Investment refers to a placement of funds in some assets that will be held over some period of time with the expectation that the funds will grow. Each one of us has assets of some kind, ranging from physical assets to financial assets. For our purposes, investment will mean a measurable asset retained in order to increase one’s personal wealth.

The prime motive behind investing is that we want to improve our future welfare. Sources of funds may be from assets already owned, savings or foregone consumption or borrowed money. By foregoing consumption today and investing the savings, we expect to enhance our future consumption possibilities. Anticipated future consumption may be by other family members, such as education funds for children or by ourselves, possibly in retirement when we are less able to work and produce for our daily needs. Regardless of why we invest we should all seek to manage our wealth effectively, obtaining the most from it. This includes protecting our assets from inflation, taxes and other factors.

The sooner one starts investing the better. Your investments get more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year.

Three rules of investment:
Invest early Invest regularly Invest for long term and not short term Invest Early: The sooner you start the better. Start investing in small amounts, continuously for a long time, money grows due to the power of compounding. If you start investing when you are single you will be able to save maximum. The best policy is to start saving from the moment you begin earning. Invest Regularly: Develop the habit of adding to your recurring deposit / systematic investment plan of mutual fund / deferred annuity account on a regular basis, perhaps monthly or quarterly. By investing regularly with SIP of mutual funds you take advantage of a strategy called rupee-cost averaging. Regular investing, however, does not ensure a profit or protect against loss in declining market scenario. Invest for Long Term and Not Short Term: If you decide that your money can work for you over a long period of time, then better compounding works.

Consider this: Rs 1,000 invested at 8% earns Rs. 80. Left to compound, the original Rs.1,000, plus accumulated interest, will earn Rs.160 in the 10th year, Rs.507 in the 25th year, and Rs.1,609 in the 40th year — returns of 16%, 51%, and 161%, respectively, on the initial Rs.1,000.

The proper choice of investment instrument can actually make it almost simple to realize your goals. In other words, right choice of investment will improve your present life and let you look ahead to the future too. It allows you to understand how today’s financial decision affects other areas of your finances. For example, buying a particular investment product might help you pay off your housing loan faster or it helps to support your retirement significantly. One must view each financial decision as part of a whole and also consider its short and long-term effects on your financial objectives. Surprisingly, many of us do not have any type of formalized investment plan in place.

Some tax-saving options:

Public Provident Fund (PPF)

It is an ideal investment avenue for those who seek to preserve their capital. The returns are to the tune of eight percent and are tax free. An investment in PPF up to a ceiling of Rs 70,000 is also allowed as a deduction from taxable income, under Section 80C.

Mandatory for the salaried class, Employee Provident Fund (EPF) provides tax-free returns to the tune of 8.5 percent. A deduction of up to Rs 1 lakh is allowed under Section 80C.

National Savings Certificate (NSC)

You can also invest in NSCs to avail tax deduction under Section 80C. The interest accrued every year in NSCs is deemed to be reinvested and thus eligible for Section 80C deduction.

Home loan

The principal component of the EMI towards a home loan qualifies for deduction under Section 80C. This deduction has a ceiling of Rs 1 lakh.

Infrastructure bonds
Parking Rs 20,000 in tax free infrastructure bonds can benefit you, as it provides an additional tax deduction of the invested sum. It has a lock-in period of five years and tenure of 10 years. The interest earned is subject to tax.

Medical insurance
If you are thinking of a medical insurance for yourself and your family, now is the time to act. Premiums paid on medical insurance policies for yourself, spouse and children can be deducted from your taxable income under Section 80D, up to a maximum of Rs 15,000. You can also claim a tax deduction of up to Rs 15,000 on premiums paid for health insurance cover of your parents.

Life insurance

Buying or renewing a life insurance policy allows the premiums to qualify for deduction under Section 80C of the Income Tax Act, within the overall limit of Rs 1 lakh per annum. The proceeds from a life insurance policy on maturity are exempt under Section 10(10D), subject to the condition that the premium paid in any year is not more than 20 percent of the sum assured.

Equity-linked savings schemes

Equity-linked savings schemes (ELSS) are mutual fund schemes that are eligible for deduction under Section 80C.

Impact Of Income Tax Deductions On Net Tax Liability

Tax saving allocation considered:

• Rs 1 lakh under Section 80C

• Rs 20,000 under Section 80CCL

• Rs 30,000 under Section 80D An education cess of three percent is
applicable on net tax liability. This is not included in the
calculations shown here.

CASE I: Individual earning Rs 4 lakhs per annum

In case of no investments in any tax-saving instruments:
Tax payable under 10 percent IT slab – Rs 24,000.

