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US Jobs data pushes wall street up by almost 5%

Yesterday I wrote about how US markets fell following bad news from the french banking sector. Well today we are seeing the wall street in a very positive mood. At 1.00 IST the three major US indices, the DOW, NASDAQ and S&P 500 are trading almost 5% above their previous close. This surge in markets has been caused by jobs data released today.

As revealed by the jobs data, the first time jobless benefits claim fell by 7,000 in the week ended August 6, this is the lowest level since April of this year. Market experts are saying that this is an indicator that the economy is growing at a moderate pace. The markets remain highly volatile though. The thing that's driving the markets is the news coming out of Europe.

Markets were also buoyed by the better than expected results posted by some big names like CISCO which rose 16%  after it posted figures that beat market expectations. On the home front TATA Motors announced a flat profit the quarter at Rs. 19.19 billion. The European markets too turned around yesterday's loss and ended the day in green.

Global markets are highly volatile and all eyes are focused on how the Euro debt crisis unfolds. The crisis is has affected countries on both ends of the spectrum. Recently doubts have been cast over France, which till now was in the rescuer's camp as well the tiny nation of Cyprus has been engulfed by the crisis. The Cyrus finance minister made a statement that a bailout was imminent.

Chaos everywhere!

The world markets have been in a chaos ever since S&P downgraded the U.S to AA+. Fears of a double dip recession have been renewed. The downgrade might be questionable but its impact has been significant as we have been seeing over the last few days. Massive selling by investors who are fearing of a recession. Its a world where the pessimist's rule. Good news is hard to come by. Every day is throwing up some more bad news.

As I am writing this blog major U.S indices are reeling in the red. Recent news of bad health of the French banking sector send huge shock-waves among the U.S markets. The worry was about the French banking sectors huge exposure to shaky European Debt. Major French banks Societe Generale and BNP Paribas witnessed huge falls on French bourses. Bank of America also saw a big fall of almost 11 percent. A day before the U.S markets had seen a sharp recovery after the Fed announced that it would keep the interest rates at near zero levels for the coming two years to aid economic recovery. This cheer however was short lived as the markets tanked again the next day.

A Reuters survey revealed that 73% of Americans feel that their country is on the wrong track and that they are headed for another recession. This survey clearly highlights the pessimism that has gripped the world. The global economy was already troubled by the Euro zone problems and now the U.S debt issue has added to the already worse situation. The way things are moving ahead in the Euro zone and in U.S. it seems that some very painful days await us in the near term. Seems like I too have caught on the pessimism!

March IIP at 7.3 %

The IIP figure for the month of March stood at 7.3 % YoY up from the 3.6 % in the month of February, according to data released by the Central Statistics Organization.

Manufacturing output which constitutes about 80 percent of the industrial production rose by 7.9 %.

Industrial output grew 7.8 percent in the 2010 – 11 fiscal that ended in March compared to the 10.5 percent growth clocked in the previous fiscal.

The HSBC Markit Purchasing managers index moved up 0.1 % to 58 for the month of April. The index was at 57.9 in March.

The RBI stepped up it fight against inflation by hiking the interest rates by 50 bps and is seems willing to take more tough measures to rein in inflation. Experts believe that more tough measures by RBI will hamper the industrial growth as the cost of borrowing will increase further.

Markets haven’t reacted well to the IIP numbers as both the indices are in the red. At 12.20 PM the Sensex was down 98 points at 18486 and the Nifty was down by 33 points at 5531.

Sector wise  figures

Mining Sector growth at 0.2% vs 12.3% y-o-y

Manufacturing Sector growth at 7.9% vs 16.4% y-o-y

Basic Goods growth at 4.3% vs 10.8% y-o-y

Electricity growth at 7.2% vs 8.3% y-o-y

Consumer Goods growth at 7.7% vs 9.3% y-o-y

Capital Goods growth at 12.9% vs 36% y-o-y

Sensex slipping into bear phase?

