When financial crisis is an opportunity

The troubles in Greece, Spain, Portugal, Ireland, have forced these countries to refocus their priorities. On the other hand, so-called successful economies like Brazil, India and China may have to pay, perhaps very soon, for lop-sided growth

Investors don't like trouble. Instinctively, like vast herds of wildebeest running across the Serengeti Plain, investors will also often stampede away from assets, markets, and countries that are having problems. Although it often sounds both prudent and cautious to follow the herd, over time it may be a bad idea.

Recently, investors have been savaging the so-called peripheral countries of the euro zone. For one reason or another, countries' sovereign debts have been considered very risky, at least by the default swap markets. Certainly if you look at some of the numbers this appears to be true. However, it might also be prudent to think of something else.

As the American White House Chief of Staff, Rahm Emanuel, said, "You never let a serious crisis go to waste." What he meant was that crises, especially the ones forced on countries or companies by the market, create a climate where reform goes from should to must. The greatest contribution that the market can make to efficiency, and ultimately economic growth, is discipline. And market discipline is never as effective as during periods of economic stress.

One of the most economically stressed countries has been Greece. Prior to the recent economic crisis, the Greek economy benefited broadly from its membership in the European Union and the euro. It allowed the Greeks to borrow at lower rates without the requirement of fiscal prudence.  But it was not simple profligacy that brought the Greeks down. Their monetary problems stemmed from an economically inefficient legal infrastructure.

The Greek regulatory environment is a major detriment to growth. The economy is filled with inefficient state-owned industries that were a heavy burden on both the economy and Greek taxpayers. Its tax system is complex and compliance was a bad joke. There are substantial barriers to entrepreneurship and the labour system fails to align wages with productivity.

Before the crisis, reform of all these barriers to economic growth seemed politically impossible. But the cost of international help required that the reforms proceed. The resulting strikes and riots were evidence that the political fears were justified. Nevertheless, the reforms have gone forward and they will increase Greece's productive potential and economic growth whether it remains within the euro zone or not.

Spain is another country that has recently been a victim of the markets. Like Greece, Spain suffers from inefficiencies within its legal infrastructure. One of the most severe problems is a two-tiered labour system. Centralised, compulsively collective bargaining agreements, indexing of wages and protection for permanent employment worked exceptionally well for those people with jobs, especially those within the civil service. But the system discouraged new hires and so discriminated against the young. The result is an unemployment rate stuck at over 20%.

Earlier this year, Spain's prime minister initially refused to attempt any reform and steadfastly maintained that Spain was not Greece. The recent troubles with the Irish banks and Portuguese sovereign debt have happily refocused his priorities. If market pressure continues, the result will be real reform followed by real growth.

In contrast to the problems of developing countries, economic growth in emerging markets seems positively stellar. The economies of Brazil, India and China were almost untouched by the global recession. They are all now growing at an impressive rate. This is a problem. Over the past two decades all three countries have undergone extensive and often painful reforms of their regulatory systems. The fruits of these reforms are evident in their more recent economic growth and resiliency. Sadly, their success has led them to rest on their laurels.

In Brazil, economic growth has created a new middle class intent on using credit to purchase imported consumer products whose price has been lowered by the strong real. The result has been a deficit and inflation. Since there has been little need, the Brazilian government has not dealt with its tangled bureaucracy, inefficient tax system and poor infrastructure.

The booming Indian economy and the stronger rupee have also pulled in more imports than exports. This trade deficit is being filled by short-term capital. Like Brazil this could easily lead to a disastrous balance of payment crisis.

China's growth has led to a new assertiveness which is based on the false conclusion that their market-controlled economy functions far better than a market system. The optimism and exuberance masks massive problems with their financial system, real estate market and mercantilist export strategies.

In time, perhaps very soon, the markets of China, India and Brazil may have to pay for their success. In contrast, the productivity forced upon Greece by the markets will no doubt reap rich dividends. What investors need to understand is that investment in regulatory reform during a crisis is a signal to change direction and run away from seeming success toward apparent failure.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected])



nagesh kini

6 years ago

The PIGS - Portugal-Italy-Greece-Spain now added Iceland-Ireland all free market countries like the South Asians and Mexico are under going the pangs. Russia and the so-called Eastern Bloc has managed to stay out.
India under no circumstances should opt for rupee convertabilty.
Reduce imports of Californian oranges, Washington grapes and Chinese Ganesha's ( I've been gifted one!), now onions from Pak.

