Saturday, 13 October 2012

The Euro tale

What caused this crisis??

17 member-Euro area today is going through its worst times. Unemployment is high at an average of 11.5% in the member nations. Productivity levels are low and Euro is not performing with respect to other currencies. Debt-GDP levels, and government deficits are on unacceptable levels as per the rules (60% Debt-GDP ratio and 3% budget deficit mandate) of the euro-zone. The GDP growth rate is in negative 0.20 (-0.20) % as countries contract on the back of reduced production and demand for its products. "Euro" as a currency in the mid of all this is not looking in good shape. Let us see how it all happened.

In the early 2000s till 2006-07, World went from a period called as "Globalization of Finance" wherein easy lending and borrowing was the norm. Housing therefore became an easy target for the lenders and investors. Nobody knew that there was a bubble building up with incorrect valuations. Money started flowing in the developed markets from the developing markets due to financial innovation of the products such as fixed-income securities/Bonds that assured a return to the investors. Such "sovereign" bonds invited money from other nations through capital market route, which was highly risky. The World and especially Euro-area, was now going into a state of "financial contagion" where-in every bank/agency owed money to other(s).The countries used this money for public spending and financing housing projects. Ireland used it for housing to only create a housing bubble. Greece used this money to double the wages of its workers and introduce more pensions. So by now, easy lending had increased the debt of these nations. Now what?? They could have either went for QE (Quantitative  easing) or printing money (Which they can't do as per the euro-area norms) or hiding it and restoring confidence (which they actually did) and thus deceiving world investors. The risks were further diluted as the products such as CDOs or collateralized Debt Obligations and CDS (Credit default swaps) came from the investment banks of the US. Actually even today nobody knows how many of these credit derivatives, Euro-area is exposed to.
When the 2008 global financial crisis came and the world went into a recession, euro-area, especially Greece, finally had to admit huge debt and deficit levels. The yields on those government bonds increased to unimaginable heights as Prices came down drastically. In 2010, EFSF (European Financial Stability Facility) was created to bail-out Greece.

Current situation & Structural problem -

Euro-area has a structural problem. When it was created in 1999, it was decided that the region will have a common monetary union and ECB (European central bank) to control inflation only (single mandate). The states were allowed to formulate their own fiscal policies (such as taxation rules, pensions and other public expenditure) but not monetary policies. So different countries with different people, work ethics, production power, consumption levels, trading partners, innovation capability, credit worthiness were all grouped under the same heading "Euro-area" with a common currency "Euro". So now when one country does something and exposes itself to world's financial markets, it was exposing other member states as well because of a common currency. Any appreciation or depreciation affected the balance sheets and profit and loss accounts of other nations too. It also thus created trade imbalances in many countries in the euro-area. During default another issue came out which was a lack of any Banking Union that would take action in case of bank runs or during recapitalization (as happened US). Such a body in euro-area would have helped gain investor's confidence in case of defaults. Efforts to kick start the economy by increasing production in the infested states have met failures as the money has been used in driving consumption and not production.  

What a grim situation is this. Consider this - You are president of any one of the PIGS countries. You know that there is a social unrest due to high unemployment, high taxes and reduced public expenditures (to reduce deficits and cover debts), high austerity measures, reduced confidence of global investors, low production levels, no official body to bail-out banks and above all No room for getting fresh notes, as you don't have the right. In the mid of all this, 16 more members are there to decide for you which only adds to delays.

Way forward  - 

Now after so-many initiatives and efforts, Euro-zone is trying to stay on-board. After bailing out Greece in 2010 and again in October 2011, through EFSF route, Euro-area is considering other options such as ESM, EU-FTT, EFC and Balance budget amendment for its future path in an effort to save Euro from collapsing.

ECB has already provided loans to hundreds of Euro-area Banks at a nominal interest rate of 1% to boost lending and improve depositor and consumer's confidence. Recently European Members in June decided to provide European Investment Bank easy funding to boost the infrastructure spending on promising projects. Another mechanism, EFC (European Financial compact) or TSCG (Treaty on Stability, Co-ordination, Governance in Economic and monetary union), which would come into effect from 1 Jan 2013 would require countries to exercise some serious steps where-in the structural deficit can't be more than 0.5%(if the Debt-GDP ratio has overshot 60% limit) or else a maximum of 1%. They should also include the Balance Budget law in their constitution/laws which would mandate that their expenditure can't be more than their income. Clearly such austerity measures will further stop growth activities and the GDP growth rates are not expected to go beyond 1-1.5% on an average for the Euro-area in the coming year. However a good news here is that the ratifying countries will be eligible to sign for ESM (European stability mechanism),which is designed to Recapitalise banks, provide primary and secondary market support facility along with the loan/bailout requirements. EU FTT (European Financial Transaction Tax) is all set to come into effect by 2014 where 0.1% FTT  would be levied on Financial transactions. It would be a source of income for the Euro-Banks that are currently reeling under tremendous pressure. The burden will be passed to consumers ofcourse.

