This is the presentation for The affect of current (2011) downturn in US and European countries on Indian Stock market.
Transcript
SukantPrusty
Anurag Nath
SatishNaik
Manjushaa
Hemanth Kumar
2. Financial Crisis: Overview
Downturn in the world economy
Causes 3. Housing Slump 4. Subprime Mortgage Crisis 5. Financial Innovation 6. Impacts 7. Bank Failures 8. Home Foreclosures 9. Federal Reserve Steps in 10. Changes in the Market 11. Events 12. Bear Stearns Bailout 13. Northern Rock/Bank of England 14. Countrywide 15. Solutions 16. The Federal Reserve has tried to take corrective measures 17. Regulation 18. Problems with Regulation
Housing Slump
Housing Boom
Housing prices were on the rise 19. People bought and built more and more 20. Thought it was a good investment 21. Thought that home values would not decrease 22. Took out second mortgages to use toward consumer spending
Banks used to operate on a fractional reserve system 26. Today almost no reserve is required due to new rules that the public doesn’t even know about 27. Banks are able to issue more loans when they do not have to keep a reserve on hand 28. When they run out of qualified candidates, they reduce the requirements, which leads to subprime mortgages
These loans slowly inflate the system, and create wealth that is not “real”
29. Subprime Mortgage Crisis
Mortgage originators sold the loans on the secondary market
No risk for the originators so little effort went into analyzing the borrower’s ability to repay 30. High risk and debt tolerance
Adjustable Rate Mortgages (ARMs)
Rates are beginning to increase from the low introductory rate
Financial Innovation
Financial innovation is the act of creating and then popularizing new financial instruments as well as new financial technologies, institutions ,and markets. 31. Adjustable Rate Mortgages 32. Investment Vehicles that went wrong 33. Mortgage Backed Securities (MBS) 34. CDOs – Collateralized debt obligations 35. Not understood by investors
Financial Innovation
Financial innovations are optimal responses to various problems or opportunities
Many financial innovations that have been created in the recent past to respond to the financial boom were not fully understood 36. They were not adapted properly from the past, and when the financial sector crashed, these innovations responded negatively
2011 crisis
Expense $3.8trillion income $2.3trillion 37. To meet deficit he borrows money in forms bonds instruments or even foreign government. 38. Total loans and interest adds up $14 trillion 39. Pays money of interest by loans. reduce spending or raise taxes 40. Call federal reserve ,create and deposit dollars.
2011 crisis
Dollar value reduced inflation 41. Overseas manufacturing recession 42. Lead to stagflation 43. The day has come where the us can no longer buy pay bills.
European debt crisis
44. Introduction of Euro
The European Union introduced the euro on January 1, 1999. 45. It benefited countries such as Portugal, Italy, Ireland, Greece and Spain (together now known as the PIIGS) 46. Before introduction of Euro, they borrowed money at interest rates much higher than the rates at which a country like Germany borrowed. 47. When they started to use the euro they could borrow money at interest rates close to that of Germany, which was economically the best managed country in the EU
Cause for the crisis
The rest of Europe, in effect, used Germanys credit rating to indulge its material desires. They borrowed as cheaply as Germans could to buy stuff they couldnt afford 48. Inflation in the PIIGS countries was higher than the rate of interest. 49. It means that, if the borrowing rate is 3 per cent while inflation is 4 per cent youre effectively borrowing for 1 per cent less than inflation.
Greece Debt Crisis
European peripheral countries (PIIGS) racked up enormous amount of debt in Euros. 50. The debt of Greece, currently amounts to around 160 per cent of it’s GDP. So, other than the citizens, the governments also started to borrow. 51. A job which now pays 55,000 euros in Germany, pays 70,000 euros in Greece, even with the fact that Germany is a more productive nation. 52. It means more and more borrowing by the government, when they already have so much debt
Spain Debt Crisis
Spain had the biggest housing bubble in the world. 53. To put things in perspective, Spain now has as many unsold homes as the United States, even though the US is six times bigger. 54. Most of these new homes were financed with capital from abroad. 55. Spains real estate debt comes to around 50 per cent of its GDP. Every time there are default threats, the European Central Bank (ECB), helps out with a bailout.
Crisis Deepens..
Since the start of the financial crisis ECB has bought, $80 billion of Greek. Irish ,Portuguese Govt bonds and lent another $450 billion to various European Govts and banks accepting virtually any collateral, including Greek Govt bonds 56. Germany ECB rescue fund. In case of Greece, a lot of German and French banks which have lent money will be in trouble if Greece defaults 57. The German Govt gives money Rescue Irish government Give money to Irish banks repay their loans to the German banks
Crisis Deepens..
