Monday, April 13, 2009
US economy showing glimmer of hope: Obama
US economy showing glimmer of hope: Obama
The Economic Times, April 12, 2009, Page 4
Reuters WASHINGTON
PRESIDENT Barack Obama said on Friday the recession-hit US economy was showing "glimmers of hope" despite remaining under strain and promised fur-ther steps in coming weeks to tackle the financial crisis."We've still got a lot of work to do," Obama told reporters after a meeting with economic and regulatory teams plus Federal Reserve Board Chairman Ben Bernanke. But he added, "We're starting to see progress."
Obama spoke a day after encouraging trade and jobless figures pushed stocks higher, and White House economic adviser Lawrence Summers predicted the economy would emerge from a sense of "freefall" by the middle of the year. Less than three months into his presidency, Obama stopped short of declaring that the recession he inherited from predecessor George W. Bush was bottoming out.But he offered a somewhat more upbeat tone than he has recently on the state of the economy, which is locked in its worst crisis in decades. "What we're starting to see is glimmers of hope across the economy," he said.
"Over the next several weeks, you'll be seeing additional actions by the administration," he added but gave no details. Obama made no mention of "stress tests" being conducted at 19 major U.S. banks. The results, due at the end of April, are anxiously awaited by the financial markets. The White House had said At tempting to assess banks' capital needs, the government is testing how they would fare under more adverse economic conditions than are expected.
Mindful of market sensitivity, the Treasury Department is asking banks not to talk about the stress tests as part of their first-quarter earnings results, according to a source familiar with government discussions. Asked whether banks were being told to be silent, Obama adviser Austan Goolsbee told Fox Business Network: "You ought to wait until the proper announcement time of all the bank examinations together, rather than have individual banks come run-ning forward revealing their individual information alone."
Obama did say, however, that he and his advisers discussed a program to use public private sector investment funds to help banks clear their books of toxic assets. He also voiced confidence that his administration was addressing problems in both the troubled banking system as well as non-bank financial institutions, a sector that escaped adequate regulatory scrutiny before the latest crisis.Obama was briefed by Bernanke, Summers, Treasury Secretary Timothy Geithner, Federal Deposit Insurance Corp Chairman Sheila Bair, Securities and Exchange Commission chair Mary Schapiro and US Comptroller of the Currency John Dugan.
Obama cited improvement in small business financing and what he called a "very significant" pickup in mortgage refinancing needed to stabilize the troubled housing market.
The Economic Times, April 12, 2009, Page 4
Reuters WASHINGTON
PRESIDENT Barack Obama said on Friday the recession-hit US economy was showing "glimmers of hope" despite remaining under strain and promised fur-ther steps in coming weeks to tackle the financial crisis."We've still got a lot of work to do," Obama told reporters after a meeting with economic and regulatory teams plus Federal Reserve Board Chairman Ben Bernanke. But he added, "We're starting to see progress."
Obama spoke a day after encouraging trade and jobless figures pushed stocks higher, and White House economic adviser Lawrence Summers predicted the economy would emerge from a sense of "freefall" by the middle of the year. Less than three months into his presidency, Obama stopped short of declaring that the recession he inherited from predecessor George W. Bush was bottoming out.But he offered a somewhat more upbeat tone than he has recently on the state of the economy, which is locked in its worst crisis in decades. "What we're starting to see is glimmers of hope across the economy," he said.
"Over the next several weeks, you'll be seeing additional actions by the administration," he added but gave no details. Obama made no mention of "stress tests" being conducted at 19 major U.S. banks. The results, due at the end of April, are anxiously awaited by the financial markets. The White House had said At tempting to assess banks' capital needs, the government is testing how they would fare under more adverse economic conditions than are expected.
Mindful of market sensitivity, the Treasury Department is asking banks not to talk about the stress tests as part of their first-quarter earnings results, according to a source familiar with government discussions. Asked whether banks were being told to be silent, Obama adviser Austan Goolsbee told Fox Business Network: "You ought to wait until the proper announcement time of all the bank examinations together, rather than have individual banks come run-ning forward revealing their individual information alone."
Obama did say, however, that he and his advisers discussed a program to use public private sector investment funds to help banks clear their books of toxic assets. He also voiced confidence that his administration was addressing problems in both the troubled banking system as well as non-bank financial institutions, a sector that escaped adequate regulatory scrutiny before the latest crisis.Obama was briefed by Bernanke, Summers, Treasury Secretary Timothy Geithner, Federal Deposit Insurance Corp Chairman Sheila Bair, Securities and Exchange Commission chair Mary Schapiro and US Comptroller of the Currency John Dugan.
Obama cited improvement in small business financing and what he called a "very significant" pickup in mortgage refinancing needed to stabilize the troubled housing market.
IBA asks PSBs to help realty cos finish projects
IBA asks PSBs to help realty cos finish projects
The Economic Times, April 12, 2009, Page 5
ON A CASE-TO-CASE BASIS, BANKS COULD DECIDE ON FURTHER FINANCIAL HELP
Our Bureau NEW DELHI
IN A sign of relief for cash-strapped realty companies facing tight credit situation, Indian Banks Association has told public sector banks to consider extending financial assistance for incomplete projects. A large number of real estate projects are stuck as demand for homes and offices have dried up and credit availability is extremely tight for property companies.
“The committee (managing committee of IBA) took a view that banks, which had already extended finance to projects, which are incomplete, could, on a case-to-case basis decide on the need to extend further financial assistance to bridge funding gap for completion of the projects,” said IBA in a letter to Confederation of Real Estate Developers’ Association of India (Credai). IBA members include banks from both public and private sectors.