Let's see where does the "Euro-area" go from here....and specially "Euro" :-p

signing out -GuruBussi

Monday, 1 October 2012

The Present World economic Quagmire

The World is going through some really bad days!!!

With central banks in most nations cutting their key rates to boost their economy and government finding it difficult to achieve fiscal consolidation in the present scenario, the world is reeling under tremendous pressure.

In Euro Zone, the growth is just not happening. The unemployment levels are way high and hovering around 11-12% with some nations like Greece and Spain experiencing a heavy unemployment level of 22-23%. It is like almost 1 in every 4 Individuals doesn't have a Job. In such a scenario, coupled with low Business and Investor sentiments, growth can't happen as the consumer demand is almost negligible. Euro-zone recorded negative growth of -0.3% for last 12 months and is expected to grow at 0.5% in 2013. Help thus can only come from outside nations in the form of exports such as US, Asia etc but a downturn in these economies would seriously blow euro-zone.
ECB will have a strong role to play here. The recent announcement of purchasing unlimited bonds in a sterilised manner will help contain sovereign debt crisis in nations. ESM (European Stability Mechanism), which finally will come into effect from October 8 will send positive message outside as Germany recently gave it a positive nod along with other Euro-zone nations. ESM will be a body that will provide euro-zone, financial assistance in hard times. Post this EFSF (European Financial Stability Facility) will be responsible for giving Bailouts to 3 nations only - Ireland, Portugal and Greece. The Inflation rate in euro-zone is at around 1.8-2.2%. This is not a good sign as growth is below the Inflationary numbers. 

Now whatz goin on in the west?? US today has high unemployment levels of 8.2% which is expected to come down to 7.5% in 2013 at the back of recent QE (Quantitative easing). The Business sentiments are strong and consumers are increasing in numbers. Housing market is gaining numbers as people are able to find jobs now which has resulted in lowered employment and decreased house inventories and increasing house prices. So the consumer sentiments are getting stronger. The growth however is a concern as US economy is expanding at a rate of 2-2.5% with Inflation rates at comfortable 2%. The key interest rates are less than 1 which has led to more lending and better Business sentiments. So in the present time it is unlikely that US will enter into a recession.
Things however can change post elections in November. On January 1, 2013, two of the key acts are getting expired. These are Tax Relief, Unemployment Insurance Authorization and Job creation act, 2010 (extension to "Bush tax cuts of 2001 and 2003") and Budget Control Act. If these two acts are NOT extended in 2013 then US may enter into a state called "Fiscal Cliff", as was coined by Ben Bernanke, Chairman, Fed Reserve in Feb 2012 wherein the consumer and Business sentiments will be hurt and US might enter into a recessionary state along with Unemployment levels touching new heights, though the budget deficit will be reduced to a large extent. In the other case, if these two laws are extended then the deficit of the US govt. will rise again affecting future spending by the govt., including cuts in its defense spending. All in all, it will be really interesting to see how world's largest economy handles this situation.

Now what about 3 Asian big shots?? - China, Japan and India?
China today is also getting hurt from the global turmoil. Its growth has always been export-driven and not domestic-consumer driven. HSBC PMI(Purchasing Manager's Index) for last month was around 48, thus showing that manufacturing activity has contracted due to decreased global demand for its products. Today, when demand from most European nations has waned coupled with low Business sentiments, growth is just not on the right track. Its economy is expanding at a rate of 7.5-8% with Inflationary rates at mere 2.5% which is way below its target of 4% of 2012. China can thus play with its monetary policies as there is a room to cut key rates and boost lending, thereby boosting internal consumer demand to propel its growth. This will also improve its domestic housing market. There is enough room for fiscal easing as well to ensure less tightened regulations on various sectors. This will definitely boost the growth further. 
Japan today is fighting with its extremely low growth (around 1%) and very high public debt. Even after this Govt. is not cutting on its spending and thinking on the lines of fiscal tightening in the fear that it will affect its internal consumer purchasing power, thus affecting its growth (considering exports are down post Tsunami and due to the impending world economic crisis).The Manufacturing activity is thus also down with PMI closing at 47 for the last month. The key interest rate is thus kept at almost zero by BoJ, with almost 3 cuts so far this year.
Finally letz talk about India. Due to policy paralysis (affecting Business sentiments), lower manufacturing and exports, India is expected to grow at 5-6% in the current FY. Still we have high inflation rates, fiscal deficits and due to various reasons (including political deadlocks) fiscal consolidation seems impossible in the future. However the recent reforms of allowing FDI in Multi-Brand Retail and Aviation gave some boost to India Inc and Foreign investors which marginally increased the growth forecast to 6-6.5% for FY2013. Key lending rates are at almost stable levels and the recent CRR further gave push to the economy. It is all upto the next Monsoon and exports to alter the current growth numbers, considering India is still an agrarian economy and a good monsoon drives the economic wheel. It will further improve the domestic consumer market and bring inflationary rates down.

