How Exposed Are Our Auto Ancilliaries?

In India the demand for passenger vehicles (PVs) and commercial vehicles (CVs) have declined by 2.2% and 14.5% respectively during August - October 2008. This has resulted in a slowdown in India's auto ancilliaries. From the above table it is observed that currently exports account for 20% of sales for Indian auto ancilliaries. The lion share of their sales goes to domestic market. As the market demand in most global auto markets have been pressurized, the auto ancilliaries having high exposure to domestic and global OEs are likely most susceptible to a decline in sales and profitability.

The data shown above reveals that the companies (like Exide, SKF India, Apollo Tyres, MRF) that have strong exposure to the domestic replacement market are relatively better-off to counter the market slowdown. However Chinese imports could be a threat for tyre companies. The vendors will reap benefits of the lower commodity prices and rupee depreciation in the near term but, it will be slightly offset by drop in realisations as the market demand is cooling down. Nevertheless domestic OEs (especially two-wheeler manufacturers) will likely benefit from lower component prices.

Pink Slips

I was reading an article by Saritha Rai on Indian Express website titled 'I signed the letter, took the cheque and walked out... it was over in five minutes'. The protagonist of the story is a 27-year old professional in India's outsourcing industry who had only seen the good times ... and was sacked unceremoniously from his company, the obvious reason being the "bad market conditions".

What I want to say is, what we always heard of happening in the West has arrived in our Bangalore as well. I think the situation is similar, if not more morbid, in Gurgaon, Noida, Pune or Hyderabad where the outsourcing industry is the mainstay of their economies. During my years of working (2005 - 2007) at Convergys in Gurgaon, I have seen how the young professionals took the advantage of the explosion in the outsourcing industry by hopping companies, demanding and getting handsome pay hikes.

Many of my peers lived a lavish lifestyle on their plastic money; a few of them had bought a house or owned a car by taking loans. I can imagine if some of them lose their jobs in a jiffy may land up in a jobless state with a market debt of Rs. 30 - 40 lacs (60 - 80 thousand US$). Most of these young professionals were spendthrift and had the least propensity towards savings. In the past years the same people who were besieged with jobs are now having the nightmare of "pink slip".

But the recent, serial bust-ups in Wall Street and a recessionary US economy has badly hit Indian outsourcing firms. With American companies — their biggest customers — facing an economic dip, outsourcing companies are cutting back and, in turn, choking the job market. As a ripple effect it is showing up in unexpected ways in Bangalore; restaurants and drinking lounges reporting 30% - 50% dip in revenues, real-estate companies slashing prices of apartments and introducing low-end options, and outsourcing workers switching over to two-wheelers and company cabs rather than driving their cars.

A Jeffersonian Statement

Thomas Jefferson wished to be remembered for three achievements in his public life. On his tombstone, it reads that Thomas Jefferson was "author of the Declaration of American Independence, of the Statute of Virginia for religious freedom, and Father of the University of Virginia" and, as he requested, "not a word more." Historians might want to add other accomplishments--for example, his distinction as an architect, naturalist, and linguist--but in the main they would concur with his own assessment.

In 1802, during the years of his presidency, he made the following statement which shows his ability to envision future.

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."

This is more or less the exact situation that America is subjected to now.

Real Estate Developers Are Faced With Severe Liquidity Crunch

As a result of rising interest rates on home loans and reluctance on the part of developers to reduce prices on their projects, demand for real estate in India has slowed significantly, leading to significantly lower cash generation for real estate companies. Developers are now faced with a severe liquidity crunch, as the worsening macro environment coupled with the increased risk perception of the sector has made fundraising extremely challenging.

Real estate developers have relied on short-term debt (40-50% of total debt) for financing land purchases and funding construction of leased assets. Many companies have reported that borrowing costs have increased by 250-300 bp over the past few months, the bigger issue has been availability of financing – news articles and market stories suggest that a number of banks and mutual funds have stopped lending to real estate developers fearing defaults. Given slowing sales and weak cash-generation, it is estimated that some developers will be hard pressed to meet their repayment commitments.