In case tax-saving investments are made:
Total deductions: Rs 1.5 lakhs Net taxable income: Rs 2.5 lakhs Income
tax payable: Rs 9,000 Effective tax saving: Rs 15,000

CASE II: Individual earning Rs 7 lakhs per annum

In case of no investments in any tax-saving instruments:
Tax payable under 10 percent slab: Rs 34,000 Tax payable under 20
percent slab: Rs 40,000

In case tax-saving investments are made:
Total deductions: Rs 1.5 lakhs Net taxable income: Rs 5.5 lakhs Income
tax payable: Rs 44,000 Effective tax saving: Rs 30,000

CASE III: Individual earning Rs 10 lakhs per annum

In case of no investments in any tax-saving instruments:
Tax payable under 10 percent slab: Rs 34,000 Tax payable under 20
percent slab: Rs 60,000 Tax payable under 30 percent slab: Rs 60,000

In case tax-saving investments are made:
Total deductions: Rs 1.5 lakhs Net taxable income: Rs 8.5 lakhs Income
tax payable: Rs 1.09 lakhs Effective tax saving: Rs 45,000

1) List down all your debts
You need to take stock of all your loans and borrowings. It could be credit card due, personal loan, car loan, housing loan, education loan, loan from FD, loan from insurance policies, loan from your employer, hand loan and so on. For each and every loan you need to note down how much you owe, the present interest rate, EMI, Number of months to be paid.

2) Negotiate for lower interest rates
If you could negotiate the interest rate and bring it down, then you can come out of debt quicker. Most of the credit card companies come forward for negotiation if you sincerely show interest in repaying. They need not run after you to collect the debt. It will reduce their expenses. So they will be happy to negotiate. Balance transfer offers from credit cards are also a way to reduce your interest rate.

3) Refinancing and consolidation
Replacing a loan with another is known as Refinancing. By doing a refinance it should reduce your interest rate and it should bring down the time you are in debt. But most often people go for refinance that provide them lower EMI but increasing the time they stay in debt.

4) Categorise your debt
Housing loan can increase your net worth over a period of time. Housing loan gives you tax benefit also. For a business man car loan provides some tax benefit. Based on these factors a debt needs to be categorized. This will help us in comparing different loans.

5) Prioritize your debts
After sorting out various loans, now we can comfortably prioritize the loans. Obviously this will be based on the interest rates and tax benefits. At times paying off a small loan first can give you a lot of motivation to get out of debt.

6) Creating and Executing a Debt payoff plan
You need to create a debt pay off plan with different scenarios. So that you can find out how some more savings or a different repayment order will help you to get out of debt sooner. When creating a plan, you need to choose one which is comfortable to your attitude. Otherwise, you may not execute it properly.

7) Refrain yourselves from applying for fresh loans
You need to make a vow that you will not be adding any fresh loans, till you come out of all your debts completely. Think for a moment, how you will feel when you become debt free. This will give you a lot of positive energy to come out and stay out of debt.

8 ) Postpone buying major assets
Buying a property or any other assets need to be postponed till you get out of debt. With your new ownership comes the new, probably large and unpredictable expense. This can make you deviate from your debt pay off plans and at times the consequences could be uncontrollable.

9) You stop using your credit card
There are two groups. One group of people uses the credit cards responsibly. That is they will repay the credit card dues in full when they receive the bill. The other group will pay the minimum amount due and carry forward the balance amount due. If you belong to the second group, you need to stop using credit cards temporarily. Take out and keep your credit cards in the locker. Once your financial situation and buying habits improve, then you can start using your credit cards again.

10) Change your spending habits.
Being in debt obviously means that you have been living beyond your means. The solution is very simple. Spend less than you earn and you will get out of debt soon. You need to change your spending habits. Then only this simple solution will be achievable. If you buy things you don’t need, you’ll soon sell things you need. Don’t save what is left after spending; spend what is left after saving.

11) Involve all your family members
You need to inform all your family members and dependents about your debt status. Then you will be able to take decisions with much more clarity. Moreover, if your family members know about your debt, they will also change their spending habits and support you in getting out of debt faster. Consider the postage stamp: Its usefulness consists in the ability to stick to one thing till it gets there. Similarly, you need to stick to your debt pay off plan till you get out of it.

When you hear the term investing – most people are referring to the former. A lot of people believe that you have to constantly monitor the market and keep on top of all the news about stocks you own. Whats ironic about all this ‘active’ management is that even after all this monitoring the odds are against you to beat the benchmark such as the BSE Sensex Index. If you think this is a lot of work for very little return you can choose the more ‘passive’ style. In this form of investing, you pick an index and buy an ETF that mirrors the returns of the index. All other things being equal, your returns will mirror that of the indexes with very little management or research on your part.
At this point, you have probably figured out which style suits your personality best. Before we jump into the exact steps involved in buying stocks, you have one more step to complete. You have to plan and set goals before you start investing. Why before you ask? Stock investing can be a very emotional process. That is because everyone is very emotional about losing or gaining money. If have a few guidelines in mind regarding how much you want to make or how much you are willing to lose in a particular investment, you increase the odds of making better investing decisions during the whole process.
Some questions that you should answer before you start investing are:
- How much money do you need to sustain your current lifestyle in retirement?
- How far are you away from retirement?
- What type of investments are you comfortable with?
- How much money will you keep aside for short-term financial needs?
- What kind of returns on your investment (profit) would you be content with?