The BSE sensex has shed almost 10 percent this year, the worst performance among Asian nations, compared to 17 percent returns that it gave last year. A fall of 20 percent in the key indices is generally considered a bear phase.

Inflation has become the biggest threat to growth and RBI is finding it tough to rein it in. Even after eight rate hikes in the last thirteen months inflation didn’t seem to be coming under control. The March end figure of 8.98 percent had everyone convinced that RBI will have to continue its rate hike program. RBI, in its mid quarter review on 3^rd May increased key lending rates by 50 basis points, 25 basis points more than what market experts had expected. This clearly shows that the RBI has woken up to the fact that strong measures are needed to stop inflation from spiraling out of control.

RBI Governer D. Subbarao, said that controlling inflation is essential to maintain the medium term growth of the economy, even if this means sacrificing growth in the short term. Experts predict RBI to continue its hawkish stance in the near term.

Economic growth forecast for this year is at 8%, down from 8.6% last year. Foreign funds have pulled out close to 2,000 crore in the last few days. Easy money was the key driver for the rise in equities in 2009-10, but is coming to an end as the US Fed might end some of the monetary measures it initiated to spur growth. This will reduce the amount of investments by FIIs.

Investors are worried about the rising funding costs as well the rising input costs which will hit the earnings of Indian corporates. The tough stand that policy makers are taking to control price rise by sacrificing some amount of growth is another factor that has the investors worried. Market experts are warning investors to be prepared for some pain in the short term.

RBI takes inflation head on

The RBI increased lending rates yesterday, in its mid quarter policy review. Markets and economists expected rates to be increased by 25 bps but RBI surprised everyone by increasing them by 50 bps. RBI acknowledged that rising input cost and oil price are fuelling inflation to a high of almost 9 percent (March end) and controlling inflation is its priority even if it means economic slowdown in the short term. It also reduced its growth projection for the economy to 8 percent for the current fiscal year.

The short term lending rate (repo) was increased by 50 bps to 7.25 percent. The reverse repo, the rate at which banks park their funds with RBI, too has been raised by 50 bps to 6.25 percent.

RBI Governor D Subbarao said that the inflation which stood at 8.98 percent in March and the rising oil and commodity prices will pose a challenge to economic growth this fiscal. RBI reduced its GDP growth projection by 1 percent between 7.4 and 8.5 percent.

RBI expects inflation to be at high levels for the first half of the current financial year. Hence one can expect some more rate hike in the near term if the inflation figures do not start to come down. A normal rainfall might just ease the inflationary pressures.

India's very own Sovereign Wealth Fund?

The debate on whether India should have its own sovereign wealth fund (SWF) was revived on Tuesday when Dr. Kaushik Basu, the chief economic advisor to the Prime Minister, said that its time India decides on the sovereign wealth fund issue. From a level of forex reserves of about $5 billion in early nineties, India currently had a reserve position of $300 billion and was the seventh largest holder of forex reserves, he noted. Let us see what a sovereign wealth fund is and how it can be beneficial to a country.

What Does Sovereign Wealth Fund - SWF Mean?

A SWF is a special purpose investment vehicle created by a Government with surplus foreign exchange to invest overseas. Pools of money derived from a country's reserves, which are set aside for investment purposes that will benefit the country's economy and citizens. The funding for a sovereign wealth fund (SWF) comes from central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources. The types of acceptable investments included in each SWF vary from country to country; countries with liquidity concerns limit investments to only very liquid public debt instruments. A few years ago, India had considered setting up a SWF, but the proposal was not pursued.

Top 5 SWF’s

Country	Fund Name	Assets ($billions)	Inception
UAE – Abu Dhabi	Abu Dhabi Investment Authority	$ 627	1976
Norway	Government pension Fund	$556.8	1990
Saudi Arabia	SAMA Foreign Holdings	$439.1	NA
China	SAFE Investment Company	$347.1	1997
China	China Investment Corporation	$332.4	2007

What is the purpose of setting up an SWF?

