Many are loudly criticizing Paulson’s mega bailout fund. $700bn is not a small amount  considering the fact that the global GDP as of 2007 is estimated at around $55 trn (1% of global GDP), and the size of the US economy is around $14 trn (therefore around 5% of US GDP).

People are saying that the US taxpayer is getting squeezed from every which angle to make up for the irresponsibility of mega ‘sophisticated’ financial institutions. Not only is he having to deal with a fall in the prices of his real estate assets, costlier credit, job insecurity and business uncertainty, he’s now having to subsidize something that he doesn’t even understand. This is not entirely true however Read the rest of this entry »

I attended my first Startup Saturday Mumbai event today at the SP Jain Management Institute. I must say that overall I was quite pleased by the entire event. By the end of the event (in our true Indian style, people including the speakers and myself arrived late), 35 odd people showed up. This was a good mix of entrepreneurs, would-be entrepreneurs, bloggers and (unfortunately only) one person from the VC community – Hemir Doshi from IDG VC India. Both speakers were good, but I enjoyed listening to Rang De’s founders’ story more than the talk on the ‘importance of monitoring competition’. Read the rest of this entry »

Analysts blame the high interest rate environment on the poor results. Some 70% of car sales are financed, and high interest rates make it more expensive to take out loans to pay for their car purchases. The small car segment is thought to be more sensitive to interest rate fluctuations, as the middle class families that buy from this segment cannot afford to make outright purchases.

I largely agree with the rationale presented above. However, the high interest rate environment should have had an equally damaging effect on Hyundai’s sales as well. Even if you take into account that Hyundai’s August 2007 base of 16,000 cars was lower than Maruti’s base of 60,000 cars – you cannot explain away such a dramatic a dramatic difference in results.

The reason for Maruti’s poor performance goes beyond the interest rate environment. Since the Swift Maruti hasn’t had any new launches of note. Moreover, its marketing has been limited and unfocussed. Its strategy of driving sales through schemes in the rural and semi-urban segment – although intuitively appealing (tap into less served segments) – failed to provide results. The likely reason is that households in these regions, who have fewer financing options, are even more interest rate Read the rest of this entry »

The past couple of months have seen a strong correlation between oil prices and the Indian and Chinese equity markets. As oil fell, Indian equities rose, while China’s continued to fall. High oil prices are bad for everyone (except for the oil producing companies/countries, of course), even if governments subsidize petrol diesel by not passing on the price increases onto customers – as it happens in India. This is because the government needs to pay for subsidies by borrowing from the public – that is by selling more government bonds, which leads to an increase in interest rates.

A fall in crude means that the government needs to borrow less to subsidize oil, therefore reducing the upward pressure on interest rates. Lower interest rates are of course great for boosting demand for goods and services, as companies are individuals are able to more borrow more cheaply to fund their consumption and Read the rest of this entry »

The 12-13% Wholesale price index (WPI) inflation in India is usually blamed on two things: higher energy prices and higher crude. If you look at food prices, they’ve only increased by 6.2% this year. Crude has gone up by 16.5% but these prices have not been passed on to consumers as it is being subsidized by government. So where are these 12% plus inflation figures originating from?

The culprit is manufactured goods. Inflation here is running at 10.8% - this despite the fact that industrial growth has slowed. In April, the year on year (yoy) inflation was 6.2%, and in May this fell to 3.8%. This begs the question – why are prices increasing so much if growth is so muted? And if you cannot blame oil or food for rising input costs what can you blame? Read the rest of this entry »

I visit the NSE’s site several times a day, everyday. For the first time today, however, as I scrolled down the homepage, I noticed a little image that advertised the ‘NSE theme song’. Apparently they’ve been playing it on Radio City 91.1 in Mumbai and Delhi (if you visit the site they’ve got a link to the PDF with the timings so that you can tune in and listen out for it!). Here are they lyrics Read the rest of this entry »

There has been a lot of chatter in the market about FIIs staying away from the Indian markets because they feel that the valuations in India are still relatively quite expensive. Index PE ratios, when looked at in comparison to historical levels are a good way to determine how cheaply/fairly/expensively the companies that make up the index are relative to their historical levels.