Credai chairman Kumar Gera said IBA’s move will help ease liquidity situation for real estate developers. Added NCR-based ATS Infrastructure MD Getamber Anand: “It’s a chicken and egg situation for real estate developers today. Since developers don’t have enough liquidity, they can’t construct, which forces home buyers to stay away from the market adding to liquidity woes. If bank finance is made available, builders will be able to construct and that will give buyers a confidence to put in money in realty projects.”
Mr Gera says IBA’s letter is carefully worded and it will depend on how different banks follow it. Banks have been very cautious about lending to real estate sector and whenever they are making loans, it is on higher interest rates and against increased collaterals.
“Developers are paying interest at an average rate of 17% for any loan from banks these days. This rate is unaffordable especially since property prices have fallen,” says Mr Gera.
In December, Reserve Bank of India(RBI) had allowed restructuring of loans for commercial real estate, following which several realty firms have got their loans restructured. “Getting a loan restructured is not at all easy. Banks are charging a very high processing fee and even raising interest rates for the restructured loans,” says Pune-based Kumar Builders chairman Lalit Kumar Jain.
The Economic Times, April 12, 2009, Page 5
ON A CASE-TO-CASE BASIS, BANKS COULD DECIDE ON FURTHER FINANCIAL HELP
Our Bureau NEW DELHI
IN A sign of relief for cash-strapped realty companies facing tight credit situation, Indian Banks Association has told public sector banks to consider extending financial assistance for incomplete projects. A large number of real estate projects are stuck as demand for homes and offices have dried up and credit availability is extremely tight for property companies.
“The committee (managing committee of IBA) took a view that banks, which had already extended finance to projects, which are incomplete, could, on a case-to-case basis decide on the need to extend further financial assistance to bridge funding gap for completion of the projects,” said IBA in a letter to Confederation of Real Estate Developers’ Association of India (Credai). IBA members include banks from both public and private sectors.
Credai chairman Kumar Gera said IBA’s move will help ease liquidity situation for real estate developers. Added NCR-based ATS Infrastructure MD Getamber Anand: “It’s a chicken and egg situation for real estate developers today. Since developers don’t have enough liquidity, they can’t construct, which forces home buyers to stay away from the market adding to liquidity woes. If bank finance is made available, builders will be able to construct and that will give buyers a confidence to put in money in realty projects.”
Mr Gera says IBA’s letter is carefully worded and it will depend on how different banks follow it. Banks have been very cautious about lending to real estate sector and whenever they are making loans, it is on higher interest rates and against increased collaterals.
“Developers are paying interest at an average rate of 17% for any loan from banks these days. This rate is unaffordable especially since property prices have fallen,” says Mr Gera.
In December, Reserve Bank of India(RBI) had allowed restructuring of loans for commercial real estate, following which several realty firms have got their loans restructured. “Getting a loan restructured is not at all easy. Banks are charging a very high processing fee and even raising interest rates for the restructured loans,” says Pune-based Kumar Builders chairman Lalit Kumar Jain.
Mumbai, Gurgaon residential mkts likely to see oversupply
Mumbai, Gurgaon residential mkts likely to see oversupply
The Economic Times, April 12, 2009, Page 4
Raja Awasthi & Sanjeev Sharma NEW DELHI
THE residential sector, which has already seen a 15-20% price correction in markets across the country this year, is going to witness a significant residential supply over the next 12 to 18 months in two key markets Mumbai and Gurgaon (NCR). The direct implication of the over supply will be that the rentals will come down drastically which could lead to a further price correction over a prolonged period of time (one to two years).
Says Niranjan Hiranandani, MD, Hiranandani Developers: ”There is no over supply in the Mumbai market. In last one month there has been a good sale of apartment as far as Mumbai market goes. There was a short phase and thing are changing. There has been softening of prices, but things will look up from May onwards. This is all a temporary slowdown and the market will pick up.”
Morgan Stanley Research Asia Pacific reveals that in the next few months mid Mumbai micro market will get six to seven lakh million sq ft of residential space as compared to negligible delivery over the last couple of years. In fact the Mumbai market has seen a 50% rental correction in prime areas from Rs 2 lakh for a three BHK in 3Q 2008 to Rs 1.1 lakh now. Rohtas Goel CMD, Omaxe Group & president Naredco said: “The low sentiments majority of buyers are in wait and watch policy. After the recent price cut by the developers by squeezing their margins to the minimum level and interest rate cut by banks, we don’t foresee any further price correction in the real estate.”
In fact, in many markets, the level of transactions have gone down drastically, which has resulted in this dip. This is also because residential capital values in some micro markets in the metros have shown a negative growth in the last one quarter.
Says Santhosh Kumar, deputy CEO of Jones Lang LaSalle Meghraj (JLLM): “In the current real estate scenario, what is being observed is a stabilization of select markets. A consistent upswing is not possible in any market. When a large level of supply is in the offering. Real estate markets have observed high growth levels in the recent past. However, in certain areas, market stabilization has been observed. This indicates that there are not many buyers for the prices quoted for various real estate typologies at this point of time.”
In various markets, despite a slowdown in demand, essentially from the end-user and speculative investors, developers have refrained from reducing rates. But both in Mumbai and Gurgoan now developers are offering 25% to 30% discount on the market rate. Sales in secondary markets have also taken a beating with very few transactions taking place at relatively lower price points than market expectations.