So with all the permutations and combinations of the economic situations, let’s all see where does the World go from here!!!!! 

Wednesday, 26 September 2012

The Oil fight - White house : Dragon

So............. welcome again to the Blog by GuruBussi

There is a concern in Washington and Beijing over who wins the Oil game. In 2000, China's demand for energy was nearly half of what US required. But, by 2010, China surprisingly surpassed US as the leader in consumption of energy, and thus making China the biggest source of Green House gases as it depends heavily on fossil fuels for its energy needs. It was due to an astonishing rate of growth that China reached at the back of strong exports and Domestic Infrastructure. Experts believed that China could not be the leader of Energy consummption before 2015, but due to economic crunch in 2008 and fuel-regulations in the US, China surpassed US and shocked World in 2010 itself, as per a report by British Petroleum.

US,the 3rd largest producer of Oil today and the leader in consumption of crude oil, had been betting big on oil resources from Middle-East until the last decade as the Demand for oil surpasssed the supply it could afford from its own territories. Today about 2/3rd of its requirement is imported for various countries which are primarily NOT Middle-east as US shifts its focus from Middle-East sources to those in Canada, Mexico, South America and of certain African countries. Now talking about China, the 2nd largest consumer of Oil is betting big on sources from countries such as Saudi Arabia (World's largest producer), Angola and Iran alongwith those in Sudan, Russia and even Chad. It is interesting to note here that China is onle of the leading customers of Saudi Arabia, Iran and Angola.

Today when US has imposed sanctions on Iran and others have boycotted Iran as well, China is shaking hands with Iran as 20% of all exports of oil from Iran go to China. China has also shaken hands with small countries such as Sudan and Chad to import oil and promise developments in return. Venezuela is also a key customer to China. It is interesting to note here that Taiwan, which is a geopolitical disadvantage for China as it controls the key sea-routes and reserves in south China sea along with Brunei Vietnam and Philipines, is now getting weapons from China's biggest oil rival - US. On the other hand, Iran which faced oil sanctions from US is now receiving support from China

Now Where is the WAR here? China has been trying to shift its strategy from being an Oil consumer to Oil producer and in the process hurt US in the best possible way it can. It was 2005, when CNOOC (China National offshore oil corp) tried to takeover Unocal, California based huge Oil co. in a bid to own oil reserves and exploration rights. That attempt shocked White House and brought tremors in political and economic parlance since it was not just about Oil, it was about owning it and controling the supply and thus the economy. That was a failed attmept. Another recent attempt of 2012 is in the pipeline where the same state owned-compnay CNOOC is now betting big for Nexen, Canada based Oil co. that owns assets in the gulf of Mexico.Again the White House has turned cautious on this and is carefully watching the move of capricious Dragon.

There would no end to this game.China would continue buying assets that would fulfill its growing demand of oil and hurt US in the process by ensuring that it has maximum control over assets.However a cause of concern for China is that Washington might disturb the social status in Middle east which would affect oil imports and thus hurt China severely. On the other side, US, that has shifted focus from depending upon oil for its energy needs to depending on efficient sources such as wind, nuclear,solar and geothermal would ensure that Dragon doesn't have a complete control over oil reserves especially around the Americas!!!!

Thursday, 20 September 2012

China's problems and hunt for consumers!!

World's second largest economy, housing largest population, China, is hunting for consumers now. With growth rate predictions already in the 7-8% bracket, China is now feeling the heat of global turmoil. US has always accused China of stealing millions of Jobs on the back of cheap exports to the US and has advised China to rely less on exports and more on demand from its domestic consumers. But China has been doing exactly the opposite. Instead of boosting its internal demand and improving its demographics, it is increasingly becoming dependent on exports for its growth.

