Government policies — both in developed and emerging markets — to smooth economic cycles may in fact be simply increasing volatility
July in the US is one of the hottest months of the year. It certainly was on the US stock markets. The S&P has climbed almost 10% since the end of June. It has mimicked the rally that occurred this spring. Does this portend the beginning of a persistent recovery or is something else happening?
It was due to earnings. In both cases the rallies were caused by earnings, really good earnings. The present level of earnings for many companies and their forecasts of future growth have led to higher valuations for many US companies and a rise in their stock prices. Is this a prediction for better times? Probably not, but it does tell us something very important.
To start, earnings are always suspect. Accounting allows for many variables. Revenues can be brought forward, pushed back, extended, expanded, hidden, distributed or they can simply be made up. The same is true with costs.
Earnings are also retrospective. They represent information that can be several months old. They are based on trends and decisions of the past, not the future. So rather than crystal ball, they represent a rear-view mirror.
Still, the earnings this season have been very good. They have exceeded expectations by more than 10%. In the US markets with over 70% reporting second quarter earnings, profits look to have grown 42% and profit margins nearly 10%. Some companies have done very well indeed.
The American delivery company UPS’ earnings jumped 71% on revenue growth of 13% with improvement across all business units. Its competitor FedEx forecast earnings to grow by 32%. Two Dow Jones components — the US heavy machinery manufacturer Caterpillar and the chemical giant DuPont both did well as did Cummins Engine Company, whose second-quarter profit more than quadrupled.
In contrast, other US companies, specifically companies selling to consumers in the US like Home Depot, Kellogg, Colgate and CVS all had disappointing earnings. The difference is important. The UPS, FedEx, Caterpillar, DuPont and Cummins earnings all had one thing in common. Most of their profits came from international sales and for international sales read Asia. For DuPont the Asia-Pacific region increased revenue by 47%. Cummins realised two-thirds of its revenue outside of the United States. UPS volumes in Asia grew over 40% and international operating profits soared 78%. The companies that did not do as well were focused on the US.
This is hardly news nor unexpected. It is common knowledge that emerging markets have been growing faster than developed markets. Recently markets have fallen because the recovery in the developed countries seemed to be in danger. Developed markets were plagued by worries about sovereign default and double dips, most of which turned out to be overblown. Now they are rising because of expectations of future growth in younger economies. But what if this is about to change?
Emerging markets have a different problem. Rather than slowing, they have been overheating. The main cause for concern in emerging markets right now is inflation. In India, Pakistan, Egypt and Vietnam the inflation rate is already at double digits. The Reserve Bank of India has raised interest rates in an effort to get ahead of the problem, but they already may be behind it. Inflation is accelerating.
In theory China’s inflation is contained. The government has imposed restrictions on the real-estate market to try and return the price rises to something that looks vaguely sane. But it has announced targets for new loans for 2010 at 7.5 trillion renminbi ($1.1 trillion). This is 90% more than the 4 trillion renminbi ($585 billion) in new loans extended in 2008. The mere size of this lending spree must ultimately unleash inflation. It has already created a potential loan default rate of 23% and rising. No doubt China’s tightening, if it is in fact tightening, is just beginning.
It is really a question of the effectiveness of monetary policy. The fear has been that the loose monetary policy in developed markets would spark inflation. It hasn’t, but so far it has not been very effective in stimulating growth. In contrast, the contractions in emerging markets are supposed to cool inflation. If they don’t, will the monetary authorities in emerging markets follow their developed market colleagues and just apply more of the same medicine? If they do, will it choke off the present source for much of the world’s growth?
The real point is that despite the assurances of central bankers, government attempts to control markets can have enormous unintended consequences. Policies to smooth economic cycles may in fact be simply increasing volatility. The fall is coming and it is a season of dramatic change, for both the weather and the markets. The earnings optimism is likely to be as short as summer itself.
(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).
