And now prime borrowers could default too...

Jan 9, 2010

In this issue:
» 25-30% rise in home prices will crowd out genuine buyers
» FDI in India has been rising steadily over the years
» China becomes the world's largest exporter
» US Fed should not delay its exit policy
» ...and more!!

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It is a truth universally acknowledged that the seeds of the current global financial crisis were sown in the US when subprime borrowers began to default on their loans in 2007. Before that, interest rates were low, home prices were charting an upward path, liquidity was abundant and there was a sense of buoyancy prevailing all around. Consumers in the US went on a borrowing binge in excess of their incomes. Banks and financial institutions wanted to capitalise on this buoyancy and grow the size of their balance sheets. And so they lent indiscriminately not just to prime borrowers but to subprime borrowers as well. The rest, as they say, is history.

2010 has begun and the US is still struggling to limp back to normalcy. While the recovery process seems to be underway bolstered in large part by the stimulus measures, high unemployment has continued to persist. And to add fuel to the fire, real estate gurus Robert Shiller and Karl Case are of the opinion that the mortgage crisis will now spread even to homeowners with strong credit scores. Shiller says, "There will be continuing foreclosures, and not just subprime, it will be prime mortgages." Already, the amount of prime mortgages overdue has considerably increased in the third quarter from a year earlier. What is more, rising unemployment is not helping matters either. It is affecting not just the poor people but also the middle class and the upper class sections of society. And this means, that unless the unemployment scenario improves, more defaults cannot be ruled out.

These are certainly tough times for the world's largest economy. We believe that rising unemployment is not the only worry. The government also has to worry about whether the recovery process will hold its own once the stimulus measures are withdrawn.

 Chart of the day
India's dazzling growth in the period before the crisis made it the apple of the foreign investors' eye. Little wonder then they poured large sums of money into Indian equities sending the stockmarkets northwards. But there were valid concerns that this was just 'hot money', which if withdrawn, could leave India high and dry. What was therefore needed was long term capital and foreign investments in industries which could bolster India's economic growth. In other words more FDIs were needed than FIIs. The fickleness of FIIs was demonstrated in 2008 when plunging stockmarkets worldwide led many of these foreign investors to book profits in the Indian markets. However, as today's chart of the day shows, FDI into India has increased steadily over the years. This remained stable even when portfolio investments nosedived in FY09. And this is certainly an encouraging sign.

Data Source: CMIE

Home prices in India are far from being in the bubble territory. When 95% of the home buyers are buying for residential and not for investment purposes, a bubble is not even on the horizon. This fact offers plenty of comfort to the largest mortgage lending company in India - HDFC. Its peers in the US - Freddie Mac and Fannie Mae - are still struggling to recover from the subprime crisis. However, HDFC can afford to look ahead. In an interview to a business daily, Ms Renu Sud, the MD of HDFC has opined that another 10% rise in home prices is affordable. While genuine buyers formed just 30-40% of the home sales in 2008, the figure has gone up to 95% in 2009. As per Ms Sud, this has offered more resilience to Indian real estate market. However, price rise to the extent of 25-30% will crowd out the genuine middle class buyers. It will only invite the speculative class of investors to the market. Also, certain pockets in Delhi and Mumbai that are already seeing lofty prices may see an imminent correction. Having said that HDFC expects mortgage loans to grow by 20-25% in the next fiscal. Its only caveat to developers and buyers is - "Don't let greed come in".

There are many who despise Fed chief Bernanke's stance on liquidity management. His resolve to exit the stimulus packages at ease is also a matter of concern to many. Chief economist at Morgan Stanley, Mr. Stephen Roach has been amongst the ones most vocal about these concerns. He believes that the financial crisis itself is far from over. Also the breadth of the global recession was staggering. With demand for funds far from showing a pull back, the supply of the same is grossly imbalanced. Cheap money floating across economies is one of the key reasons for the same. Hence Mr. Roach believes that there is never an easy time to correct economic imbalances. However, if the stimulus exit is delayed for long, the Fed will only be inviting another bubble.

After the US's unpleasant employment data in recent times, it is now Europe's turn. Europe's unemployment rate for November 2009 unexpectedly increased to 10%. Significantly, this is the highest in more than 11 years. It is the highest since August 1998 to be more precise. Companies continue to cut costs in view of the recessionary environment and this has contributed to the same.

What makes this whole phenomenon worse is that it tends to set off a vicious downward spiral. Companies cut jobs in fear of slowing demand. People losing jobs as also the fear of losing jobs amongst people that still have theirs leads to lower spending, and a consequent fall in demand. This again leads companies to further cut salaries and jobs.

