ICO stands for ‘initial coin offering’. Many of us know this. But, to me, it may as well stand for ‘incredible commercial opportunities’ or ‘incredulous and crazy offerings’. The 'Kodak Moment' A couple of weeks ago, I posted an article that shows how some companies’ share prices jumped as a result of merely announcing the development/deployment of blockchain. For example, the chart below shows the stock performance of Kodak. On the 9th of January this year, the company’s share price shot up by more than 300% when it announced a forthcoming ICO with the aim of creating a “photo-centric cryptocurrency”. I have always known that technology would eliminate my job as a corporate finance professor. And I think my time has come: instead of value being created through the proper management of a company’s finances, all it now takes is to say that you are doing something with ICOs and blockchain. Source: Kodak Stock Performance during ICO announcement A recent survey by TokenData on last year’s ICOs finds that out of 902 events it tracked, 142 failed before funds were raised, with an additional 276 failing after fundraising. This represents a failure rate of 46%. But there’s more. The survey also finds another 113 projects that it calls ‘semi-failed’ because their teams dropped off the radar or their community withered away. Now, if you think that is crazy, wait until you delve deeper into what some of the cryptos do – or don’t do. First, some coins don’t even bother to link themselves with the blockchain. For instance, there was a crypto issue that carried the (noble) intention of raising money to build the new satellite city of New Dubrava in Russia. The whitepaper on the RSC coin (don’t ask what it stands for as the paper never bothers to mention it) is six pages long and comes in the form of a letter pleading for help. It doesn’t mention any business model, growth strategies or anything that can help investors understand how the funds raised will be used. And blockchain? What blockchain? According to information shown on TokenData, it did not raise a single cent. Other cryptos have much more realistic objectives. Wu-Tang Coin is just using ICO to raise the money needed to buy a limited-edition recording by the hip hop group Wu-Tang Clan. And that’s it. Reading its five-page whitepaper is, therefore, easy, as it makes it clear that it is a gift and nothing else. Amount raised: $954. At least it managed to raise that amount though. A quick count on TokenData reveals that 19 ICOs received less than $500. Most interestingly, 15 of these were within the past seven months. This probably reflects the fact that investors are becoming warier of ICOs and are increasingly being aware of their pitfalls. Make Our Country Great Again My exploration into the wild land of ICOs was rewarded with some interesting finds. For instance, I discovered that PutinCoin exists (market value: $1.65M). According to its whitepaper, it is "a cryptocurrency coin [its description] created to pay tribute to the people and the president of Russia. It was created and developed with the intention of supporting the vastly growing Russian economy, the market around it and even the economy across the Russian boarders [sic]”. As you could perhaps guess, there is also a TrumpCoin (market value: $379,000). As far as I can tell, it was created to support his election campaign. And, of course, there is the MACRON coin (market value: $767,500). The purpose of this coin is rather telling: “MACRON was created in support of (then) French Presidential candidate, Emmanuel Macron (who eventually went on to win the elections).” Crystal clear. Praise The Lord Jesus Coin, on the other hand, seems to have much bigger drawing power. With a market value of $1.40M, its website claims that “It’s Time to Decentralize Jesus”. It is “the currency of God’s Son. Unlike morally bereft cryptocurrencies, Jesus Coin has the unique advantage of providing global access to Jesus that’s safer and faster than ever [sic] before.” I must admit that I love the fact that the team behind this coin is considerate enough to also provide the whitepaper in Latin. Apparently, commercial opportunities aren’t confined to coins alone. This year sees the debut of Virtual Currency Girls (Kasotsuka Shojo) in Japan. It is formed of eight female band members, each of whom wears a character mask representing a crypto. Between them, they show Bitcoin Cash, Bitcoin, Ether, NEO, NEM, Ripple, Mona and Cardano. Virtual Currency Girls There are so many things about cryptos that you didn’t know you wanted to know. And now you know. Given the way things are going, I am sure newer ‘value creation’ ideas will emerge. It is going to be a fun, interesting and entertaining ride from here. I am cancelling my Netflix subscription. A big Thank to Zoran Dordevic, CEO of Tolar for informing of the existence of the Jesus Coin. No, he is yet to buy one of these. This article was originally published here.
