Global Investing

Indian stocks — is the gloom about to lift?

INDIA-ECONOMY/BUDGETIs the gloom finally starting to lift  for Indian stocks? Deep in the red this year, the market has nevertheless risen 3 percent in March. That’s despite oil’s surge over $100 a barrel. So what gives?

On the face of it, it’s a terrible time for the Indian market. Soaring oil prices, near double-digit inflation and a hawkish central bank  — all this will almost certainly ensure that India misses its 9 percent growth target for the coming fiscal year.  But the Mumbai market fell 15 percent in the first two months of 2011 and that means valuations in India, always an expensive market, may be approaching reasonable levels.   ”A sharp rise in oil is always a tail risk for India but given equity valuations, we think it is a good time for stock picking with a 12-month view,” Morgan Stanley analysts told clients in a note.

And oil does not necessarily spoil the party, Morgan Stanley says. MS analysts note that of the six oil supply shocks over the past three decades, only the 1990 Iraq war left Indian equities in the red six months after the shock. That was due to a balance of payments crisis which is not likely this time. So, excluding the 1990 event, the Sensex index has risen 24 percent on average in the six months after an oil shock, MS says.

Well then, is it time to start buying? Most are still cautious, citing valuations, as well as oil. Some like John-Paul Smith, Deutsche’s chief emerging equity strategist, say they will stay neutral for now. Smith says India will start to look attractive when prices fall to two times book value – it is currently at 2.2 times book.   But he still sees oil as key, adding: “If the oil price falls, the two standout beneficiaries in emerging markets will be India and Turkey.”

The Naked Truth

Do independent asset managers perform better than bank-run funds?

Lipper was recently approached to analyse the difference in performance between funds operated by broader financial services companies (banks and insurers) and those managed by ‘pure play’ asset managers.

This research came in the wake of comments made by Peter Hargreaves, founder of IFA Hargreaves Lansdown, who said in September that many funds in the UK run by banks were “seriously crap”.

With the temperature apparently rising, it might be a little foolhardy to enter such a debate. Yet objective analysis is surely where independent fund researchers can best provide a useful contribution. Besides, it might be gettin’ hot in here, but I for one will not be takin’ off my clothes.

from Davos Notebook:

Will Goldman’s new BRICwork stand up?

RTXWLHHJim O'Neill, the Goldman Sachs economist who coined the term BRICs back in 2001, is adding four new countries to the elite club of emerging market economies. But does his new edifice have the same solid foundations?

In future, the BRIC economies of Brazil, Russia, China and India will be merged with those of Mexico, Indonesia, Turkey and South Korea under the banner “growth markets,” O'Neill told the Financial Times.

Hmmm.  Doesn't quite grab you like BRICs, does it? The Guardian helpfully offers an amended branding banner of  "Bric 'n Mitsk" (geddit?). But which ever way you cut it, it's hard to see a flood of investment conferences and funds floating off under the new moniker.

from MacroScope:

Scams from Abuja to Reykjavik

It suffered the collapse of its currency, economy and banking system so being invoked in a version of the notorious Nigerian email scam is one of the smaller humiliations endured by Iceland.

The confidence trick, which has roots in the 18th century, usually involves an email from someone claiming to be either a deposed African dictator or a Nigerian lawyer, promising a sum of money in return for help to access a substantial fortune.

But the latest spam email making its rounds purports to be from Iceland, one of the highest profile sovereign casualties of the global financial crisis. This version of the email is supposedly from a "devoted christian (sic)" from Iceland", a widow seeking help to access $6 million in a Canadian bank left to her by her husband who worked for an oil giant for 19 years.

from MacroScope:

Are CDS markets the euro zone’s iceberg?

icebergIn an unfortunate turn of phrase at the height of his country's current debt crisis, Greek Finance Minister George Papaconstantinou on Monday compared his government's Herculean task in slashing deficits and debts as akin to changing the course of the Titanic. Sadly, we all know where the great "unsinkable" ended up almost a century ago and I'm sure,  given the chance, Mr Papaconstantinou would have chosen another metaphor. But if the Greek economy (or perhaps the euro zone at large?) is to be cast as the Titanic, then what is its potential iceberg?

For some euro politicians, look no further than the sovereign Credit Default Swaps market. France's finance chief Christine Lagarde said as much last week when she questioned "the validity, solidity of CDSs on sovereign risk" and warned speculators to be careful as regulators took a "second look" at the market and European governments closed ranks. Lagarde, of course, is not alone.  You can be sure CDS are being examined long and hard by Spanish intelligence services investigating the "murky manoeuvres" in the debt markets.  But what is the exact charge against CDS?

CDS are ways to buy or sell insurance on the risk of debt defaults without needing to own the underlying bonds in the first place. It's a way of hedging your debts, if you like, without having to go through the often more complicated game of selling securities short (or selling borrowed paper). In essence, it allows you to take a bet on default without having to go to the trouble of owning the bonds you're insuring against.  Some critics, not unreasonably, would view this as the epitome of the casino capitalism that has elicited so much public outrage over the past three years . The fear is this market has become the tail wagging the dog.

