Foreign fund flows push shares 81% in 2009

Foreign fund flows push shares 81% in 2009
Financial Express, January 6, 2010, Page13

Reuters, Mumbai

Indian shares are no longer cheap after recording their biggest annual rise since 1991, investment strategists overseeing the country’s top performing equity funds for 2009 said on Tuesday.

Indian shares rose 81% in 2009, driven by a flood of foreign funds, stretching 12 months forward price to earnings multiple of India’s benchmark index to nearly 17 times, one of the most expensive in Asia.

“Markets are not cheap any longer... the earnings has come on the back of substantial fiscal and monetary stimulus,” Sankaran Naren, equities chief investment officer at ICICI Prudential Asset Management said in the Reuters Trading India chat room. “International valuations are cheap compared to Indian markets.

“In large caps, stocks are pretty fairly valued, so one does not see pure value picks there. However, in midcaps, there are some value picks,” Rajat Jain, chief investment officer of Principal Pnb Mutual Fund, overseeing Rs 8,000 crore of funds, also said in the chat room.

While Naren, who manages Rs 7,500 crore of equity assets, said his main bets were in the healthcare, telecom and utilities sectors, Jain prefers financials, consumer firms, construction, industrials and some infrastructure companies.

Principal’s funds, including its Emerging Bluechip Fund which rose 147.3% in 2009 as the top Indian fund, holds shares such as state-run State Bank of India and private sector lenders ICICI Bank and HDFC Bank.

Bad loans are not a serious concern and could even surprise positively, said Jain.

Sankaran Naren, whose ICICI Prudential Discovery Fund gained 134.3% in 2009, said he was overweight telecom as it is the sector which is seeing a cyclical downturn due to competition. “My belief is that it will work, there is too much crowding in other themes” he said.

His funds hold shares such as Bharti Airtel and Mahanagar Telephone Nigam Ltd.

“Pharma is very cheap given the certainty of earnings,” he said, adding he liked power utilities as a defensive bet. Drug firms Cadila Healthcare and and FDC are among his discovery fund’s top-5 picks. His investments from the utilities sector includes Tata Power Company and Indraprastha Gas.

Real estate was the one sector both the fund strategists said they were wary of.

“The sector is new to the stockmarket and we do not know how to value landbanks,” said ICICI’s Naren. “The sector is too volatile for investors.” Jain added that the problems of real estate firms were not behind them and they still faced execution challenges. These concerns were aired hours after Godrej Properties surged nearly 20% after listing at a 5.05% premium on its debut on Tuesday.

PE, VCs on road to raise $13-15 bn in 2010, say experts

PE, VCs on road to raise $13-15 bn in 2010, say experts
Business Standard, January 6, 2010, Section II, Page 3

Shilpy Sinha & Shivani Shinde/Mumbai

Investments to be company-specific; infrastructure to remain in focus.

Private equity (PE) players and venture capitalists (VCs) are back in the market to raise funds. Sector experts say 2010 will see these players raise $13-15 billion, almost on a par with what they raised in 2008.

PE players and VCs had raised $10-11 billion in 2009, though most of this was in the second half of 2009.

"We will see a 30-40 per cent rise in fund-raising this calendar year. We expect PE players and VCs to raise $13-15 billion,&" said Harish H V, partner, Grant Thornton.

"Close to 45 funds are either preparing to enter the market or have already hit the road to raise funds. While I feel that matching the level of 2007 is difficult, the year will be better than 2009,&" said Jagannadham Thunuguntla, equity head, SMC Capitals.

The increase reflects the growth that India Inc has continued to report even in the downturn. "Limited partners (LPs) are quite positive about India's economy. We do not expect any change in the fee or compensation structure,&" said Harish.

Industry experts say the year will be governed by returns. "LPs are going to focus on returns. We think the returns will be more than 20 per cent, better than in 2009,&" said a banker.

"I think LPs are still trying to rework their portfolios. It will be difficult for general partners to convince LPs to invest,&" said Thunuguntla.

Infrastructure, consumer services, education, healthcare, financial and clean technology will be the favoured sectors, say experts.

One sector that is already in focus is infrastructure. The players are in the process of raising close to Rs 8,541 crore ($1.78billion) worth of infrastructure funds. Out of this, Rs 6,800 crore are India-dedicated funds, according to data from Preqin.

Some players looking at the sector are Axis Private equity, ICICI Ventures and UTI Asset Management Company. "Investors will become company-specific rather than sector-specific. Good sectors can have bad companies and so it makes sense to focus on companies,&" said Thunuguntla.