Steel & cement showing signs of revival, local demand strong: Chawla
Steel & cement showing signs of revival, local demand strong: Chawla
The Economic Times, April 13, 2009, Page 9
After taking a series of steps to help the economy sail through the worst times in several decades, the government is now gauging how the economy is responding. Ashok Chawla, secretary, department of economic affairs (DEA) in the finance ministry, talks to Soma Banerjee, Deepshikha Sikarwar and Gireesh Chandra Prasad of ET about the economy’s prospects as well as the decisions taken by world leaders at the recent G20 meeting. Excerpts:
Have we started seeing the fruit of the measures taken by the government to boost growth? Your estimate of the growth in 2008-09 fiscal?
In some sectors such as cement and steel, we have seen clear signs of revival. We have not seen too much decline in domestic demand except in real estate, which has different structural issues.
The affected sectors are those that are dependent on exports such as gems and jewellary and apparels. If exports, accounting for one-fifth of the country’s GDP, are affected, then it is bound to have impact on industrial output. Had our economy been more export dependent, the impact would have been worse as in the case of China, where two-fifth of economic output is dependent on exports. We may post a growth of 6.5% or slightly more in 2008-09 fiscal. Public investment in the fourth quarter of the last fiscal grew significantly due to the economic stimulus packages. We expect the fourth quarter of the last fiscal to do better than the third.
What about the current fiscal?
The negative sentiment about global growth is coming from bodies like the OECD and the IMF. That does not apply to India. Growth may be flat or of modest in the first two quarters of 2009-10. By the second half of FY10, economic recovery would decidedly take place. Substantial improvement in growth is expected in the third quarter, ending December. This fiscal, we expect to record a more than 6% growth.
Can we expect further measures to stimulate the economy in the coming days?
That is a decision to be taken after the elections. The model code of conduct, however, does not prevent the government from taking decisions which are necessary for the nation’s overall welfare in consultation with the Election Commission. We don’t see a real need for further steps (before the new government is in place) after having initiated two stimulus packages.
Credit is key problem faced by the industry. Banks have not cut lending rates commensurate with the RBI’s policy rate cuts. Can the government nudge them to cut lending rates?
Bank lending is based on their risk perception. Their instinct is to ensure that they do not burn their fingers. Besides, the average cost of funds for banks have also not come down. That’s why despite the sharp decline in RBI’s policy rates aimed at reducing the cost of funds, there has not been a corresponding reduction in bank lending rates. However, there are clear signs that the situation is changing. Banks have begun to offer lower interest on bulk deposits in the last three months. This is a clear indication that we will see bank lending rates move southward in the coming days. The authorities cannot put pressure on banks to reduce rates as lending is a commercial decision based on their risk perception. Besides, the situation is not so bad for the government to think of any interest subvention.
The government itself will be a big borrower in the current fiscal. Will it not crowd out private sector investments? Is overseas sovereign borrowing option being looked at?
The government borrowing programme is going to be large and there could be some pressure on interest rates. We’re looking at various other options like open market operations, market stabilisation scheme to ensure that private sector investment is not crowded out. There is no plan for an overseas sovereign borrowing.
Are there plans for private placement of debt with the RBI?
Monetisation of fiscal deficit is not allowed under the Fiscal Responsibility and Budget Management (FRBM) Act except for exceptional circumstances. The government is committed to the FRBM Act. The increase in fiscal deficit was necessitated by the circumstances that the country went through. Our objective is to revert to the path of fiscal consolidation at the earliest. If it is not possible in 2009-10, we will certainly do that in 2010-11. There is certainly no need to think of monetisation of public debt.
Do you propose to take any action on tax havens as discussed at the G 20 meeting?
At the G-20 meeting, there was a discussion about non-conforming, non-cooperating jurisdictions. We follow OECD’s template for all our bilateral tax treaties for sharing information.
The Economic Times, April 13, 2009, Page 9
After taking a series of steps to help the economy sail through the worst times in several decades, the government is now gauging how the economy is responding. Ashok Chawla, secretary, department of economic affairs (DEA) in the finance ministry, talks to Soma Banerjee, Deepshikha Sikarwar and Gireesh Chandra Prasad of ET about the economy’s prospects as well as the decisions taken by world leaders at the recent G20 meeting. Excerpts:
Have we started seeing the fruit of the measures taken by the government to boost growth? Your estimate of the growth in 2008-09 fiscal?
In some sectors such as cement and steel, we have seen clear signs of revival. We have not seen too much decline in domestic demand except in real estate, which has different structural issues.
The affected sectors are those that are dependent on exports such as gems and jewellary and apparels. If exports, accounting for one-fifth of the country’s GDP, are affected, then it is bound to have impact on industrial output. Had our economy been more export dependent, the impact would have been worse as in the case of China, where two-fifth of economic output is dependent on exports. We may post a growth of 6.5% or slightly more in 2008-09 fiscal. Public investment in the fourth quarter of the last fiscal grew significantly due to the economic stimulus packages. We expect the fourth quarter of the last fiscal to do better than the third.
What about the current fiscal?
The negative sentiment about global growth is coming from bodies like the OECD and the IMF. That does not apply to India. Growth may be flat or of modest in the first two quarters of 2009-10. By the second half of FY10, economic recovery would decidedly take place. Substantial improvement in growth is expected in the third quarter, ending December. This fiscal, we expect to record a more than 6% growth.
Can we expect further measures to stimulate the economy in the coming days?
That is a decision to be taken after the elections. The model code of conduct, however, does not prevent the government from taking decisions which are necessary for the nation’s overall welfare in consultation with the Election Commission. We don’t see a real need for further steps (before the new government is in place) after having initiated two stimulus packages.