Another issue is monies raised by some of the promoters of these real estate companies by pledging their shareholding – the impact of which is extremely difficult to assess given the lack of transparency in such transactions, which increases the perceived risk of companies.

Asia Is More Attractive

The Morgan Stanley Capital International (MSCI) emerging markets stock index is down 55 percent year-to-date. Investors caught up in the credit crisis sold their profitable emerging market positions in order to raise cash to protect their core positions. This deleveraging process has been indiscriminate across regions, countries and asset classes and continues even as central banks and governments shove cash into the markets in order to keep up the flow of money in the credit markets.

But, emerging market equity prices are expected to bounce back from the indiscriminate dumping of the sector faster than developed stock markets. In particular, Asian emerging market stocks are now expected to outperform their peers because the sharp decline in commodity prices will bring down their manufacturing costs and make them more competitive in exports as well as feed resilient domestic demand.

China's benchmark Shanghai Composite Index is down nearly 65 % year-to-date while India's 30-share BSE Index is down 51.50 % over the same period. India is a lot less expensive than they were but nevertheless, relative to other emerging markets, it remains one of the more expensive stock markets. Russia at 3.5 times perspective earnings versus 7.5 times for emerging generally makes Russia cheapest market in the world. As for Egypt, it tends to have a relatively low correlation with both developed and emerging markets because it is under-owned and has more investment coming from the region or from domestic sources.

Global Needs Assessment: People Are Still Less Welcome

International migration is part of today’s often discussed globalization. International movement of capital, goods, and labor have accelerated the pace of industrialization yet, today capital and goods move freely across borders, but people are less welcome. All developed countries have received significant numbers of migrants irrespective of the continent they are situated in.

In 2009, UNHCR is launching an annual Global Needs Assessment (GNA) in its operations worldwide to comprehensively map the real state of the world's refugees and people of concern under its mandate.

The aim is to outline the total needs, the costs of meeting them and the consequences of any gaps. The GNA will be a blueprint for planning, decision-making and action with governments, partners, refugees and people of concern.

In early 2008, a pilot GNA using a rigorous methodology drawn from UNHCR's Strengthening Protection Capacity Project, was carried out in eight countries – Cameroon, Ecuador, Georgia, Rwanda, Thailand, Tanzania, Yemen and Zambia. It focused on the unmet needs of refugees, internally displaced people, returnees, asylum seekers and stateless people.

The results published in the report 'Refugee Realities' revealed a sobering reality of substantial and disturbing gaps in protection, including basic needs such as shelter, health, education, food security, sanitation and measures to prevent sexual violence. It showed that a startling 30 percent of needs were unmet in the pilot countries – a third of them in basic and essential services. UNHCR is already actively involved in these sectors, but not to the levels required.

Results showed a clear need to improve and ensure access to asylum systems with better reception facilities and procedures, registration, documentation and border monitoring. Training and technical support are also needed to increase the capacity of governments to adequately respond to people of concern. Women and children require better protection with improved prevention and response measures for sexual abuse and violence, as well as strengthened child protection programmes.

To address the needs gap in the eight pilot countries, UNHCR has included requirements totalling $63.5 million in its 2009 budget.

In a parallel effort to the GNA pilot, all UNHCR field offices provided their rough estimates of the financial requirements to meet the total needs of each population of concern. The global total reached USD3.8 billion, highlighting the stark reality that UNHCR has only a portion of the funding required for its responsibilities towards 31.7 million people of concern at the current annual funded budget of USD1.8 billion.

With a current operating budget that cannot support all needed interventions, UNHCR must make tough decisions on prioritizing, to the detriment of those it is mandated to protect.