Fund-raising by VCs already seems to be gaining momentum. "I am seeing an improvement in early-stage venture funding. My sense is that things will improve from the lows of 2009 but may not touch the high that was touched in 2007 and early 2008,&" said Alok Mittal, managing director, Canaan Partners. Norwest Venture Partners recently raised a $1.2-billion global fund.

Says Anil Ahuja of 3i. "Fund-raising will be more selective. It will be better in 2010 than what we saw in 2008-09. LPs will be more careful in allocating capital to first-time funds. Established funds will have it easier as LPs will feel more comfortable with funds with proven track records. The number of funds that get allocation from LPs will come down significantly,&" said Ahuja.

Telangana crisis pushes cement prices up

Telangana crisis pushes cement prices up
Business Standard, January 6, 2010, Section II, Page 4

Sohini Das/Ahmedabad

Production, despatch affected by turmoil; rail wagon shortage hits momentum.

The ongoing agitation for a separate Telangana state has disrupted supply and triggered a rise in cement prices in western parts of the country, especially the Mumbai region.

Andhra Pradesh (AP) has nearly 50 small and medium cement manufacturing units and the monthly output from these is normally between 2-2.2 million tonnes. Industry sources said Orient Cement and Andhra Cement are among those who had to shut their units for some days in December.

This is because the turmoil has not only affected demand but also transportation of the commodity via rail and road. There has also been a shortage of rail wagons since November, that had originally sparked a series of price rises across western and southern markets. Due to transportation uncertainties, some manufacturers had to shut production, as storage is a major issue with this commodity.

When asked, company officials declined to say anything; the Cement Manufacturers Association was not available for comment.

"Andhra accounts for nearly 60 per cent of the south Indian cement market and also supplies cement to the Mumbai and Gujarat market. The supply in AP has been impacted by around 10-12 per cent due to plant shutdown, which has also impacted its dispatches to the western markets," claimed Rupesh Sankhe, analyst with Mumbai-based Angel Broking.

Also, construction activity has almost come to a standstill in Andhra, with some companies like Bharat Forge even considering relocating operations to states like Gujarat.

"While demand has gone up in Mumbai, arrivals are yet to pick up. Despatches are expected to rise in some time. However, traditionally, February to May is a period of high demand and prices should be on the upward curve in the Mumbai region during this time," explained Sanjay Ladiwala, president of the Cement Stockists and Dealers' Association.

Currently, the wholesale billing price is Rs 250 for a 50-kg bag in Mumbai, while retail prices are around Rs 265 a bag, Ladiwala informed. This is up marginally by Rs 2-3 in the last one week and has increased by around Rs 10 per bag over November prices.

Prices in Andhra had firmed up from Rs 145 in October to Rs 155-160 by November-end, while in Karnataka and Tamil Nadu, the commodity was then selling for Rs 165 and Rs 175 per bag, respectively.

South Indian players were expected to go in for 'pricing discipline' after cement prices had crashed below Rs 140 in September-end, Sankhe said. Things are, however, very different now.

Should RBI raise interest rates?

Should RBI raise interest rates?
Business Standard, January 6, 2010, Page 8

Business Standard/New Delhi

A rate hike will set back the recovery process, but if RBI does raise rates, it will be to prevent the rise in food prices from spilling over to other sectors and to dampen inflationary expectations

Dharmakirti Joshi, Director and Principal Economist, Crisil Ltd

In its October policy, the Reserve Bank of India (RBI) had set the tone for monetary tightening. The exit from an accommodative monetary stance was signalled via reversing some of the unconventional liquidity-boosting measures announced earlier. Raising the SLR was one of them. RBI nevertheless refrained from explicit tightening via interest rate hikes as the recovery was considered fragile.

What has changed since then? Compared to October 2009, the economy now appears to be on stronger legs. The second quarter GDP growth of 7.9 per cent positively surprised market participants and policy-makers alike. Until the first quarter of this year, government spending was the key driver of demand in the economy. It still is, but now private consumption demand too is supporting it. Real private final consumption expenditure grew at 5.6 per cent in the second quarter versus 1.6 per cent in the first quarter. The investment demand too has picked up. Recent data shows that exports have started growing, albeit over a depressed base. All this has improved the growth prospects for the current fiscal, leading all the key forecasters to scale up their India growth estimates for 2009-10. While the economic scenario has improved significantly since October 2009, some concerns on the growth front still remain, given the uncertain global scenario.

