation both subjectively as well as objectively. This issue has the Impact of the Bretton Woods Conference as its topic.
FinView has the excerpts from Mr. Rajat Mishra, Sr. Vice President , SBI Capital Markets Ltd. who gives his view on the Fed rate hike and the investment climate in the country. Classroom section shares knowledge on Factoring and Forfaiting. We would like to thank our readers for their immense support and encouragement.
You remain our prime motivation factor that keeps our spirits high and give us the vigor and vitality to keep working hard.
Thank you.
With the upcoming 4G services, companies like Samsung and Micromax, largest smartphone sellers in India, have shifted their focus on the devices which run faster on 4G network. To strengthen its sellers’ network Flipkart announced that it will give small working capital loans to all its strong network of 80,000 merchants.
The five-year high 9.8% IIP number for October was a big positive for the economy which showed that the economy may be finally out of glut and rising. After two-weeks of negotiations, India finally made it clear in Paris that due to its development agenda it cannot turn back on the coal, though the country is committed to increase its dependence on renewable energy by seven-fold by 2022.
The month also saw the most awaited move by Federal Reserve which raised its rate by 25 bps for the first time in a decade. This ended the uncertainty in the market. Finance Minister Arun Jaitely introduced Insolvency and Bankruptcy in Parliament which will help in winding up of failed business in 180 days and is in line with the global practices.
The cover story is an analysis of the Federal Reserve rate hike and its impact on the Indian market. The Article of the Month (AOM) discusses about the inclusion of Yuan in the IMF Reserve Currency basket. It talks about the growth of Yuan and the effect of the inclusion on the Chinese economy as well as world economy.
FinGyaan talks about the Derivative market and how it functions and what could be its implication. While the FinSight section analyses the reason as to what led to the delay in the growth of India.
This time around we have incorporated a new section named FinRewind which will talk about the major financial happenings of the past. This section will try to analyze the situation both subjectively as well as objectively. This issue has the Impact of the Bretton Woods Conference as its topic.
FinView has the excerpts from Mr. Rajat Mishra, Sr. Vice President , SBI Capital Markets Ltd. who gives his view on the Fed rate hike and the investment climate in the country. Classroom section shares knowledge on Factoring and Forfaiting. We would like to thank our readers for their immense support and encouragement.
You remain our prime motivation factor that keeps our spirits high and give us the vigor and vitality to keep working hard.
Thank you.
Stay invested!
Team Niveshak
(click on image or here to view)Niveshak December 2014 Issue with Page Flip version
Posted by Team Niveshak
on
Thursday, January 1, 2015
, under
2014,
December,
Finance Club,
IIM Shillong,
Niveshak,
NIveshak Investment FUnd
|
Dear Niveshaks,
With this issue of Niveshak, we bid farewell to an eventful year of 2014. The month of December saw foreign investors pouring in $2 billion in the Indian capital markets in December, taking this year’s total inflows to a whopping $42 billion since January.
Niveshak December 2013 Issue with Page Flip version
Posted by Team Niveshak
on
Monday, December 30, 2013
, under
2013,
December,
Finance Club,
IIM Shillong,
Niveshak
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Dear Niveshaks,
Niveshak December 2012 Issue with Page Flip version
Dear Niveshaks,
The latest fad to make inroads in the Indian economy from the global arena is FDI in multi brand retail. It was passed by both houses in the just concluded winter session of the parliament. But come January 1st and we witness the rollout of undoubtedly the biggest scheme in the history of independent India.
Our cover story focuses on the same and we evaluate the suitability of cash transfer schemes for India of today. We also portray the India where cash transfers can be extremely successful. Is India ready to embrace this latest offering from the West? Turn on the pages to find out.
The success (failure?) of the cash transfers will be something to watch out for and we sure will keep a tab on that; but are the 2014 FIFA World Cup and the 2016 Olympics not something to watch out for as well? Agreed that it’s a little too early to foresee these events but isn’t Niveshak all about keeping you ahead of the times! This issue’s Article of the Month analyses the effects of these events on the Brazilian economy. While this article takes you years ahead, our Finistory article takes you about a century back to the era of World War I and analyzes the transformation of the US economy in that period.
This month, our Finance Minister, Mr. P. Chidambaram, advised RBI to proceed ahead with issuing of new banking licenses without waiting for amendment of the Banking Regulation Act of 1949. Is this the beginning of a new chapter in the ever-dynamic relationship of the Government of India with its central bank? Explore the same in the FinGyaan section of this issue.