Most of us have been hearing and probably following concepts like smart cities, smart homes, smart gadgets, Internet of Everything, Industrial Internet of Things (IIoT), etc. If you're not familiar with IoT or Machine-to-Machine and what it really means for a layman, please first go through this 2 minute read: Explaining IoT to a Layman. Grave Situation Accidents are increasing at an alarming rate across the world and especially in India. Around 4,80,652 road accidents took place in India in 2016 killing over 1.5L people and injuring almost c. 5L. There are various reasons ranging from bad road conditions, over speeding, poor street lighting, road rage, driving under influence of alcohol, improper road designs and others. Two-wheelers account for 25% of total road crash deaths in India. India is on the top of list of countries by traffic-related death rates. The situation is becoming so serious that according to some stats there is one accident every minute. Metros are literally competing with each other to become the accident capital of the world. It's fair to say I'm scared to take my car out, especially when I observe the style of driving, people recklessly switching lanes, autos driving in the wrong direction and sanctity of traffic signals being abused without much monitoring from the traffic police. Highways, even though expanding in number of lanes, are not becoming safer, with no proper signage, trucks flouting rules, motorists crossing speed limits and lane switching resulting in very dangerous driving environment. Now let us see how various technology-based solutions under the umbrella of IoT or M2M can help reduce the frequency of accidents or at least better manage emergencies during accidents. Smart Helmets For bikers, whether they ride a motorcycle or a bicycle, it is key to wear a helmet and safeguard onself against head injuries. But what if there is a "smart" helmet that also communicates with other drivers and vehicles. For example, a helmet with LED lights which are connected with the bike's handle through Bluetooth or some other low energy communication protocol, making it turn RED when breaks are applied. LED on the left or right side of the helmet blinks when the bicycle is making left or right turn. How about putting a little GPS connection between the smartphone and the helmet which can allow a biker to project the directions on the road. Most importantly, the helmet will be connected to the smartphone and in case of an accident, through a connected sensor send a message to a relative or a family member configured inside the phone app. Look at the basic smart helmet demonstration developed by 2 college kids, who are part of IoT-NCR open community, a crude solution which shows that at cost of INR 3000 one can build a prototype. At a larger scale this solution can be made more economical for the riders. Another interesting invention is that of an avid biker and an engineer who join hands to build an IoT device that ensures road safety. You can read their story here. Connected Cars and Connected Highways Everyone these days talks about connected cars. As per research, almost 80% of cars coming in market from January 2018 onwards would have an embedded module which would allow the vehicle to be connected with the owner and as well with the manufacturer. Once your vehicle is linked to the internet and to you through a mobile app, there can be variety of information flowing both ways, which can significantly help reduce and manage road accidents. One basic use case is informing your near and dear ones in case your cars meets with an accident. But for a moment think about how 'connected cars' and 'connected highways' can help prevent or minimize accidents. Heavy fog caused a 50 car pile up on Yamuna Expressway in January 2016. A 'connected highway' and car could have sensed the congestion/accident when the first two cars bumped into each other and immediately informed through a central server to all vehicles on the highway about the approximate accident location. This is possible if all cars have an RFID chip that is read by RFID reader at the toll gate. The system then knows which car entered the highway and adds them to notification database, and removes it from the system when the car leaves the highway through an exit or the last toll. Cameras on light poles or the RFID on the car, which met with an accident can communicate to the backend informing its status, thereby triggering through the central server, a message regarding a possible accident or a slowdown. Another feature I can think of is Auto lock built into the car to avoid over speeding wherein if the speed crosses 100 KM on a 60 KM lane, the car will gradually slow down the first time, if it goes over again then it will slow down and send a warning message to the driver the second time and third time this violation can result into a car being locked down and message sent to the nearest patrolling station or cops to handle the situation manually. TCS presented the 'connected car' concept, which highlights some of these important points. Smart Traffic Management With the nature of 'connected cars' and ''connected highways or other solutions such as smart traffic management are needed, which manage traffic conditions and blockages to minimise bottlenecks. For example how about traffic lights dynamically changing the timing of RED/GREEN/YELLOW based on the traffic in the connecting lanes. Also these solutions can help the patrolling policemen catch violators easily and also charge them a penalty through an automated/integrated payments system. This reduces scope for bribery rampant in India. Delhi government during the odd-even rule in New Delhi collected huge amount of fines, and were also able to reduce traffic on road - how about a technology-based solution that allows them to catch offenders and collect fined in an automated manner? Conclusion I see immense potential in IoT and M2M based solutions to help cities and governments reduce accident rates and more importantly save lives of end consumers. $11 billion of fuel is wasted in extra fuel consumption due to traffic jams and I don’t know how to quantify the monetary value of time that it is saved for end consumers and enhanced productivity. This article was originally published here.