Another development since the last policy is the pick-up in inflationary pressures. In its October policy, RBI had raised the fiscal yearend inflation target to 6.5 per cent. Given the speed with which inflation is rising, it is quite likely that this target will be breached much before that. The weak base of last year is further pushing inflation up. Under normal circumstances, a simultaneous rise in growth and inflation would have triggered a rate hike. The nature of inflation, however, makes the monetary policy decision quite complicated. The pressure on inflation is largely due to a supply shock from agriculture and not due to demand factors. For the month of November 2009, food inflation stood at 17 percent, fuel inflation was negative and manufactured product inflation was 4.0 per cent. The weekly data on food and fuel as on December 19 shows inflation is firming up in these categories from November levels. It is well understood that the spike in food prices cannot be arrested by raising interest rates. The pressure from supply side shock to food prices has, however, been persistent and is reflected in the double-digit inflation in the Consumer Price Index (CPI) since October 2008. This can spill over to general inflation if the demand is picking up and monetary conditions are easy. Raw material/commodity prices have also posted a significant rally recently. This has the potential to further pressurise inflation by raising the cost of production.

The nature of growth and inflation in India at the current juncture does pose a dilemma for RBI. When the downside risks to the economy had increased with the onset of recession in advanced economies, it was easier to decide on a swift rate reduction. With recovery gaining pace and inflation in the uncomfortable zone, there is little doubt that we will soon see an interest rate hike. But timing the rate hike in today's scenario is a major challenge not only for the Indian central bank but also for many others around the globe. If you raise rates too soon, you risk jeopardising the recovery that has just begun, and if you do it too late, you risk inflation.

The monetary policy has to be vigilant as it impacts the economy with a delay. Since the last policy announcement in October, the recovery is stronger and inflationary pressures are higher. I expect RBI to now move from implicit tightening to explicit tightening to address the potential second-round effects of food price increases on general inflation and also to tame inflationary expectations which are now rife. The danger in waiting for the recovery to firmly take hold is that it could be too late to tame inflation. RBI could begin with CRR hike and a 25 basis points increase in short-term interest rates in its January policy. Following that, interest rate increases could be calibrated, depending on the strength of the recovery and inflationary pressures.

Chandrajit Banerjee, Director General, CII

As India, and indeed the rest of the world, shows signs of recovering from the global economic crisis, the task of central bankers is becoming more complex. While the fiscal and monetary support has helped economic recovery, the recovery itself is not yet strong enough to warrant an increase in interest rates. Further, with the hardening of food prices, the RBI governor will face many calls to tighten policy at the third quarter review of Monetary Policy at the end of this month.

Yet it is worth examining the merits of an immediate tightening versus a wait-and-watch approach. While the recent numbers on industrial growth have been impressive, it is uncertain whether they can be sustained in the event of a withdrawal of monetary stimulus. The sectors which have been doing well are consumer-driven and, therefore, are sensitive to interest rates. Indicators of investment demand, such as capital goods production, still remain subdued. An increase in interest rates would serve to slow down consumer demand which could have a further negative impact on firms' investment plans. In any case, there is a risk that the weak monsoon will have a negative impact on rural incomes and hence on consumer demand. It is, therefore, quite likely that the recent pick-up in growth needs to be nurtured by a soft interest rate regime.

The main driver of both CPI and WPI inflation has been food prices, which have been increasing at a rapid rate. The price of food articles has increased by as much as 19-20 per cent during December, with the main contributors being cereals, pulses, fruit and vegetables, meat and fish. The main reasons for the sharp rise in food prices are the shortfall in food production and weakness in distribution. The deficiency in this year's monsoon has led to a sharp 18 per cent drop in the kharif food grain output. This could have been offset through wider disbursement of government stocks. However, the government response in terms of distribution has been poor, as indicated by food stocks remaining far higher than what is required as per the buffer norms.

It is clear that food prices are being driven up by certain structural and policy-induced factors. The effectiveness of monetary policy in dealing with this is questionable. Monetary tightening will be a blunt instrument, curbing demand across sectors when the problem clearly lies in a single sector.

Another concern is that interest rates are already high in India due to the impact of a sudden increase in government borrowing following the onset of the global financial crisis. The benchmark yield on 10-year government securities has hardened from a low of below 5.0 per cent in January 2009 to about 7.6 per cent currently. This has, to some extent, off-set the impact of monetary easing, so actual lending rates have not declined to the same extent as policy rates.

