Sunday, April 4, 2010

>World Financial Markets: SECOND QUARTER 2010

The global recovery will be maintained in 2010, lifting GDP at an above-trend 3.4% pace. The booming recovery in manufacturing will broaden to the service sector. The US will continue to outperform most other developed economies, reflecting more aggressive policy support and previous corporate cost-cutting. The EM will lead the recovery as strengthening external demand boosts exports while highly accommodative policies and generally healthy banking sectors support domestic demand.

A continued positive feedback loop between financial markets, confidence, and consumer and business spending will drive the expansion in 2010. As fiscal stimulus wanes, improving labor markets that generate sizable gains in wage income and ongoing monetary stimulus will support final demand growth. Ongoing household deleveraging, corporate caution, and lingering banking problems in the US and Europe will keep the global recovery modest relative to the depth of the downturn.

Massive output gaps will reduce developed market core inflation to 0.5%oya in 2010. This will prompt the Fed, ECB, and BoJ to leave policy rates on hold. Disinflation pressures are more limited in the EM, where there is less slack. EM policymakers will normalize cautiously; they are skeptical about the G-3 economic recovery and do not want to add to upward pressure on FX rates.

The FX recovery trade faltered in midwinter. EUR and high-beta G-10 currencies were weighed down versus USD and JPY by concerns about Euro-area sovereign risk, policy tightening in China, and soft data, but Greece’s aggressive budget cuts and healthier data already have turned the tide in risk sentiment.

We forecast a broad USD sell-off in the spring and summer followed by a rebound in the fall. The global upturn and strong profits will feed US cyclical capital outflows, and the Fed’s low-for-long policy encourages use of USD as a funding currency. But, shifting Fed rhetoric and liquidity withdrawals should prompt a USD rally in the fall and early 2011. With the BoJ lagging the global tightening cycle, rising capital outflows will undercut JPY in 2011. GBP likely will underperform, as a hung parliament breeds policy uncertainty, and continue to do so in 2011 amid budget cuts and private sector deleveraging. As global growth underpins commodity prices, commodity FX will continue to outperform, led by AUD and CAD.

We expect US Treasury yields to drift higher as QE draws to a close and seasonal patterns play out. We target 2-year yields at 1.25% by midyear and 10s at 4.10%, and we expect the curve to flatten gradually over the course of the year.

EM FX appreciation should endure through end-2010 as central banks tighten. EM growth is on track to reach 6.1%, above our 5.5% estimate for the long-term potential GDP growth rate, and 3.5%-pts higher than G-7 growth. Both EM Asia (7.9%) and Latin America (4.6%) are forecast to grow by more than 1%-pt above their potential growth rates; CEEMEA will grow slightly below potential at 4.2%. Watch rising inflation in EM, particularly in Asia and Latin America. Strong growth and increasing inflation pressures are prompting EM central banks to tighten monetary policy well ahead of their G-3 counterparts. We expect rate hikes in Brazil, China, India, Israel, Malaysia, Peru, the Philippines, and Thailand by June.

We are overall positive on commodities. The outlook for energy turns more bullish in 2Q, when we expect an acceleration in price gains. We hold a positive view on base and precious metals in 1H, but do not expect further price appreciation in 2H as funding costs should start to rise.

To read the full report: WORLD FINANCIAL MARKETS

>Global Economics Paper No: 192 ->The Long-Term Outlook for the BRICs and N-11 Post Crisis

The BRIC and N-11 countries are emerging from the crisis better than the developed world.

As a result, our long-term projections for the BRICs look more, rather than less, likely to be realised.

It is now possible that China will become as big as the US by 2027, and the BRICs as big as the G7 by 2032.

Within the BRICs and N-11, China, Brazil, India, Indonesia and the Philippines appear to be performing best.

Bangladesh, Egypt, Korea, Nigeria, Turkey and Vietnam form a second group of countries that have performed broadly in line with expectations.

Iran, Mexico, Pakistan and Russia have need for improvement.

We show the ongoing dramatic BRIC influence in key product markets, with autos and crude oil as examples.

To read the full report: ECONOMICS PAPER

>2020 Global Energy Scenarios

Introduction: The world is increasingly aware that fundamental changes will be necessary to meet the growing demand for energy. There are many possible scenarios about what may emerge in the foreseeable future. Four such scenarios were constructed by the Millennium Project and are presented here. All the research related to their construction is available in the CD included with the 2008 State of the Future.