SWFs are typically created when governments have budgetary surpluses and have little or no international debt. This excess liquidity is not always possible or desirable to hold as money or to channel into immediate consumption. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds. In such countries the main reason for creating a SWF is because of the properties of resource revenue: high volatility of resource prices, unpredictability of extraction and exhaustibility of resources.

There are two types of funds: saving funds and stabilization funds. Stabilization SWFs are created to reduce the volatility of government revenues, to counter the boom-bust cycles' adverse effect on government spending and the national economy. Savings SWFs build up savings for future generations. One such fund is the Government Pension Fund of Norway. It is believed that SWFs in resource rich countries can help avoid resource curse, but the literature on this question is controversial. 

Other reasons for creating SWFs may be economical, or strategic, such as war chests for uncertain times. For example, the Kuwait Investment Authority during the Gulf war managed excess reserves above the level needed for currency reserves (although many central banks do that now). The Government of Singapore Investment Corporation and Temasek Holdings are partially the expression of a desire to bolster Singapore's standing as an international financial centre. 

What is the opinion of the Indian Industry?

India Inc has favored the idea of setting up sovereign wealth fund. According to it the wealth fund size could be around US $50 billion. The way the country is growing has made it essential to secure future energy sources and the fund will play a significant role in this regard, said some corporate heads. India Inc feels that the fund will invest in sectors like energy especially oil and coal as well as infrastructure.

According to a survey by industry body Assocham, most corporates opine that the fund structure should be based on a public-private-partnership model.

 

Apparently India is the only BRIC nation without a sovereign wealth fund. Countries like China, Singapore, Saudi Arabia, Norway, Kuwait and Russia all have sovereign funds to invest in assets abroad.

Does India really need one?

The general argument behind the creation of a sovereign wealth fund is that it will help India to invest in energy assets abroad in order to safeguard its future energy needs. Countries like Kuwait, Saudi Arabia and Norway derive majority of their revenues from oil exports thus it is no surprise that their SWF’s invest in non oil assets in order to reduce their dependence on oil prices and to mitigate the associated financial risk. India, on the other hand does not depend on revenue from oil export. India is faced with a risk due to fluctuations in oil prices as oil accounts for more than a quarter of India’s imports. Based on this fact it may be a good idea to set up a fund that invests in energy assets so as to mitigate the risk of fluctuating oil prices. However one must understand that oil forms only a quarter of our imports, whereas hedging motive for countries like Kuwait and Norway is the fact that oil forms a much more significant part of their exports.

Another important issue is that the assets that India seeks are all abroad, in sovereign countries. Does one expect the governments of these countries to sit back and do nothing as we mop up strategic assets in their own backyard? There is a major political risk involved in securing such assets as many of the intended assets lie in countries that are not democratic. Will such nations honour the deals they make. 

Do we have the appetite to take the risk?

Oil and other energy investments are a high risk and high return bet. How much risk will a government controlled fund be willing to take? Many of the deepwater bets taken by the smartest oil companies in the world have proved to be wrong, sinking millions of dollars. Will an Indian sovereign fund, where every decision has to be cleared by an empowered committee, be able to take these risks? The other problem is the speed of decision making. Government-owned oil companies like ONGC and BPCL already face red-tape and delays in getting clearance, often resulting in the opportunity being lost. Will it be any different for the sovereign fund? The fund will have to be answerable for its returns.

It is evident that at present the idea of a sovereign wealth fund seems very attractive. India should not merely try to ape other countries and be in a hurry to set up one. But it is also a fact that as we prolong this decision others are already securing energy assets globally. Chinese companies spent about $32 billion last year buying oil, coal and metals assets abroad, while ONGC invested $2.1 billion to buy Imperial Energy. Also given the perennially increasing current account deficit our forex reserves might not be as formidable as they seem. The government needs to decide on this issue soon.