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Wednesday, December 2, 2009

CNG Cylinders Market Summary

The outlook for high-pressure CNG cylinders market in India is positive. With Government initiatives for facilitating the discovery & exploration of natural gas, growth of robust distribution channels, fiscal benefits to the manufacturers of cylinders, retrofitting of CNG kits, tax exemption for commercial & heavy vehicles and new licensing policy, the industry is likely to register impressive growth over the coming years.

Wednesday, August 26, 2009

Recession Update: Bulls vs Bears

After touching a dangerous high of 364 basis points late last year, the benchmark LIBOR-OIS spread reached to a level of 25 basis points on August 3, 2009. In layman terms, it indicates the extent of credit market rotations. The current levels are indicative of easing credit markets, which almost froze after the collapse of Lehman Brothers, and other major players on the Wall Street.

Wednesday, August 12, 2009

A Quick Look At Why Gold Is A Great Investment

Updated: May 2016

Gold needs no introduction – a cherished commodity in some cultures and one of the most preferred investments, en said specially in turbulent times. If you are investing, take it as a long term value proposition, rather than a short term profit making tool. Whenever the global economy hit a roadblock, gold had witnessed a surge in demand. Over a decade spanning from May 2006 to May 2016, gold price has more than doubled from approx USD/oz 682 to USD/oz 1,302!

In the shorter term, stock markets may appear glossier with quicker returns on the back of frenzied activities during bull runs. On the flip side, the same markets can be very volatile and often ‘sentimental.’ While the matured stock markets are often said to mirror the fundamental strength of the economy, they react to news and often, half-baked information, at the blink of the eye.

Indian Measures to Counter Economic Recession


Ever since, the first signs of the recession began showing in India, the Government has come up with various incentives, apart from measures by RBI. The Central Bank has took some steps, such as reducing the benchmark lending rate; lowering cash reserve ratio (CRR); and easing lending norms for commercial banks to provide boost to the housing sector lending. To provide a stimulus to the export sector, RBI has enhanced the credit period for exporters from 6 to 9 months.

The Government, in its turn, plans to reduce sales tax by 4%, to be funded through USD 4 billion of Government spending. In the introductory speech (dated February 26, 2009) of the Commerce and Industry Minister on the announcement of Trade Facilitation Measures, following measures to combat the economic slowdown were discussed:

  • Interest subvention of 2% till December 31, 2009, for certain employment intensive sectors 
  • Additional funds of INR 1,200 Crore for Central Sales Tax/ Terminal Excise Duty/ Drawback refunds
  • Extension of Duty Entitlement Pass Book Scheme (for saving on Customs Duty) up to December 31, 2009
  • Restoration of Duty Entitlement Pass Book rates for all items at rates prevailing prior to November, 2008
  • Increase in Duty Drawback Rates on certain items effective September 1, 2008
  • Around INR 2,300 Crores have been provided through various existing schemes for cushioning the adverse impact of declining exports 
Since, the fiscal and monetary measures take approximately 8-12 months to bring about the desired effects, the impact will be fully visible from September 2009.

Eurion Constellation is a research and consulting firm serving businesses in U.S., Europe and India. The research services have a global reach with focus on industry / market / economic research, financial analysis, equity research, company valuations and report writing. The consulting wing in India focuses on the startup and SME sectors. Please feel free to get in touch for any business requirements. Visit http://www.eurionconstellation.com

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Subprime Crisis In A Nutshell

The US Subprime crisis (over USD 5 trillion in losses) began to reveal itself somewhere in the last quarter of 2006. It's full impact was still anyone's guess. However, soon it began gripping the global economy, toppling financial markets; setting off recession; and pushing marginal countries, like Iceland, on the verge of bankruptcy. The crisis was more a result of blind enthusiasm riding on the back of a decade long rally from mid-1990s to 2006, and utter disregard for the fundamental business cycles related to the real estate markets. The market players, during the building up of the U.S. housing bubble, seemed to carry the misplaced optimism about the rising property prices.

Driven by oil and food prices in the world markets in 2006, inflation started climbing. At the same time, the property prices started climbing on account of oversupply of built-up homes. The cost of the mortgage loans (most of which were adjustable rate loans) shot up for most borrowers. As a result, the loan to rental value ratio also began increasing considerably. The matters got worse, as a sizable number of homeowners driving the market rally, were subprime borrowers. With the rise in inflation, the purchasing power of the subprime borrowers eroded and they began defaulting on loan repayments. Since, the Alt A, or subprime loans (for the borrowers with no, or inferior credit records) carry higher interest rates than prime loans, the lenders freely offered loans when prices were rising. The U.S. Government's encouragement to subprime lending, especially through its sponsored organizations, Freddie Mac and Fannie Mae, added steam to the then rallying markets. The highly developed secondary mortgage market and its inherent financial engineering techniques fueled the crisis further. Investment banks and other financial institutions repackaged the mortgage loans as MBS (Mortgage Backed Securities) or CDO (Collateralized Debt Obligations), thereby maintained money supply for further lending, apart from taking large exposures in such securities.