It looks like the manufacturers of this product have run out of new or relevant ideas on how to push the brand
'Daant fit toh life fit'. That's the new message from Anchor toothpaste. Well, er, we knew that already, no? I mean, you can't be having a good life if you are in urgent need of a root canal, correct? Or, for that matter, 'Kidney fit toh life fit', 'Heart fit toh life fit', 'Kaan fit toh life fit' are also valid, right? So then what are they saying out here?
Well, I suspect makers of Anchor Toothpaste could simply not find anything new or relevant to say for their brand. Germs and plaque have become infra dig.
Colgate has already hired all the dentists in the country to plug their different variants (isn't that against ASCI guidelines? Does anyone care?). And Close Up has adopted street kissing and made it its own. So it seems the poor Anchor guys had no option but to weave in a convoluted tale. A while back, they called Anchor Toothpaste a '100% vegetarian product' (whatever that means), but clearly that either didn't work out with the veggies, or they have switched loyalties.
So now they are asking you to have a blast in life, with the help of power teeth. The TVC stars an exuberant young bride (who looks like she stays at Malabar Hill). She obviously has spent more time in her life at spas and Page 3 parties rather than inside a kitchen. She's seen trying to bake a cake for her beefcake partner. Grooving and dancing (an ancient Hindi film song belts away in the background), she botches it up and sends the cake crashing into the dirty wall. But since it's turned out steely-hard, nothing happens to it. The hubby (who looks like he stays at Nalla Sopara) doesn't want to displease a pretty new bride (you don't want to upset Malabar Hill girls!), and chews it away as if it was popcorn. Such are his steely teeth, courtesy Anchor.
The verdict: It's not going to work. There's nothing in the commercial about what's so hot inside Anchor toothpaste that I must believe in this sort of a claim.
It's a straightforward lifestyle commercial, where the brand manager is clearly hoping, praying, that some execution trick will inject life into sales. That's really narrow thinking. People will recall the bumbling bride (and maybe her entirely mis-matched hubby), but not Anchor.
Perhaps the brand should get back to being vegetarian again.
While IDFC, ICICI Bank and IL&FS are expected to launch tax-free infrastructure bonds, robust activity on this front is expected only in the last quarter
IDFC, ICICI Bank and IL&FS at present are the three frontrunners likely to launch tax-free infrastructure bonds. While this tool of investment has been in discussion since the Budget announcement, an investor can expect launches of such bonds only in the last financial quarter.
"As these bonds come with a tax advantage, most people will show interest and subscribe to them only in the last quarter of the financial year.
This is when most tax-saving tools are in demand," said an official from a leading infrastructure company, preferring anonymity.
According to sources, while IDFC and ICICI Bank are most likely to launch such infrastructure bonds, IL&FS may also join the list.
An executive official from IDFC was also quoted in a news report expressing willingness to raise funds through such bonds. "Since we have a lot of leeway in raising resources with this new status (as an infrastructure finance company), we will not be looking at applying for a banking licence. But, at the same time, we are open to the idea of raising funds by issuing retail bonds or tax-free infrastructure bonds," the official was quoted as saying in a news report.
Chanda Kochhar, CEO, ICICI Bank, has also spoken in favour of such tax-free bonds. "Tax-free bonds would prove to be a cost-effective source of funding for banks and enable them to ramp up their infrastructure financing activities," Ms Kochhar has been quoted in various news reports.
An email query sent to ICICI Bank, IDFC and IL&FS remained unanswered at the time of writing this story.
Last month, the Central government had allowed non-banking financial companies (NBFCs) to issue tax-free infrastructure bonds.
The Union Budget has proposed to offer tax relief on investments up to Rs20,000 in long-term infrastructure bonds.
Issuance of tax-free infrastructure bonds is among the multiple options that the Central government is considering in order to cater to the huge investment outlay planned for infrastructure. The 12th Five Year Plan (2012- 2017) has an investment outlay of $1 trillion for infrastructure.