China has been increasingly betting big on Infrastructure projects and investments. Infact its investment on Infrastructure in 2011-12 was a whopping 10% of its GDP as opposed to US's 2% and our's 8%. But the problem today is that the average age of its working age population is increasing over the years.According to a  recent World Bank report, the age dependency of old on working age population in China has increased to 11.54 as companred to 10.55 10 years back showing that China is adding more to its old population or less to working age population (probably due to one-child policy). I dont't know what will they do with huge Infrastrucute investments when their demographics are not favourable. The factories are running at 60% capacity in China today as compared to 80% some years back due to less foreign and domestic demand and exponential increase of factories, to which a limited anount of orders are distributed (considering a stable foreign demand).

China today is suffering from reduced demand from its domestic public. Due to less wages (majority chinese still falll in low-wage category) and other issues such as social insecurity in terms of health, education, insurance and even a private house (as most of them still do not own a house) etc, people do not really "consume" as they like to keep money for later stages. Moreover the deposit rates in China are not healthy, hovering at around 3% only, thus not giving Chinese enough disposable money. To tackle all these issues Chinese govt. floated around $5.4tn money as credit in the past 4 years. It helped but rose inflation in short term.
So what should a country with a mighty $3 tn forex reserve do? It is time china must use the earnings from its investments and feed it into public expenditure that would boost consumption, reducing its dependence on exports. It is time for some important policy decisions that woud increase the wages of its huge working-class population and improve domestic fundamentals.

Monday, 17 September 2012

What FDI in Retail means for us???

      Finally after months of so called "policy paralysis", UPA govt. has finally cleared FDI in Multi-Brand retail (51%) alogwith in Aviation (49%) sector that was much needed. Left parties and opposition have opposed this move citing various reasons, but I think it came at a good time when country's inflation and fiscal deficit are at high levels. So what now? Sweden's IKEA, US' Walmart, Britain's Tesco etc? Yes, Indian consumers will now have access to them as these retail majors come here and work closely with Indian majors. FDI in retail will be beneficial for all.

Norms such as - 30% sourcing has to be done from local MSMEs, would definitely add to the income levels of those in semi-urnban or tier-3 cities or even villages. Farmers will now be able to get the best price since the concept of middlemen willl be thrashed after the norms come into play. Though for this to happen effectively, APMC (Agricultural Produce Market Committe ) concept has to be abolished. This will give farmers liberty of selling it directly to large retailers which not only will give them the correct price but also access to an organized way of doing Business.

The norms also have a 50% mandatory investment in the back-end Infrastructure for these large retailers which means inventments in processing, procurement, manufacturing, packing, logitics, warehousing etc. All this will improve the current poor infrastructure that we have. India today has only 4% organized retail Business and so retailers see a huge oppotunity here for expansion. Today, about 2/3rd of Indian population depends on Agriculture and FDI in retail is expected to improve the life of farmers due to the above mentioned reason as there would be a rise in disposable income and fall in Gini co-efficient. The overall situation of the economy thus can improve at the back of the demand so generated from the farmers.

Besides the above effects, it is expected to control inflation to some extent. In India, due to 96% unorganized retail Business, about 40% Agricultural produce gets wasted due to the absence of back-end Infrastructure, which has been very well taken care by the govt.

Above all, It is expected to create millions of Jobs!!! :-)

Wednesday, 12 September 2012

Lodestone-Infy deal

When I heard about Infy's acquisition of Lodestone consultants, I welcomed such a decision. Infosys Technologies, India's second largest software exporter behind TCS, saw huge problems during 2008 US crisis. Infy's 70% Business comes from US and on top of it, its major revenue generating vertical being BFSI which was badly hit during the same period. So with this dual danger (US-BFSI), I think it is a right time to expand your presence in other markets. Lodestone is a Swiss firm and has a significant presence in Europe and around the World. By getting 750 consultants Infy has paid nearly $350 mn which comes down to 2.5 cr/employee and the overall acquisition at 1.6 times the revnue of Lodestone. One might think that this is an expensive deal considering the present gloomy in Europe, I believe this is a right move. Situation will change. Moreover the reach and expertise that Lodestone has will help Infy's efforts to diversify from a 'Coder' to 'IT consultant'. In strategic Management we call it a WO strategy (converting your weakness into opportunities)

Cheers Infy!!

