World
End of the QE experiment and volatility of markets

The problem with any experiment is that they cannot not only fail, but they can create far more harm than what they set out to prove. The market volatility of the last three weeks may be a taste of what is to come

 

Last week the Japanese Central Bank increased its quantitative easing (QE) program. Markets around the world jumped to new highs like a well-trained dog. This week the European Central Bank strongly hinted that it too would be easing. It did not specifically say how or when, but the suggestion was sufficient to raise market expectations for at least a day. The assumption, which may or may not be correct, is that the markets see the central bank action as stimulus that will help grow economies. While it is true that these programs do grow assets, their real effect on global growth seems to be far less.

 

Perhaps, the main and immediate result of the Japanese action was to devalue the yen. It fell 2% against the US dollar. Thanks to almost continuous QE, the yen has fallen 32% since 2011. In theory, this has two positive implications for Japan. It raises inflation in Japan by making imports, especially energy, more expensive. Second, it increases exports. But, the theory does not always work so well in practice. Much of inflation created by devaluing the yen comes from making Japan’s main import, energy, more expensive. This hurts the consumer the most and it is the consumer who is supposed to create the demand necessary for more inflation and growth. Secondly, during the years of the strong yen, many Japanese companies placed their manufacturing overseas. So, while the weak yen flatters Japan Inc.’s balance sheet, it does not necessarily create more exports.

 

Despite all the QE provided by the Bank of Japan, the reality is that growth during the second quarter actually fell by -7.1%. The probability of a rebound in the third quarter is not great. We will know more on November 17th when the preliminary numbers are available.

 

Devaluing the yen has also impacted on Japan’s trading partners. The Chinese renminbi has a fallen against the US dollar but strengthened against the yen. This certainly does not help the slowing growth in China. After years of stimulus, the present growth is 7.3% down from 7.5% and projected to slow further. Bad loans are rising at the state owned banks. Housing prices continue to fall and 70% of the coal miners are in the red.

 

A slowdown in China is hardly good news for most of her main trading partners, which include many emerging markets. Falling growth coupled with a very strong US dollar is the worst news for emerging markets since the ‘taper tantrum’ last year. We now have a new buzzword to describe the present situation. It used to be the fragile five, including Brazil, India, Indonesia, South Africa and Turkey. But now, Russia has been added to what is now the suspect six.

 

These countries generally share current account deficits (CAD) and inflation above 6%. India is probably the best off, but Brazil and especially Russia will have real problems. In a low demand deflationary world with falling oil, gold and commodity prices, those countries that rely heavily on these exports are facing everything from a slow down to a meltdown.

 

Like Japan, the European Central Bank’s actions and threats have not helped. The European economy continues to slow and deflation continues to spread. The fear that central bank stimulus will create inflation has disappeared. What has not appeared is the realisation that central banks cannot create growth. Not yet.

 

But that is the reality. Easy monetary policy either is pushing on a string or seriously wrong. Where it has been successful in creating unsupportable asset bubbles is where the real danger lies. As the Financial Times’ John Authers pointed out, is that “an all-time high for the US stock market is a dangerously exposed bet that central banks can shift not only the markets – everyone knows they can do that – but also the global economy.”

 

The problem with experiments, any experiment, is that they cannot not only fail, but they can create far more harm than what they set out to prove. The market volatility of the last three weeks may only be a taste of what is to come.

 

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and speaks four languages.)

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Soon easier, faster delisting norms for companies

The new norms -- to help companies save cost and time with a faster process and also check any manipulation in share price associated with a longer time-frame-- will be put up for approval at SEBI's board meeting next week

 

To make delisting easier and faster, market regulator Securities and Exchange Board of India (SEBI) will soon announce a new set of regulations wherein time required to complete such an exercise may be more than halved from a minimum of 137 days at present.

The changes are being made after taking into account suggestions made by the industry and other stakeholders, including market entities and investors.

The new norms -- to help companies save cost and time with a faster process and also check any manipulation in share price associated with a longer time-frame-- will be put up for approval at SEBI's next board meeting.

According to sources, the board of SEBI is likely to meet next week. It will also discuss new insider trading norms and listing regulations.

As per the proposed delisting norms, the whole exercise could be completed in more than half of 137 days currently required for completion of the process. At times, the process takes more than a year.

Besides, a company has to make a public announcement regarding the delisting process soon after the board meeting and letter of offer has to be dispatched within a week. The delisting offer would be for a period of four-five days.

Under the new regulatory regime, a company has to make payment or return the shares within a month as against the current practice which takes about three months.

The new rules on the matter come against the backdrop of concerns raised by various entities about existing delisting process which at times is also seen as time-consuming.

The delisting offer will be considered successful if the holding of the promoter (or acquirer) reaches 90% post offer.

Current rules require the acquirer to either reach higher of 90% of the total issued share capital or acquire at least 50% of the offer size.

SEBI may also do away with the requirement for shareholder's nod and bourses' approval for the delisting process.

The offer price could be determined on a 'fixed-price' basis or a two-step process through which the promoter could make a counter offer.

The current delisting regulations were put in place in 2009 and it facilitates removal of the securities of a listed company from a stock exchange with promoters buying out shares held by minority shareholders.

The changes in SEBI's delisting norms are being considered to harmonise them with other regulations, including the new Companies Act and other regulations of SEBI itself such as takeover and buyback norms.

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Fund raising via debt placement in October falls 34% to Rs38,000 crore

During October, Indian companies garnered Rs38,399 crore from debt on a private placement basis, lower than Rs58,578 crore raked up in September

 

Fund mobilisation by Indian companies through private placement of corporate debt securities or bonds plunged by 34% to just over Rs38,000 crore in October 2014.

 

In debt private placements, companies issue debt securities or bonds to institutional investors to raise capital.

 

According to the data available with the Securities and Exchange Board of India (SEBI), companies garnered a total of Rs38,399 crore during October from debt on a private placement basis, lower than Rs58,578 crore raked up in September.

 

Besides, the number of issuances fell to 279 in October from 312 in the preceding month.

 

Fund raising through private placement has been lately subdued owing to a robust performance of the stock market. Moreover, companies are opting for initial public offer (IPO), qualified institutional placement (QIP) and rights issue route to mop up funds.

 

With the latest fund mobilisation, overall capital raised through private placement of debt securities, so far, reached Rs1.84 crore in the current financial year as against Rs2.76 lakh crore mobilised during the entire 2013-14.

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