After answering the above questions, you have an idea of what your investing style is, how much money you’ll need and the big picture in general. Now, you’re ready to start investing your money in stocks.

2. Keep records of your trading results.

3. Keep a positive attitude, no matter how much you lose.

4. Don’t take the market home.

5. Continually set higher trading goals.

6. Successful traders buy into bad news and sell into good news.

7. Successful traders are not afraid to buy high and sell low.

8. Successful traders have a well-scheduled planned time for studying the markets.

9. Successful traders isolate themselves from the opinions of others.

10. Continually strive for patience, perseverance, determination, and rational action.

11. Limit your losses – use stops!

12. Never cancel a stop loss order after you have placed it!

13. Place the stop at the time you make your trade.

14. Never get into the market because you are anxious because of waiting.

15. Avoid getting in or out of the market too often.

16. Losses make the trader studious – not profits. Take advantage of every loss to improve your knowledge of market action.

17. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.

18. Always discipline yourself by following a pre-determined set of rules.

19. Remember that a bear market will give back in one month what a bull market has taken three months to build.

20. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.

21. You must have a program, you must know your program, and you must follow your program.

22. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.

23. Split your profits right down the middle and never risk more than 50% of them again in the market.

24. The key to successful trading is to know yourself and your stress point.

25. The difference between winners and losers isn’t so much native ability as it is discipline exercised in avoiding mistakes.

26. In trading as in fencing there are the quick and the dead.

27. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
28. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.

29. Accept failure as a step towards victory.

30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker! Don’t let ego and greed inhibit clear thinking and hard work.

31. One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity always lies through the open door.

32. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this he is safe. When he ignores this, he is lost and doomed.
33. It’s much easier to put on a trade than to take it off.

34. If a market doesn’t do what you think it should do, get out.

35. Beware of large positions that can control your emotions. Don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.

36. Never add to a losing position.

37. Beware of trying to pick tops or bottoms.

38. You must believe in yourself and your judgment if you expect to make a living at this game.

39. In a narrow market there is no sense in trying to anticipate what the next big movement is going to be – up or down.

40. A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss – which is what does the damage to the pocket book and to the soul.

41. Never volunteer advice and never brag of your winnings.

42. Of all speculative blunders, there are few greater than selling what shows a profit and keeping what shows a loss.

43. Standing aside is a position.

44. It is better to be more interested in the market’s reaction to new information than in the piece of news itself.

45. If you don’t know who you are, the markets are an expensive place to find out.

46. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word – Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.

47. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does, console yourself by thinking of
all the times when liquidating early reserved gains that you would have otherwise lost.

48. When the ship starts to sink, don’t pray – jump!

49. Lose your opinion – not your money.

50. Assimilate into your very bones a set of trading rules that works for you.

1. Trading for excitement & thrill Not for profits.
Many traders consider stock market as casino and trade for thrill and fun only. As soon as one has a losing trade, he wants to quickly make back the lost money. He thinks about the other things he could have  done with the money, regret taking the trade and want to recover as quickly as possible. This in turn leads to further mistakes. Be patient and wait for the next high probability opportunity. Don’t rush back in.

2. Trading with a high ego.
Many individuals who have remained highly successful in other business ventures have failed miserably in trading game. Because they have a fairly big ego and thought they couldn’t fail. Their egos become their downfall because they can not except that they would be wrong and refuse to get out of bad trades. Once again, whoever or wherever has any one come from does not concern the markets. All the charm, powers of persuasion, number of degrees & diplomas of business management on the wall or business savvy will not budge the market when you are wrong.

3. Three 4-letter words that will kill you! HOPE–WISH–FEAR–PRAY
If you ever find yourself doing one or more of the above while in a trade then you are in big trouble! Markets has own system of moving up & down. All the hoping, wishing and praying or being fearful in the world is not going to turn a losing trade into a winning one. When you are wrong just use a simple 4-letter word to correct the situation-GET OUT!

4. Trading with money you can’t afford to lose.
One of the greatest obstacles to successful trading is using money that you really can’t afford to lose. Examples of this would be money that is supposed to be used in any other business, money to be paid for college/school fee, trading with borrowed money etc. Ultimately  what happens is that when someone knows in the back of their mind that they are risking the money they can not afford to lose, they trade out of fear and emotion versus logic and no emotion. If you are in this  situation It is highly recommend that you stop trading until you earn enough to put into an account that you truly can afford to lose without causing major financial setbacks.

