Mubin Panjwani's Report card of Global Economy & India in particular (Part 1)

Jan. 14, 2011 - PRLog -- FAMS Group Chairman and Managing Director gets candid about his views on the global economic scenario and what he expects in the coming days ahead.

The following is a snippet of the consversation of Mr. Mubin Panjwani, CMD FAMS Advisors Pvt Ltd:-

I firstly would like to apologize for the long pause in my communication to the media. I was conducting an in-depth study of value based stocks done whenever there is value perceived in the markets. The study conducted covers all sectors and over 200 stocks.

Does that mean there are over 200 companies where value is left? Yes it does. And what makes my absence more preferably is that the markets have started to tank. We had predicted this earlier.

Let me know get into the details of macro economics. The reports from US and UK are that they are stabilizing and growing. If these developed markets are growing, then it is obvious that safe investors will look to invest in bonds in US and UK even though the interest spread in India over developed markets is huge. Now the big question is “IF” the developed markets are actually stabilizing and growing. Contradictory reports of trouble in Europe will confuse all investors more. There seems that Ireland, Portugal, Spain and Greece (PIGS) will have trouble in this year too. They have more than $500 billion debt to be matured in 2011 and if Italy is taken into consideration then the amount will increase by another $200 billion. By 2013 European Sovereign states will face redemption of up to $2.85 trillion. These figures cannot be trusted as they are revised monthly. The question is that when Ireland and Greece was bailed out, the amount fixed to bail them out was not precisely certain. Next up now is Mr. Portugal and the matters do not stop there, talks are already on if Spain cannot repay its debt it will also require a bailout. The real question is that how many more nations will require the bailout and what is the amount that they require for the next 5 years. Providing this estimate will provide such nations to prepare plans over the next 5 years to re-construct their financials so that they get fit in their financial burdens.

The other problem is that who will fund the bailouts? Right now the financially strong nations like Germany and France do their part of the responsibility of saving the Euro. But another doubt is that for how long their economies will survive by doing this. Can their nations look at junk investments with high risk factors all the time? The answer is a clear NO! What does that mean? They would require some non-European support.

China the big daddy of the international reserves surplus has volunteered to back the European economies. It said it will utilize a part of its reserves surplus, approximately near $3 trillion, to help back the defaulting nations bonds. What does China look to get in return? China will definitely bargain for more trade to be taken place to boost its exports. Also what China will look to do is play the hero so that its image is built up, and then like what it did in some African nations it will acquire companies or even natural resources to help support its domestic consumption. China has over the years realized that its domestic natural reserves will not last its consumption indefinitely. It has progressively looked to go overseas and acquire natural resources assets to boost its ownership of such assets.

Of course China is not such a bad boy of the world as it is made out to be. China is looking “smartly” forward. If the Euro zone disintegrates, global recovery will halt and we will go into recession. The only other super developed region is the US. However the US and China are not that cordial as US feels threatened by China’s dominance in the global growth. China has been growing over 10% and thereby helping global recovery to growth at close to over 2.5-3%. China realizes that holding its reserves only in US dollar can prove risky if US does not recover entirely. Thereby it is looking to diversify into other currencies of the developed world. Also if it can help save the Euro zone from defaulting entirely, this will prove to be a cushion for global growth to fire on all cylinders. China is thereby proving to be the “Superman” of global recovery and growth.

Let us know talk a bit on domestic concerns. Compared to the might of China where it can help other economies stabilize and help them towards growth; India – the other giant growth engine of global growth, on the other hand looks to save itself from a dangerous situation of self implosion. Over the past year, the image of India has deteriorated considerably. The corruption and scams that plagued India in 2010 have left India’s image damaged for the global investors. Also compared to other emerging nations like China, Brazil and Russia, India has outperformed its peers. However now it looks to the dangerous cycle called “Inflation”

India’s inflation has raced to over 8.43% for Dec 2010. Food articles are fueling the rise at over 15% and to make matters worse the fuel inflation is also over 10%. This hurts the pockets of the ‘aam aadmi’ who cannot afford such price rises. This year we saw onions reach Rs. 100 per kg and garlic over Rs. 400 per kg. Milk, poultry, and other commodities also contributed to the rise in food.

RBI now looks to settle the nervousness in its meeting on Jan 25 2011. The banking industry met with RBI officials to discuss what they feel should be done. If rumors are to be believed, then we could see a hike in rates up to 50 bps along with a cut in SLR. Now the demand was for a cut in CRR or SLR, but what I feel is that cutting CRR will do no good to RBI. Instead if SLR is cut then the liability burden to pay banks at the reserve rate will decrease. Also that portion can be utilized by banks to ease liquidity. However as rates will rise, banks will look to raise deposits rates to mobilize more deposits. However banks may not be able to raise interest rates at free will. In the next few months Banks will bear the burden of lower Net Interest Margins. Also by limiting the returns on the SLR to the banks by RBI the liquidity will be preserved with the RBI.

This time will be hard for banks as the margins may contract. What I feel is that with new banking norms being finalized and the Government looking to consolidate the banking industry, this period would not be so bad for the growth of India. Those banks who sustain higher margins will survive and those who may not be able to sustain will be eager for consolidation. This will motivate banks for voluntarily consolidation rather than forced consolidation from the Government.

Government of India in the past has looked at the banking sector to consist of 3-5 public sector banks, 4-6 private sector banks and 3-4 foreign banks, all who are financial stable and strong enough to meet the growing needs of India and its huge population.

In the short term, if RBI raises rates India may look more attractive to foreign bond players. With developed markets having rates close to 0.25-1% and India offering close to 9% the temptation is huge to invest into India, a country which also is one of the growth engines of global growth. The Government of India can look at this as a positive measure and use such capital inflows to solve its infra financing needs. The infra bonds limits can be raised to absorb such superfluous inflows. This way the global investors will gain with higher interest rates and India will get its financing to upgrade its infrastructure.

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About FAMS - Financial Assets Managed Simply™ (FAMS Advisors Pvt. Ltd)

Financial Assets Managed Simply™ (FAMS™) is a fast growing financial services company established on the basis of trust and wealth creation for all, offering asset management and research services to help maximize returns from the stock market and minimize risks. It is headed by value based proprietary investor Mubin Panjwani who has been a fundamental value investor in the Indian capital market since many years.