Act now or forever hold your (b)-piece, Obama

It appears the penny has finally dropped in Washington. Bank bailout watchdog Elizabeth Warren, chair of the Congressional Oversight Panel, has unveiled a report that outlines the shocking state of the U.S. commercial mortgage sector, which left unaided could spark “economic damage that could touch the lives of nearly every American”. The Havard Law School Professor and her panel colleagues are talking the kind of apocalyptic language that may just shake the White House and its star policy advisers into facing problems we have now rather simply obsess about those we may or may not encounter in the future. The global banking system may well need some kind of Volcker-esque guidelines to curb the next generation of excessive risk-takers but Obama is putting the cart before the horse in his efforts to haul the economy back on track. Certainly, his and the previous administration has toiled long and hard to stabilise the U.S. housing market, propping up Fannie and Freddie and their dysfunctional offspring, but the subprime mess has distracted attentions from the toxic commercial market, where the clean-up task is no less important. Warren reckons there is about $1.4 trillion worth of outstanding commercial real estate loans in the U.S that will need to be refinanced before 2014, and about half of them are already “underwater,” an industry term that refers to loans larger than the property’s current value. But bank brains are wasting too much time figuring out how the so-called “Volcker rule” might affect their operations and future profitability, instead of getting their arms around underwater real estate loans that could break their institutions in two long before the anti-risk measures even take hold. Obama’s premature challenge to their investment autonomy, which he says cultivated the collapse of banks like Lehmans, is like suturing a papercut while your jugular gapes wide open. Maybe now, as Warren’s report hammers home the threat posed by unperforming commercial real estate debt, Obama will give Wall Street a chance to refocus on the “now” and worry about “tomorrow”, tomorrow.

It appears the penny has finally dropped in Washington.

Bank bailout watchdog Elizabeth Warren, chair of the Congressional Oversight Panel, has unveiled a report that outlines the perilous state of the U.S. commercial mortgage sector, which left unaided could spark “economic damage that could touch the lives of nearly every American”.

The Havard Law School Professor and her panel colleagues are talking the kind of apocalyptic language that may just shock the White House and its star policy advisers into facing problems banks have now rather simply obsess about those they may or may not encounter in the future.

From Reuters TV: ING’s Greater China fund likes telcos, banks

Michael Chiu, senior investment manager at ING Investment Management, has China Mobile as its biggest holding, and is overweight the banks as it plays down the potential impact of NPLs.

from Summit Notebook:

Private banking: you may be worth it

Those who tend to avoid posh restaurants in Geneva’s expensive Rue du Rhone district and famed private banks because they believe they are not rich enough may be given a second chance at century-old wealth manager Julius Baer.

The Swiss private bank, which has made its name thanks to the services it offers to the ultra-rich, believe its powerful high-end brand may be keeping potential clients away.

“It’s a bit like the nice chic restaurant on Rue du Rhone you walk by 10 times and think: “I am not so sure I can go in there, it might be a bit sophisticated,” Boris Collardi, Chief Executive of Bank Julius Baer, told the Reuters Wealth Management Summit in Geneva.

from David Gaffen:

Ken Lewis: When Buying the Dips Fails

In a bull market, buying on the dips works like a charm. Pullbacks in the market are quickly cannibalized by hungry investors looking for anything that smells like a bargain.

 

In a bear market, dip-buying does not work so well, as supposed bargains turn out to be value traps. This brings us to Ken Lewis, retiring as CEO of Bank of America. If dip-buying is a disaster in bear markets, Lewis engineered the M&A version of "dip buying" at the worst time not once, but twice.

He struck first with a $2 billion investment in Countrywide Financial in August of 2007, just before stock markets peaked - and after real estate was already teetering. In a good environment, it's a potentially solid investment. Not so much this one, when Countrywide was at $18 a share, and Lewis doubled down with a $4 billion buy (well, rescue) of Countrywide in January of 2008. That's hit the bank hard due to rising defaults in the housing market, which some analysts believe have not peaked.

from David Gaffen:

Citigroup Is the Economy

It used to be that Citigroup was one of the market's most important stocks, if not the most important. At the nexus of the banking, securities and lending industries that benefited most from the easy-credit boom of the middle of the decade, its success as a stock mirrored the market and the economy.Somewhere around 2006, when people started to call for a breakup of the company, it was supplanted by a company even more tied to the derivative-fueled mess that masked the holes in the economic landscape - Goldman Sachs.

But Goldman continued to earn massive profits while Citigroup nearly died a painful death. Shares eventually fell to less than $1 a share, it was kicked out of the Dow and investors started to view other consumer banks as better indicators of the market's health.

Still, there's a chance that Citigroup may become more important once again, provided it survives (with substantial help from the government). Kevin Depew, recently writing on Minyanville.com, noted that most of Citigroup's short-term debt has returned to spreads present before the blowup of Lehman Brothers, suggesting that bond investors believe the debt crisis has receded. He notes (using a bit of technical analysis) that "Citigroup right now might again be The Most Important Stock in the Universe."