We continue to receive your support in the form of articles and FinQ entries and our sincere thanks goes out to all our esteemed readers for the same. We would also like to thank all the participants for an overwhelming response to our intercollege first-of-its-kind event ‘FinDrishti’. Please continue to motivate us so that we can come out with more insightful reads in the issues to come. And as always,
Our cover story focuses on the same and we evaluate the suitability of cash transfer schemes for India of today. We also portray the India where cash transfers can be extremely successful. Is India ready to embrace this latest offering from the West? Turn on the pages to find out.
The success (failure?) of the cash transfers will be something to watch out for and we sure will keep a tab on that; but are the 2014 FIFA World Cup and the 2016 Olympics not something to watch out for as well? Agreed that it’s a little too early to foresee these events but isn’t Niveshak all about keeping you ahead of the times! This issue’s Article of the Month analyses the effects of these events on the Brazilian economy. While this article takes you years ahead, our Finistory article takes you about a century back to the era of World War I and analyzes the transformation of the US economy in that period.
This month, our Finance Minister, Mr. P. Chidambaram, advised RBI to proceed ahead with issuing of new banking licenses without waiting for amendment of the Banking Regulation Act of 1949. Is this the beginning of a new chapter in the ever-dynamic relationship of the Government of India with its central bank? Explore the same in the FinGyaan section of this issue.
We continue to receive your support in the form of articles and FinQ entries and our sincere thanks goes out to all our esteemed readers for the same. We would also like to thank all the participants for an overwhelming response to our intercollege first-of-its-kind event ‘FinDrishti’. Please continue to motivate us so that we can come out with more insightful reads in the issues to come. And as always,
Stay invested,
Team Niveshak.
(click on image or here to view)
Niveshak December 2011 Issue
Dear Niveshaks,
‘Niveshak’ has completed yet another year. As, we enter our 5th year, we have indeed come a long way from our humble beginnings in 2008. This year we saw more than 700 article entries coming to us from b-schools across India and even more Fin-Q entries. We also published a number of interviews from dignitaries a cross industry and academia. Also, new sections such as Market Snapshot and Classroom were introduced this year which got a lot of appreciation from readers.Surely, these achievements wouldn’t be possible without the continued support and contribution from our readers. As we pass the baton to our new team, I on behalf of the outgoing team would like to thank all the readers for their support and hope that we lived up to the expectation of one and all by contributing our bit to this great knowledge sharing platform called ‘Niveshak’.
The year 2011 was expected to be the year of growth, but instead the year turned to be just the opposite. I am not able to remember a single editorial in the last year where I have written something good about the markets or economy. The benchmark Sensex slipped by more than 20% during the year, the rupee depreciated by even more.Inflation, RBI policy,government in action, Euro crisis continued to dominate the headlines throughout the year and I don’t remember one editorial in last year where I have not mentioned these. I remember the June issue in which our cover story was on ‘double dipped’ recession. I distinctly recollect receiving mails from some optimistic readers about falsely spreading negativity. Two months later‘Economist’ carried a cover story on the same topic and today ‘double-dip’ is real in some parts of Europe and the global economic data point to some very difficult times ahead in other advanced economies as well.
Optimists argue that the global economy has merely hit a ‘soft patch’. Firms and consumers reacted to this year’s shocks by temporarily slowing consumption,capital spending, and job creation. As long as the shocks don’t worsen confidence,growth will recover and stock markets will rally again. However, the ‘double-dip’ proponents argue that the problems of the advanced economies is that of insolvency,not illiquidity; large and rising public and private deficits and debt, damaged financial systems that need to be cleaned up and recapitalized, massive loss of competitiveness, lack of economic growth, and rising unemployment. It is no longer possible to deny that public and private debts in PIIGs nations will need to be restructured. If the problem in advanced economies aggravates, the domino effect will ensure that no part of the world remains unaffected. We sincerely hope that the optimists are right and the new team has something good to write in the next year.
This issue brings to you some more interesting and insightful reads. The cover story this month focuses on Foreign Direct Investment in Indian retail sector.The issue also features an article on the critical review of the Disinvestment policy in India. Other articles in this issue focus on Alternative Investment Assets, Credit Default Swaps and regulation by Credit Ratings Agencies. The Classroom this month explains the meaning and significance of LIBOR. We would like to thank all those who have contributed articles to this issue and sent entries for FinQ.
Merry Christmas and Happy New Year!!
Stay invested.