Contemporary dating in India is increasingly being pushed into the digital space, so much so, that it might even put some job-hunting portals to shame. Often these days one finds a match sooner than one might find a job to his profile online. In a fast-paced world of 30-minute deliveries, much faster cab services and instant payments, "with no time to stand and stare", why should love take a miss? “How I met your mother? Well, on a dating app.” My friends often tell me, “It’s a digital world, why not seek love the digital way.” But these dating apps are not just limited to finding the “perfect mate”. They are also often used by those looking for a friend or a long-term relationship. In our so-called connected times, most social groups are still limited to 5-6 close friends. Continuous engagement through likes, shares, and tagging on social media, whilst does create the illusion of a wide circle - the dynamics of real and meaningful relationships haven't changed much. Busy schedules, traffic problems, and changing priorities ensure the avenues to meet new prospects driving your love life are still limited. Courtesy online dating apps, one can now connect to a greater number of people pre-selected as per your preferences. Apps like Tinder, Happn, TrulyMadly, Go Gaga use geotagging, algorithms and complex calculations to determine the “suitable” match for you. These platforms differentiate themselves from social networking sites like Facebook in the fact that they are customized according to your preferences. One can mention their inclinations, choices, interests and even sexuality upfront, without fear of being judged or ridiculed. Online dating apps help people come out of their shell, virtually mingle with people of similar interests, establish trust and then finally spend some time in real life. The dating market in India has seen some unique propositions in the last couple of years. While some apps like Tinder and Happn find matches based on location-proximity, some others like GoGaga promise to find trustworthy relationships using a unique “wing-man” concept, where your match is generated through mutual friends. There are around 100 million people in India between the age group of 18-35 who are unmarried and actively looking for a relationship. The online dating market is expected to grow to c. $250m over the next 3 years growing at CAGR of c.10%. However, app-based dating is still to go full-throttle in the user mindset as there are often apprehensions about finding love online, mostly concerns around privacy and credibility. But then aren’t we ordering our groceries, electronics, and most of the essential utilities online? The new Digital India has truly enabled finding love the digital way. We for one believe that for people to find love online, as a society we need to move away from the taboo of online dating. It’s no different from talking to your friend or crush on messages. Let’s not be ashamed of finding love online, for the “winged cupid [was] painted blind.” The prime responsibility of online dating apps is building a genuine and credible community. Once concerns about privacy and authenticity are adequately addressed, the online dating industry in India is set to swipe right. Written by Medha Mehta from Go Gaga
Why is so much of India’s population excluded from access to formal credit and what can be done to address this issue? Rohit Sen argues that advances in data science, technology and the government’s new financial infrastructure will encourage the development of financial inclusion. A couple of weeks ago, my maid asked me for a loan. “What do you need the loan for?” I asked. “Sir, I took a loan last year, but the interest is very high. Each month my balance keeps going up and up. It is too much”. It turns out she went to a local money lender and is paying 5% per month, which is about 80% annualised. It’s easy to see how things can get out of hand. Sensibly, she wanted to borrow from me to pay off this high interest loan. It was the only way she could get her head back above water. She’s someone I trust, so I gave the loan. But let’s suppose I didn’t. What would she do then? I doubt she really had anyone else to turn to. Would she have to sell something precious to her? Would it just spiral out of control? In India today, a substantial amount of people are facing this situation. The security guard in my building has no access to formal credit. Nor do many working in the service sectors. Call centre staff? Workers in small and medium sized enterprises? No chance. Even most graduates can’t get a loan from a bank. In fact, access to credit in India is so restricted, that rather than ask who can’t get a loan, the more pertinent question is who can get a loan. The answer is that less than 10% of Indians have access to formal