The asset that has bounced back again

Jan 22, 2010

In this issue:
» Home prices become unaffordable again
» QIPs worth Rs 1 trillion in the pipeline
» Obama to limit the activities of big banks
» RBI expected to hike CRR
» ...and more!!

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When one looks around these days, it appears as if its 2007-2008 all over again. Business activity has picked up. Stock markets are booming and confidence is once again returning. Shockingly, it seems like the gut wrenching crisis that we have had recently never happened. Is it any surprise then that real estate price in India is going back to those heady levels of 2007-08 all over again? As a leading business daily put it aptly, "Welcome back to the era of crazy rise in home prices." There has been a 30% rise in home prices in the last six months with a lot of pent up demand coming into the market around the Diwali season. What is more, most NRIs, who now wield a sizeable clout in big cities like Mumbai and Delhi, have invested in Mumbai this time around than Dubai, further adding to the overall demand.

It should be noted that there is no dearth of demand for good residential projects in the country. The market is significantly underpenetrated. Thus, whenever there is a correction to the tune of 25%-30% and prices become more affordable, buyers queue up to buy. Furthermore, seeing strong demand, real estate speculators and investors jump in and hence, push up prices even further.

What is needed is a strong surge in supply which can only be possible through a structural reform in the industry. Until that happens, a decent house is likely to be out of bounds for an average middle class Indian, especially in the big cities.

 Chart of the day
Speaking of high prices and the middle class Indian, things are getting from bad to worse not only in housing. The cost of just feeding oneself is now going through the roof. Today's chart of the day shows the mind boggling rise in food prices. Much of it can be blamed on the erratic monsoons this year. But growing demand and a distribution system with leakages are not helping matters. Given that food prices hurt the weakest sections of society, we believe it will take a heavy political toll if matters are not resolved urgently.

Note: Data for the week ended January 9, 2010
Data source: Financial Express

They say 'make hay when the sun shines'. Wall Street bankers did it before 2008. Personal loan and credit card borrowers emulated it. Each of them tried the easiest way to raise and multiply money. And now is the turn of India corporate. The easiest way to raise money may not necessarily be the best and cheapest way. However, it is certainly the most alluring.

Wanting to fuel their ambitious growth plans in the second fastest growing economy, Indian companies need to raise capital. Quick sale of shares to foreign investors is a win-win proposition to both. Attractive returns in emerging markets entice the investors with cheap money. Indian companies in return quickly get capital at attractive valuations and with minimal disclosure. Termed as 'Qualified Institutional Placement' this is the easiest means of raising money at expensive valuations. And India Inc. raised a record Rs 415 bn through this route in 2009. For 2010, the amount is pegged at Rs 1 trillion. Economics like the cost of equity, impact on shareholder returns etc. take a backseat for such bargains. More importantly the valuations are not based on fundamentals but on negotiation. For promoters it is about timing the good market appetite to make a killing. While not every QIP may be detrimental to the interest of investors, their necessity and end use need to be adequately justified.

Stock markets around the world seemed rattled today. It all began with the US markets. Financial stocks fell on the news that Barrack Obama plans to put new limits on the size and activities of big banks. Bank holding companies will be banned from owning, investing in or sponsoring hedge funds or private equity funds. They will also be banned from engaging in proprietary trading, or trading on their own accounts, as opposed to the money of their customers. Consolidation in the financial sector will also be discouraged.

It may be noted that Obama is on a populist overdrive of late. The recent electoral setbacks for his party haven't helped matters. We are not great fans of big banks and their practices. However, it will be difficult to execute the plan. In fact, there are doubts if such measures would have prevented the financial crisis in the first place. Do you think the move to curtail the activities of the big banks will help prevent another financial crisis? Please share your views with us.

Road minister Kamal Nath's plans of building 20 kilometers of roads per day finally seem to be gathering some steam. This is notwithstanding that the plans are running several months behind schedule. As per the Wall Street Journal, the Minister is expecting US$ 5 bn in private capital to flow into the road projects by June 2010.

As Mr. Nath has told this paper, financiers have expressed interest in providing financing for India's road projects. And these include private equity funds, global investment banks and pension funds.

We believe the Minister's intentions are laudable. However, execution of these grand plans remains an issue. This is considering the impediments in acquiring the necessary land and approvals for such projects.