When a country prints currency in huge quantities, the currency will not remain of any real value. 58. So the citizens money gold or will continue using the euro. 59. People at the same time demanding their money back. Will lead to a lot of banks collapsing. 60. Investors anticipating that their claims on the Italian government would be redenominated into lira would shift into claims on other euro-area governments, leading to a bond market crisis
European elites’ Mistakes in managing the Greek debt problem
Admission of Greece to the euro in the 1st place. 61. ECB acceptance of Greek bonds as collateral 62. Despite high debt & deficits. 63. Investors charged near-zero spreads 64. Failure to send Greece to the IMF in early 2010. 65. Refusal to think about the likely need for restructuring of the debt.
How an economy is effected by other economies
The crisis in the European and American economies (any economy) impacts other economies via three channels:
- Trade channel
- Financial channel
- Confidence channel
66. Trade channel
When an economy falls into a recession, it impacts the affected country’s trading partners too. 67. Falling household and business demand in the slump-hit economy hits the exports/imports of its trading partners. 68. The share of exports to EU (excluding UK) and imports from EU has fallen over the years. 69. In 1987-88, exports to EU constituted about 18.6% of total exports. This has declined to 17.5% by 2010-11.
Trade channel
Trade channel can impact Indian external sector indirectly as well. 70. Most policymakers, economists and experts put forth the view that India has been only marginally affected.
Two reasons were cited forth
First, India is a virtual non-entity in global trade as its share was less than 0.5%-0.7% of the total global trade volumes. 71. Second, share of developed economies in trade had declined. In 1987-88 developed economies contributed 59% of exports and in 2010-11 their share has declined to 34%.
Financial channel
The impact of turmoil in one economy’s financial markets is not merely transmitted to other markets, the quantum and direction of the movement is also more or less similar (decline in equity markets, rise in corporate bond spreads and depreciation in currency). 72. This is because cross border financial linkages have increased substantially over the years. Besides, the correlation between assets too has been rising across the world.
Financial channel
Apart from movement in financial markets, four kinds of financial flows could impact Indian financial markets:
1) Foreign Direct Investment:
There are many American and European companies which have investments in India. So, there has been a slowdown in FDI in India. 73. Already there has been a fall in FDI to 138462 crores in 2010-11 from 179059 crores in 2009-10.
Financial channel
2) Foreign Institutional Investment
With a turmoil in global financial markets, FII inflows will decline. 74. We have a large number of global financial firms which operate across the world and in case of a decline in one major market, there is a pull out from other markets as well.
FIIs pulled out nearly Rs 2,000 crore from the stock and debt market in September 2011, the second consecutive month in which overseas capital outflows were greater than inflows.
75. Financial channel
3) External Commercial Borrowings
External commercial borrowings could also decline if the European crisis spreads to other economies. 76. ECBs declined in the first stage of the crisis as well. 77. Already there has been a drop in the ECBs because of the fall in rupee.
Financial channel
4) Remittances and NRI deposits
The deposits increase in the crisis periods Oct-Dec 2008 and Jan- Mar 2009 and decline thereafter. 78. It could be that NRI preferred to invest higher proceeds in India seeing crisis in their own economies. In case of remittances, we see a decline in crisis period Oct 08 – Mar 09 but see improvements as crisis eases. 79. There were huge concerns of remittances collapsing because of the crisis. In some countries they did collapse worsening poverty status. 80. In India, despite the decline it manages to remain in positive.
Confidence channel
This channel shows confidence declines in business and households seeing the global uncertainty. 81. So even if an economy’s macroeconomic conditions and outlook look favorable, the decline in confidence can disrupt the economic conditions. 82. Decline in confidence is also one of the reasons for decline in business investments which led to decline in overall Indian GDP growth. 83. Credit growth also declined because of decline in business investments.
RBI Governor MrSubbarao has stressed on this channel on numerous occasions
84. Increasing integration of India with global economy
Apart from these three channels, Indian economy has become more global over the years. 85. The business and trade cycle of India has started to follow the cycles of advanced economies.
RBI Executive Director Deepak Mohanty in his speech explained the increasing correlation:
With increased global integration, the Indian economy now is subject to greater influence of global business cycles. The correlation between the cyclical component of the index of industrial production (IIP) of the advanced economies and India has risen to 0.50 during the period 1991-2009 from 0.20 in during the period 1971-1990
86. Increasing integration of India with global economy
If the debt crisis spreads to other nations in Europe and their banking systems, European entities could start repatriating funds from Indian stock markets. 87. In recent years, some Indian conglomerates initiated or increased their stakes in American and European companies. 88. There could be decline of exports of goods and services to Europe and through the reduction of revenues or loss incurred from European-related operations of these companies. 89. The macro-economic impact could have a more severe effect on the Indian economy than the financial impact by repatriation of foreign funds.