But first, an explanation of how an ‘Index’ is calculated: There several ways to create an ‘index’ but the method commonly used is the ‘free float market capitalisation methodology’ where very crudely Indices are calculated adding together the market capitalisation of each of the companies chosen for that index based on some sort of criteria, dividing that figure by the sum of the market capitalisation of those companies that met the same criteria in a base year and then Read the rest of this entry »

After the January 21 crash, I was pretty sure that the investor participation in both cash and derivatives had suffered, but when I had look at the NSE turnover figures, I was pleasantly surprised. For the first four months of the fiscal, turnover in the cash segment has averaged at around 13,200 Cr., only 7% from the previous fiscal. Admittedly, the numbers for Feb and March must have pulled down the 2008 average - the average daily cash segment turnover for October 2007 peaked at almost 21,000 Cr. for the NSE. In January, the figure was Read the rest of this entry »

Marshall Wace has taken the concept of social investing / wisdom of the crowd investing to a whole new level. These guys created a trading system called Trade Optimized Portfolio System (TOPS), which basically ranks analysts from brokerages on the performance of their tips, benchmarks them, and follows the investment recommendations of the best performers. They’re not exactly small fries either - with an estimated $15bn dollars in Assets Under Management (AUM), they’re responsible for some 3-4% of the daily volumes of all equites traded on the London Exchanges, and are ranked amongst the 10 biggest hedge funds in Europe.

As one investment banker put it, the idea behind TOPS was simple (in concept, though probably fairly complex in the algorithms used). It was the equivalent of ’skimming the cream to get the best investment ideas’. The incentive system is clearly in place, as well - if you rank highly according to the the ranking table spat out by the TOPS system, then Marshall Wace will not only take your advice, but transact through your brokering outfit - and this means millions of dollars in Read the rest of this entry »

Manmohan Singh prepared a Working Paper for the International Monetary Fund in December 2007, in light of the curbs imposed by the Securities and Exchanges Board of India (SEBI). It clearly explains the history and origins of P-notes and suggested at the time what the impact of the curb may be.

Some history:

Since 1992, when FIIs were allowed to invest in Indian equity markets after the balance of payments crisis, an offshore market for PNs developed as a primary conduit for foreign investors to invest in India.

The origins of such flows stems from the bilateral tax treaty that India has had with Mauritius. The main provision of the 1983 treaty was that no resident of Mauritius would be taxed in India on capital gains arising from the sale of securities in India. The treaty therefore gave capital gains exemption for investments routed via Mauritius. Despite the uniform reduction in capital gains tax arbitrage that existed from the early 1990s through July 2004, it is interesting to note that there has been a rapid growth in the market for PNs in the last three to four years.

In the decade, short term capital gains have been as high as 40% and long term capital gains as high as 20%. However, since July 2004, the tax treatment on short term (security held for less than 1 year) capital gainshave been reduced to 10%, and there are no taxes Read the rest of this entry »

If you’re lucky enough to be a high net worth individual, you’re probably going to have dozens of personal financial advisors running circles around you, showering you with advice on how to invest your money. The richer you are, the more complex the financial instruments your personal financial advisor will suggest you invest in, and the bigger the words they’ll use to describe the simplest of things: and this will make you feel good. “This attractive woman is actually quite intelligent”, you’ll say to yourself.

I’m a young professional, and I cannot afford a personal financial advisor. To be honest, I’m also a little bit more comfortable managing my own money - it forces me to know what’s going on, and forces me to understand what I’m getting into. It makes me feel like I’m more in control of my finances. Having worked in Financial Services, I’m a little luckier though - I’m slightly more used to all the jargon. But what about those retail investors that haven’t worked in financial services - and don’t have advisors from large banks with European sounding names?

For the west, there are resources such as Investopedia.com and Fool.com that seek to demystify investing. They’re simple, straightforward and down to earth in the way that they explain Read the rest of this entry »

In many ways the US has recently been facing the kind of balance of payments problems which have been seen many times before, but most often in emerging economies.

For several years now, the US has run a large trade deficit by feeding domestic consumption with cheap imports from emerging economies, most notably China. The large flow of money out of the economy was offset by inward capital investment from Europe, Asia and the Middle East.

Since the credit crunch started to bite, the stability of the US financial system has been called into question by the failure of Bear Stearns and the public difficulties faced by Fannie Mae and Freddie Mac. Coupled with the Fed policy of cutting interest rates to fend off a recession and the gloomy consumer outlook underpinned by housing market instability, the US has become a much less attractive destination for international capital.