These scenarios describe how alternative global energy conditions could emerge. Each explores plausible cause-and-effect links and illustrates key decisions, events, and consequences throughout the narratives. Much of the content of these scenarios is based on the results from a two-round Delphi. The first round collected judgments from an international panel regarding events and conditions drawn from the Project energy team’s assessment of major global energy scenarios and related research reports. This assessment and an annotated bibliography of these scenarios and reports, along with extensive endnotes for this chapter, are available in the CD included with the 2008 State of the Future section 3, “Global Scenarios.” The second round collected comments on draft scenarios constructed from the results of the first round of the Delphi.

The four axes for the scenarios were: rate of technological breakthroughs, strength of environmental movement impacts, status of economic growth, and conditions of geopolitics, including war, peace, and terrorism. Each of the axes could be high, low, or moderate (for vacillating) between now and 2020. The scenario team selected the combination of conditions of axes that might produce the most interesting and plausible scenarios for further discussion in the energy policy process.

Abstract of the Scenarios:
Scenario 1. Business as Usual – The Skeptic
This scenario assumes that the global dynamics of change continue without great surprises or much change in energy sources and consumption patterns other than those that might be expected as a result of the change dynamics and trends already in place.
Click here or on the title of the scenario to get to the full text of this scenario.

Scenario 2. Environmental Backlash
This scenario assumes that the international environmental movement becomes much more organized; some groups lobby for legal actions and new regulations and sue for action in the courts, while others become violent and attack fossil energy industries.

Scenario 3. High-Tech Economy – Technology Pushes Off the Limits
This scenario assumes that technological innovations accelerate beyond current expectations and have impacts in the energy supply mix and consumption patterns of a magnitude similar to the Internet’s impact in the 1990s.

Scenario 4. Political Turmoil
This scenario assumes increasing conflicts and wars, with several countries collapsing into failed states, leading to increasing migrations and political instabilities around the world.
Click here or on the title of the scenario to get to the full text of this scenario.
Scenario 1. Business as Usual—The Skeptic
Moderate growth in technological breakthroughs Moderate environmental movement impacts Moderate economic growth Moderate changes in geopolitics and war/peace/ terrorism

A Caldron of Contradictions
The world of 2020 is a caldron of contradictions. It is a good time for some and a bad one for others, both promising and disappointing, full of apparent opportunities and broken promises, a world of both hope and despair. There have been only moderate technological breakthroughs in energy and other fields. Environmental impacts, while not benign, at least have not yet been catastrophic. Economic growth has been cyclical; geopolitics and terrorism have been brutal sometimes and quiet at other times. In short, with some exceptions, most past trends have continued to our time. The shifts that have occurred seem to have a random quality and are applauded or despised largely on the basis of politics, ethnicity, or nationality. One trend, however—continuing energy demand growth—has reached a crescendo, and most people in the world are now feeling its consequences.

To read the full report: GLOBAL ENERGY SCENARIOS

>Union Budget 2010 –Tax Card (KPMG)

To see the report: TAX CARD


What has changed?
Tata Motors has divested 20% stake in its construction equipment subsidiary Telcon to Hitachi for Rs 11.6bn. Hitachi now has the controlling stake with 60% stake in the business.

We expect the proceeds to be used to repay debt and reduce the leverage on the balance sheet. We estimate automotive debt/equity would reduce to 0.9x by the end of FY12e (from 2.7x currently) if cash proceeds were used to repay debt. Expected cash proceeds are: a) Tata Motors sells 49% stake in Tata Motor finance at Rs 6.4 billion (valued at 1x FY09 P/BV), b) Rs 48 bn of free cash flow generated from domestic business and c) Rs 11.6 bn stake sale in Telcon

We have increased our target price to Rs 974 (from Rs 922) as we now value Telcon at a 20% discount to the current deal valuation. Our estimated value for Telcon increases from Rs 6/share to Rs 41/share as we take the current deal as the benchmark for valuations from P/E methodology earlier. Our subsidiary value estimate increases to Rs 117/share from Rs 90/share previously.

Our consolidated earnings estimate have been increased by 2.7-3.4% in FY11- FY12e factoring in cash proceeds and increase in minority interest

The stock currently trades at 8.7x on our FY12e consolidated estimates.

Catalysts and action
Develeraging of balance sheet and improvement in Jaguar and Land Rover operations are key catalysts for stock performance.

To read the full report: TATA MOTORS