With abundant liquidity inundating China, the central bank in that country chose to rein in the excesses by raising the reserve requirements of banks. India also could follow suit. India has been grappling with the problem of high food inflation for a while now. While food prices have eased, the RBI is still expected to tighten monetary policy by increasing cash reserves held at banks when it releases its monetary policy on January 29. However, hike in interest rates does not seem to be on the cards.

As reported on Reuters, the food price index rose 16.81% in the 12 months to Jan 9, lower than an annual rise of 17.28% the previous week. Meanwhile, the fuel index rose to an annual 6.43% in early January. So far, the rise in inflation has been attributed to supply side shocks given poor monsoons and the consequent adverse impact on crop production. But demand side factors are also now beginning to emerge. What has compounded the problem for the RBI is that a hike in rates could thwart economic recovery, and hence it seems more likely that increasing the CRR would be the route that the central bank would follow to rein in inflation for the time being.

Meanwhile, after starting the day's trade on a negative note, the BSE-Sensex largely languished deep in the red during the day. At the time of writing, amidst broad based selling, the Sensex was down 238 points. The Indian markets seemed to be moving in tandem with other Asian markets, most of which also displayed weakness and closed in the negative.

 Today's investing mantra
"People calculate too much and think too little." - Charles Munger

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15 Responses to "The asset that has bounced back again"

Bharat Capital Research & Inv.,

Jan 24, 2010

Its depend on US Govr.or fed how they will react,if impliment thn i dont think it is good for Equaity Market globally, if it will execute world equaity market will correct more from here as of now, i think at this level think market will consolidate or sidewayzone, we have to wait for sometime if market will correct more on monday and close down thn i must say this rally was over n we entered in second bear rally, If market will take support on friday lower level close above friday close on monday after some trading session move towards new high in next month thn its real bull market really will starts so watch out monday closing how market will react


Rajiv Kaushik, Haridwar.

Jan 24, 2010

This looks quite ridiculous that our government is doing nothing for the rising food prices. They take a east stand and avoiding the hard one.They can crack down on the hoarders also.After all they are the ones who are also liable for price rises.But Thanks to their contribution to the corrupt politicians.This happens all due to the political connivance.No one is bothered about the poors.



Jan 24, 2010

no i dont think such measures can actually prevent a repeat of the financial crisis.



Jan 23, 2010

Curtailing the activities would only cause them to find better ways of risking financial. The answer should be better regulation and enforcement by a central watchdog like the RBI in India which keeps a Hawk's eye on the banking sector and could identify failing banks in the past and merge them with bigger stable banks


m c bhatt

Jan 23, 2010

For US Banks to sustain, they are required to change the credit rating system for loans and advances, presently they have ways and means to finance even if the lonee has a negative credit rating, secondly, the evaluation of their assets (Loans and Advances), the NPA identification system prevailing in India should be implemented and thirdly, the Central Bank shold be adequately empowered to control the operations of the Banks.


sujatha kumar

Jan 23, 2010

Yes. The curbs to be enforced on banks will definitely make them to concentrate on their primary business - that of borrowing and lending money. Allowing banks to indulge in secondary business activities will make them look to short term and quickfix methods for making unreasonable profits which was the precise reason for the financial debacle in 2008!


Mithilesh Kumar

Jan 22, 2010

Crisis is bound to appear in some form or other from time to time .In what way it will come is impossible to conjecture whether we try to prevent or not does not matter.



Jan 22, 2010

any govt is ment for all the people not only for the influencial people,govt should have a controll on all the areas such thet people live peasepully


atul prakash

Jan 22, 2010

Leveraging of capital held in various forms of trust has lured Banks into unreigned speculation in the Capital Markets.

The Markets ZOOMED UP with this HUGE UNFETTERED LEVERAGING ACTIVITY and put valuations to reach tizzy heights. Till ZOOMING continued in share price valuations on the New York Stock Exchange, the Market held steady.

It crashed into the abyss, the moment a more rational President was elected to lead the USA, who the NYSE knew was going to be more people friendly (Anti Wall Street)in his observations and hence, would put an end to this irrational leveraging by the Banks.



Abhay Kumar Shrivastava

Jan 22, 2010

Yes, people money should be restricted from being used by bankers towards hedge funds, private equity funds etc. national gaurantee facilitates them in raising deposit at cheap very very nominal rate. Putting this money in high risk area for high gains, eats away national gaurantee, putting national financial health at its peril. National gaurantee should not be misutilised by the bankers.

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