Bank credit disbursals have just started picking up from a 12-year low, though the banking system still has surplus liquidity as indicated by the amount of funds being parked with RBI in its daily reverse repo auctions. Recent data for the week ending December 18 shows that while the year-on-year increase in banks' credit is just 11.3 per cent, banks' investment in government bonds has increased by 24.2 per cent. An increase in RBI's policy rate at this stage would only encourage banks to stay away from commercial lending, rewarding them for their risk-averse behaviour.

Monetary tightening would only result in a further increase in bond yields which would increase the government's interest costs and pose a challenge to fiscal consolidation. Instead, it would be important for the government to stick to its borrowing targets for this year and try to reduce its borrowing in the coming year. Once private sector demand picks up, it will be difficult to sustain the government's current level of borrowing. Raising interest rates without first reducing government borrowing will only lead to the private sector being "crowded out&".

Real Estate Intelligence Service, Tuesday, January 05, 2010

Nath invites Malaysian cos to invest in highways sector

Nath invites Malaysian cos to invest in highways sector
The Financial Express, January 5, 2010, Page 11

Press Trust of India, Kuala Lumpur

India has achieved construction of 9 -km roads per day and the target of developing 20-km daily would be accomplished by this April, road transport and highways minister Kamal Nath said here on Monday.

‘‘We have reached 9-km per day of road construction and will hit our target of 20-km a day by April,’’ Nath, who is here to invite the Malaysian companies to enter the highway construction sector in India, said.

As many as 35 Malaysian companies are already involved with various infrastructure projects in India.

To have a 20-km of road construction a day or 7,000 km of roads a year, there has to be 20,000 km of work in progress, he noted.

The minister said between November 2009 and June 2010 contracts worth $20 billion would have been awarded. Referring to land acquisition, he noted that states would also need to address the issue. The transport and highways minister stressed that mega infrastructure projects would not be awarded to small companies.

‘‘Medium-sized companies should take more jobs and aspire to become bigger. If small companies take big projects I may not have the roads,’’ he said, adding such companies may not even be able to get finances.

‘‘We don’t want companies to take on more than they can chew. We also don’t want hoarding of contracts,’’ he added.

Now, green norms mandatory for new government buildings

Now, green norms mandatory for new government buildings
The Financial Express, January 5, 2010, Page 11

Press Trust of India, New Delhi

New government and public sector undertakings (PSUs) buildings will have to mandatorily comply with new green rating norms to tackle climate change threats.

‘‘This decision was taken by the Centre two days ago to ensure that buildings are environment-friendly aiming to achieve high energy utilisation,’’ minister of new and renewable energy Farooq Abdullah said on Monday at a function here.

The minister said all new buildings of government and PSUs will have to comply with the requirement of at least 3 star rating under the Green Rating for Integrated Habitat Assessment (GRIHA).

Efforts will be, however, made for higher rating by such buildings subject to the site condition as western rating systems are not suited for Indian climate and GRIHA has been designed exclusively for Indian buildings, the minister added.

GRIHA is a national rating system under which green buildings will be rated by technical expertise from Teri, The Energy Resources Institute, headed by RK Pachauri.

The aim of a green building design is to minimise the demand of non-renewable sources and maximise its utilisation.

While emphasising on integrating traditional heritage with scientific tools, the minister suggested that even small dwelling units being constructed under the Indira Awas Yojna be brought under the GRIHA ambit to ensure sustainability.

Deepak Gupta, secretary in the renewable ministry, said CPWD has already adopted GRIHA rating and efforts are being made to spread awareness in this direction among the concerned stakeholders including builders, architects.

‘‘A technical group has also been constituted to study the feasibility of GRIHA in larger areas such as townships and campus. The team will submit its report within the next six months,’’ Gupta said.

Buildings will be rated on the basis of design, system design, including ventilation, water and waste management, indoor environmental quality and selection of ecologically sustainable materials.

Pachauri said, ‘‘The country is witnessing rapid boom in construction industry and the primary objective of the rating system is to help design green buildings and in turn help evaluate the greenness of buildings’’.

Regulation came too late to stop housing bubble, says Bernanke

Regulation came too late to stop housing bubble, says Bernanke
The Financial Express, January 5, 2010, Page 18

Bloomberg

Federal Reserve chairman Ben S Bernanke said low central bank interest rates didn’t cause the housing bubble of the past decade and that better regulation would have been more effective in curbing the boom.

“The best response to the housing bubble would have been regulatory, rather than monetary,” Bernanke said on Sunday in remarks to the American Economic Association’s annual meeting in Atlanta. The Fed’s efforts to constrain the bubble were “too late or were insufficient,” which means that regulatory actions “must be better and smarter,” he said.