Credit is key problem faced by the industry. Banks have not cut lending rates commensurate with the RBI’s policy rate cuts. Can the government nudge them to cut lending rates?
Bank lending is based on their risk perception. Their instinct is to ensure that they do not burn their fingers. Besides, the average cost of funds for banks have also not come down. That’s why despite the sharp decline in RBI’s policy rates aimed at reducing the cost of funds, there has not been a corresponding reduction in bank lending rates. However, there are clear signs that the situation is changing. Banks have begun to offer lower interest on bulk deposits in the last three months. This is a clear indication that we will see bank lending rates move southward in the coming days. The authorities cannot put pressure on banks to reduce rates as lending is a commercial decision based on their risk perception. Besides, the situation is not so bad for the government to think of any interest subvention.
The government itself will be a big borrower in the current fiscal. Will it not crowd out private sector investments? Is overseas sovereign borrowing option being looked at?
The government borrowing programme is going to be large and there could be some pressure on interest rates. We’re looking at various other options like open market operations, market stabilisation scheme to ensure that private sector investment is not crowded out. There is no plan for an overseas sovereign borrowing.
Are there plans for private placement of debt with the RBI?
Monetisation of fiscal deficit is not allowed under the Fiscal Responsibility and Budget Management (FRBM) Act except for exceptional circumstances. The government is committed to the FRBM Act. The increase in fiscal deficit was necessitated by the circumstances that the country went through. Our objective is to revert to the path of fiscal consolidation at the earliest. If it is not possible in 2009-10, we will certainly do that in 2010-11. There is certainly no need to think of monetisation of public debt.
Do you propose to take any action on tax havens as discussed at the G 20 meeting?
At the G-20 meeting, there was a discussion about non-conforming, non-cooperating jurisdictions. We follow OECD’s template for all our bilateral tax treaties for sharing information.
Township builders may get more time for foreign funds
Township builders may get more time for foreign funds
The Economic Times, April 13, 2009, Page 9
Borrowing Period May Be Extended Till Year-End
Gireesh Chandra Prasad & Deepshikha Sikarwar, NEW DELHI
COMPANIES such as DLF, Unitech and Parsvnath that build integrated townships are likely to get six more months to raise foreign loans with the government thinking of extending their foreign borrowing facility lapsing in June to the end of the year. Integrated townships comprise houses and other urban amenities like commercial premises, hotels, resorts, roads and bridges built in an area of at least 100 acres.
The decision is expected to be taken at the forthcoming review of the external commercial borrowing policy scheduled in June. The proposed move comes at a time when township developers are unable to find financiers for their ongoing projects as lenders across the world tend to avoid risky customers, particularly, in an emerging market like India. Although the government opened the foreign borrowing window for developers of integrated townships in January 2 this year as it sought to stimulate the economy, RBI data show that hardly any developer could access foreign debt in January or February. The government believes that the facility should be in place for at least a year to make a meaningful impact, said an official who asked not to be named.
The facility was available till May 2007, when the Reserve Bank of India, which operates the foreign borrowing policy, withdrew the facility to prevent ‘excessive’ foreign fund inflow into the real estate sector that was witnessing sharp appreciation in prices. The facility was re-introduced this January as the government sought to address the liquidity crisis faced by companies following the global financial meltdown. The government has also noticed that construction labourers, who lost jobs because of the problems faced by the sector, have started signing up for jobs under the national rural employ guarantee scheme — the largest job guarantee scheme anywhere in the world, for which Rs 30,000 crore was spent last fiscal, almost double the amount originally budgeted, a government official said.
As per government definition, integrated township includes housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges and mass rapid transit systems. Development of land and providing allied infrastructure forms an integrated part of township development.
The Economic Times, April 13, 2009, Page 9
Borrowing Period May Be Extended Till Year-End
Gireesh Chandra Prasad & Deepshikha Sikarwar, NEW DELHI
COMPANIES such as DLF, Unitech and Parsvnath that build integrated townships are likely to get six more months to raise foreign loans with the government thinking of extending their foreign borrowing facility lapsing in June to the end of the year. Integrated townships comprise houses and other urban amenities like commercial premises, hotels, resorts, roads and bridges built in an area of at least 100 acres.
The decision is expected to be taken at the forthcoming review of the external commercial borrowing policy scheduled in June. The proposed move comes at a time when township developers are unable to find financiers for their ongoing projects as lenders across the world tend to avoid risky customers, particularly, in an emerging market like India. Although the government opened the foreign borrowing window for developers of integrated townships in January 2 this year as it sought to stimulate the economy, RBI data show that hardly any developer could access foreign debt in January or February. The government believes that the facility should be in place for at least a year to make a meaningful impact, said an official who asked not to be named.
The facility was available till May 2007, when the Reserve Bank of India, which operates the foreign borrowing policy, withdrew the facility to prevent ‘excessive’ foreign fund inflow into the real estate sector that was witnessing sharp appreciation in prices. The facility was re-introduced this January as the government sought to address the liquidity crisis faced by companies following the global financial meltdown. The government has also noticed that construction labourers, who lost jobs because of the problems faced by the sector, have started signing up for jobs under the national rural employ guarantee scheme — the largest job guarantee scheme anywhere in the world, for which Rs 30,000 crore was spent last fiscal, almost double the amount originally budgeted, a government official said.
As per government definition, integrated township includes housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges and mass rapid transit systems. Development of land and providing allied infrastructure forms an integrated part of township development.