credit. That means there are at least 1 billion to people who can’t access formal credit in India. To be clear, I am not saying that all of them should be able to get credit, it’s merely an indication of the size of the problem. And in the same way water fills available space, in India there is a large informal lending economy to fill the gap. Why don’t Indian banks lend to such a large demographic of the population? Why are all the aforementioned people, who have jobs, denied credit? Are they all really that unsuitable as potential borrowers? The problem actually arises from two factors: first, most of the population has no formal borrowing history and thus no bureau (CIBIL) score and are consequently invisible to banks. Since banks don’t have enough information on the borrower, they ask for collateral, and that’s why most lending is secured. The trouble is, many people don’t have the luxury of having security they can pledge. Second, banks, due to their large branch network and employee base, have a heavy cost structure. Any loan disbursed needs to be of a certain size for it to be economical for them. There’s a reason why you can’t apply for a INR10,000 ($150) personal loan. Again, most people are not in a position where they can borrow and afford to repay a loan of INR1 lakh ($1,500) or more which further encourages the practice of informal money lending at high rates. The good news is that we are living in a time where three trends are coming together; their confluence creates a solution to this long-lasting problem of access to credit. Advances in data science, technology and the Indian government’s ‘India Stack’ infrastructure allow us to create products that the underbanked need and want, and a business that can have enough scale to address this challenge in a meaningful way. No longer do individuals need to be in invisible; by capturing some of their data from their digital and analogue footprint we can make an assessment of an applicant’s creditworthiness. By having an operationally light, fully digital infrastructure, not only can we provide the underbanked with products that are relevant to them, we can also provide a better experience as well. Incrementally, it is possible that hundreds of millions more Indians will be able to have access to credit through a formal system. Credit will be cheaper and easier to access and manage than the informal channels available to them today. Does it matter that people have or don’t have access to credit? Why can’t people just save up enough money before they buy whatever good or service they are seeking? Yes it does matter. A lot. Millions of Indians are constrained from pursuing their wants, needs or aspirations simply because they lack the capital to do so. They could do these things if they were able to spread payments over time, it’s not as if they don’t have income, but in a credit scarce world they are stuck. Think of the budding photographer that can’t pursue their passion, the millennial that is unable to take an educational course and better their prospects, or the family that can’t afford to pay the hospital fees for medical treatment in an emergency. Credit is not the answer to everything. It can lead to trouble. If managed responsibly however, it can help level the playing field in the good times, and provide a safety net in the event of a financial shock. It can give people the choice and economic freedom to do with their lives what they choose, or at the very least, fulfil important lifecycle events. This new form of digital underwriting is still in its nascent stage. Fintech players have barely scratched the surface into figuring out what sorts of alternative data have significance in explaining credit worthiness of a borrower. They haven’t faced a full credit cycle through which their models have really been put through their paces. There is a long way to go. Nevertheless, we do now have a roadmap towards financial inclusion. This will help people to save, invest, and improve their circumstances. An economically empowered population will of course be good for the bottom line of the national accounts, but it will also have a profound impact on a societal level too. A freer society is a richer society. Let’s hope that this can be realised. About the Author Rohit Sen is CEO and Co-founder of NIRA, a consumer credit fintech startup based in India. Previously, he worked as a structured credit trader in London for 12 years. Rohit completed his Bachelor’s at Oxford (2002) and his Masters degree at LSE (2003). He tweets @solar_corona This article was first published on South Asia @ LSE, and is republished with permission. Click here for the original article. These are views of the author, and not the position of the South Asia @ LSE blog, nor of the London School of Economics.
