The world stock markets breathed a sigh of relief on Monday morning as the biggest economy raised its debt ceiling to avoid a potential default. President Obama and the Congress have agreed on a framework that would target raising US' debt ceiling. It would also target spending cuts and boosting savings. This news came as a breath of fresh air for all those who were worried that US would default on its debt.
But despite this huge risk, the country has still attracted the safest credit rating of AAA from Standard & Poors that has recently released the sovereign debt ratings for 126 countries. The ratings agency had only threatened to downgrade US debt if the debt ceiling was not raised. So solving the debt problem with more debt has given the entire world a lot to cheer on. But is this really a solution to the problem?
If we look at the examples of countries with mountains of debt like Greece, it does not appear so. Rather it appears that US seems to have just postponed their problems to another date. Or as a matter of fact to another President in case Mr Obama does not win the next Presidential race. The country's economic growth has slowed down in recent times. Add to this, the unemployment rates have skyrocketed. For private employment to pick up, it is necessary for the economy to grow at faster rates. And with the government scheduled to cut back on its spending, it is unlikely that the public sector would fuel any major growth. Therefore, in all possibility, it does appear that the US is headed in to another recession. And if this happens, there would be fresh tremors across the world's markets.
'No power on earth can stop an idea whose time has come'. This is how the then finance minister, Mr Manmohan Singh, introduced India to reforms way back in 1991. Clearly, it was the best thing to have happened to the country since independence perhaps. This 'big bang' change helped propel India's GDP by a massive 247% in the two decades that followed. However, a lot of water has flown under the bridge since then. The finance minister of 1991 is now the prime minister of the nation and that too, for the second consecutive term. And has he stuck to his guns of introducing large scale reforms? May be not, if the daily, San Francisco Chronicle is to be believed. The newspaper has come down heavily on Mr Singh's new found approach of diverting focus from reformist changes and instead, embracing populist measures. This, the daily believes, is clearly taking its toll on the economy. As per estimates, India seems to be losing about 2.5% points in growth a year on account of un necessary regulations and approval requirements. However, not everyone believes in this theory. There are experts who argue that Mr Singh is clearly doing the right thing as this will make the Indian growth story far more inclusive. If the evidence so far is anything to go by, Mr Singh seems to be failing in his approach as inflation is running rampant and investments slowing down. It will be interesting to see how things pan out in the long term.
SEBI in recent times has made headlines for coming out with guidelines meant for the benefit of minority shareholders and for investors across mutual funds. And with respect to the latter, the regulator intends to make investing a simple and easy process. Some of the measures introduced by the Securities and Exchange Board of India (SEBI) Chairman, UK Sinha are wider open offer exit routes, simplified initial public offer (IPO) application and single Know Your Client (KYC) norms. That said, investors will have to shell out Rs 100 for annual investments of over Rs 10,000 (Rs 150 for first time investors) if made through a mutual fund distributor or an agent. The single KYC norms are expected to intensify competition across brokers though. Earlier, investors had to submit various proofs and signatures to every new equity broker, mutual fund house, depository participant and portfolio manager he approached. With single KYC norms now being introduced, investors will be abl e to switch between brokers without having to submit umpteen signatures thereby fuelling competition between them. Indeed, with this process, serious investors will certainly benefit especially those who were hampered by the cumbersome process that was prevalent earlier.
If you have been an investor in financial stocks in the emerging markets your portfolio by now could have a shade of red. Banks in the biggest emerging markets are losing the confidence of investors. As loans turn sour after a two-year credit binge, rising NPAs and conservative provisioning is taking a toll on profits. Few in India have also had to write-off staff payments on a retrospective basis against their reserves. This is at a time when the lending margins are also showing no signs of recovery. Only the ones with high share of low cost deposits have been able to at least maintain the same. A report by rating agency Fitch, published by Bloomberg puts it accurately. "Loans to Brazilian shoppers, Chinese infrastructure projects and Indian developers have fueled the global economic recovery. This has turned emerging-market banks into some of the world's biggest companies by market value" It also suggests that banks in Brazil and China could see loan growth drop by at le ast 50% over the next 2 years. This is while the central banks try to curb price rises and asset bubbles. Our very own RBI has been quite proactive at this and the results are being seen. As per the IMF, the average debt burden in the BRIC economies is just 40% of GDP (gross domestic product). This when compared with 102% percent for developed nations seems benign. However it will be best to assume that banks in emerging markets will have to moderate growth in the medium term to keep themselves healthy.
In the meanwhile, the Indian Stock Markets shed half of the morning session gains but continue to trade in the green. At the time of writing, the benchmark BSE Sensex was trading up 117 points, whereas the Nifty has put on 34 points Mahindra and Mahindra (M&M) and Infosys were seen gaining the most amongst blue chips. All major Asian indices closed in the green today with stock markets from Japan and South Korea leading the pack of gainers. Europe too has opened on a positive note.
