Dear Niveshaks,

The possible downgrade of US Treasury security dominated the headlines this month. S&P, Fitch, Moody have all warned of a possible downgrade, if US fails to raise its debt ceiling by the August 2 deadline. If the US defaults on its T-bills, something which it last did way back in 1979, the repercussion would be severe both for the US and the global economy. To make matters worse, the economic data from US indicate a stalling economy and a possible QE3 on cards. The expectation of QE3 has already made Gold prices to rally, which was already rallying hard on the back of fiscal concerns in Eurozone. In general, the monetary easing would create more volatility for commodity prices. In the last two instances of QE, money created in US went out into emerging markets and created bubbles in the commodity space, principally in oil but also in gold and other metals. Meanwhile, the euro zone’s debt drama has lurched from one nail biting scene to another. First Greece took centre stage, then Ireland, then Portugal, then Greece again and now Italy. Each time European policymakers reacted with denial, followed at the eleventh hour with a half-baked rescue plan to buy time. With Italy now at the centre stage of the debt crisis, it is clearly a new phase for the Euro debt crisis. No longer confined to the small peripheral economies of Greece, Ireland and Portugal, it has hurdled over Eurozone’s giant like Spain and Italy.

On the domestic front, the Indian economy is resilient, but the happenings over the past six months have not been right for the investor’s sentiments. The policy stance of the government in various fiscal matters and the recent Mumbai blasts have clearly increased the political uncertainty and affected the economic environment in the country. The Government has a lot of ground to cover if the target economic growth is to be achieved. The severe lag in the decision making process of the Government over the last few months, because of the various civil protests, has halted progress across sectors and affected the economic growth. Meanwhile, persistently high inflation and interest rates have hit business as well consumer confidence. The business, particularly the micro, small and medium enterprises (MSMEs) are cutting down on investments while the consumer led sectors such as the auto and housing are also experiencing slowdown due to high interest rates. RBI is further expected to increase the repo rate by 25 basis points at its monetary review, slated for July 26. It would be 11th time that RBI would be raising rates since early 2010. However, the inflation still remains high and a cause of concern for the policy makers.

This issue brings to you some more interesting and insightful topics. The cover story this month focuses on the draft microfinance bill posted by Ministry of Finance recently, its implications and the way ahead for the Indian microfinance industry. The article of the month explores the issue of savings rate deregulation, the pros and cons, and the steps RBI should take in this matter to benefit both banking institution and common people. Other articles in this issue focus on the impact of RBI monetary policy tightening, the role of securitization in structuring debt portfolio and the impact of CDS introduction in India. Lastly, the Classroom this month explores the topic of Capital Account Convertibility.

Hope you find the issue an interesting read.

Stay invested.

Dear Niveshaks

The other day I was wondering about what could have brought China an indomitable competitive advantage which has not only helped it in achieving a phenomenal GDP growth rate but also in making it resilient of the recession which gulped most of the parts of the world 2 years back. A prolonged discussion with one of my colleagues brought forth various points like labour cost, manufacturing competence etc. One thing where our discussion ultimately boiled down to was China’s pegged currency. But recently we saw China making an announcement that it will make Yuan’s exchange rate more flexible thereby breaking the currency’s 23-month-old dollar peg. This move was welcomed by most of the stock indices of the world with Sensex advancing by 1.7% and MSCI Emerging Markets Index by 2.4%. The S&P 500 was 1.2% higher, so were European stocks.

The dollar peg had come under intense fire from critics as China’s export juggernaut roared back to life, while much of the rest of the global economy remained sluggish in the wake of the financial crisis. But China has ruled out any chance of a major appreciation or one-off revaluation. So the question arises whether this unpegging of currency will dampen this form of China’s competitive advantage in due course of time or it is just an intended move to placate critics of China’s currency regime. Our cover story for this month answers this question by stating the possible implications, or I should rather say repercussions, on China and rest of the world.