Rajat Sethia
(Editor -Niveshak)
(click on image or here to view)
Niveshak December 2010 Issue
Dear Niveshaks
As we all get ready to take a leap into the next decade, I find myself jotting down my thoughts for the last time in editorial. Our team’s journey is finally coming to an end and it is the time when we need to pass on the legacy to the next team. It is indeed a déjà vu feeling of last December when our team had got the opportunity to work for this illustrious magazine. The time since then has passed in a flash. Let us have a quick recap of our eventful journey. We started with the footsteps to 2010 where we saw how this world of finance was going to shape up, followed by auditing what is called as the balance sheet and income statement of our India Inc –Union budget 2010. Later we had a sneak peek of some of the most important events in the world of finance like Greece Debt crisis, Goldman Sachs fraud case, and currency war between nations which did affect the whole globe. We also took you through some of the milestones of the last century in our anniversary edition which was highly appreciated and acclaimed by our readers including those from corporate world. In the meanwhile, we constantly tried to make this magazine a platform to facilitate interaction by introducing interesting sections like Nivesh – A portfolio game and Crossword apart from the Fin Quiz section.
When we took charge of this magazine, the responsibility and expectations were high as the magazine had already achieved a lot in its one year of existence. We started the magazine with the dream of making it even bigger in the field of finance and we firmly believe that we have achieved the same to a great extent. Now Niveshak has become the most coveted platform to facilitate knowledge sharing among the finance enthusiasts of India. This would not have been possible without your support and encouragement. We improved with every issue solely because of the feedback and compliments received from your side which really motivated us and boosted our morale. We take this opportunity to thank the entire B-School fraternity of the country, and especially to those participants who sent numerous appreciation mails, articles, fin-Q and crossword entries. They are the ones who are undeniably the reason behind Niveshak’s success. I would also like to acknowledge the guidance and support of our mentors – Prof Sarkar and Prof Sivasankaran who inspired and motivated us throughout our journey. I must congratulate and also thank the entire team of Niveshak comprising of Bhavya, Durgesh, Hitesh, Sumit, Swarnabha, Tanvi and Upasna for completing this journey successfully. They were phenomenal during the whole journey. Here I would like to make a special mention of Bhavya and Swarnabha whose creative intelligence and perseverance have been instrumental behind Niveshak’s grand success. Last but not the least, I would like to congratulate Biswadeep for creating this masterpiece.
Just as after every sunset, the sun rises again with all the new hopes and enthusiasm, I am confident that the new team Niveshak, with their enthusiasm and motivation, will take Niveshak to greater heights and achieve those feats which our team couldn’t even think of. I just wish the new team gets the same love and support from you which we got in the last 1 year.
Although this is my last editorial, I won’t bid adieu as Niveshak is something to which I shall remain attached forever. Bbye for now.
Stay Invested.
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)
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
Niveshak December Issue
Day by day, the world is plunging deeper and deeper into the financial crisis. Bailouts after bailouts, rate cuts (read interest rate) after rate cuts there seem to be no way out of this for some time. Negative economic and financial data galore in government reports and corporate financial statements across the globe. Probably this is the best time for us B-Schoolers to understand the dynamics of global economics and financial markets.
We, B-School students take cue of this opportunity and explore into emerging financial instruments and markets. One of the most innovative instruments that has come out recently is the “Death Bond”. A Death Bond is a security backed by life insurance which is derived by pooling together a number of transferable life insurance policies. The life insurance policies are pooled together and then repackaged into bonds and sold to investors. The peculiarity of this instrument lies in the fact that is not affected by standard financial risks. The only risk of holding a death bond is with the underlying insured person. If the person lives longer than expected, the bond’s yield will begin declining. But the risk associated with one policy is diversified as the number of policies increases in the pool of underlying assets.
Going back to the financial crisis, we pick up some learning and ideas on how to avoid similar crisis in the future. Some suggest the restructuring of the IMF as the answer while some demand the strict adherence to Basel-II norms as the best way to avoid bankruptcy of banks. But are the Indian Banks ready for these strict capital adequacy norms? An article addresses the concerns and challenges that Indian Banks face in toeing the line of Basel. One of us has also explored into the low interest rate regime of Japan for an answer for cheap money.
Sometimes too much of regulation makes an economy shock proof. We have tried to analyze how some regulations have made sure that the Indian economy is not much affected by the global crisis and still grows at a brisk pace of 7%. At the same time we notice that the stock markets of India have crashed heavily despite a decent economic growth. We shall try to chalk out a road to recovery in the sensex. Moreover in this issue, participants from B-Schools across India have also given their perspectives on the future (or The End) of Wall Street and the lessons learnt from the fall of the high street Investment Banks, most notably Bear Stearns. May be after reading this issue some of you will agree with the idea that we put across in the first paragraph of this message.
Wish you a happy reading.
Team Niveshak
