>The India story: Opportune times (EDELWEISS)

■ Interest rates to stay “lower for longer” in advanced economies
The global economy is up from the trough. However, we believe growth is still nascent and stimulus-dependent, especially in the developed world. Globally, particularly in developed nations, stimulus unwinding is likely to be slow as policymakers would rather prefer to err on the side of caution than putting growth recovery at risk. While most of the extraordinary stimulus measures are to be gradually rolled back during the first half of CY10, we believe, the Fed will keep interest rates at current levels for most of the year. Appreciation in the EUR is anyway acting as a “pseudo tightening” for the Euro zone and will delay rate hike by the European Central Bank (ECB). On the other hand, Japan is still in the process of injecting fresh stimulus, acknowledging likelihood of poor economic performance for a prolonged period.

■ USD to remain weak; flows to remain strong into emerging markets
We expect the USD to remain weak during CY10, primarily driven by: (1) surging federal deficit and large treasury issuances; (2) sharp expansion of the Fed balance sheet; (3) improved risk appetite globally, reducing significance of the USD as ‘safe haven’; and (4) several emerging markets (EMs) shifting their reserves from USD to gold. Low interest rates in the US, without the fear of any quick appreciation of the domestic currency, will lead to continued flow of USD to EMs. Even in case of a slowdown in USD flows, EMs will still enjoy inflows of other low yielding developed country currencies. JPY remains a prime candidate for being used in such “carry trade” as a result of the near-certainty of its continued weakness and extremely low interest rates in Japan.

■ India stands to benefit more than peers
India has been relatively less battered in the global crisis and most indicators suggest a strong growth recovery ahead. The country remains largely immune to the risk of any rollback in stimulus as the same was miniscule at less than 1% of GDP (against ~15% of China), targeted at the lower strata of the economy—in line with GoI’s long-term strategy of “inclusive growth”. In our view, the current phase of high inflation will be a concern for just around six months and, thus, will not put undue pressure on the interest rate scenario. With the economy poised to re-enter a healthy growth zone, the pro-cyclicality of India’s fiscal dynamics will reduce deficits considerably over FY11-12. With stability and strength in income generation, efficient use of capital, favourable demographics, India is in the early phase of a virtuous cycle of high savings, capital formation, and high growth.

■ Focus on consumption and infrastructure creation in India
India’s current valuation premium over EMs has been in line with the recent past. Given the strong visibility of growth and political stability, there should not be any de-rating in the premium over the near term. We expect earnings estimates for FY11 to grow further. Even if there is no further uptick in valuation multiples, Indian markets will keep moving up along with earnings upgrade. While we are bullish on Indian equities in general, we believe key to outperformance will be with bottom-up sector and stock selection. We prefer to play the India growth story via infrastructure creation and end-consumption. We are overweight on BFSI, industrials, real estate, and consumer discretionary.

To read the full report: INDIA STRATEGY

>Monetary Policy and the Myth of ‘Bubbles’ in Asset Prices

Monetary policy and asset prices: The consensus view
The theory and practice of monetary policy in the world’s developed economies since the early 1990s has converged around a set of broad principles. Price stability has become the main focus of monetary policy, with most central banks adopting more or less formal inflation targets specifying a goal for some measure of consumer price inflation over time.2 While some central banks such as the Fed and the RBA have notionally retained other statutory policy objectives, these objectives have in practice been subordinated to the pursuit of price stability.

To facilitate this focus on price stability, central banks have been made increasingly independent of government, while also being subject to stricter accountability and transparency regimes. Monetary policy has also been separated from other traditional central bank functions, such as financial sector supervision, to ensure a singular focus on price stability. The choice of the inflation rate as the target for monetary policy reflects the unsatisfactory historical experience with the pursuit of multiple policy objectives by central banks. This was often associated with poor economic performance, including high and variable rates of inflation, as well as a lack of transparency and accountability in the conduct of monetary policy.

Central banks have also come to use an official interest rate as their main policy instrument. This has increased the transparency of central bank operations and aligns the singular focus on price stability with a single policy instrument. Monetary policy can be assessed in terms of how the official interest rate responds to macroeconomic variables. If monetary policy responds to these variables in a systematic way, it becomes possible to identify a policy rule, for example, the Taylor rule,3 which can then be used to benchmark the stance of monetary
policy. The empirical literature on monetary policy rules suggests that the behaviour of official interest rates has become more predictable in recent decades and dominated by central banks’ response to inflation.4 Official interest rates also respond to the level of economic activity because economic activity helps forecast future inflation. Attempts at including other variables such as asset prices in these policy rules have produced mixed results. This does not mean that monetary policy ignores other variables, but the response to these variables is effectively captured by the response to consumer price inflation and economic activity. Since asset prices are poor predictors of future consumer price inflation, monetary policy does not typically respond to asset prices in a systematic way.

An important implication of these developments in the theory and practice of monetary
policy is that it has become increasingly endogenous to economic activity: in other words, it is the economy that drives monetary policy, not the other way around. The literature on policy rules confirms that the conduct of monetary policy in recent decades has become less discretionary and therefore more predictable. With inflation expectations well anchored by an inflation target, the need for activist monetary policy is greatly reduced. Deviations in the official interest rate from the Taylor rule are usually small. Large deviations can help identify episodes of greater monetary policy discretion when policy may have been too easy or too tight relative to prevailing economic conditions.

Consensus under challenge: The evolving debate on the role of asset prices in monetary policy

In December 1996, Greenspan famously asked ‘how do we know when irrational exuberance has unduly escalated asset values…? And how do we factor that assessment into monetary policy?’

Greenspan suggested the following answer to his own question:
We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.7

Greenspan’s 1996 ‘irrational exuberance’ speech reflected the consensus view of the relationship between monetary policy and asset prices that informed the decision-making of the US Federal Open Market Committee (FOMC), the body that sets US interest rates.