Increasing integration of India with global economy
The euro zone crisis could trip the fundraising plans of Indian companies at home and abroad and dent confidence, while euro’s weakness will hurt exporters selling in the currency. 90. Analysts fear the crisis in the euro zone would impact equity markets worldwide, including India, and companies may be forced to defer fundraising plans. 91. Meanwhile, a weaker euro is worrying exporters. 92. Indias chief economist KaushikBasu is of the view that the debt crisis in Europe may turn advantageous for the countrys capital markets. This is because foreign investors would look to park their money in safe havens.
Investing Mantra
An argument is made that there are just too many question marks about the near future; wouldnt it be better to wait until things clear up a bit. face up to two unpleasant facts: The future is never clear [and] you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long term values.
- Warren Buffett
93. 1st January 20112011 may be a choppy ride on Dalal Street
Sensex all time highs at 20561. 94. RBI governor signals halt in interest rate hikes after 6 continuous rates hikes reaching to 6.25% 95. India’s growth story intact at +8% 96. But concerns are. Rising interest rates, soaring commodity prices, increase in borrowing costs, poor infrastructure, pressure on profit margin, expensive share valuation, record crude prices, large money raising targets.
05 AUGUSTThe World Sinks!
Sensex Falls by 387 points or 2.2%
97. 5 AUGUST FALL
Staying true to the age-old saying that when America sneezes, the world catches a cold, the stocks markets across the globe on Friday plunged deep into red after an overnight crash in the US bourses. 98. The Dow tumbled 512 points — its ninth deepest point drop ever — as fear about the global economy spooked investors. 99. In India, the stock market plunged deep into red on worries over a possible recession in the US with the benchmark Sensex crashing by over 700 points at one time to slip below 17,000 level. 100. Economic Affairs Secretary R Gopalanattributed days fall in markets to panic-like situation among investors due to negative news flow about the US economy.
08 AUGUSTFears take Lion’s Share
Sensex Falls by 315 points or 1.8%
101. 8 AUGUST FALL
Fearful investors reacted to the United States losing its coveted AAA credit rating 102. Standard & Poors downgrade of the US sovereign debt rating triggered a flight from risky assets in global stock markets. 103. If the global economic situation worsens then there will be a flight to safety and money will be pulled out from all the markets including India, — Dipen Shah, head of private client research group at Kotak Securities
29 AUGUSTDalal Street gets a stimulus on Bernanke’s NOSensex rockets 567 pts on fed qe rejection
Sensex Rises by 567 points or 3.6%
104. 29 AUGUST RISE
US Fed refrained from announcing another stimulus
Investors were relieved that America’s central bank has stopped short of launching a third bond buying programme, known as Quantitative Easing (QE)
It could have increased the flow of money into commodities and emerging markets, including India, stoking inflation.
The RBI on Monday unveiled the much awaited draft norms on new banking licences that will allow corporates to set up banks. Shares of non-banking finance companies jumped after the announcement
105. 23 SEPTEMBERInvestors fret as stocks heads for weak end, Sensex sheds 199 points in worsening global crisis, Rs breaches 50 as RBI refuses to intervene
Sensex falls by 199 points or 1.2%
106. 23 SEPTEMBER FALL
Global Policymakers tries to calm the market 107. Rupee reached to a 28 month low of 49.90/$ 108. Corporates and Bank want RBI to intervene in the Forex market to stop the free fall of Rupee. 109. RBI deputy governor SubirGokarn told “very narrow objective of smoothening what might be a very volatile market situation, nothing beyond that” 110. Rupee Down due to global dollar scarcity.
DOW V/S SENSEX
111. 30th September 2011
Deviation
112. The impact of Europe on Indian Stock Market1stMarch 2011
Sensex rose 623 points. biggest gain in 22 months, From 17823.4 to 18446.5
113. The impact of Europe on Indian Stock Market1stMarch 2011
114. The impact of Europe on Indian Stock Market1stMarch 2011
The reason behind this rise was
Government’s lower-than-expected fiscal deficit estimate for 2011-12
The government pledged to contain fiscal deficit in 2011-12 at 4.6% of GDP compared with 5.1% in 2010-11
But the rising crude oil prices raise doubts on whether the government would meet its budget shortfall target, so the investors were a bit sceptical.