Higher FDI an unrealistic expectation: CII study
Higher FDI an unrealistic expectation: CII study
The Economic Times, April 13, 2009, Page 9
LONDON: In view of the global economic downturn, expectation of high level of foreign direct investment (FDI) into India would be unrealistic, industry body CII said in a report. Similarly, foreign institutional investor (FII) investments would be minimal, perhaps, nil, the Confederation of Indian Industries (CII) said in a study titled ‘Global Economic Crisis: India’s Recovery’. The industry body said India must depend on domestic resources to support investment in infrastructure, agriculture, industry and services sectors. “Net FII investment by February this year was $51 billion at book value. India needs to plan on the basis of a steady fall,” the study pointed out.
The Economic Times, April 13, 2009, Page 9
LONDON: In view of the global economic downturn, expectation of high level of foreign direct investment (FDI) into India would be unrealistic, industry body CII said in a report. Similarly, foreign institutional investor (FII) investments would be minimal, perhaps, nil, the Confederation of Indian Industries (CII) said in a study titled ‘Global Economic Crisis: India’s Recovery’. The industry body said India must depend on domestic resources to support investment in infrastructure, agriculture, industry and services sectors. “Net FII investment by February this year was $51 billion at book value. India needs to plan on the basis of a steady fall,” the study pointed out.
Survey says US recession will end in H2 ’09
Survey says US recession will end in H2 ’09
The Economic Times, April 11, 2009, Page 12
.but unemployment will rise well into 2010
Reuters WASHINGTON
THE US economy is set to emerge from recession in the second half of this year as consumer spending and the housing sector recover, but unemployment will rise well into 2010, according to a survey.
The Blue Chip Economic Indicators survey of private economists released on Friday showed that 86% of respondents believed that the economic downturn would be declared to have ended in the second half.
“Real GDP contracted very sharply during the first quarter of this year and will continue to shrink, albeit more slowly in the second quarter before turning very modestly higher in the third and fourth quarters,” the survey said.
Much of the anticipated turnaround in the economy, now in its 16th month of recession, would be driven by some improvement in consumer spending, housing, business inventories and exports. Yet, abovetrend growth was not expected until the second half of 2010.
Gross domestic product plunged at a 6.3% annualized rate in the fourth quarter of 2008, the steepest quarterly decline since 1982. The economic downturn will next month become the longest U.S. recession since the Great Depression.
However, recent economic data have suggested that the pace of deterioration might be slowing.
According to the Blue Chip survey, consumer spending which accounts for over two-thirds of U.S. economy activity, will be supported tax cuts from the government’s $787 billion stimulus package, the extension of unemployment benefits and lower inflation. But even with the anticipated improvement in the economy’s fortunes, companies were expected to continue laying off workers well into 2010, the survey showed.
“The huge output gap created by the recession implies that unemployment will continue to rise well into 2010,” it said. The jobless rate surged to 8.5% in March, a fresh 25-year high. Since the start of the recession in December 2007, about 5.1 million US jobs have been lost.
Participants in the Blue Chip survey reckon the unemployment rate will not hit its cyclical peak until the second half of next year. The survey forecast the unemployment rate peaking at 9.8%. The survey of 52 economists conducted between April 1-2 predicted that real gross domestic product would contract by 2.6% this year on a year-on-year basis, beating the 1.9% decline in 1982 that had marked the largest annual contraction in post-war period.
There will be a decoupled revival of Indian markets’
There will be a decoupled revival of Indian markets’
The Hindu Business Line, April 12, 2009, Page 12
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The ingredients for sustained long-term growth are intact in India. Once India becomes an investment destination by choice, it will revive ahead of global markets.
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Mr Satyanarayan Bansal, CEO, Barclays Wealth
Aarati Krishnan
The risk-reward equation for investing in equities is more favourable today than it has been at anytime over the past year, says Mr Satya Narayan Bansal, CEO of Barclays Wealth. Predicting that India is set to emerge as an investment destination by choice for foreign investors, rather than one by default, he holds the view that India may recover ahead of other global markets, as domestic demand drivers are largely intact. Excerpts from an interview with Business Line:
What kind of impact has the stock market meltdown had on your clients?
While markets have become challenging, clients have become more concerned about the long-term health of their portfolio. They aren’t looking for quick returns as they did in the recent past. Even 18 months ago, clients would tell us that they were making a 18-20 per cent return irrespective of the stock or sector they were in. Even if you had a good idea to offer, they weren’t keen to explore it. Today, clients are far more open to explore new ways of managing wealth. I would say for an industry like private banking this is a good time to acquire clients and establish long-term relationships.
Do clients come to you with requests to help recoup money lost in the stock market meltdown? What do you then do?
It is a truth that wealth erosion has been quite pervasive both in stocks and the real estate space. What they have already lost cannot be recovered by a simple suggestion or two. But what we are doing is that, based on the financial behaviour of the client we try to align the portfolio to their risk profile and goals. The portfolio composition for a client has to be based on his financial personality and long-term goals. Irrespective of whether they can recoup earlier losses or not, clients need to be able to beat inflation and generate a reasonable return over it. They may require a better-than-debt return but may not be able to take equity risks. In this context, we have to find the right balance.
With interest rates globally at historic lows, there may be a case for higher risk-taking. But in India, when you have the opportunity to earn a 8.5 per cent return with a risk-free bank deposit, is there a case for taking on additional risk through equity investments?
When the markets are tough, debt becomes a natural choice for many investors. But to earn a reasonable return on the investment, a higher risk needs to be assumed. Equities in the medium to long term are bound to outperform debt. The basic logic is that shareholders of a business have to be rewarded more than the lenders to a business.