Year 2007 started on a grim note of an impending possibility of an approaching financial turmoil and by mid-2008, it became clear this predicament would not remain limited to the US. The fall of 158 year old Lehman Brothers triggered a chain reaction world over – the leading institutions at the Wall Street were wiped out, the world stock markets crashed, the credit lines froze, the business activities dipped and there was an overall liquidity crunch.

Eurion Constellation is a research and consulting firm serving businesses in U.S., Europe and India. The research services have a global reach with focus on industry / market / economic research, financial analysis, equity research, company valuations and report writing. The consulting wing in India focuses on the startup and SME sectors. Please feel free to get in touch for any business requirements. Visit http://www.eurionconstellation.com

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Tuesday, August 11, 2009

Impact Of Recession On Developing Countries

The recent tidings in the global market has put a question mark on the decoupling theory, where nations are not impacted by the state of other economies. The subprime crisis concerned primarily the US, but had a ripple effect on almost all of the other nations due to the interdependence and interlinking of individual economies. The Emerging Economies, though, have been robust in terms of fundamentals, were severely affected by the global meltdown. Developing nations like India, China and other Southeast Asian countries have the potential to pull out the World out of the recession, but it is expected to take longer than previously thought.

 
What Is Pushing The Oil Prices?

Arguably, oil prices have been both cause and effect of the current economic downturn. Crude prices began their rally in 2007, hitting an all time high of over USD 140 per barrel in June 2008. Following graph represents the price trend of crude oil in years 2008 and 2009.


Source: Basket Price Archives (OPEC Website) 

Crude oil price, one of the key drivers of global inflation rates, is traded internationally in New York and London. The trade is denominated in US Dollars, with major players from developed countries dominating the market, which explains the effect of Foreign Exchange Rates on the price levels of crude, up to some extent. In all market conditions, it is not easy to establish a direct correlation between US Dollar rates and crude prices, nevertheless, in the recent scenario the connection was easy to see. The main factors affecting the oil prices were:

Tumbling Dollar

In the wake of the subprime crisis, when the demand for US assets and investments fell, the demand for US Dollar began sliding, with a corresponding impact on the exchange rates against all of the major currencies. The investors found it prudent to invest in oil futures for hedging their Dollar positions, as rising crude prices made its a safer investment. This propelled the oil prices even further.
Speculation

Speculative trading in oil futures on the expectation of further rise in prices, led to the already high prices to skyrocket.
 
Economic Prosperity

The growth in the emerging markets has been creating demand for fuel and putting upward pressure on crude prices, though this factor has had a smaller contribution in the recent oil price rally. The rising oil prices aggravated the financial troubles of the subprime borrowers, apart from affecting every other segment, deepening the crisis to unmanageable levels.

How Are Developing Nations Affected?

Food Prices and Inflation

The low per capita income in a developing economy makes it quiet vulnerable to the inflationary pressure of oil and food prices. The diagram below, illustrating average percentage consumption on food by per capita, explains the unprecedented levels of inflation in the emerging economies during 2007-2008, directly impacted by the food prices.


Source: HSBC 

Main factors exerting price pressure on commodities market in general and food prices in particular, were crude oil prices and commodities markets. The supposed commodities hedging soon took the form of speculative trading in futures creating a virtual food crisis and pushing millions of people below the poverty line across the globe. According to Center for Research on Globalization (CRG), Montreal, by the year 2008, the average price of rice had risen by 217%, wheat by 136%, maize by 125%, and soy beans by 107%, over the 2006 price levels.

Foreign Investments

Foreign investment through FII route has become a major source of liquidity and volumes in the capital markets of the Emerging Economies, especially, in countries like India and China. This mode of investment largely remains risky, since, it can be liquidated anytime. In fact, the FII activities often set the tone of the capital markets. As the financial crisis grew in magnitude in late 2007, the FIIs began liquidating their holdings in the foreign countries for meeting their obligations back home. The heavy selling by FIIs made created a sudden hiatus in the capital markets, causing the indices to dip steeply, and wiping out investors’ savings in no time.

Consumer Confidence and Consumption

In an attempt to take the essential lessons from the US economy, other nations started resorting to a more cautious, and even conservative approach towards the current economic scenario. They began cutting down their budgeted spending and consumption, starting from non-essentials like holidays, out-of-home entertainment, upgrading technology, clothing, telephone expenses, and replacement items and so on. This reduced the demand for product and services in the market, giving rise to recessionary trends in the economy.

Exports of Goods and Services

According to IMF World Economic Outlook for 2009, the US has formally entered into recession, and is expected to see a growth of meager 0.1%. Therefore, the export demand from this country is in for a contraction. The impact of this will vary in magnitude for different countries, depending upon the volume of their exports targeted to the US. The BRIC (Brazil, Russia, India and China) nations have not been severely hit on this count as they have diversified their exposure to other developed and developing nations. Currently, Brazil’s exports to US account for 3% of its GDP. Similarly, for Russia, India and China, this figure stands at 1%, 4% and 8%, respectively. However, overall export volumes across nations have shown a negative trend in 2008.

Eurion Constellation is a research and consulting firm serving businesses in U.S., Europe and India. The research services have a global reach with focus on industry / market / economic research, financial analysis, equity research, company valuations and report writing. The consulting wing in India focuses on the startup and SME sectors. Please feel free to get in touch for any business requirements. Visit http://www.eurionconstellation.com

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