Barack Obama: From Frying Pan To Fire

Obama’s domestic agenda is clearly ambitious and will undoubtedly be an aggressive repudiation of the policies of the past eight years. It is an agenda heavily dependent on tax increases from higher-income earners, which should be supported by a like-minded. However, Obama’s aspirations may be constrained by external factors beyond his control. Even with expanded Democratic majorities in Congress, the political reality is that the financial crisis will likely dominate his playing field, hampering to some degree his ability to tackle the other pillars of his domestic agenda.

As the federal government responds to the credit crunch and growing recessionary pressure, Obama will need to dedicate significant federal funding to expedite recovery, thereby siphoning money from other priorities and increasing pressure on the national deficit and debt. The final 100 days of the Bush administration have been a churning cauldron for the President and the markets, and Obama will quickly learn what it is like to go from the frying pan into the fire.

Indian Commercial Banks: Even More Privileged Now

Over the last 45 days, RBI has lowered high Reserve requirements by up to 7% of deposits (20%+ of SLR/CRR), narrowed the repo/reverse-repo corridor by 150bps, and been proactively accommodative (rather than preachy) of banks’ liquidity and other needs. These actions are precipitated by extraneous events, possibly temporary in nature, and (in part) mirror global actions. But they could represent the beginning of a structural thaw in the overtly cautious and economically burdensome policy environment for India’s banks.

India’s banks have always dominated the domestic financial landscape – garnering 50%+ of household savings and 90%+ of system deposits. They were, however, being increasingly challenged (on the savings and lending sides) by rapidly growing MFs, life insurers, and in-flowing foreign capital. This has probably changed with capital savers and users flocking to banks (with fairly implicit backing of the government/RBI), commercial banks now appear even more privileged.

RBI's Mid-Term Review of the Annual Policy Statement for 2008-09

The Reserve Bank of India has reviewed the current and evolving macroeconomic situation and liquidity conditions in the global and domestic financial markets. In its Mid-Term Review of the Annual Policy Statement for 2008-09, the Reserve Bank of India indicated that in the context of the uncertain and unsettled global situation and its indirect impact on our domestic economy and our financial markets, it would closely and continuously monitor the situation and respond swiftly and effectively to developments. In doing so, the Reserve Bank will employ both conventional and unconventional measures. Global financial conditions continue to remain uncertain and unsettled, and early signs of a global recession are becoming evident. These developments are being reflected in sharp declines in stock markets across the world and heightened volatility in currency movements. International money markets are yet to regain calm and confidence and return to normal functioning.

It was also indicated in the Mid-Term Review that the current challenge for the conduct of monetary policy is to strike an optimal balance between preserving financial stability, maintaining price stability and sustaining the growth momentum. Inflation, in terms of the wholesale price index (WPI), has been softening steadily since August 9, 2008 and has declined to 10.68 per cent for the week ended October 18, 2008. Globally, pressures from commodity prices, including crude, appear to be abating. The moderation in key global commodity prices, if sustained, would further reduce inflationary pressures. On the growth front, it is important to ensure that credit requirements for productive purposes are adequately met so as to support the growth momentum of the economy. Domestic financial markets have been functioning normally. Prudent regulatory surveillance and effective supervision have ensured that our financial sector has been and continues to be robust. However, the global financial turmoil has had knock-on effects on our financial markets; this has reinforced the importance of focusing on preserving financial stability.

Not Far Away From 10,000

India’s bellwether stock index, the Bombay Stock Exchange’s (BSE) Sensex, soared towards the psychologically important 10,000 mark on Friday, powered by pent-up energy from traders who missed Thursday’s strong rally in Asian markets because Indian markets were closed on account of Bhai Dooj, a Hindu festival.

The Sensex closed at 9,788, adding 8.22% or 743 points, but analysts said the rally will last if only the central bank steps in with aggressive support by cutting rates and releasing money into the system.

After the recent spate of rate cuts by central banks across the globe, led by the US Federal Reserve, many more central banks are expected to announce rate cuts next week. This could see at least some of the funds parked in safe and liquid US treasury bonds coming back to Asian equity markets, according to global analysts. The allocation of such capital will favour those Asian markets where central banks are more focused on growth, these analysts add.