Weekly Market Report: Not yet out of the woods until the Sensex crosses 20,000

The local market witnessed a lacklustre performance in the week ended 10th December on the back of a huge sell-off in the broader markets. However, the announcement of better industrial output numbers for October, on the last trading day of the week, provided some relief and helped the indices pare some of their losses.

Investors will keep a watch until the Sensex crosses the 20,000-mark to make any big moves. The wholesale price index based inflation for the month of November will be announced early next week, providing some direction to the market on that particular day.

The market opened the week flat, as the indices after having crossed their crucial levels in noon trade, could not sustain the gains. A sell-off in select blue-chip stocks kept the market under pressure on Tuesday, forcing a close with a marginal loss in a generally choppy session.

A sell-off in the broader markets on Wednesday, after a news report that intelligence agencies are looking at price-rigging in select stocks, pulled the indices lower at the end of the session. The broader markets were thrashed for a fifth successive day on Thursday on offloading by institutional investors. The losses widened in the post-noon session, sending the indices further southwards. But on Friday, the domestic market made a good comeback, recovering over half the losses it had suffered in the previous trading session. Gains by select blue-chips and stocks in the broader markets supported the rally.

The market ended the week with a loss of 2% with the Sensex declining 458.04 points and the Nifty falling by 135.45 points.

The top Sensex gainers during the week included Wipro (up 5%), NTPC (up 4%), BHEL (up 3%), Jindal Steel & Power and Reliance Industries (up 2% each). The major losers were State Bank of India (down 11%), Reliance Communications (down 10%), DLF (down 8%), HDFC Bank and Reliance Infrastructure (down 7% each)..

BSE Oil & Gas (up 1%) was the only notable gainer in the sectoral space while the BSE IT index ended flat. BSE Bankex (down 8%) and BSE Realty (down 7%) were the top sectoral losers during the week.

India's industrial output soared by 10.8% in October. Robust demand for automobiles, electronic goods and power equipment spurred the growth in factory output, which encouraged finance minister Pranab Mukherjee to exude optimism that industrial output growth would be in the double-digits on an annual basis as well.

The Index of Industrial Production (IIP) had registered a slowdown in the previous two months and was at a sluggish 4.4% in September 2010, after surging by 15% in July.

Food inflation rose again, albeit marginally, to 8.69% for the week ended 27th November from 8.60% in the previous week, which was the lowest since May last year. The upward trend in food inflation also marked a break of seven consecutive weeks of a fall in food prices.

After four consecutive record-setting months, vehicle sales in the country slowed down in November, growing by 17.81% as against 45.93% growth registered in October on a year-on-year basis.

According to Society of Indian Automobile Manufacturers (SIAM), the total number of vehicles sold in the country stood at 12,21,981 units in November this year as against 10,37,232 units in the corresponding month last year. The industry body expects lower sales in December from that in November.

State-owned oil companies are likely to raise petrol prices by Rs1.50-Rs2 per litre early next week, while a Rs2 per litre hike in diesel rates is under government consideration, according to a senior government official. A hike in diesel prices looks imminent as crude oil prices have inched closer to $90 per barrel, widening the gap between domestic retail rates and the import cost.

India's exports in November rose by 26.8% to $18.9 billion year-on-year. Imports also grew by 11.2% in November to $27.8 billion. The trade balance in the month was $8.9 billion. The increase in exports prompted the government to exude confidence that outbound shipments will touch $215 billion this fiscal.

India's foreign exchange reserves grew by $2.41 billion during the week ended 3rd December to $296.40 billion after two consecutive weeks of decline, the latest Reserve Bank of India (RBI) data showed. In contrast, the country's forex reserves stood at $293.98 billion at the end of the previous week. Foreign currency assets, a major component of India's forex kitty, rose by $1.98 billion to $267.23 billion during the week ended 3rd December.

In international news, China's inflation accelerated at the fastest pace in 28 months in November, beating analysts' forecasts. Consumer prices rose 5.1% from a year earlier, driven by food costs, a statistics bureau report showed on Saturday. In October, inflation was 4.4%. Meanwhile, on Friday, the People's Bank of China-the country's central bank-hiked the Reserve Requirement Ratio by 50 basis points. The revision will come into effect from 20th December.


SEBI Chief: Swan song or extension game?