As per reports on Bloomberg, the euro-area economy returned to growth in the third quarter of 2009 after governments spent billions of euros on stimulus programs to bolster spending. Still, corporate investment fell 0.8% during the quarter and consumer spending dropped 0.1%. What remains to be seen is when the tide turns, and when the pessimism turns to optimism once again. Considering the complexity of the problem, our guess is as good as yours.

Crisis or no crisis, China has shown a penchant for breaking records. This time it has pipped Germany to become the world's biggest exporter. China's exports had faced rough weather in 2009 when its exports fell by around 17%.But it still managed to do better than Germany. One reason was its ability to prevent any gains in the local currency and the other was its economic stimulus package. Not just that, exports of other countries including Germany slumped further. During the period January to November of 2009, Germany reported exports of US$ 1.05 trillion. That figure for China stood at US$ 1.07 trillion. As reported in the Economist, China's share of the world exports increased from 3% in 1999 to almost 10% in 2009. And this is expected to keep rising going forward.

Despite its growing prominence in the world export market, we believe that China would still need to lessen its dependence on exports and focus more on its domestic consumption. This is especially so if it wants to sustain its high growth in the future and insulate itself from future global economic shocks.

India's economy is on its way to recovery and the Indian stockmarkets have given this development a huge thumbs up. This has been amply demonstrated in the way stockmarkets have zoomed since March 2009. So we thought it was fitting to ask our readers where they think the Sensex would be by June 2010. And the results certainly are interesting. Around 55% of the visitors to our website are of the opinion that the Sensex would be higher than 18,000 by June 2010. 26% believe that the benchmark index will be between 14,000-18,000. The balance opine that Sensex levels will be lower than 14,000. Overall, the majority of our readers do not think that a repeat of 2008 will be seen in the stockmarkets. And to that we say, Amen!

After last week's robust performance, this week too major indices across the globe ended on a positive note. The Indian markets though, were not amongst the top gainers this week, and were infact the lowest gainers among all other markets. India's benchmark index, the BSE-Sensex closed with gains of 0.4%. Part of the reason for this dull performance when compared to other major markets is the uncertainty surrounding interest rates and the Indian government's anticipated policy actions with respect to curbing the menace of inflation.

Coming to global markets, Brazil and Japan topped the list with gains of 2.6% and 2.4% respectively. UK and France followed as these markets ended higher by 2.2% and 1.9% respectively. The US markets ended higher by about 1.8%. Most gains across key markets were led by positive US retail sales data that boosted confidence in the global economic recovery.

Yahoo Finance, Kitco

 Weekend investing mantra
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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10 Responses to "And now prime borrowers could default too..."

B.B Malhotra

Jan 11, 2010

China was a sleeping gaint Now it has woken up. They would give tough compition to other exporting countries. Icertainly agree that it must internal moneytary system in such a way that it increases domestic cosumtion. Therafter it would emerge a super economic power.Intersting our monetary policies have in tune with need of the hour.With the rise in diposable income of the masses our cosuption increased.This is the sucess of our monetary policies Central bank has done well


Viraf Panthaky

Jan 10, 2010

Most articles are a "MUST READ"! Very good and keep it up


Ajit Pendharkar

Jan 9, 2010

" 5 Minutes snap shot" is an excellent summary of various dimensions of world economy.It really helps to capture important aspects in a short time.To me it is my morning breakfast.

Complments to the makers.

Ajit Pendharkar


Gurdev Singh Sandhu

Jan 9, 2010

I am just new reciever of The 5 Minuts Wrapup and fond the information very very interesting and knowledgeble I appreciate the efforts being made and wish the programme new hights in the new year 2010



Jan 9, 2010

Many 2 thanks for ur relevant guide and information about national and international financial investment scenario.Pl guide for best investment in the present stomarket (equity & Derivatives ) THANKS



Jan 9, 2010

the 1:1 bonus issue from RIL is not yet credited to my dmat a/c.
what is the average normal taken?
do i have to take any initiative?


Prem Singh Dhankar

Jan 9, 2010

Great, many facts- however lets use these facts judiciously. sensex at 18000 in june2010! well it cud be less 8000- another jolt from nowhere.


bharat virmani

Jan 9, 2010

Interesting and informative.


malaya kumar patra

Jan 9, 2010



S. Guru Bhaskara

Jan 9, 2010

This was the first
'5 Minute Wrapup ' I have read. Needless to say, I found it interesting, highly readable (presumably because the news is giving in brief, punchy paragraphs instead of tedious analysis). May be a section on your recommendations for sectors/scrips holding potential for growth would be a nicw addition.

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