Tuesday, 21 August 2012

The Volt way

If you have been following the recent track events at the Olympics, it would be hard to not notice most of the athletes blazing through the tracks wearing bright green shoes. The reason behind the unusually bright coloured footwear isn’t the result of a common taste in fashion among athletes but rather a clever marketing scheme employed by Nike which has worked quite successfully.
Known as “THE VOLT” the brand new line of shoes launched by Nike, currently used by all the Nike sponsored athletes, are coloured in striking fluorescent green for a reason. The human eye is most sensitive to the yellow-green shades of colour. The colour grabs maximum attention of the viewers as it appears extremely striking in contrast to the background of red tracks in London. The science behind this branding strategy is actually quite impressive. The volt is coloured in a way which reflects light more effectively than anything close to the athletes on track, so it’s nearly impossible for the viewer to not pay attention to the Volt.
The Olympics is an excellent way to drive product sales for sport equipment manufacturers. Nike’s strategy is an excellent example of sensory branding. While Public appreciation of the colour is divided, Nike’s strategy has been able to achieve its objective I.e. make the viewers aware of their product.
Scott Martyn, a University of Windsor professor who specializes in sport and Olympic history says “Nike has got great bang for its buck with the Volt You have to say that the (marketing) value for money is fantastic, that they’ve done exceedingly well given the relative investment and they’ve capitalized on it quite significantly”, But Nike has also faced strong criticism with many calling it an attempt at Ambush Marketing. Adidas paid $150 million to be the official sponsor of the Olympic Games, but Nike has garnered a lot of attention with the Volt since shoes are not subject to clothing – use Requirements. This can be used as a perfect example of sensory branding concepts combined with ambush marketing.
The FIFA world cup had vuvuzelas along with the official ball of the tournament, two standout products of the tournament which the viewers paid maximum attention to. This time around, its Nike with the volt and it only goes to show the importance of research in marketing where even the colour of a product can make or break the entire marketing strategy.

Sunday, 22 July 2012

The GDP game

India's last year's GDP was close to 1.6 tn. I was just going through an article this morning and what i discovered completely shook my mind. India's current GDP is almost half of total GDP of New York and Tokyo combined. How can two cities have produce goods and services that will overtake complete GDP of India. Well Japan is known for its manufacturing and New York is the land of Service giants. So why not? Being a permanent resident of Delhi and a student of Pune, one thing i really liked about the facts. Per capita income of Pune will be higher than any other city of India and Delhi's GDP will be the highest of all Indian cities by 2025. 

Thursday, 19 July 2012

A good name is an Advertisement in itself

Coca Cola, Idea, Future Group, Xerox, Hallmark...and the list goes on like endless start-ups of Silicon Valley of 1990s. Aren’t such names an Advertisement in itself? Coca cola means a brand selling cola, Idea means a brand that searches for new Ideas of innovation, ‘Future group’ implies something that will make India’s future, Xerox goes for Xerography and so writing on paper.  Big companies know about this strategy as they don’t really have to spend huge amounts to instil its message into a consumer’s mind through advertising. For example Reliance – It knows that the word Reliance would be taken as ‘confidence’ ‘trust’ or ‘faith’ by consumers which would invariably help Reliance in Future Brand extensions and so les advertisement for new products as the name already stands for something.
Look at Hutch as a name. It spent huge amounts to let people know that it operates into telecom Industry. ‘Airtel’ on the other hand was smarter as it named the company based on its sector and thus creating less confusion and so less expenditure on Advertisements. Same was the case with. Same was the case with Happydent white after it bought the concept from Pepsodent. Both these products remind us of teeth and so the consumer involvement increases and the expenditure on Advertisement falls
A wise company must make a wise choice by choosing apt names following the above rule.

Sunday, 15 July 2012

The Brand extension way

Companies love Brand extensions. Who doesn't?. A famous Brand would invariably end up in extending its name to other products of different categories. Infact I believe thatz what a Brand is all about. Extensions. We all know that Samsung is a big name in consumer electronics but who knows that back home it is maker of ships and is into life insurance services, hospitality etc. Virgin group is well known for its train services, aviation, alcohol, telecom, financial services and now it is into space travel as well. There are more examples like Hello Kitty, Godrej, Tata, Kingfisher and others. A company must be cautious before venturing into another category. It may have a negative rub-off effect to others stable and growing categories, if it has been unsuccessful in new category. Virgin faced problems with Virgin cola, Bic(a company known its disposable items) faced problems with its underwear, Heinz with its cleaning vinegar, Xerox with computer systems, Pond's with its toothpaste, Fritolay with its Lemonade and the list goes on....
I wonder why a stable company ends up doing such a foolish act and inturn destroys the Brand equity that it has created. P&G is smart. It doesn't really say that a new product is by P&G coz it gives the product a new name. So if the product fails, P&G's image doesn't get tarnished. Hats off!!!