Investors who today think debt is the best option may chase stocks if they begin to deliver returns! If you look at the debt space today, there is a tactical opportunity available there as well. There is a possibility that the yield on G- Secs may come down, after some stabilisation. Even debt investors may make close to equity returns if they capture that opportunity. But the risk on that trade is almost close to equity risk. So investors need to have a longer duration view to do that.
You mentioned that the risk-reward ratio now favours equity investments. On what do you base that?
Our equity markets are now at low levels, aligned with the global meltdown. We feel that valuations in the Indian context for the given growth, even if it is at 5-5.5 per cent, are appealing. While there is de-growth in the global economy, our linkage to exports is lower than most others economies at 15 per cent of GDP.
Domestic demand drivers are largely intact. Capital formation is still at good levels, at a 30-33 per cent savings rate. Thus, the ingredients for sustained long- term growth are intact in India.
Once India becomes an investment destination by choice, it will revive ahead of global markets. That is why we feel that the risk reward is far more favourable today than they were during the steep valuations of last year.
Let us take the case of the markets falling by 10-15 per cent from these levels. Even then, we don’t expect the markets to sustain at those levels. For investors who wish to have an allocation to equities, such temporary blips will not affect the long-term health of the portfolio, provided they are willing to invest with a horizon of 2-3 years. Investments can be spread over the next 4-5 months to reduce volatility.
Every asset class has seen increased volatility in recent months. So how do you deal with that while structuring a portfolio?
I think volatility is not an exception any more, it’s a rule. In my view, volatility is a good opportunity to create long-term portfolios as it rewards risk-taking. When volatility is high, risk premiums are high; that can be used to make higher returns. For investors who do not want to take a directional call on the markets, volatility can be used to structure products.
For instance, we have seen equity market volatility at the 28-32 per cent in the Indian markets.
A few months ago that spiked to 70 per cent. Now, the view that many ultra-high net worth individuals took at that time, was that volatility would not sustain at that high level. It was a good strategy for them to capture the volatility risk premium — through a structured solution that allowed them to ‘short’ volatility.
The correlation between global and Indian stocks is quite high today. Is there a need for a separate India-specific strategy?
Yes. I think the story of decoupling has been debated very widely … the growth in Indian markets is going to be way ahead of the global markets. We’re talking of a 5-7 per cent growth, even as other economies talk of contraction. That requires a separate strategy. We believe that a revival of equity markets in India will be at a faster pace than revival of global markets.
India was an investment destination by default. Global investors were allocating a portion of their portfolio to emerging markets and within that, Indian markets were getting a share. But now that might change.
Investors globally might look at destinations which are still growing and India will be among the very few that are still growing at 5 per cent plus.
That may lead to a decoupled revival of the Indian markets. There are local nuances in India which will have to be factored into tactical calls.
What’s your prognosis for the property market? What are you telling your clients?
We haven’t come out with any formal view on property. Many of the investors in India have a very strong personal involvement with their property purchases and consider it a physical investment. But our broader reading is that the property market is heading for some more correction in the immediate future. That’s for the simple reason that the sector is facing a liquidity crunch and is unable to bring in users at current price levels, leave alone investors.
There is a lot of doubt in the minds of users on whether the project will be completed on time. That is changing the face of the industry. An industry which was running almost on negative capital, when the advances on projects were used to complete the project, now has to have much higher cash flows.
You need to have 100 per cent of the cash in hand before you start a project and realise cash from it. That is a complete shift in the way the business of real estate was being run. Therefore, if you leave aside local nuances, I believe that the real estate market will correct further. I would not be surprised if that correction is another 25-30 per cent from here.
We must also keep in mind that the rise in the Indian property market was much steeper and happened in a shorter timeframe than other global markets. The fall has to be in line with the rise. In stocks, prices start eroding ahead of volumes; but in real estate volumes decline ahead of prices.
The Hindu Business Line, April 12, 2009, Page 12
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The ingredients for sustained long-term growth are intact in India. Once India becomes an investment destination by choice, it will revive ahead of global markets.
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Mr Satyanarayan Bansal, CEO, Barclays Wealth
Aarati Krishnan
The risk-reward equation for investing in equities is more favourable today than it has been at anytime over the past year, says Mr Satya Narayan Bansal, CEO of Barclays Wealth. Predicting that India is set to emerge as an investment destination by choice for foreign investors, rather than one by default, he holds the view that India may recover ahead of other global markets, as domestic demand drivers are largely intact. Excerpts from an interview with Business Line:
What kind of impact has the stock market meltdown had on your clients?
While markets have become challenging, clients have become more concerned about the long-term health of their portfolio. They aren’t looking for quick returns as they did in the recent past. Even 18 months ago, clients would tell us that they were making a 18-20 per cent return irrespective of the stock or sector they were in. Even if you had a good idea to offer, they weren’t keen to explore it. Today, clients are far more open to explore new ways of managing wealth. I would say for an industry like private banking this is a good time to acquire clients and establish long-term relationships.
Do clients come to you with requests to help recoup money lost in the stock market meltdown? What do you then do?
It is a truth that wealth erosion has been quite pervasive both in stocks and the real estate space. What they have already lost cannot be recovered by a simple suggestion or two. But what we are doing is that, based on the financial behaviour of the client we try to align the portfolio to their risk profile and goals. The portfolio composition for a client has to be based on his financial personality and long-term goals. Irrespective of whether they can recoup earlier losses or not, clients need to be able to beat inflation and generate a reasonable return over it. They may require a better-than-debt return but may not be able to take equity risks. In this context, we have to find the right balance.