Along with low liquidity in global markets, the deteriorating attractiveness of the US has put pressure on the dollar to weaken to keep the money flowing in. These were the main factors behind the dollar hitting lows against the EUR, GBP and JPY in Q1 2008.

However the dollar has strengthened in Q2 and the beginning of Q3, largely due to the weakness of other developed economies; the Eurozone and the UK flirt dangerously with their own recessions and the outlook for the Japanese economy looks little better. Whether the dollar rally will continue depends largely on three factors; firstly, whether the Fed can maintain stability Read the rest of this entry »

Given the recent news SEBI considering (but not doing anything yet) about revoking the P-note ban, I thought it might be a good idea to revisit the topic. Thank you to Akshay for passing on info that has helped me better write this post.

In India, only domestic investors, or ‘Foreign Institutional Investors’ (FIIs) - those foreign institutions that have registered with SEBI, are allow to invest into the equity markets directly. Participatory notes (P-notes) allow foreign investors, such as hedge funds, which are not registered with SEBI to invest easily in the Indian equity market.

Practically, the way that P-notes work is that a foreign investor - say a hedge fund - would deposit funds with an FII that is authorized to issue P-notes, who would use the funds to purchase shares as instructed by the hedge fund. The FII would then issue a P-note to the hedge fund, which is essentially a certificate that says that it is entitled to X shares of company ABC, and any capital gains or losses and dividend payments would be passed onto the hedge fund. In return for this service, the hedge fund would pay the FII a fee.

A crude example: If a hedge fund not registered with SEBI wants to buy one share of Hindustan Unilever Limited (HUL), their FII would pick up a share of HUL for Rs. 240 and write a contract that says that in return for a fee and the Rs. 240 paid by the hedge fund, when the hedge fund asks the broker to sell the share they will comply and pay back the hedge the Rs. 240 plus or minus the rise or fall of the share price and the dividends if there were any.

Because foreign investors bought P-notes from reputable FIIs (they knew that they wouldn’t go back on the agreement), and there was a healthy supply of P-notes going around, foreign institutions were able to trade these P-notes amongst themselves.

On October 16, 2007, N. Damodaran, the then SEBI chief issued a decision to curb foreign participation through P-notes as he felt that there was excess money being pumped into the Indian market unchecked leading to volatility - which is always bad thing, especially for the retail investor Read the rest of this entry »

With the emergence of large domestic (Pantaloon’s Big Bazaar) and international players (Metro AG, Tesco, Tesco/Trent- read my post on this, Bharti/Wal-Mart) in large scale organized retail, I got to thinking – how does this affect the margins of consumer product companies such has Hindustan Unilever, Colgate-Palmolive, and Cavin Kare? On one hand, you might see margins (the different between how much you sell for and how much it costs you) on goods increasing due to a lower distribution cost – its easier to distribute 100,000 bars of Lux soap to one Metro AG in one go, than distribute that amount in rural India.

On the other hand, since these stores buy in bulk, they’re in a much better position to negotiate on cost – therefore pushing margins down. Moreover, many of these stores Read the rest of this entry »

It seems that two years after Tesco started negotiating (and failed to reach an agreement) with the Bharti group, the retail giant is entering the country in a joint venture with the Tata’s retail arm, Trent. Now this is not a traditional joint venture –  these two companies are not sharing the capital investment and the profits. Tesco is giving Trent’s hypermarkets (very large supermarkets) exclusive access to its IT systems, supply chain (which includes access to Tesco’s low cost vendors – many of which are based in India), and infrastructure management (tools that Tesco has developed to better manage the retail spaces, inventory, delivery etc.). In return for this exclusive arrangement Tata is Read the rest of this entry »

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I believe that retail investors – that is those of us that invest in the stock market – have the odds stacked pretty heavily against us. The biggest one really being that we’re pitted against large institutions – people who have had far greater resources in terms of research and analysis, and indeed training in high finance.

Even if we did have all the resources, and the knowledge, we just wouldn’t have the time. The guys working for large investment banks, literally do this for a living, and many retail investors – well, don’t. We have day jobs – and most of us cannot watch the trading screen and read research papers all day.

Despite being aware of these facts, we continue to choose to invest directly. Why? Because of the allure of high returns, the thrill of picking the right stock, and the excitement of watching our stock move in the right direction. Moreover, we like being in control of our own finances.