Everybody has all but assumed that SEBI chief CB Bhave is not getting an extension. Will they be surprised?

On Friday, 10th December, CB Bhave, the current chairman of the Securities and Exchange Board of India delivered what was considered a hard hitting piece on autonomy of regulators at the A D Shroff Memorial Lecture. CNBC TV18 anchors called it his ‘swan song’. Other sections of the media proclaimed too that an extension for the incumbent SEBI chairman was out of the question now. Is it?
Mr Bhave had made a pitch for independence and autonomy of regulators saying, "If regulators have to depend on the executive for the release of funds, the question of independent behaviour by the regulators will be jeopardized. It is necessary to carefully consider the pros and cons of taking (away) the financial autonomy from the regulators”. He also mentioned that "regulators do not enjoy protection in terms of the conditions under which their service can be dismissed by the executive," but admitted that this had never been done. Clearly, it seemed that he was in a reflective mood and that can happen when it is clear that he was going.
However, sources in Delhi insist that the game is far from over. They say that it was not by chance that a few weeks ago the Prime Minister’s Office (PMO) wrote to the Finance Ministry to ask why Mr Bhave should not be given an extension. We also learn that although the Finance Ministry has explained its position, the PMO is apparently “putting a lot of pressure” to give Mr Bhave an extension.
Hence, when the selection committee meets on Monday, 13th December, Mr Bhave will be very much in the running for the job although he will neither appear before the selection committee nor appear eager for the post. There is a sense of déjà vu to this situation. Last time around, Mr Bhave appeared for the interview but told the selection committee that he did not want the assignment because of cases pending against the National Securities Depository Limited (NSDL), which he then headed. He also took the opportunity to tell the board about why he felt persecuted by the then SEBI Chairman M Damodaran.
This time around, there are plenty of people feeling just as persecuted by Mr Bhave’s actions and decisions. The most famous of course is the MCX group’s struggle against the series of pro-National Stock Exchange actions by SEBI. The BSE is equally aggrieved, but under its present chairman, S Ramadorai (former chairman of TCS Ltd, who has a close equation with Mr Bhave) has been publicly silent about its issues.
Recently, even the Sahara Group did the unthinkable and issued full-page advertisements across the media to protest what it called the “irresponsible & wrongful ex-parte order” which had left it “sadly astonished”.
These are not the only ones. The entire mutual fund industry has been quietly waiting for the ‘Bhave reign” to end, so have Independent Financial Advisors, so are BSE brokers, who see the value of their shareholding vanish (valued at around Rs4.5 crore) if the report of the Bimal Jalan Committee, set up under Mr Bhave is accepted.
Incidentally, CNBC TV18 also had the market all a-flutter by announcing that an Executive Vice President of Tata Capital, Himadri Bhattacharya, was hot in the race for the post. The other names apparently are R Bandyopadhyay, secretary in the Ministry of Corporate Affairs, GP Singhal, finance secretary Madhya Pradesh, UTI Mutual Fund chief UK Sinha, RBI deputy governor KC Chakrabarty and Dr KP Krishnan, former joint secretary, Finance Ministry.
The market has not even heard of Mr Bhattacharya and given how the Delhi bureaucracy thinks, many believe that he is not senior enough to be a contender. Some say that the name has been included because of the Pay Commission recommendation that private sector talent should also be considered for these appointments. But, as a wag says, “anything is possible in the SEBI chairman’s appointment. The last three chairmen were not in the shortlist of three names that had been sent to the Prime Minister, so don’t be surprised if an entirely new name is sprung on the market too”.