With interest rates globally at historic lows, there may be a case for higher risk-taking. But in India, when you have the opportunity to earn a 8.5 per cent return with a risk-free bank deposit, is there a case for taking on additional risk through equity investments?
When the markets are tough, debt becomes a natural choice for many investors. But to earn a reasonable return on the investment, a higher risk needs to be assumed. Equities in the medium to long term are bound to outperform debt. The basic logic is that shareholders of a business have to be rewarded more than the lenders to a business.
Investors who today think debt is the best option may chase stocks if they begin to deliver returns! If you look at the debt space today, there is a tactical opportunity available there as well. There is a possibility that the yield on G- Secs may come down, after some stabilisation. Even debt investors may make close to equity returns if they capture that opportunity. But the risk on that trade is almost close to equity risk. So investors need to have a longer duration view to do that.
You mentioned that the risk-reward ratio now favours equity investments. On what do you base that?
Our equity markets are now at low levels, aligned with the global meltdown. We feel that valuations in the Indian context for the given growth, even if it is at 5-5.5 per cent, are appealing. While there is de-growth in the global economy, our linkage to exports is lower than most others economies at 15 per cent of GDP.
Domestic demand drivers are largely intact. Capital formation is still at good levels, at a 30-33 per cent savings rate. Thus, the ingredients for sustained long- term growth are intact in India.
Once India becomes an investment destination by choice, it will revive ahead of global markets. That is why we feel that the risk reward is far more favourable today than they were during the steep valuations of last year.
Let us take the case of the markets falling by 10-15 per cent from these levels. Even then, we don’t expect the markets to sustain at those levels. For investors who wish to have an allocation to equities, such temporary blips will not affect the long-term health of the portfolio, provided they are willing to invest with a horizon of 2-3 years. Investments can be spread over the next 4-5 months to reduce volatility.
Every asset class has seen increased volatility in recent months. So how do you deal with that while structuring a portfolio?
I think volatility is not an exception any more, it’s a rule. In my view, volatility is a good opportunity to create long-term portfolios as it rewards risk-taking. When volatility is high, risk premiums are high; that can be used to make higher returns. For investors who do not want to take a directional call on the markets, volatility can be used to structure products.
For instance, we have seen equity market volatility at the 28-32 per cent in the Indian markets.
A few months ago that spiked to 70 per cent. Now, the view that many ultra-high net worth individuals took at that time, was that volatility would not sustain at that high level. It was a good strategy for them to capture the volatility risk premium — through a structured solution that allowed them to ‘short’ volatility.
The correlation between global and Indian stocks is quite high today. Is there a need for a separate India-specific strategy?
Yes. I think the story of decoupling has been debated very widely … the growth in Indian markets is going to be way ahead of the global markets. We’re talking of a 5-7 per cent growth, even as other economies talk of contraction. That requires a separate strategy. We believe that a revival of equity markets in India will be at a faster pace than revival of global markets.
India was an investment destination by default. Global investors were allocating a portion of their portfolio to emerging markets and within that, Indian markets were getting a share. But now that might change.
Investors globally might look at destinations which are still growing and India will be among the very few that are still growing at 5 per cent plus.
That may lead to a decoupled revival of the Indian markets. There are local nuances in India which will have to be factored into tactical calls.
What’s your prognosis for the property market? What are you telling your clients?
We haven’t come out with any formal view on property. Many of the investors in India have a very strong personal involvement with their property purchases and consider it a physical investment. But our broader reading is that the property market is heading for some more correction in the immediate future. That’s for the simple reason that the sector is facing a liquidity crunch and is unable to bring in users at current price levels, leave alone investors.
There is a lot of doubt in the minds of users on whether the project will be completed on time. That is changing the face of the industry. An industry which was running almost on negative capital, when the advances on projects were used to complete the project, now has to have much higher cash flows.
You need to have 100 per cent of the cash in hand before you start a project and realise cash from it. That is a complete shift in the way the business of real estate was being run. Therefore, if you leave aside local nuances, I believe that the real estate market will correct further. I would not be surprised if that correction is another 25-30 per cent from here.
We must also keep in mind that the rise in the Indian property market was much steeper and happened in a shorter timeframe than other global markets. The fall has to be in line with the rise. In stocks, prices start eroding ahead of volumes; but in real estate volumes decline ahead of prices.
Opportunity’ in realty chaos
Opportunity’ in realty chaos
The Hindu Business Line, April 12, 2009, Page 13
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Even if property prices and interest rates fall, ‘sentimental recession’ in the buyer’s mind may put off purchase.
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Mr SUNIL ROHAKALE, EXECUTIVE DIRECTOR, ASK INVESTMENT HOLDINGS
Suresh Parthasarathy Vidya Bala
Unless interest rates drop to a compelling level of 7 per cent, there may not be a significant pickup in residential demand, says Mr Sunil Rohakale, Executive Director, ASK Investment Holdings. This Wealth Advisor has nevertheless chosen to launch a real estate private equity for Indian investors. Mr Rohakale explains as to why this fund, which will predominantly invest in residential units, was chosen to be launched during a downturn. He also explains the reasons for the slowdown in demand and how a realty fund may be a superior option for investing in real estate.
Excerpts from the interview:
How does investing through realty fund score over direct investing in realty or buying realty shares?
For one, there is concentration risk of buying a property as against the diversification that a fund offers. Two, investing in a realty fund amounts to stepping into the developer’s shoes instead of buying from the developer. In other words, one can benefit from the extra margin enjoyed by a developer. Three, direct investing in realty has additional costs such as stamp duty and registration and recurring costs such as property taxes. Four, the question of when one should exit and who should moot such an exit would arise in direct investing. Five, maintaining a building/flat and leasing and managing it is a hassle.