5. No Trading Plan
If you consider yourself a trader, ask yourself these questions: Do I have a set of rules that tell me what to buy, when to buy and how much to buy, not just for the next trade, but for the next 10 trades? Before I enter a trade, do I know when I will take profits? Do I know when I will get out if I am wrong? These questions form the first part of a trading strategy. There simply cannot be any expectation of success if we can’t answer these questions clearly and concisely.

6. Spending profits before you make them.
Nothing is more exciting then getting into a trade that blasts off and puts you into a highly profitable situation. This can cause major problems however, because this type of trade puts you in a highly euphoric state and leads to daydreaming about the huge profits still to come. The real problem occurs as you get caught up in the daydream and expectations. This causes you to not be prepared to get out as the market reverses and wipes off all your profits because you have convinced yourself of the eventual outcome and will deny the reality of the situation. The simple remedy for this is to know where and how you will take profits once you enter the trade.

7. Not Cutting Losses or letting Profits run
One of the most common mistakes made by traders is that they let their losses grow too large. Nobody likes to take a loss, but failing to take a small loss early will often result in being forced to take a large loss later. A great trader is not someone who has never had a loss. Great traders have made many losses. But what makes them great is their ability to recover quickly from a string of losses. Every trader needs to develop a method for getting out of losing trades quickly. Research and learn to apply the best methods for placing protective stoploss orders. The only way to recover from many (small) losing trades is to make sure the winning trades are much larger. After a series of losing trades, it becomes difficult to hold a
winning trade because we fear that it will also turn into a loss. Let your profitable trades run. Give them room to move and give them time to move.

8. Not Sticking to your plans & Changing strategies during market hours
If you find yourself changing your strategy during the day while the markets are still open, be mindful of the fact that you are likely to be subject to emotional reactions of fear and greed. With rare exception, the most prudent thing to do is to plan your trading strategy before the market opens and then strictly stick to it during trading hours.

9. Not knowing how to get out of a losing trade.
It’s amazing that most of the traders don’t have any clear escape plan for getting out of a bad trade. Once again they hope, pray wish and rationalize their position. It must be kept in mind that market does not care what you think. It does what it does and when you are wrong you are wrong! The easiest way to keep a bad trade from going really bad is to determine before you get in, where you will get out.

10. Falling in love with a stock (Just Flirt).
Many traders get fascinated by just a stock or two and look for opportunities to trade in those stocks only ignoring the other profitable trading opportunities. It is because they have simply fallen in love with a stock to trade with. Such tendencies can be suicidal as for as trading is concerned. It may cost any one dearly.

For April 2010, the value of EELII stands at ~121, up significantly from ~79 in April 2009. A value of ~100 for EELII suggests non-agriculture GDP growth of ~9% Y-o-Y.

■ Current uptick broad based, driven by multiple factors
Each of the lead variables constituting the index affects the real economy with different lead periods. For example, as per our model, the effect of change in policy interest rates (repo rate) is most pronounced on the economy with a lead of ~9-12 months, while the impact of change in commercial vehicle production is the highest with a lead of around three months. EELII has historically predicted non-agriculture GDP growth closely; the adjusted coefficient of determination (adjusted R-squared) for the multiple regression is over 0.80.

The uptick in EELII in the recent months was driven the most by strong production of commercial vehicles, cement dispatches, pick-up in non-oil imports, continuation of resource mobilisation in the domestic primary market and a reasonable interest rate scenario.

■ Third quarter macro developments map uptick in EELII
In the previous releases, EELII had indicated that non-agriculture (industry and services) growth would be over 9% in Q3FY10. The reported growth in non-agriculture GDP comes to ~8% for Q3. On the other hand, the projected growth in non-agri GDP had significantly surpassed the forecast of EELII in Q2. This has largely been due to the lumpiness in the government expenditure that had taken place during Q2FY10 (~13% Y-o-Y), courtesy the second tranche of the Sixth Pay Commission related disbursals, followed by a decline in Q3 (-2.2% Y-o-Y). While the actual non-agri GDP had been higher than projected in Q2 and lower in Q3, if one adjusts the lumpiness in the government spending, the trajectory of non-agri GDP mimics the trends in EELII.

In fact, even in Q3FY10, non-agri GDP (ex-government spending) records a growth of ~10% and is perfectly in line with the path projected by EELII.