To read the full report: MYTH OF BUBBLES

>GOLD BULL

Are you reading it correctly? Yes, you are. Am I out of my mind? No, I am not.
Gold prices are on upswing. They are going up at the moment slowly due to rising loss of
confidence of the Investors in paper currencies and also people at large. Gold is going up not
because of hedge against inflation – no one consciously buy this metal with inflation in mind. Have you ever gone to a jeweler’s or gold shop to buy the gold as hedge against inflation? Definitely not.

The analysts and media who have been touting rise in gold as investor’s intention to hedge against inflation must get their head and speech examined. They have been spreading LIE at the instance of the officials of respective governments. With the loss of confidence resulting in steep decline of US dollar, the US administration has been reiterating its oft repeated stance of strong dollar policy; and when the world is not listening to buy the bankrupt dollar, they have been using media and analysts to tell the world NOT to buy gold, adding that gold market is in bubble which is going to burst one day.

Anything will burst one day. Everyone will die one day. Does it mean that we should leave our desire to live and enjoy our life? It is nature’s cycle that what is borne today will die one day; and what is falling or rising one day will rise and fall one day. It is the eternal truth. We do not have to go to the Harvard or Wharton to learn that. This is the parental heritage.

Yes, Gold and Silver have been rising due to investor’s preference to get away from paper assets to something real. They no longer treat Real Estate as really a Real wealth! This is why they are turning to Gold. Gold is GOD, Gold is Truth, and in India there is official state Sanskrit symbol “Satya Mev Jayte” that means “Truth Alone Wins”.

This is the reason that even an illiterate Indian is buying gold all the time. He is not illiterate, today’s Bankers, Investment Bankers, Insurers, Central Bankers, Finance Ministers, Governors are. How do you measure the actions of all Central Bankers, including that of George Brown, the Prime Minister of UK who was the Chancellor of HM Treasury, sold Gold at the bottom of the cycle - $ 260 to $320? Almost all Central Banks sold over 3000 tons of gold at the rock bottom prices during last 15 years.

What the World Doesn’t Know
..Is the hidden the fact that “United States has lost almost all of its Gold during its covert practice for over 20 years”. YES, the gold may be there physically at Fort Knox or HSBC Bullion Vault in USA. But that is NOT enough. Who owns the gold is more important than who keeps the gold. It is like your goods are in a warehouse or bank locker. The warehouse-keeper or banker can not claim Title to or Ownership of those goods. These goods are kept with him in Trust.

The FED and Treasury appear to have been concealing lending of gold to hedge funds by
camouflaging transactions through various central banks. When those Central Banks lend to these hedge funds to short the gold, they appear to claim the gold from Fed and Treasury who earmark the gold in its balance sheets. In other words, the earmarked gold shown in Fed / Treasury balance sheets is in fact owned by foreign Central Bankers and is no longer owned by the United States. If the shorted gold does not return to Fed/Treasury, they will be obliged to show it as “sale” one day. That day of reckoning will come when the Foreign Central Banks start demanding the gold physically.

When the Truth will come out?
If there is a massive call from the States and Local Governments like California to launch a
campaign against the Fed/Treasury to give them enough funds by selling part of existing gold reserve of 8134 tons, will meet with the denials from US Administration (Fed /Treasury) on evasive grounds.

Both Fed/Treasury know pretty well that there is no real gold ownership left with them, and that selling of gold belonging to other nations would tantamount to committing breach of trust. Even the President of United States, be it were President Clinton, George Bush or Barack Obama, may not be aware of the constructive loss of US Gold through the hedgers who acted solely at the behest of same Fed/Treasury officials having ulterior motive.

To read the full report: GOLD BULL

>HAVELLS INDIA LIMITED (FIRST CALL)

■ We initiated the coverage of Havells India Ltd and set a target price of Rs.612.00.

■ Havells India Limited engages in the manufacture and sale of electrical and power distribution equipment in India and internationally.

■ The company expects to achieve Rs 500crore from exports of switchgears within a time frame of three years. The company has commenced its new automated manufacturing unit in Baddi Himachal Pradesh.

■ The company is aiming to attain a turnover of Rs 300core from Kerala this fiscal.

■ The company has bagged a $200 million export order from the West European countries for the supply of motors and compact fluorescent lamps (CFLs) for a period of five years.

■ CARE assigns `AA` & `PR1+` rating to Havells India.

■ The company’s Net sales and PAT is expected to grow at a CAGR of 10% and 18% over FY08 to FY11E.

To read the full report: HAVELLS INDIA

>CREDIT CARDS: HIGH - RISK HIGH - RETURNS (INDIA INFOLINE)

Credit Card - The business: The advent of credit cards (popularly known as plastic money) has enabled access to easy money to the cardholder. The huge demand for this form of credit has resulted in sharp spike in number of credit cards in circulation. Financial institutions including banks have started increasing their exposure to this high-risk high-return business to tap the rising demand.

The credit card enables the holder to defer the payment, (for a particular purchase made) to the card issuing company over a certain period of time. The lending company earns service charges as a compensation for the credit utilized. In addition, the delayed payment towards the dues enables the lending company to charge interest which is typically higher than any other form of advance.

Aggressive stance resulted in rising NPLs
Large private sector banks (especially ICICI Bank, HDFC Bank Axis Bank) were among the first few players who entered this niche business segment. The high-yield earning business and limited intervention from the central bank these banks to rapidly increase their exposure to the segment.

Changing environment signals towards policy changes
The credit card business is an unsecured loan with no collateral and the global downturn during the last fiscal year and had compelled card issuing companies to reduce their exposure to this risky segment.

To read the full report: CREDIT CARDS