The May issue carried an article on the much hyped SEBI-IRDA tussle that had surfaced because of the insurance product ULIP. Well… the insurance industry regulator IRDA has emerged victorious in the regulatory turf-war, with the government ruling that it and not the market watchdog SEBI would oversee the product. But what seem important for us are the steps taken by IRDA to ensure that ULIPs sold by agents are based on the financial profile of the individual being approached and not on the fees. This, if implemented on a larger scale, will definitely serve the purpose in the best interest of the investors. In the current edition, we present to you a very interesting article on BP and the oil spill from one of its rigs in the Gulf of Mexico. This focuses specifically on the financial aspects and impacts of the oil spill, which contaminated a vast area of United States marine environment and continues to have a serious impact on the ecosystem, on BP and the whole Oil industry of the world.

Time indeed moves so fast. It gives me immense pleasure to inform you that we, Niveshak, are at the doorstep of our 3^rd year of existence and will celebrate its second anniversary in the next issue. With this new beginning, let us revisit the world of finance with all its failures and their learning from the last century. Yes this is the theme for the next issue. We invite you to write articles on “Milestones that shaped the world of Finance” for the Anniversary edition. However, you can also send articles on any topic of your choice. For more information, please see the declaration page of this issue. We look forward to your support and wishes to continue this growth story at an exponential pace.

What a journey it has been.

Markets across the globe are at their peaks since the Sub-Prime crisis engulfed the world economy last September. Although it was there for some time, it made its presence felt when the so called rock stars of high street finance, the last four wall street investment banks, ran for cover in the second week of September last year. Since March this year the bull has been spotted on most of the occasions but bear has capitalized on the volatility of the markets on some occasions. Since then, Bull has pushed all the indices by more than 30%. To name a few, Nasdaq composite has moved up by 48%, Dow Jones Composite Index up by 35%, NYSE S&P 500 by 40% and Nikkei by 35%. But the star performer has been our very own Bombay Stock Exchange-Sensex which has risen by more than 80% since March this year. This has been made possible by positive quarterly corporate results, positive government reports, dwindling unemployment figure, and growth in Industrial indices, increased oil prices, increased government spending by all countries, favourable growth projections by banks, government & nongovernment agencies.

Banks like Goldman Sachs, Citibank, JP Morgan Chase which were seen chasing Federal Reserve for life support a few months back booked huge Q2 profits even after servicing debt bullets. This brought more cheer among B-Schoolers than in the market. Corporate houses have been successful in riding this wave and have accumulated huge capital. Indian corporate which raised huge capital through Global Depository Receipts and by Qualified Institutional Placement, were seen a few waves ahead.

All these news make us float in optimism and take a look behind; we see lots of instances where a day of Bear Paws upset days of Bull Run. What does this suggest? This says that there is enough pessimism and volatility in the market; too high for comfort. Any half cooked report of a small negative projection by any non entity on any sector has upset the whole market on many sessions. Macroeconomic fundamentals are projected on flowery assumptions and so are still dicey. They have been intentionally projected to boost sentiments, financial markets & the economy. As a result most of the markets are trading by more than twenty times their Price to Earnings Ratio. Most of the listed companies are trading at more than fifty times their Price to Earnings ratios. This indicates that even at such perceived low levels, the market is irrationally upside and will slip once the dust settles and the smoke clears.

The Union Budget was passed on 6th July with a negative short term effect on the markets. The long term effect of this budget, its effect on various sectors, its comparison with expectations and growth parameters have been discussed in details as the cover story of this issue.

We are very happy that in our next issue, Niveshak will celebrate its first anniversary. With your support, good wishes and contributions, Niveshak has successfully completed a full circle around the sun. Together we have witnessed the most turbulent time of the world of Finance and learnt from it. We have seen the fall of banking stars, we have seen iconic companies turning to Chapter 11 bankruptcy or mergers/acquisitions for survival, we witnessed bankruptcy declaration by sovereign states and then we saw economies navigating through the worst of recessions. To mark the success of our journey together, we shall have a special anniversary issue capturing the roller coaster ride that we have been through, the highs and lows of the world economy over the past year, the most fearsome fight between the Bear & the Bull. We invite you to contribute articles on any specific event of the last year or on “The year that was” as a whole. Yes that is the theme of out anniversary issue. Lots of exciting prizes are waiting to be yours. For more information, please see the declarations page or Niveshak website.

What an awesome “Year that was”.

Team Niveshak

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