One keeps hearing all sorts of anecdotal statistics from various studies – one revealed that over a decade, only 20% of asset managers managed to beat the S&P 500. One can react to this statistic in two ways: either the retail investor thinks to himself that if sophisticated financial analysts have such a poor record, they don’t stand a chance.

Alternatively, they might think to themselves that the belief that ‘investing is best left to professionals’ is false. I tend to agree more with this view. If anything, statistics such as these should only serve to further encourage retail investors to participate more actively in the market. If professionals have such a poor success rate, we might as well give it a shot ourselves Read the rest of this entry »

When the equity markets are faring poorly due to a bad economic environment. When trying to figure out whether a company’s stock is defensive or not - ask yourself one question - are its products neccessities or luxuries? Can consumers cut back spending on them just because economic conditions are poor and they’ve possibly seen a reduction in wages, or been laid off? Indeed, could the consumption of the goods created by such a company rise in uncertain times?

Sectors that have traditionally been thought of as defensive include Food, Tobacco, Utilities, and Oil. Makes sense - the amount that households can cut back on Food is limited, and indeed, Tobacco consumption tends to go up when times are bad. When input costs rise, these are the companies that can pass on the price rises to the consumer. Therefore, in times of economic uncertainty, equity investors’ money flows into these types of stocks, leading to an increases in their prices.

However, when times are good, the stocks that fall into the above sectors aren’t star performers - for the opposite reason as outlined above, there’s only so much you can eat - indeed margins in the stocks of defensive industries are often quite low.

Let’s look at two stocks that are considered defensive Read the rest of this entry »

According to this Press Release, a company called XIUS-bcgi has developed a new technology called eCogNito, which is essentially enables contactless payment for goods and services through the mobile phone. The technology is embedded within the SIM card, therefore doesn’t need special mobile technology, or indeed very advanced mobile phones – indeed the company claims that it is already compatible with millions of handsets, on any network. Bharti Airtel has signed a memorandum of understanding with XIUS-bcgi to roll out a pilot scheme, which they claim already has 260,000 subscribers for this initiative.

XIUS-bcgi has also invented a new technology called ‘Active Posters’ (AP). These are paper thin devices that can be mounted behind a glass terminal, which communicate with the eCogNito solution, allowing any shop with a glass front to become a 24×7 store. Users have to point the mobile phone to Read the rest of this entry »

A Mobile Virtual Network operator is one that can offer mobile phone services without being licensed radio spectrum (read more about MVNOs in Wikipedia). They operate by buying airtime from radio spectrum licensees, but market the mobile service under their own brand. The reason why I’m excited about MVNOs is because its going to be good for the Indian consumer in two ways:

1. It’s going to spur further competition, which means possible even lower prices, and greater service innovation
2. It’s going to lead to the creation of a number of brands that will attach themselves to specific segments of the population, providing more tailored services based on that segment’s need

I think that the second point is an interesting one. Given the diversity of the Indian Market, culturally and economically, we might find a number of brands Read the rest of this entry »

This post actually started out as a reply to a comment on Ashish’s (from pluggD.in) post on Reliance launching launching its Direct to Home (DTH) service called BigTV. Rohit - clearly quite frustrated asked “Why do large Indian companies have to get into EVERYTHING. Why not the world leaders in at least ONE thing.” Well Rohit, I can’t really tell you the answer to the second part, but let me say, as far as the first part is concerned - I hear you man, I feel you. To quote an aquaintance, ‘I’m afraid of the day I wake up, walk into the bathroom, pull out my Reliance toothbrush, squeeze on some Reliance toothpaste Read the rest of this entry »

Tata motors has been facing opposition from activists and political parties ever since it stepped foot in Singur. The disturbances have anything but died down - indeed there was rampant picketing and incidents of Tata Motor employees receiving threats from protesters lead ostensibly by the Sava Farmland Comittee - which has been opposed to the way that land was taken away from farmers. In fact one employee was beaten and hospitalised by a villager. It seems that it’s nearing the end of its tether. On July 31, Ravi Kant, the CEO of Tata Motors said:

“We are moving ahead in spite of all these challenges. We have not lost sight of the fact that we want to introduce this vehicle in the market in the October-December quarter. We are continuing as long as our patience lasts,”

This statement has been interpreted by many as a fairly obvious threat to the West Bengal government: ‘Fix this mess, or we’re taking our business elsewhere.’