Several other indicators coincident with GDP, viz. IIP growth, core sector growth, Purchase Manufacturer’s Index (PMI – India) firmly indicate towards quarterly strong non-agri GDP growth. During this period (October-December 2009), Y-o-Y growth in IIP averaged at ~13%. While some part of this is on account of a low base, substantial contribution to this growth is from pick-up in manufacturing and mining activities. Given the strong uptick in core growth trends in the economy, overall GDP growth for FY10
should ultimately be over 7%.

■ Government policies backing growth well
The government announced the Union Budget for FY11 amidst market speculation of a dilemma between need for focus on (a) growth, and (b) fiscal consolidation and stimulus rollback. Budget managed to do the tight rope walk of reining in the high deficit without hurting the ongoing growth recovery.

Finally, rollback of stimulus turned out to be selective and gradual – excise and customs duties were increased partially, while service tax rate was kept unchanged. Moreover, an effective reduction in income tax will put more money into the hands of consumers. Social sector programmes do not go out of the radar of the government with continuing support for rural employment and rural infrastructure. Overall, government did not resort to any severe fiscal policy contractions, keeping a steady eye on supporting broad-based growth recovery. While on one hand the gradual unwinding of the stimulus signifies that government is confident of growth, the budget also underscores the caution of policy-makers to ensure that the recovery momentum does not lose steam.

■ Monetary action to be slow but steady – “staying behind the curve” may be the preferred choice
Given the continued positive surprises on GDP and IIP fronts, inflation staying high, and current policy rates being far lower than their “steady state” levels, we expect the RBI to be cautious, start hiking policy rates at a slow pace from April 2010 onwards. However, such hikes will definitely be gradual – RBI will refrain from taking any hasty move based on point–to-point data releases. Such a tightening at the moment will not be a shocker as (a) a hike in policy rates will indicate RBI’s confidence in robustness of the economic recovery, and (b) even after the first few hikes, policy rates will still stay far below their “steady-state” levels (e.g., long-term average level of repo rate in India is ~6.0-6.5%). We think, both repo and reverse repo rate will witness a cumulative tightening of 100-125bps during FY11.

To read the full report: LEAD INDICATOR INDEX

• As per their latest available forecasts for 2010, there is probability of delay in arrival of South-West monsoon, with the initial phase of onset and advancement witnessing below normal rainfall, especially in North coastal Andhra Pradesh, Vidarbha, Orissa, Chattisgarh, Jharkhand, Bihar and Gangetic West Bengal.

• The forecast however, sees high probability of revival in rainfall during the months of May, June and July (the period of maturity of rains), with most of these months recording normal rainfall. The fully mature monsoon (during the months of June, July and August) is expected to be normal.

• The prevailing El Niño condition over the Central Pacific ocean is expected to start fading out from July onwards. An El Niño condition, which is essentially the warming up of the Pacific waters, is said to weaken Asian monsoon. It had been one of the main reasons for the occurrence of three droughts in India in the recent past. Generally, the year following an El Niño year is considered to be favourable for Indian monsoons.

To read the full report: MONSOON 2010

The term “emerging economies” seems to have been coined sometime during the 1980s and became part of standard vocabulary during the 1990s. The term referred to economies that were neither “developing” nor “developed”. In practice, it referred to a group of upper-middle-income countries that attracted private capital following the first oil shock. After defaulting on their external loans during the 1980s, many of the emerging markets (EM), as they were soon called by Wall Street and the City, experienced often severe financial crisis during the second half of the 1990s and in the early 2000s. To be fair, developed economies also experienced various crises during that period (e.g. ERM crises) and a handful of EM reached per income levels comparable with, or even higher than, some of the developed markets (DM), which is why the IMF moved these countries into the “newly industrialised economies” (NIE) category. But the pun about the “submerging” emerging markets, for better or worse, continued to stick.

Following the 2008 crisis, the financial fortunes of DM and EM diverged rapidly. While many DM are witnessing rapidly rising public debt, large fiscal deficits and slower growth, most toptier EM weathered the global crisis much better in terms of public-debt sustainability and the short/medium-term growth outlook. The diverging fortunes have been reflected most strikingly in the concerns about debt sustainability in the so called Eurozone PIIGS. For instance, investment-grade Greece 5Y CDSs are currently trading at 280 bp vs sub-investmentgrade Indonesia and Turkey at 160 bp.

The rating agencies rated Greece A until very recently, while both Indonesia and Turkey carry a sub-investment-grade rating. The rating agencies rationalize this in various ways. Sovereign ratings assess creditworthiness “through” the cycle. Typically, the investor base in the DM is much broader, domestically and internationally. Capital markets are much deeper, and their sovereign debt structures are often (though by no means always) less vulnerable than in the average EM. Finally, DM debt service track records are typically very strong. While some of these arguments have some merit, the rating agencies almost certainly underestimate the improvement in the creditworthiness of EM sovereigns and potentially underestimate the deterioration in DM creditworthiness.

Past (surprise) EM crises seem to have made the agencies cautious about EM upgrades. At the same time, the agencies tend to be reluctant to downgrade a country by more than 1-2 notches a year given that they claim to rate “through” the cycle. Another problem is that by downgrading a sovereign aggressively the agencies may contribute to financing difficulties and thus trigger a sort of “self-fulfilling prophecy”. The reluctance to aggressively downgrade a DM in line with the markets’ assessment of sovereign default risk is therefore understandable, but it hardly justifies the fact that until very recently Greece and China carried pretty much the same long-term foreign currency ratings. It looks odd that Greece with very limited macroeconomic flexibility due to EMU membership and a public debt burden exceeding 100% of GDP should be rated at the same level as China whose public debt amounts to a mere 25% of GDP and whose FX reserves exceed 45% of GDP.

To read the full report: TALKING POINT

The large proportion of contracted external debt (regardless of the institutional sector) had in fact been identified as one of the main sources of external vulnerability of these economies at the time of the Asian crisis in 1997.

We shall show that in the 2000s the debt structure balanced gradually towards more stable and less risky domestic debt due primarily to the reduced exposure to foreign exchange risk. However, there are still persistent signs of financial vulnerability. First for certain countries, the balance has not been restored in all institutional sectors (public sector and non financial private sector in the Philippines; non financial private sector in Indonesia), second, new financial vulnerabilities have appeared as attested by the high debt levels (particularly concerning the non financial private sector in South Korea), which raises the issue of their medium term sustainability.

We propose in the context of this study to analyze the debt structure of six emerging economies in Asia (South Korea, India, Indonesia, Malaysia, Philippines and Thailand) by adopting both a time-factor and transversal viewpoint.

We were particularly interested in the debt of three institutional sectors: the government sector, the banking sector and the non financial private sector (households and corporate) over a period starting from the middle of the 1990s (pre-Asian crisis) to today.

The findings of this study can be summarized in three main points:

- Public sector:
• On the domestic level, India seems to show relative vulnerability linked to the long-term sustainability of public debt. This sustainability could be reassessed if the budget deficit were to worsen,

• On the external level, only the Filipino public sector seems to be relatively vulnerable due to the volatility of capital flows and the foreign exchange rate, caused by the non negligible proportion of external liabilities contracted with foreign private creditors. The other economies present no particular vulnerability linked to the public debt structure.

- Banking sector:
• On one hand, this sector’s proportion of external liabilities fell for all countries over the study period and on the other hand, the economies of the zone no longer have since the beginning of the 2000s, external currency mismatches on the balance sheet of these sectors. As a result, the economies of the sample present no specific vulnerability linked to the external debt structure of the banking sector.

- Non-financial private sector:
• On the domestic level, South Korea presents relative vulnerability with respect to the heavy debt burden of households and corporate which exposes them in the short-term to a greater sensibility of their net worth to an interest rate or income shock. Against a background of relatively limp global recovery, the high debt level strains also the potential of economic recovery given the limited possibilities of using debt to leverage growth. In the long term, there is also the issue of the sustainability of corporate debt and the solvency of this sector for which an adjustment would entail reduced investment.

• On the external level, Indonesia and the Philippines seem to be the economies that require watching due first to the non negligible proportion of externally-contracted liabilities, although these have been on a downward trend since 2001 (especially in Indonesia). A depreciation of the national currency would threaten the solvency of these sectors by increasing the burden of the liabilities owed.

To read the full report: DEBT STRUCTURE

In the absence of rigorous adherence to contractual provisions, project companies and sponsors have had to take on the burden of additional costs, either through the drawdown of available cash, the raising of equity, or the issuance of debt. Governmental concession‐granting authorities have also seemed willing to extend the schedule for project delivery. Banks, recognising these systemic constraints, and responding to the requests of project companies and concession‐granting authorities, seem willing to reschedule project loans, chiefly by postponing commencement of principal moratorium. This spirit of accommodation/adjustment‐ or ‘jugaad’ ‐ adopted by various project counterparties (including sponsors, bankers, contractors and the government) has prevented large‐scale rating downgrades. Nevertheless, the capacity for ‘jugaad’ is limited and in certain cases, projects remain vulnerable to specific event risks; as such, there could be selective ratings downgrades in 2010.

Fitch‐rated operating projects appear to have weathered the economic slow down without deterioration in credit profiles (beyond the initial stress scenarios). The pick‐up in user demand and revenue growth rates witnessed in recent months has contributed to Fitch’s stable outlook. The economic crisis dampened usage growth rates in the transportation sector, and some projects are struggling to achieve base case forecasts, but other operating projects are displaying resilience. Consequently, there may be select ratings upgrades for the Fitch‐rated debt of certain operating projects. Outside of Fitch’s rated universe, the agency has a largely stable outlook on the Indian infrastructure sector as a whole; this stems from the recovery following the economic slowdown witnessed in the second half in FY09. This recovery has been aided primarily by three factors: (a) renewed urgency displayed by the government to bid out new projects; (b) demand pick‐up on the back of higher GDP growth rates; and (c) favourable financial environment, including a buoyant equity market and banks awash with liquidity. All of these factors have contributed to a return of an appetite for risk on the part of the private sector.

Although achieving financial closure for greenfield projects has become a lot easier and quicker ‐ due to abundant bank liquidity in a favourable economic environment ‐ projects continue to be burdened with high interest rates, heavy gearing and medium‐term amortising loan tenors; all of which contribute to high risk profiles for such projects.

Project developers appear to be pricing some of the risk elements of past projects into their bids and return expectations for new road projects; this is a consequence of the National Highways Authority of India’ s (NHAI) inability to complete timely right of way (RoW) acquisitions or to permit partial tolling. Developers are also seeking to employ creative methods of overcoming public counterparty delays, including financing higher ROW upfront purchase prices and then filing for a concession extension after project delivery (COD).

To read the full report: INDIAN INFRASTRUCTURE

The large proportion of contracted external debt (regardless of the institutional sector) had in fact been identified as one of the main sources of external vulnerability of these economies at the time of the Asian crisis in 1997.

We shall show that in the 2000s the debt structure balanced gradually towards more stable and less risky domestic debt due primarily to the reduced exposure to foreign exchange risk. However, there are still persistent signs of financial vulnerability. First for certain countries, the balance has not been restored in all institutional sectors (public sector and non financial private sector in the Philippines; non financial private sector in Indonesia), second, new financial vulnerabilities have appeared as attested by the high debt levels (particularly concerning the non financial private sector in South Korea), which raises the issue of their medium term sustainability.

We propose in the context of this study to analyze the debt structure of six emerging economies in Asia (South Korea, India, Indonesia, Malaysia, Philippines and Thailand) by adopting both a time-factor and transversal viewpoint.

We were particularly interested in the debt of three institutional sectors: the government sector, the banking sector and the non financial private sector (households and corporate) over a period starting from the middle of the 1990s (pre-Asian crisis) to today.

The findings of this study can be summarized in three main points:

- Public sector:
• On the domestic level, India seems to show relative vulnerability linked to the long-term sustainability of public debt. This sustainability could be reassessed if the budget deficit were to worsen,

• On the external level, only the Filipino public sector seems to be relatively vulnerable due to the volatility of capital flows and the foreign exchange rate, caused by the non negligible proportion of external liabilities contracted with foreign private creditors. The other economies present no particular vulnerability linked to the public debt structure.

- Banking sector:
• On one hand, this sector’s proportion of external liabilities fell for all countries over the study period and on the other hand, the economies of the zone no longer have since the beginning of the 2000s, external currency mismatches on the balance sheet of these sectors. As a result, the economies of the sample present no specific vulnerability linked to the external debt structure of the banking sector.

- Non-financial private sector:
• On the domestic level, South Korea presents relative vulnerability with respect to the heavy debt burden of households and corporate which exposes them in the short-term to a greater sensibility of their net worth to an interest rate or income shock. Against a background of relatively limp global recovery, the high debt level strains also the potential of economic recovery given the limited possibilities of using debt to leverage growth. In the long term, there is also the issue of the sustainability of corporate debt and the solvency of this sector for which an adjustment would entail reduced investment.

• On the external level, Indonesia and the Philippines seem to be the economies that require watching due first to the non negligible proportion of externally-contracted liabilities, although these have been on a downward trend since 2001 (especially in Indonesia). A depreciation of the national currency would threaten the solvency of these sectors by increasing the burden of the liabilities owed.

To read the full report: DEBT STRUCTURE

Impact
■ With global economic growth firming – albeit in fits and starts — and monetary conditions likely to remain very loose for an extended period of time, the macro backdrop is, broadly speaking, supportive of healthy equity market conditions. Earnings forecasts are also far from unreasonable, in our view, compared to previous recoveries. All this adds up to a healthy outlook for Asian equities on a 12-month view (for more details on this see our recent note “Asia strategy: Would you buy Asia at 2.5xP/BV? You should!”, 2 February 2010).

■ But in the near term, Asia ex Japan is likely to remain range bound or even drift lower. Current valuation levels in many cases make for an underwhelming near-term risk/reward trade-off, and key cyclical indicators such as earnings revisions1 and the OECD LI (that are tightly correlated with Asian markets) are falling and are likely to continue to do so in the near term.

■ It is hard to overstate the importance of the fact that our earnings revisions indicator is falling – average returns are -25% when it is falling and Asia ex Japan has risen only once when this indicator has been falling and that was way back in 1991, when China’s economy was about 7% of its current size, India had a GDP per capita of US$315, and Korea‟s export-to-GDP ratio was about half what it is today.

Outlook
Despite this subdued near-term outlook for equity markets, there are pockets of value in Asia:

• Stocks that are plain and simply cheap, in an absolute level sense, have a high probability of outperforming. This applies under all market conditions. The best valuation metric to use here is P/BV and our latest screen features quite lot of Korean stocks (as it usually tends to) but also a surprisingly high number of Hong Kong/China stocks.

• China. China has been treated harshly in the recent sell-off, with the market the second worst performing this year. We say harsh because we don’t think China deserves this high-beta status – its earnings growth is relatively stable, it has a strong structural element to its growth rate (making it relatively resilient to external shocks), and it has policy flexibility. Looking ahead, with valuations now really quite attractive, growth likely to remain strong, earnings expectations very reasonable, and 2Q by far and away the (traditionally) strongest quarter for China, now is a very good point to start accumulating China stocks.
• Telcos. Not sexy. And some argue that they are a value trap. But telcos are, by far, the cheapest sector in Asia ex Japan and many of the stocks feature heavily on our screens for both value and dividend yield. With the balance of risks to markets skewed slightly to the downside in the near term, the odds of this sector continuing its recent run of outperformance is high, in our view.

To read the full report: ASIA STRATEGY

The buyers would seem to be European state related banks adopting a buy and hold strategy. At least that is what is suggested by the apparent lack of trading in the recently sold bonds and by the apparent banning of hedge funds from the sovereign bond sale. GREED & fear has no idea whether implicit promises of government guarantees have been made or not by the most relevant government. But the suspicion lingers. Meanwhile, GREED & fear is convinced that the last has not been heard of Greece’s fiscal problems or those of the related PIIGS. Investors fornow should assume continuing weakness of the euro against the US dollar.

Hopes are rising again for the cyclical prospects for the American economy. GREED & fear refers to the improving capex picture mentioned here last week (see GREED & fear - Temporary fudges, 4 March 2010). Then there are the markets’ hopes for better jobs data next month given the better than expected data announced last week in the context of a weather affected month. Thus, US nonfarm payrolls fell by 36,000 in February, compared with the expected losses of 68,000 jobs (see Figure 2). The consensus is now expecting about 300,000 new jobs generated in March. Finally, US consumer credit rose by US$5bn in January. This is the first such month-on-month gain in twelve months.

If all this indicates improving cyclical prospects, and therefore the potential for a renewed pick up in Fed tightening expectations, GREED & fear would also like to draw attention to the continued fundamental sickness of the all important US housing market; most particularly when federal government support actions are taken out of the equation. The fundamental weakness of housing can be seen in the continuing rising tide of mortgage delinquencies and foreclosures. Thus, US residential mortgages 90 days or more past due rose from 4.38% of all mortgage loans in 3Q09 to a record 5.09% in 4Q09, according to the Mortgage Bankers Association. While foreclosure inventory increased from 4.47% to a record 4.58% of outstanding mortgages over the same period (see Figure 4). The weak state of housing can also be seen in the collapse in the shelter component of the core CPI which captures the falling trend in rents. Thus, the shelter CPI index fell by 0.5% MoM and 0.1% YoY in January (see Figure 5). This is the biggest month-on-month decline in shelter costs since December 1982 and the first year-on-year drop since the data series began in 1953.

To read the full report: GREED & FEAR

■ Cherry-picking on margin strength…: A bank’s margin strength can be determined from a
combination of its liability franchise and composition of its asset franchise. With credit offtake showing signs of growth in spurts, franchise quality holds the key.

■ …and lower C/D ratios: We believe banks with higher C/D ratios may either need to cut back or witness a capping of opportunity for margin augmentation. Further, in an environment of lower pricing power, banks with better liquidity would be better equipped to tap the resurgence.

■ Asset quality to be watched closely: While certain banks would surprise positively in terms of NPL recoveries, this space needs to be watched closely. Within our banking universe, Indian Bank and IOB currently have the highest restructuring ratios and we reckon, with the improving macro-economic picture, the former should surprise positively, given its fundamental strength. Indian Bank’s current estimates do not factor in this upside.

■ Change of guard … now at PSU banks: We would see change of guard at several PSU banks in 2010. Management quality will likely become a key focus theme across the financial services space and a likely driver for valuations.

To read the full report: BANKING UPDATE

Shift in credit pricing from Benchmark Prime Lending Rate (BPL R) to Base Rate as minimum lending rate for banks…

Teaser home loan rates come to an end…Margins of banks, particularly PSBs, to come under strain