A global crash in this asset class is looming... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

A global crash in this asset class is looming... 

A  A  A
In this issue:
» Are bulls hoping for worsening fundamentals?
» Is competition good for Indian banks?
» Chinese Yuan overtakes the Euro
» Slowdown in emerging mkts could last for years
» ...and more!

It all began with collapse of the housing market in the US. The loose monetary policies of the then Fed chief Alan Greenspan had unleashed a wave of money which found its way into various asset classes, most notably real estate. That bubble burst in 2008 when the US housing market crashed and brought down along with it big banks and financial institutions that were exposed to the sector.

Five years since that crisis, another bubble seems to be on the verge of bursting once again in the housing market. And as reported in Moneynews, according to noted economist Nouriel Roubini this is going to be a housing market train wreck of global proportions. Simply because housing markets in 18 countries are vulnerable to a meltdown. And this is not just in the developed economies but also in the emerging countries.

It is obvious that the housing bubble in the developed world is a product of the central banks keeping interest rates very low. But this excess money has also found its way into the real estate markets of emerging economies as global investors look for alternate investment avenues. Besides rising liquidity, emerging countries are also grappling with the problem of rapid urbanisation. The surge in demand is not being matched with an increase in supply of homes thereby leading to higher prices.

So is this housing bubble set to burst? As long as the US Fed and other central banks continue with their printing presses, this kind of buoyancy may continue. But as soon as this support is withdrawn, it will hardly be surprising if the housing market collapses. And higher the prices rise, the bigger will be the crash.

The problem is the close link between the real estate sector and the banking system. This was amply evident in the 2008 global crisis. And a similar trend has been playing out this time as well. For instance, in China, the real estate bubble has been a product of the country's banks lending indiscriminately to the real estate sector.

This is something to worry about in India as well. As reported in Firstpost, banks' exposure to real estate is around 17% of total advances. Public sector banks' gross NPAs (non-performing assets) as percentage of total advances stood at 4.75% as of March 2013. This has more than doubled over the last six years. Thus, a scenario where the meltdown in the housing sector impacts banks and thereby the Indian economy cannot be entirely ruled out.

No asset class including real estate can see a continuous rise in prices. At some point of time, these are bound to crash. And given the close ties that banking has with the real estate sector, the adverse implications of this crash will not only be felt by stock markets but by the economy as well.

Do you think the bursting of the real estate bubble seems very likely across countries including India? Let us know your comments or post them on our Facebook page / Google+ page

01:26  Chart of the day
China and India continued to lead the pack as far as GDP growth in the July-September 2013 quarter is concerned. This is despite the economies slowing down in both the countries. For India, the performance was slightly better than the growth it had recorded in the June 2013 quarter. Whether this can be construed as bottoming out with the possibility of recovery in the coming quarters remains to be seen. While the economies of the developed world continued to chug along, the real surprise was Japan, whose GDP growth during the quarter was better than the US and the Eurozone.

GDP growth in the July-September 2013 quarter

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Guys over at zerohedge.com have published an interesting looking chart. It highlights how the US stock markets have moved in relation to the US economy over the past few months. Now, if you need the biggest proof that the US stocks are far removed from reality currently, then this chart could be your answer we reckon. Since around September this year, the stocks have gone into ever higher orbits while the macro has taken a beating. In view of this, the bulls are hoping that the macro keeps getting worse. Why? Perhaps because this will then encourage the US Fed to continue with its quantitative easing and further boost the stock markets. But wait? Aren't stocks related more with fundamentals over the long term than mere liquidity? They certainly are. And this is the whole crux of the matter. The intention of quantitative easing was to bring the economy back on track. However, what it has done is encourage speculation in risk taking assets like stocks and make the environment even scarier. Thus, a significant correction is a must have in order to correct these excesses of the past.

Banks in India have come under fire in recent months for their inability to control asset quality. The PSU banks in particular have been lashed out at for sloppy credit appraisal. Something that has resulted in PSU banks carrying the burden of restructured loans on the verge of turning NPAs. Shareholder wealth has been destroyed and depositors of these banks are wary of losing their hard earned money. Needless to say that the regulator is keen to put some systems in place to reinstate depositor and investor trust in Indian banks. Interestingly, in his recent speech, the RBI governor has cited the importance of competition to the banking sector. According to him, a wider presence of private and foreign banks will force the incompetent PSUs out of their lethargy. Some may even be forced to merged. All in all a competitive banking scenario will be good for both depositors and shareholders in the long run.

While Indian economy is facing a crisis, the hype over how IITs have grabbed offers worth more than a crore is hard to digest. Offers worth more than a crore at IITs were something that used to happen three years back. It is indeed heartening that trend is coming back. But does that imply a turnaround in the domestic job market? Well, as an article in Business Standard suggests, that would be a very biased conclusion. For IITs are hardly proxies for the job markets in India. While the placement season has brought good news, one must note that most of such offers are from companies based in US. That really leaves a lot of employable Indians out of the net.

The latest job outlook survey by Manpower also suggests after four back to back lackluster quarters, the hiring plans of Indian Inc. this quarter are the most optimistic across the world. However, before we cheer the news, here are some harsh facts. At the entry level, the companies are enjoying bargaining power like never before with regards to wages. The real wages, i.e, the wages adjusted for inflation are the lowest in last 15 years. As Indian economy is facing slowdown, more and more engineering colleges and business schools are on the verge of shutting down. The scenario is so bad that even employee search firms catering to mid and junior level candidates are closing down. The young population in India is supposed to be its biggest strength. However, even the educated youngsters are finding it difficult to get a job. We wonder what the celebrations are all about.

The standard of living in emerging markets has improved over the last 3-4 years. As such, these markets have become a key for most consumer companies. In fact, companies like Unilever draw more than half of their sales from emerging markets. Thus, their view on emerging market economies gives interesting insights as to where these markets are headed. Until now increasing demand from emerging markets resulted in improved sales and higher profits for most global consumer companies. However, the recent slowdown in emerging markets has hurt them. And if Paul Polman, CEO of Unilever, is to be believed the current slowdown is not cyclical in nature. The slowdown is a result of structural inefficiencies and thus is likely to persist for years. Thus, it seems that emerging markets are in for a torrid time. While most markets may have performed well up till now it is predominantly due to easy monetary policies of the West. Easy money flow across borders has led to higher stock prices. In short, this is a liquidity driven rally with fundamentals being out of sync. It should be remembered that such rallies do not have long legs and subside soon. Hence, unless structural reforms are undertaken which shall help improve fundamentals the emerging market rally may well turn out to be just another bubble.

Ever since the 2008 financial crisis broke out there has been a lot of debate about the future of the US dollar? Will it continue to remain a global reserve currency? A decade ago many believed that the euro, which had emerged as the second largest currency would topple the US dollar. But following the Eurozone crisis, there were fears about the very survival of the euro currency. So the euro taking over the US dollar was no more a possibility.

So then all eyes were on China, the second largest economy in the world and also the fastest growing in the emerging world. Many believed that the Chinese yuan could pose a formidable threat to the hegemony of the greenback. But China's communist politics seemed to be a big barrier.

Now, as per an article in Reuters, the Chinese yuan seems to have overtaken the euro in October to become the second-most used currency in trade finance. From a market share of about 1.89% in January 2012 to 8.66% in October 2013, this is indeed a massive leap. However, it's still a long way before the yuan can pose any major threat to the dollar which has a market share of 81.08% in trade finance.

In the meanwhile Indian equity markets have extended their losses and are trading at day's low. At the time of writing, the benchmark BSE Sensex was down by 40 points. Banking and FMCG stocks were the biggest losers. All the Asian stock markets except Japan were trading weak led by China and Hong Kong. The European markets also opened on a weak note.

04:56  Today's investing mantra
"Fortunately, the investment business is one where knowledge accumulates and builds into a knowledge base that's useful. There's a lot to absorb over time." - Warren Buffett
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10 Responses to "A global crash in this asset class is looming..."

Borkar M.R.

Dec 7, 2013

My views r exactly like Mr. Amit Sengupta. If I have borrowed money and then put in House and waiting for rise and paying my EMI it will be a big drag on my finances. But the ill gotten money which is essentially Black Money of P/B/S, they are not worried. Only they have to do is to increase the "asking price of the real estate" periodically. Then there is basic difference with our economy n american. They live on the future earning after using it today. In China, my friend who visited his son working in financial institute told him "generally they believe that money borrowed (from any source, especially govt.-banks) is 'not supposed to be returned and that is what some of our so called industrialists are thinking and doing. Hence, there is basic difference. Of course bubble any where if bursts it will have tsunami effect on us. So let us fold our hands pray that we will not be washed out in that. - Borkar



Dec 4, 2013

With highly inflated real estate prices it is now foolish to bye property for investment purpose. It is very much likely that the prices are not going to go up, if not go down.


Raghuveer Singh Rathore

Dec 4, 2013

Dear Friends,
I see mild bursting of real estate if BJP comes in power in 4 states on 8th Oct'2013. Besides, if NDA takes over UPA after 2014 Elections at the centre, India would perhaps be able to maintain the real estate stable if not booming.



Dec 4, 2013

In India also the threat is real. For more than a decade, banks have been hard selling housing loans. Many of these loans have been availed by the middle class working population. Generally they go for a higher cost house within their eligibility in the hope that over time, their earnings would go up while the EMI might not move up correspondingly. Inflation pushes up costs. It also pushes up interest rates. As the cost of living gallops, they are finding it hard to meet the repayment obligations. Although I do not have access to data, I am sure that a major portion of the banks accretion to NPAs sould have come from housing loans. In the good old days banks stayed clear of housing loans as they were long term while the liabilities of the bank are essentially short term. Banks would find the going tough as highly leveraged individuals find it hard to meet their repayment obligations. In other countries, a crisis may be only on the way; we already have one in our midst.


Kuruvilla Abraham

Dec 3, 2013

I have been watching the reports about the US govt QE program and anticipated tapering of the same. It may affect the stock markets all over the world seriously and drag them down. Naturally this will have impact on other sectors as well. However in India the real estate sector is more resilient. Already the banks are charging higher interest rates. If the land prices go down and the banks decide to reduce the interest rates definitely the real estate sector can survive in a better way than developed countries.

Like (1)


Dec 3, 2013

in india letter or sooner there will be crash in housing/realty sector resulting banks in trouble

Like (1)

mario francis braganza

Dec 3, 2013

the new format of appending the premium edition to the main text i/o a side column, as earlier, is hugely reader friendly. Thanks for the consideration

Like (1)

Amit Sengupta

Dec 3, 2013

I am not understanding how will a crash happen in the Indian market, given the role of black money and the role of the political class, given the close nexus between the political class with even the corporate world, as reported from time to time. Was it in your consideration while penning down the report? Link with the vast multtude of small promoters and the consequent money flow has not even been estimated. A stage has been set such that the land price keeps rising exponentially for many years to come. And demand will keep rising so lang as this sector remains a lucrative investment destination.

Like (1)


Dec 3, 2013

I doubt whether housing market in India will collapse, given the amount of black money support that this "asset class" has, in India.

Like (1)


Dec 3, 2013

The meltdown in housing market is slowly taking place. There is less demand for newly built apartments in Bangalore. There are attractive advertisements in the print media luring the purchasers/investors. But the demand for houses for rent is increasing because of migration from rural to urban area. The promoters are concentrating on high value apartments. It is stated that those promoters who collected the initial payments are not able to complete constructions in time. These are slow/advance indications of the housing bubble increasing in size and leading to the burst.

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