But despite this huge risk, the country has still attracted the safest credit rating of AAA from Standard & Poors that has recently released the sovereign debt ratings for 126 countries. The ratings agency had only threatened to downgrade US debt if the debt ceiling was not raised. So solving the debt problem with more debt has given the entire world a lot to cheer on. But is this really a solution to the problem?
If we look at the examples of countries with mountains of debt like Greece, it does not appear so. Rather it appears that US seems to have just postponed their problems to another date. Or as a matter of fact to another President in case Mr Obama does not win the next Presidential race. The country's economic growth has slowed down in recent times. Add to this, the unemployment rates have skyrocketed. For private employment to pick up, it is necessary for the economy to grow at faster rates. And with the government scheduled to cut back on its spending, it is unlikely that the public sector would fuel any major growth. Therefore, in all possibility, it does appear that the US is headed in to another recession. And if this happens, there would be fresh tremors across the world's markets.
'No power on earth can stop an idea whose time has come'. This is how the then finance minister, Mr Manmohan Singh, introduced India to reforms way back in 1991. Clearly, it was the best thing to have happened to the country since independence perhaps. This 'big bang' change helped propel India's GDP by a massive 247% in the two decades that followed. However, a lot of water has flown under the bridge since then. The finance minister of 1991 is now the prime minister of the nation and that too, for the second consecutive term. And has he stuck to his guns of introducing large scale reforms? May be not, if the daily, San Francisco Chronicle is to be believed. The newspaper has come down heavily on Mr Singh's new found approach of diverting focus from reformist changes and instead, embracing populist measures. This, the daily believes, is clearly taking its toll on the economy. As per estimates, India seems to be losing about 2.5% points in growth a year on account of un necessary regulations and approval requirements. However, not everyone believes in this theory. There are experts who argue that Mr Singh is clearly doing the right thing as this will make the Indian growth story far more inclusive. If the evidence so far is anything to go by, Mr Singh seems to be failing in his approach as inflation is running rampant and investments slowing down. It will be interesting to see how things pan out in the long term.
SEBI in recent times has made headlines for coming out with guidelines meant for the benefit of minority shareholders and for investors across mutual funds. And with respect to the latter, the regulator intends to make investing a simple and easy process. Some of the measures introduced by the Securities and Exchange Board of India (SEBI) Chairman, UK Sinha are wider open offer exit routes, simplified initial public offer (IPO) application and single Know Your Client (KYC) norms. That said, investors will have to shell out Rs 100 for annual investments of over Rs 10,000 (Rs 150 for first time investors) if made through a mutual fund distributor or an agent. The single KYC norms are expected to intensify competition across brokers though. Earlier, investors had to submit various proofs and signatures to every new equity broker, mutual fund house, depository participant and portfolio manager he approached. With single KYC norms now being introduced, investors will be abl e to switch between brokers without having to submit umpteen signatures thereby fuelling competition between them. Indeed, with this process, serious investors will certainly benefit especially those who were hampered by the cumbersome process that was prevalent earlier.
If you have been an investor in financial stocks in the emerging markets your portfolio by now could have a shade of red. Banks in the biggest emerging markets are losing the confidence of investors. As loans turn sour after a two-year credit binge, rising NPAs and conservative provisioning is taking a toll on profits. Few in India have also had to write-off staff payments on a retrospective basis against their reserves. This is at a time when the lending margins are also showing no signs of recovery. Only the ones with high share of low cost deposits have been able to at least maintain the same. A report by rating agency Fitch, published by Bloomberg puts it accurately. "Loans to Brazilian shoppers, Chinese infrastructure projects and Indian developers have fueled the global economic recovery. This has turned emerging-market banks into some of the world's biggest companies by market value" It also suggests that banks in Brazil and China could see loan growth drop by at le ast 50% over the next 2 years. This is while the central banks try to curb price rises and asset bubbles. Our very own RBI has been quite proactive at this and the results are being seen. As per the IMF, the average debt burden in the BRIC economies is just 40% of GDP (gross domestic product). This when compared with 102% percent for developed nations seems benign. However it will be best to assume that banks in emerging markets will have to moderate growth in the medium term to keep themselves healthy.
In the meanwhile, the Indian Stock Markets shed half of the morning session gains but continue to trade in the green. At the time of writing, the benchmark BSE Sensex was trading up 117 points, whereas the Nifty has put on 34 points Mahindra and Mahindra (M&M) and Infosys were seen gaining the most amongst blue chips. All major Asian indices closed in the green today with stock markets from Japan and South Korea leading the pack of gainers. Europe too has opened on a positive note.
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