Adding to the noise is Mamata’s Trinamool Congress, which opposes the project and believes that more compensation should be given to the evicted farmers. Sonia’s Congress is clearly in support of the Tata Motors, but is shying away from saying so openly because Read the rest of this entry »

…and market the hell out of it. By the time people notice that your product is terrible, you’ve already recouped your investment, and then some. It seems that bollywood has figured out the perfect money making business model. Oh I forgot - ensure that you have at least 1-2 catchy item songs, otherwise what are you going to show in your ‘trailers’ - I mean you can’t really give a teaser for your plot, simply because there is none.

According to Business Standard, the movie has already made Rs. 25-30 Cr. in 3 days of advanced bookings. Not surprising, given the fact that the Singh is Kinng (SIK) promos were coming so thick and fast that people just had to see what the fuss was all about. I know, I was one of them. Indeed according to Studio 18 - which owns the worldwide distribution rights to SIK it is expected to make Rs. Read the rest of this entry »

Perhaps we put too much stock in these guys - perhaps we should all become a little bit more self reliant…

I recently read and article about index funds in the Business Standard that honestly shocked me. There are a number of index funds that have a tracking error of over 2% - LICMF Index Sensed has a tracking error of 7.5% - absolutely ridiculous when internationally, a tracking error of 0.5% is also considered high.

An index fund is a fund that is supposed to mimic an index. So a Sensex fund is supposed to invest its cash in the 30 stocks that make up the Sensex, in the same proportions as the Sensex.

Tracking error is the difference between the return of the index that the fund is tracking and the return of the fund itself. So for example, if the Sensex gave a return of 10% and the fund that was tracking it gave a return of 7% - the tracking error is 3%. There are a number of reasons for tracking error – one is Read the rest of this entry »

Many people have argued that the use of a Wholesale Price Index in determining economic policy is a mistake and that a consumer based measure such as the CPI should be used instead. I would go further than this and argue that when the economy is experiencing inflation due to demand pressures in the commodity markets, as it is today, the weekly publishing of the WPI may not only be misleading, it may be genuinely damaging.

Now I am not saying that the WPI should not be calculated at all, it is a genuinely useful leading indicator of consumer inflation; firms facing rising input costs will of course be forced to pass them on to their customers eventually. Policy makers should therefore keep a keen eye on the WPI.

However, economists have long known that the trajectory of inflation is not just a product of rising input costs and the availability of money; it is also largely determined by Read the rest of this entry »

It won’t be news for most people to hear that global equity markets are suffering both from a lack of liquidity caused by the sub-prime fall-out, and rising inflation, fuelled by rapidly increasing commodity prices.

What marks the current situation out from other recent financial crises is the absence of a geographical safe haven. With almost every major, and many minor, equity markets feeling the pinch, investors are scouring the globe for opportunities to stabilise shrinking portfolios and provide a short term hedge against inflation.

The irony is that although commodities seem to be the only asset class which is able to tick both these boxes, the last thing the world needs is a further influx of capital into the commodities markets. If this is the case we run the risk of entering downward cycle of rising inflation Read the rest of this entry »

If you had taken time this week to listen to the many TV analysts (I use the word generously), you may have noticed a consensus of opinion emerging. That a consensus exists is no surprise, given their tendency to agree with almost everything; however the specific points on which they agreed seem to be the following;

Firstly, the medium to long term outlook for the Indian economy remains positive. Secondly, the recent market retraction is probably nearing its end. Thirdly, current market volatility means retail investors should stay away. On the surface this may appear logical; it is in fact entirely the opposite

That the medium term economic outlook remains positive is a position I agree with. Even conservatively adjusting growth forecasts for sustained high inflation, the economy should still grow by Read the rest of this entry »

Other than speculation regarding the future of crude prices, another popular discussion in recent months has been whether the dramatic rise (and less dramatic fall) in price was driven by economic fundamentals or short terms speculation. What is perplexing about this debate is that in the oil business these two factors have a very different relationship than in most markets and are largely indistinguishable.

Traditionally speculation affects current price by driving up demand as expectations of a price rise encourages people to buy today in order to sell tomorrow. However, the cost of storing oil means that almost any oil speculator uses the futures market, which is largely a zero sum game and has little impact on current demand, although it may well have a significant impact on price expectations.

I emphasise the phrase almost any because the one group of speculators that do not need the futures market are the oil suppliers themselves. They are in the unique position of being able to Read the rest of this entry »