Let me begin with a quiz. Which is the world’s only central bank listed and traded on the bourses? What’s more, it almost works like a hedge fund. I know you would love to quickly read below and check out. Do that and find out what the heck is going on?
Along with many other interesting articles some of which I have picked for this column, this week I also read a solid argument why equities will continue to do well. In an environment of geopolitical uncertainty, this is contrarian talk.
And then there is more to tickle your grey cells. Do read and do enjoy your weekend. I reiterate that this is only a sampling of some of the best content I read through the week, with a dash of my own thoughts. Until next week…
Distressed debt impacting Indian GDP
(Source: As India struggles to cut down debt, the economy suffers)
India’s GDP growth for June quarter dropped to 5.7 per cent, a level which is one of the lowest seen since the new government has taken charge. The measures taken to curb the illegal money and the national sales tax were held accountable for the slow down. Wonder if the situation would have been very different without the above mentioned events.
The managers point out to the impact of the soured loans on the banks’ balance sheets which prevent them from passing the entire benefits of the rate cuts to their clients. With the interest rates being high for companies and funds availability drying up for the weaker companies, they are not sure whether to go ahead with the investment or not. This impact has been seen in the GDP data.
Gross capital formation, a gauge of private investment, fell to less than 30 percent of GDP in the June quarter, from 38 per cent a decade ago. Existing capacities need to first get optimally utilized and then new investment would come in. Many believe that interest rate going down is necessary to bring back the growth. But, then the growth should have been phenomenal in Japan, US or Eurozone where the interest rates are zero or near zero.
Markets think that the interest rate cut on the savings deposits would benefit the banks and also help in bringing down the cost of funds for corporates. But, on the flip side, that much amount would be less in the hands of the consumers and that much less consumption demand from the households.
There are many other factors which would lead to GDP improving rather than just the interest rate cut.
Why equities will continue to do well
(Source: Two sides of the same coin)
Money to be invested is limited. So, one has to be very careful in allocating their hard earned money in different asset classes. But asset classes to invest the funds are also limited. When the opportunities to earn reasonable returns in some of the asset classes go down, most of the money then chase the remaining asset classes. That may be happening with equities.
Interest rates are at one of their historic lows. Slow economic recovery is holding back commodity returns and the apathy towards the hedge funds are growing by the day. What other option than equity will a large pension fund with a lot of cash would have. The question of valuation levels becomes less relevant then. Traditionally in India, we have seen that majority of the retail investments were in real estate, gold and fixed deposits. Equities used to get the left over funds. But, off late, investment in equity has become the first choice of the retail investors as reflected in the heavy inflows into Mutual Funds.
And the result is we all see: Equity benchmark at record highs.
It all boils down to where the fund flows are headed towards. Irrespective of the valuations, more and more money could head towards equities in the US and possibly globally. However, at some point of time, if the fundamentals fail to catch up with the valuations, then we may see reversal in the markets.
Good news: China on course correction
(Source: China Is Making Less Useless Stuff)
Over the years, China has gained importance in the global markets in terms of a manufacturing hub. So much so, that the price of key commodities are determined by the production capacity of China. Over the years, China has built huge capacities in the metals sector be it steel, aluminium, copper among others. This has led to a supply glut in the global metal markets reflected in the plummeting prices which we have seen over the past few years.
But China seems to be taking corrective action against the doing of its own recently. It has been in the process of shutting down the inefficient capacities in sectors like metals and chemicals which not only was bringing down the profitability of some of its more efficient state players, but also were a lot more polluting facilities. We all know about the thick smog which cities like Beijing and Shanghai are known for.
The recent clampdown on some of the illegal aluminium smelters could cut capacity equal to 9 per cent of China’s total 2017 output. It is too soon to declare the war against Chinese industrial overcapacity is over. But, nevertheless, some corrective action has started which should boost the confidence of investors about the right reforms being undertaken. Let us see if there is clear visibility in Beijing and Shanghai this winter because of these measures.
Swiss Central Bank is listed and acts like a hedge fund
(Source: What the heck is going on?)
When it comes to a central bank, first thing comes to your mind is the US Fed and if you are an Indian, then the Reserve Bank of India. Since July 19, 2017, the share price of Swiss National Bank (SNB), the central bank of Switzerland, has risen 64%. Counter intuitive as it may sound, it is listed on the stock exchange, the only Central Bank to be listed. And it works like a hedge fund.
In January 2015, SNB shocked the world by scrapping its minimum exchange rate to the euro and switched to negative interest rate policy and massive asset purchases to keep the value of the franc from rise against the euro. These assets are the bonds and equities of the US and Europe, especially the USA.
According to the bank’s filing with the SEC, it had investments in over 2500 US stocks valued at over $84 billion. SNB has been able to print francs and buy dollars as there is heavy demand for francs in the global market. It is operating like a hedge fund, and when its bets go southward, it can cover itself by creating more money.
Problem would arise when the demand for the CHF dries up and the foreign investors start unloading the franc. This would lead to a slew of other problems and issues with financial stability that the SNB might then have to address by unceremoniously dumping those stocks it has amassed.