7 years ago

forget the government dear friend, recent article published in MONEY LIFE QUOTES MR SHEKHAR KAPOOR, expressing the thought of DOING things in spite of the government. THAT in deed should be our way of life and our attitude in life.. In fact if i can date back to 1995 when MFs. started gaining ground, the payouts offered by AMCs were as low or negligible as today. THE ONLY thing that has changed since then is the number of MFs you can BOUQUET to your client in terms of portfolio building and maintaining than the commissions earning capablities. You have to change from offering new schemes that were floted every now & then in the past decade by MFs,( that made u get used to earning from the manufacturer than the existing clients),to being a financial friend of ur clients and earning from them. The time spent in marketing and speaking of MFs and the schemes giving good and consistant returns, has had a decade of stories to be told and understood. Rather The MARKET has expanded in terms of the number of munafacturers and their quantity i.e. their AUM size. There was a role that the manufacturer wnated u to play in him being a significant player in the market place over a period of time. What u need to analyse and do NOW, is that, on a constant basis keep a check on the existing schemes that ultimately effect the returns of the clients portfolio, than cherishing scheme specific marketing or goals. AND all said and done if ur client is already capable of doing this on his own he simply needs u as a FRIEND to discuss his point of view. This then becomes the opportunity of asking him to give u a referral of those who need ur services, as ur client cannot manage the portfolio of his friends or relatives due to obvious reasons. This further enhances the scope of advising and building relationships that last long enough than the changing Govt policies. Also bare in mind the Reports that have shown peoples wealth not building up because of mis-selling or wrong doing of the seller in the market place.DO not look down upon this profession, if it all it is in ur case, just put it ahead of all the ones that u would have thought of comparing it with. REMEMBER, ONE THING IN LIFE THAT "CHANGE IS THE ONLY THING THAT IS CONSTANT" .


7 years ago

for all those (IFAs) who cannot charge their clients and want the earlier mess to continue giving the so called BADDUA ,please CHANGE yourself as the world will not change for U, infact it will only give u an opportunity to change. Please prey to god if UR emotions are too high, that u get clients that listen to ur advise and feel like paying u. MR. BHAVEs reappointment hence may/may notbe disputed with other contenders.



In Reply to chinmaya 7 years ago

why u advocating compulsory implementation of fees based structure?why u dont want investor to have option of direct or commission based(dual) method both open to him?it looks like that entry load removal regime is forcing people to compulsory go to Ration shop and eat subsidised food grain.the investor has been asked to compulsorily go for zero entry load-this 2% removal has done 40-50% loss to investors due to reduced inflow of funds to amc's and due to redemption pressure-so what investor has gained.neither 2% nor the gains of market.
if it is to be implemented for mutual funds only then it is wrong,first implement it to every goods or services like TV shop,mobile shop,recharge coupons ,medicines etc-then do this fees based struture for MF investments-if u can not ask govt to do this for all goods and services-their will always be BADDUAS to these Tughlaki fatwas


7 years ago

Mr Bhave is thrown out by search panel-and the chosen name is Mr UK Sinha who has so far acted in balanced way-which was demanded by the IFAs-it is evident that "LOT OF BADDUA(cursing) OF HARD WORKING IFAs and retail investors has been heard by god through search panel-DUSRO KE LIYE JO KHADDA KHODTA HAI WOH KHUD USME JARUR GIRTA HAI

Hriman S

7 years ago

Let the govt pick an unbiased clean person, who will be for compettition and not for monopoly. And who will be retail growth.


7 years ago

carry on carry on no problem no surprise,we the common people/aam admi only for u. dont body asked the govornment.u carry on bravely.who is new sebi chief? who gose lanka he is ravan so no probs.


7 years ago

it is really surprising that PMO always like the most corrupt people in INDIA to be the head of various regulatory bodies like CVC, SEBI, NSDL, etc. AND we still say our Dear Prime minister is a great economist and wants to clean up the bureaucracy.



In Reply to Renu 7 years ago

I fully agree to u abt what you have said abt our world famous PM-who has always tried to keep his eyes and lips shut whenever any SCAM had been found-and he is heading a group of most corrupt ministers like Sharad pawar(commodity satta king,A raja(telecom scammer,and kalmadi and non other then C B BHAVE who has brought never seen systematic cleaning of retail partcipation from indian equity and who has given immense upper hand to FIIs by red carpeting them easy accessthrough p-notes but asking for pan card compulsion for un educated hard working indian person).Mr PM has never expressed any thing against these people-so i 100% agree with this


In Reply to Renu 7 years ago

You can accuse Mr.Bhave for anything, but for corruption. His integrity and honesty is beyond doubt.


In Reply to Raghupathi 7 years ago

i agree that Mr Bhave is 100% loyal to corruption and its undoubted that he is supporting all these corrupt people.


In Reply to Raghupathi 7 years ago

maybe. but how do you know?


In Reply to rajesh 6 years ago

Madhusudan Thakkar

7 years ago

In our constitution Parliament is supreme and no regulators should not be given unlimited powers.Elected representatives are flexible and pragmatic.We should not allow our system to be hijacked by people who have hidden agenda.

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