In investing in realty through stocks, one loses control of money and cannot have much say in the capital efficiency. A private equity fund keeps full watch over money flowing in and out of the project and ensures that there are no diversions. Risks attached to a project – including those related to reputation, completion and title – are evaluated by experts in the fund. A private equity fund with a clear-cut strategy and which is not open ended can, therefore, score over the other options of investing in real estate.
With realty sector being overshadowed by various concerns, would investors not view your fund as a high-risk investment?
Historically, real estate, whether land or house or office space, would have grown to 3-5 times the cost. With GDP growing from 5 per cent to 9 per cent, the home buyer’s profile too has changed. So if one sees the changing profile of a customer (from a lender’s perspective) the average age of a borrower was 47 in 1998 and he was looking for a Rs 3.5-lakh home loan and was happy with a 70 per cent loan to value ratio. In 2004, the average age of the borrower was 38 who wanted Rs 7 lakh of home loan and the loan to value was 80 per cent. In 2008, this profile changed to a 32 years, wanting a Rs 15-lakh loan, with a 90 per cent loan to value ratio.
The point that I am trying to make is that the customer has moved from being a risk-averse Indian to a risk-taking Indian; from a low-income individual – whether government or bank employee or working in a private company – to a higher income individual, with higher surplus income.
When did the home buyer’s demand wane?
Housing became unaffordable for many, as developers began to make luxurious houses. When this happened, interest rates too went up from 7 per cent to 12 per cent between 2004 and 2008. This also reduced affordability. Property price hikes also added to the fuel.
A 0.5 per cent increase in interest rate means an increase of Rs 30 per lakh of EMI. Interest rates have gone up by almost 500-600 basis points. Where the individual EMIs was Rs 50,000, a 6 percentage point increase in interest rate leads to EMI becoming Rs 65,000. Now, where am I going to pay that additional Rs 15,000 from? Initially banks were kind to increase the term… but you can’t be an 80 years when the loan matures.
You were talking about the sharp hike in interest rates. Was this not accompanied by a huge jump in income levels as well, especially in the last 10 years?
Correct. If you see HDFC’s data it says that 22 times of your annual income was needed to buy a house sometime in 1995-96. Today, you need six times your annual income to buy a house. But worldwide this figure is 3-4 times. So there is still scope for either incomes to rise or property prices to decline.
Our observation is that in India, the income of government employees has risen 6-7 per cent CAGR in the last 10 years. Private sector employees earn 12-15 per cent more. The knowledge economy – primarily IT and IT-enabled services, banking and insurance and telecom – which has been the driver of growth for quite some time now, has seen a salary increase of 15-20 per cent CAGR in the last 6-7 years. So an average Indian has seen a 12-13 per cent increase. Property price in the same period has increased by more than 13 per cent, affecting affordability. If you take the property price index of NHB, a property in Bangalore priced at Rs 100 in 2001 had gone to something like Rs 230 in 2007 (this works out to a CAGR of 15 per cent). This growth is definitely far more than the rise in income. The quality of houses and amenities offered have also changed between 2001 and now, thus putting additional burden on affordability.
Now that interest rates are declining, would housing demand pick up?
Unless interest rates drop to a compelling level of 7 per cent from the 10.5 per cent, there may not be a significant pickup. In our country, 6.5 per cent mortgage rates have happened. This will bring EMIs to a reasonable level; the original level where the borrower will once again have his surplus.
Even if this happens and property prices comes down, the ‘sentimental recession’ in the buyer’s mind may put off his purchase. He is today worried about the economic uncertainties, his job, whether the factory would work three days or five days and so on.
So what is the opportunity that you see in real estate today?
In any private equity investment, the investor is more concerned about the entry point. We do not see an opportunity to enter at the land stage because land has already been aggregated in the last two to three years. So entry has to be in the development stage. The opportunity for us is to get into those residential projects, where the plan approvals are already in place and the construction is about to start; or where construction has been started but there is no financial closure.
Secondly, there is opportunity for investment at the asset level rather than at the holding company level. The latter needs exit opportunities such as IPOs; this makes it more uncertain. We do not want to be a builder but a facilitator of the asset development so that we have control over the execution.
The third point is that SEZs and townships have longer gestation period, are decade-old projects and are not meant for an investor with a horizon of five to seven years.
Similarly, the current rentals in malls have become so unaffordable to the tenant that his business is no longer viable. Tenants have started re-negotiating fixed rents. So we feel that these segments are ahead of times, although there will be opportunities for long-term players.
We were looking at a five-year period, and therefore these did not fit our bill.
As the first three years have already been given for the developer to acquire land, the question here is how much time would be required to build a three-lakh-sq.ft or a 100-flat residential project? Architecturally, 30-36 months is a reasonable time for a 100-flat project when the plans are approved.
So, do you expect the demand to revive by the time the projects you enter into are completed?
A revival may take another 18 months. By then some amount of interest rate decline and price correction is likely to happen. I do not rule out another 25-30 per cent correction. So, a total correction of 50-60 per cent from the peak prices is very much possible. While we would reach a neutral stage in the December quarter, with a stable Government, clarity on jobs and income and improvement in global economy, transactions will start happening from the September quarter of 2010 onwards. The current journey of developers launching projects, at lower rates and lower sizes is a step towards liquidity and affordability for various segments. So we will use the next 24 months to deploy our funds.
We will collect 20 per cent of the application money and the rest over 24 months to provide value proposition to investors.
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