115. The impact of Europe on Indian Stock Market18thAugust 2011
Sensex fell by 371 points to 16,469.79, its lowest level in nearly 15 months.
116. The impact of Europe on Indian Stock Market18thAugust 2011
The reason for this drop
European markets fell sharply amid deepening fears of major global economies, including the US dipping into recession again
Renewed Eurozone debt crisis also dragged the index down
117. The impact of Europe on Indian Stock Market24thJune 2011
SENSEX ended the day 513.19 points higher at 18,240.68
118. The impact of Europe on Indian Stock Market24thJune 2011
Reasons
Greece won the consent of international lenders for a five-year austerity plan intended to avoid looming bankruptcy 119. Its prime minister pledged to push radical economic reforms through parliament. 120. JPMorgan and Goldman Sachs slashed forecasts for crude prices in the third quarter after the International Energy Agency announced the release of 60 million barrels of oil
The impact of Europe on Indian Stock Market19th Sept 2011
The SENSEX continued to fall and closed at 16745.35
121. The impact of Europe on Indian Stock Market19thSept 2011
Investors feared a Greek default within weeks after
International lenders told Greece on Monday that it must shrink its public sector and improve tax collection to secure a vital 8 billion euro rescue payment 122. Greeces prime minister cancelled a US trip to chair an emergency cabinet meeting at home 123. German Chancellor Angela Merkel suffered a regional election loss 124. EU finance ministers also failed to make progress on the debt crisis
The impact of Europe on Indian Stock Market20thSept 2011
The BSE Sensex shot up 354 points to cross the 17k mark to reach 17099.28
125. The impact of Europe on Indian Stock Market20thSept 2011
The reasons
Hope of weakening rupee would boost earnings of the IT companies and a firm global trend Infosys, rose by 3.22% and TCS gained 3.94% 126. Greece expected to clinch the release of a 8 billion euro ($11 billion) aid that it needs to avoid running out of cash next month. 127. S&P downgraded its rating on Italy by one notch to A/A-1 but European Central Bank buying Italian debt also aided the sentiment. 128. Britains FTSE was up 1.22 percent at 5,323.93 points
The impact of Europe on Indian Stock Market22ndSept 2011
SENSEX crashed 704 points to 16,361-its biggest single-session loss in over two years
129. The impact of Europe on Indian Stock Market22ndSept 2011
130. The impact of Europe on Indian Stock Market22ndSept 2011
The reasons
Fresh signs of slowdown in manufacturing activities in China and Germany. 131. IMF warned that Europes sovereign debt crisis risks tearing a giant hole in banks capital. 132. In Europe, questions about the ability of the euro zone to manage some of its countries heavy debt remain, stock losses amounted to a fall of over 21 percent for the year-to-date. 133. The slide was further aggravated by the weakness of the Indian rupee. 134. The FTSEurofirst 300 fell more than 4 percent, FTSE 100 lost 5 percent
The impact of Europe on Indian Stock Market27thSept 2011
Sensex jumped 472.93 points or 2.95% to 16,524.03
135. The impact of Europe on Indian Stock Market27thSept 2011
The events that led to the rise are
Hope of euro zone officials would act to corral Greeces debt woes and prevent another banking crisis. 136. The parliaments of Finland and Germany were set to vote on the approval to extend the powers of the euro zone rescue fund considered critical to bailing out Europe’s weak economies. 137. The new plan was to leverage the €440-billion rescue fund, known as the European Financial Stability Facility (EFSF), to help struggling European nations avert debt defaults 138. A positive opening at European markets also helped buying sentiments.
139. Movement of FTSE and SENSEX
140. Reasons for low impact on Indian economy
The slow pace of financial reforms taking in India 141. Cautious approach towards permitting foreign investments in Indian business sectors 142. Bureaucratic hurdles & regulatory constraints 143. Indian companies have major outsourcing deals with American & European companies. 144. India’s export to US and European countries has grown substantially in the past few years.
Reasons for low impact on Indian economy
Full but gradual opening of current account. 145. Capital account and financial sector: More calibrated approach towards opening up.
Equity flows encouraged
Debt flows subject to ceilings and some end-use restrictions.
Capital outflows: progressively liberalized
External commercial borrowing is subject to Strict rules and regulations.
Reasons for low impact on Indian economy
Macro ceiling stipulated on portfolio investment in Govt. Securities and Corporate Bonds by FIIs. 146. Imposition of prudential limits on Banks, such as inter-bank liabilities, borrowing and lending, money market, assets 147. Implementation of Basel II. 148. Banks credit quality remained high. 149. Less percentage of NPA .