Bernanke said the Fed is improving supervision of banks and has strengthened measures to protect consumers of financial products. Senate Banking Committee chairman Christopher Dodd, who backs Bernanke for a second term, has called the Fed’s oversight of bank lending before the crisis an “abysmal failure.” Dodd proposes stripping the Fed and other agencies of bank supervision powers and moving them to a new regulator.

Scholars such as Allan Meltzer, a historian of the central bank, have criticised the Fed for helping fuel the housing boom by keeping interest rates too low for too long. The bursting of the housing bubble led to the worst recession since the Great Depression and the loss of more than 7 million US jobs.

“It sounds a little bit like a mea culpa,” said Randall Wray, an economics professor at the University of Missouri in Kansas City, who was in Atlanta and didn’t attend Bernanke’s speech. “The Fed played a role by promoting the most dangerous financial innovations used by institutions to fuel the housing bubble.”

Senator Richard Shelby of Alabama, the senior Republican on the Banking Committee, has said Bernanke failed to anticipate the crisis that led to Fed-backed bailouts of financial firms including Citigroup Inc. and American International Group Inc and doesn’t deserve a second term as Fed chief.

Shelby, at a Dec 17 committee vote on Bernanke’s nomination to a second four-year term starting next month, said the former Princeton University professor “missed clear signals” when he was a Fed governor from 2002 until 2005. Bernanke still must be approved by the full Senate. Bernanke didn’t discuss the outlook for the US economy or Fed monetary policy in Sunday’s speech.

Bernanke said increased use of variable-rate and interest-only mortgages, and the “associated decline of underwriting standards,” were more responsible for the bubble than low rates.

UK mortgage approval numbers rise

UK mortgage approval numbers rise
The Financial Express, January 5, 2010, Page 18

Reuters, London

British lenders approved the highest number of mortgages for house purchase since March 2008 in November and the Bank of England’s preferred gauge of money supply showed a marked pick-up, official figures showed on Monday.

The data come hot on the heels of a surprisingly positive manufacturing survey and will likely strengthen expectations that the BoE will not extend its 200 billion pound quantitative easing policy once the remaining funds are spent during the next month. The Bank of England said mortgage approvals numbered 60,518 in November, rising from an upwardly revised 57,718 in October and more than double its record low of 27,162 set in November 2008. Analysts had forecast a reading of 58,000.

They are consistent with our more constructive view on UK housing as well as for overall economic growth this year. The BoE’s preferred money supply gauge—M4 excluding intermediate other financial corporations—rose by 0.9%, its fastest monthly pace since April, and the three month annualised rate picked up to -2.2% from October’s -5.2%.

Dubai makes history in hard times, again

Dubai makes history in hard times, again
The Financial Express, January 5, 2010, Page 20

Reuters, Dubai

Started at the height of the economic boom and built by some 12,000 labourers, the world’s tallest building opened on Monday in Dubai as the glitzy emirate seeks to rekindle optimism after its financial crisis.

Burj Dubai, whose opening has been delayed twice since construction began in 2004, would mark another milestone for the deeply indebted emirate with a penchant for seeking new records.

Dubai, one of seven members of the United Arab Emirates, gained a reputation for excess with the creation of man-made islands shaped like palms and an indoor ski slope in the desert. With investor confidence in Dubai badly bruised by the emirate’s announcement in November that it would seek a debt standstill for one of its largest conglomerates, the Burj Dubai is seen as a positive start to the year after a bleak 2009.

The project has been scrutinised by human rights groups, who have objected to its treatment of laborers, as well as by environmentalists who said the tower would act as a power vacuum, increasing the city’s already massive carbon footprint.

But despite the criticism, many say the edifice, believed to have cost $1.5 billion to build, is an architectural marvel. The tower’s height has been kept a closely guarded secret until now. Developer Emaar Properties PJSC will reveal the height—known to exceed 800 meters (2,625 feet)— on Tuesday and Dubai’s ruler will inaugurate the opening.

Experts believe Dubai’s recent financial troubles have not hurt sales of approximately 1,100 residential units in the Burj —meaning tower in Arabic —saying they were nearly all sold. Dubai’s real estate sector crashed at the end of 2008 when the global financial crisis hit the emirate after a six-year economic boom. Thousands of jobs were slashed and projects worth billions of dollars were canceled or delayed.

With analysts suggesting tax-free Dubai might sell some of its assets to boost revenues and slash $80 billion in debt, many wondered if the tower was on the list for grabs. Dubai, with few natural resources of its own, expects a budget deficit of 2% of GDP this year.