Whether you believe in cryptocurrencies or not, the asset class has gained a lot of traction and acceptability among market participants. India is now becoming one of the biggest trading hubs of cryptos and things will only get bigger once domestic policymakers lay out a clear regulatory framework for this space. Like equities, investors in the crypto space must understand what they are buying into and what value/utility proposition the digital tokens hold in the long term. Below are excerpts of an exclusive interview with Rahul Raj, Co-founder and CEO of Koinex, India’s leading cryptocurrency exchange which is a must read for all crypto enthusiasts and traders based in India. We have to start off by asking your thoughts on what the Finance Minister said about cryptocurrencies in his Budget Speech….Do you think he has killed India’s cryptocurrency party? The Finance Minister’s comments in the Budget Speech was leaning towards the need for cryptocurrency regulation in India for the digital currency ecosystem, rather than a complete ban. This was also corroborated by the Cabinet Secretary of Economic Affairs, Mr. Subhash Garg in his statement about India hoping to roll out a governing regulatory framework before the end of this fiscal year. The government in fact has replaced the idiom cryptocurrency with crypto-assets, referring to possibly treating it as a commodity under SEBI guidelines. The government is focused on mitigating all possible illegal financing activities which could revolve around bitcoin and we are in unison with the government on this thought. It is important to build a robust and comprehensive framework to regulate this space. As Jaitley stated, India wants to promote the use of blockchain technology but reaffirmed their negative view on crypto-assets. Do you feel, like many in the crypto universe, that thinking of blockchain independently of cryptocurrency transactions is redundant at the moment? Blockchain technology is obviously a huge technological breakthrough and is evolving every day. If you see the concept of how blockchain functions, it is by design, applicable across sectors that use recording and updating of data. So the applications of transactional nature will always be one of the foremost users of this technology and so we do see crypto-assets as being an integral part of the blockchain universe. However, the technology will also find relevance in various other industries including advertising, retail and social media and other government sectors like property office, electorate office judiciary system etc. Many Indian residents are trading on your exchange currently. On some days, volumes in Ripple are the 20th largest globally according to coinmarketcap.com on Koinex. What makes you bullish about the future? As per industry sleuths, in the last 18-24 months, $3.5 bn of trade volumes have been recorded in India. India accounts for over 10% of the global bitcoin trading volumes. With the conversations regarding the regulatory roadmap going forward, we are optimistic about the market and find a scalable business opportunity as a lot more participation is expected on the retail front. While registering on Koinex, there is a thorough KYC process. The withdrawal and deposit system on your site is also very smooth and customer-friendly. What challenges do you see going ahead especially with respect to your payment partners? We were the first open book peer–to–peer cryptocurrency exchange to be launched in August, 2017. We were also the first to deploy a thorough KYC system and integrate that into our platform and registration process. We need users to upload their PAN details, Aadhaar details, and their picture (which is verified using image mapping). Our payment systems were running smoothly, but we did face few hiccups in the light of the recent apprehensions from the government. But we hope that when there is clarity in regards to cryptocurrency regulation and compliance and the policymakers layout a clear regulatory framework, the financial institutions will be open to partner with us. In terms of what more can be done, there can be a multi-tiered KYC process where we can categorize users in different groups such as HNI’s, high traders or politically exposed individual. We have also launched our Koinex app to help users trade on the go. In your interaction with the government, do you see a good level of coordination between say the IT department, the RBI and the Finance Ministry when it comes to formulation of policy? Absolutely. A committee was formed in December which includes members from all of the above. We are sure that all stakeholders will be involved after this committee releases its report on the cryptocurrency landscape in India with its suggestions. We believe there will be a democratic process and there will be a public & industry opinion on the framework such that every stakeholder’s interests are best represented. The most iconic exchange in the world has launched Bitcoin futures in Chicago. Ethereum Exchange Traded Notes are being traded by institutional money on the Stockholm NASDAQ. Do you see crypto futures being traded in India? Crypto-assets are still in their nascent stage in India and so it will be some time before we match up with the regulated markets. These are derivative products which need even more regulation. Derivative products are one step further than trading the asset itself. