Shanghai Index Fiasco and The Ongoing Currency Crisis

Markets over the globe are currently witnessing turmoil in their positions. Indian markets have washed away the gains of the year 2015 already. US on the other hand is looking range-bound. Japan is still struggling to have a consistent growth path. Chinese stocks trembled almost 25% from its peak in 3 months time, although they are currently at double the levels of what they were a year ago. Almost each Asian country is facing the distress. In this blog, we are looking at what caused the Shanghai Index fiasco which forced China to devalue their currency. We will be focusing on ‘ In what ways India would be affected’ as well.

The decelerating Chinese growth rate has been the hot topic lately. What was happening in China internally that caused the fiasco? China, post 2008 sub prime crisis, was the fastest growing country among the emerging markets till the end of 2014. Chinese markets witnessed their index doubling. So what happened that caused the slowdown?GDP started reducing from 11.9% to 7% by 2014. China, to boost its growth in the past 5 years, had been implementing some fundamentally dangerous decisions that it made. There was reckless credit disburse in the economy to boost the credit growth. They missed out the possibility that the investments in the country might dry out. China was first hit majorly by the fear of Grexit in the early 2015. Since emerging markets were starting to look vulnerable, the foreign investors started pulling out the funds to invest into safe havens such as the US treasuries . This caused the Shanghai index to tank as much as 13% in a couple of days. The Chinese central bank then thought that may be they should try inducing some growth measures and turn the sentiment around. To be precise, they wanted to continue the bull run without letting the markets correct, which is also known as synthetic bullish market in technical terms or a bubble. People’s Bank of China thus decided to reduced their interest rates and also their reserve ratios. It led to excess liquidity with the banks. The credit growth had already reached its saturation point. Later, the PBOC ( People’s Bank of China) decided to allow this additional credit to the individuals against a collateral to invest into markets to keep the buying spree intact. The above steps did make a slight difference in the stance, but the overall sentiment was still negative.

Just when the markets were consolidating, China’s securities regulator announced a series a IPOs. This led to a sell off in the secondary markets, since the investors wanted to accumulate funds to subscribe heavily for the IPOs. It led to a selling pressure in the markets and thus causing it to fall further. China’s securities regulator banned the shareholders with large stakes in listed firms from selling for 6 months time-frame to stop the fall. Investors who were given margins loans started defaulting due to the heavy losses in the equity markets. Chinese regulator then finally had to cancel all the pending IPOs after another 8% fall in the Shanghai Index which was one of the biggest 1 day loss in the past 8 years.

Despite the unconventional measures taken by China, they could not stop the sentiment driven fall. It was a clear indication that the fundamentals of the country are under stress and the economy is showing signs of weakness. The PBOC hence decided to devalue its currency in the wake of weak economic data. It is also suspected that China might look to devalue yuan if slowdown persists. Chinese yuan is pegged with USD based on a daily reference rate. When yuan was devalued, the USD appreciated against the yuan thus causing the rupee to slide from 63/$ to 65.8 Rs/$. Rupee, which was the most stable currency of the year 2014, started to look vulnerable and it was clear that it might have a serious impact on the macro economic indicators.

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India will be affected on various fronts because of the sudden yuan devaluation. Depreciating rupee will trigger the high import costs, predominantly of crude oil and gold. But thanks to the falling crude prices, it will keep our import burdens in control provided rupee does not slip further. On the other hand, the exports will be benefited since they will be competitive. But a recently published data indicated that the export growth has been at the sluggish levels of 3%. Overall looking at the situation, we might see our fiscal deficit and current account deficit widening despite competitive exports, but the growth prospects will be intact provided the reforms are rolled out in time.

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Despite the currency crisis, I would still say India is better off compared to any other emerging economy. The Russian Ruble, South African Rand, the Indonesian Rupiah have all depreciated to the extent of 15-20% against the USD in this yuan devaluation move, while the Indian rupee has depreciated by 2% so far. Although, Rupee is hovering around 65/ $ (Levels which were last seen in Sept 2013), it is unlikely that we might have any impact in terms of inflows and investments. India which was considered one of the “FRAGILE FIVE” two years ago, is looking remarkably stable if one looks beyond day-to-day action. Interest rates are dropping, too slowly but nevertheless. In terms of stability, at the moment India looks quiet good in an uncertain global situation. While in the short term perspective the market movements are neutral, the long term perspective persists to be bullish in nature according to me.

Thank you 🙂

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The Volatile Oil Prices and the way forward…

We all have always been wondering how exactly do the oil prices react or move based on global sentiments and for what we all say “ye global gyan se oil prices pe kaisa effect padta hai??”.Well this is how it probably does. This is how I am analyzing it to be, the conditions today and the way forward.

Whats currently being going on is the ongoing deal discussions between the US and Iran. Well I will focus on that at the end of this one. Lets talk about what is been happening in the US lately. First and foremost thing is the reduction in the rig counts. Now what does this rig counts mean is the number of drilling rigs actively exploring or extracting oil or natural gas. Note here that Baker Hughes (the US giant which maintains the data on oil production) only counts the active rigs. This reduction in the rigs is the sentiment causing to believe that the oil production in US has slightly come down and that kinda explains the reason why the oil prices have jumped back to “$55 ish” recently. Apart from this the upward pressure is due to the weather conditions in Iran and the violent situation in Libya. Although the price did not suddenly spike up despite rig count reduction, because US was trying to optimally product maximum amount from their most productive wells. But recently Baker Hughes reported another reduction in the rig count, which definitely started affecting the supply and prices started inching up with time. On the other hand, US has its highest inventory of shale oil in the past 33 years, EOG Resources being the largest shale oil producer. Oh and yes we cant forget the invisible shale oil inventory though, estimates are that still companies have left 3000 wells untapped. That is a huge amount of inventory eh?? So we can actually not expect much demand from US for a while I must say.

The reason currently this serious and weirdest upward pressure is also because of the Saudi attacks on Yemen. Although Yemen is not a significant producer of oil, next to it passes the fourth busiest oil shipping bottleneck. Any guesses on that shipping bottleneck?? 😉 Yemen lies on one side of Bab el-Mandeb ( the fourth busiest oil shipping bottleneck I was talking about volume wise)

China, Japan’s recession (waat lag gayi hai boss unki toh) and the Euro Zone all showing slowdown, although ECB Chairman claims that Euro Zone is  revamping and the QE is working for them as such. Naturally the demand from those countries is going to be subdued for at least the following two quarters I suppose. China has just last night reported a GDP growth of 7%, the lowest since 2008.

And what to say about the OPEC countries. (*sigh*). They are in the condition to sell at whatever the hell price they can sell it at so no supply curtailing from them very soon.

Ah finally the most happening thing in the oil markets, the US IRAN nuclear deal. The agreement, which is aimed at curbing Iran’s nuclear program in return for the lifting of economic sanctions on the country, is to be finalized by June 30. If this deal is finalised then Iran is expected to pump up its production by the end of the next quarter thus increasing the supply in the markets again.

The way forward: 

Oil markets has been a game of demand supply dynamics and some absolutely political moves by these middle east countries. But anyway going forward the demand for oil is expected to increase for a month or so since the US maintenance season is going on, rather to be precise US will be back with its refineries producing by May end. Although in the short term we are unlikely to expect a sharp rise in the prices due to oversupply but in the long term oil will likely come back to around $75-80 levels. As far as India is considered, we are having a fantastic time with the oil prices staying low for a while (especially Mr. Finance Minister in meeting in petrol subsidies for the year :P). And I guess that is why MoF is also targeting for the Capital Account Convertibility with oil prices being favourable. Fingers crossed. Every time we have thought of Capital Account Convertibility  a crisis has occurred. Hope RBI and the MoF implement it at the right time and with the most reliable economic conditions in place. 🙂

Thank you.

Depositories Paying Dividends and Interim income??

SEBI has recently made some moves for making the depositories (an organisation which holds securities like shares, debentures, bonds, government securities, mutual fund units etc) the authority of distributing non cash as well as cash benefits. Now I would call that a real smooth way of trading for the investors.

What it implies is the benefits such as dividends, bonus shares,  interest payments etc will be given by the organisation holding the securities instead of the companies which issue them. This is really going to create a single point of contact for an investor for all his queries and requests. Centralised payments are always the best way of keeping track and increasing the efficiency.

The way NSDL (one of the depositories) has taken steps to facilitate this is by applying for the “Payment Bank” licences to RBI. Payment banks can only accept deposits up to 1 lakh and make payments whenever necessary.

Last year around 400 complaints were lodged for non receipt of dividends which was not really easy to trace and resolve for SEBI since each one was concerned to a different entity altogether.


My Take:

A big thumbs up for the move and that too strategically merged with payment bank licence. This move will really boost the market operations in an efficient way. I feel the only problem is are we ready with that kinda infrastructure to support that purpose?? Also the bank details of all the investors may be available partially which creates risk of wrong remittances as such. The financial inclusion and awareness, linking of adhaar to bank accounts( although adhaar is of no use apart from address proof for sim cards at present 😛 ) may help to resolve this problem. With this I hope the markets become more robust towards protecting investor rights and giving them a hassle free trading experience.

Thank you.

The Brand New “Real Estate Regulatory Bill”

The new and the very stringent Real Estate Regulatory Bill was passed in the Union Cabinet last week. Now that is something I would call a bill that would change the real estate business or rather to say ” the way of doing real estate business (positively and negatively)”. Concerns have always been there regarding the integrity, confidentiality and customer’s interest and bla bla bla. This bill has its prime focus on the eradication of the malpractices in the real estate. The most common malpractice being the diversion of the funds from one project to another based on the demand.

Some key points of the Dashing Real Estate Regulatory Bill:

  1. Buyers who have book a house can see the progress of the project online and lodge a complaint with the regulator if not on schedule.
  2. Only project registered with the regulator will be allowed for sale
  3. Builders will be depositing half of the booking money in an escrow account so that the end use of funds is administered.
  4. Before marketing the project, all the clearances must be in place.
  5. Online portals as well might come under this bill to showcase on those properties which are registered (housing.com, Indiaproperty.com etc)
  6. Setting up a special tribunal for decision making within 60 days.

My take:

I dont know about the passing of the bill ( it might even be passed) but the implementation?? i really doubt its efficiency. Mostly importantly the centre’s bill is not a binding on all the states (wheres the uniformity of the law). The money to be deposited in the escrow is going to be huge problem to track, (lets not forget we live in India for god sake we own the “black money” market), how is the regulator going to manage that I really cant predict at this point of time. That is why I said it might change the way of doing business which might as well become worse. But some of the points of registration and clearances are fantastic for the buyer’s interest.

Last but not the least regulations always come with a cost, both for the builder and subsequently for the buyer as well. The real estate prices are already sky high, the regulation is going to make it worse to buy (at least in the metro cities).

So for all those wanting to buy a flat in a nice lavish project in metros gear it up!!! 😉  Others with individual plots of less than 10000 sq.ft of area can relax..that bill wont be applicable anyways.

Thank you.