A 30% correction in emerging markets? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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A 30% correction in emerging markets? 

A  A  A
In this issue:
» Excess liquidity in China needs to be curbed
» Microfinance institutions to shut shop in Andhra?
» All time high oil demand
» Barack Obama: Can he?
» ...and more!!


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00:00
 
More money than you can imagine. Billions and trillions of currency notes. The Fed's quantitative easing program sent a lot of cheap money floating around the world. This money directly found its way to emerging markets. With high interest rates, and strong economic recoveries, the flow of money in this direction was but obvious.

For a while, increased cash makes everyone feel happy. FIIs pumped in a total of US$ 29.3 bn in India so far in 2010. This sent stock prices soaring. The very same stocks which were selling at their lows a year back, reached their lifetime highs. Stock markets climbed quickly to their previous peaks.

But, was the excess money even needed in the first place? Increased inflows of money have led to inflationary pressure, currency appreciation and asset bubbles forming in these countries. According to Nobel Prize-winning economist Joseph Stiglitz, these are "considerable risks". So, how do the emerging markets react? Well, economies from San Paulo to New Delhi have been trying hard to control these volatile capital inflows. Brazil raised its taxes on foreign bond purchases by almost three times. India tried to raise interest rates to stem rampant inflation.

But now, India has inadvertently done something to further reduce FII inflows. The recent bribery scams, stock price riggings and political uncertainty led to FIIs dropping Indian stocks like hot potatoes. The pace of FII inflows has slowed down considerably over the past three months. Marc Faber believes that emerging markets could easily see a 20-30% correction. Tightening monetary conditions, high crude prices and food supply concerns are all adding to the mess.

But, if you bought the right stocks at the right valuations and with the right management, you may still be safe. We believe that Faber has it right by saying that if you cannot swallow a 30% correction in whatever you buy, then don't even get up in the morning from your bed.

01:45  Chart of the day
 
Bribery and corruption are almost synonymous with life in India. This is especially so in dealing with government agencies. Customs, education, police, tax authorities, etc are all ready and willing to have their palms greased. Today's chart of the day shows that more than half (54%) of the Indian public offered a bribe to avail of services. This is according to the Global Corruption Barometer, 2010, published by Transparency International. This is much above the world average of 25%. India has also left its emerging market peers far behind. Little wonder that most of the scams that hit Indian markets in the past few weeks were bribery linked.

Do you think that paying a bribe is the only way to get your work done quickly in India? Share your views.

Data source: Economist

02:18
 
China's economy has been growing at a strong pace. But the country has also been hampered by the problem of excess liquidity. Fuelled by the government stimulus measures and rising inflows, swathes of money found its way to the property market raising fears of a bubble forming there. That led Chinese officials to introduce some measures to cool off the already overheated property market. That's not all. China now also has to deal with the problem of rising inflation. Chinese consumer price inflation has hit 5.1% in the year to November, which is a 28-month high.

And so, China's central bank has increased the banks' reserve ratio for the third time in one month. The rationale being to mop up excess liquidity in the economy and rein in inflation. The 50 basis point increase means that the required reserve ratio will be at 18.5%. This is a record high for the majority of the country's banks. Indeed, rising inflation has emerged as a concern for the faster growing emerging economies including India in recent times. It remains to be seen if China would go in for a much stronger measure of hiking interest rates in the months to come.

02:58
 
The term "microfinance" has been doing the headlines for quite some time now. The Andhra Pradesh (AP) government and the Microfinance Institutions (MFIs) continue to be at loggerheads with each other. Yesterday, the AP government tabled the controversial microfinance bill in the assembly. This move has upset the MFI network. And this could force them to shut operations in the state. The MFIs say the new norms for registration, loan disbursal and collections make it very difficult for them to operate. The last six weeks since the Ordinance was promulgated have been very challenging. They have not been able to disburse 1.2 m loans worth Rs 12 bn. And collections have fallen to 20%.

Repayments of up to Rs 74 bn to banks who funded microfinance operations in Andhra Pradesh could be potentially jeopardised. However, the political establishment has taken a stark opposite stand. It is not in favour of incorporating any of the modifications sought by the microfinance institutions. They feel that the provisions for regulation are all necessary. It is up to the MFIs to work out a sustainable business model. The controversy emerged after several suicides were reported in the state due to coercive recovery methods of MFIs. Now, other states could also look to emulate the example of Andhra Pradesh. And this could be a potential concern for the MFIs. Microfinance is no doubt a great concept. The balance between social good and economic viability is a tough task.

03:28
 
Oil demand hit all time high of 88.3 m barrel a day in the last quarter. The growth in demand for this commodity is mainly led by emerging nations including India and China. On the other hand, most of the developed nations contributed to flat or declining growth, still recovering from aftermath of recession.

With such a huge demand, it's no wonder that prices have reached a rather uncomfortable level of US$ 90 a barrel. While this is a cause of concern of most of the oil importing nations, OPEC is fine with the current price levels and unlikely to increase the supply quotas. Till that happens, oil importers will have to pin their hopes on non-OPEC nations like Russia to not impose supply limits and Chinese anti inflation policies.

04:11
 
Barack Hussein Obama. The man was widely touted to be the harbinger of change for the US. Sadly for him though, the change hasn't happened so far. On the contrary, more and more Americans are finding him in their bad books rather than good. As per Bloomberg's National Poll, greater than half of Americans say they are worse off now than they were two years ago when Obama assumed office. To further rub salt into wounds, two-thirds believe that the country is indeed hurtling in the wrong direction.

There is however a ray of hope for the US President. His numbers aren't the worst in history. There have been Presidents in the past that've gone on to serve a second term despite faring much worse than Obama.

Hope though seems to be running out for the US citizens. Employment is showing no signs of inching up. And if it still doesn't months from now, then Obama alone should not be blamed we think. The biggest blame perhaps lies with President Nixon. He is the one who took the US off the gold standard in 1971, paving the way for what eventually turned out to be the biggest monetary mismanagement in world's history. Obama is just an example of bad timing we believe.

04:32
 
After being the top performer last week, the Indian markets performed poorly in the week gone by. Declining by 2.3%, India's benchmark index, the BSE-Sensex was the top loser amongst the key global markets. Gains were seen in Europe and certain Asian markets. France and UK were the top performers, ending higher by 2.8% and 1.2% respectively. US markets ended on a slightly positive note, while China ended flat. Apart from India, Brazil performed poorly this week with its benchmark index declining by 2%.

The performance in Asia was mixed. On one side, indexes rose on the back of better than expected reports relating to economic growth and employment figures. But concerns are looming over Chinese policy makers raising interest rates to contain inflation.

Source: Yahoo Finance

04:50  Weekend investing mantra
"Sometimes your best investments are the ones you don't make." - Donald Trump
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46 Responses to "A 30% correction in emerging markets?"

NARENDRAN

Feb 11, 2011



that is called money,
money makes politicians,
politicians make power ,
power manipulates everything

WE, THE TAX PAYERS ARE JUST TAX PAYERS

Like 

P.V.SRIRAM

Dec 24, 2010

The main reason for corruption is the procedures that are being followed in the government departments whether in the issue of rationcards/passport/driving license/building approval plan/marriage certificate/water connection/EB connection etc or getting legal heir certificate/death certificate or any other work. People can't take leave often so they want to get the work done on the same day.If the procedures are removed and simplified so that we get all the things by a click of computers then there is no way we pay for getting work done.Second thing no politicians or big burecrats have been punished in this country. only those who take petty bribes are punished.

Like 

uday mehta

Dec 23, 2010

WHY ANTICIPATE THAT THERE WILL BE A CORRECTION OF 30 %. WHY NOT 50% AND WHY NOT 70%. TOMORROW IF THERE IS NUCLEAR WAR,OR IF THE GOVERNMENT FALLS, OR ANY OTHER SERIOUS REASON, THEN WHAT HAPPENS TO PREDICTIONS ? PRICE IS KING, JUST FOLLOW THE TREND WITHOUT ANTICIPATING !!! NEWS WILL COME TO US AT THE END WHEN THE CORRECTION IS OVER, AND THAT TIME THEY WILL MAKE US SELL OUR STOCKS. STOP LOSS IS IN OUR HANDS AND NOT IN THE HANDS OF OPERATORS ETC.! IT IS OUR HARD EARNED MONEY AND WE CANNOT EXPECT OTHERS TO PROTECT OUR CAPITAL / EARN FOR US..... WE ARE OURSELVES THE FUND MANAGERS. GOD BLESS US ALL !!!

Like 

Manohar Kantak

Dec 18, 2010

This is how our system works. Unless capital punishment is introduced, we cannot expect any changes. Every political party and most politicians get elected by bribing the public and then survive by looting the public. We can only wait for the crisis to occur and then pay for it.

Like 

ssk

Dec 17, 2010

No other go, forced and cornered to pay most of the times. Blood suckers, even during accidents, they asked us the bribes to finish formalities. Can't change our country.

Like 

manhar

Dec 16, 2010

Hi: Nothing gets done without handing extra cash in every field of services in India,specially relates to government offices-Airports,taxicabs,getting anything approved from governments. Even top rated banks neglect to process essential transactions for months and months and even after sending several reminders (though banks have not asked for monetary in centives)nothing gets done. Coming fron the society (U.S.) where such practices are not prevalent (unless you want to tip them), it's mind boggling to see how corrupt the indian society is. Even after bribing people, sometimes, things do not get done.

Like 

KHALID

Dec 16, 2010

PAY AT EVERY STONE YOU TURN.

ALL ARE CORRUPT SOME KEEP AN IMAGE OF MR CLEAN BUT THEY
ARE ALL THE SAME

Like 

Rasik

Dec 16, 2010

Agree. If you want to get work done 'quickly', there is no alternative to a bribe. If you have the patience and time to stick it out to get your work done, you'll probably get what you want in one lifetime

Like 

Vinay kumar

Dec 15, 2010

I agree that without paying bribe it is impossible to get permissions fast. But if we can wait & give time & do our paper work properly we can always get required permissions, of course late. We can utilize RTI act for any information of why our permissions are not given if my application are correctly filled. They are answerable for it.

Like 

ramaraom3

Dec 15, 2010

dear sir, you must make a distinction between a bribe and a mammol. to enforce a legitimate right, even to implement a legal right one perforce is made to part with his hard earned money.over a period of a couple of decades people have come to accept it as a necesary evil and stopped discussing it. i call this palm greasing ( of a corrupt BABU )to get what is legally right or redressal of a legitimate grievance as MAMOOL.20% of corruption is of this variety. this has deadened the sensitivities of normal law abiding citizens to such an extent that they routinely think of doing illegal things.
to get what is out and out illegitimate ,what is special favour like what the politicians/babus/corporates indulge in- meddling with the rule book, framing or fixing a law etc., is corruption in high places. it is not bribing. bribe taking is part of the normal activity of the administration, in feathering their nest.
corruption in high places can be tackled only when there is transperancy in administration, when technology is used extensively and systemetically by tough and committed administrators to tackle this scourge of corruption.
it is not enough for honest top administrators to be merely honest.he is not worth his salt if he doesnot fix the system of horrendous leakages. in fact mr.manmohan singh is doing a disservice if he doesnot sieze this god given oppertunity with both hands and set to cleanse the system.nobody will dare to raise their voice against him at this time.all the skunks have to lie low for sometime.



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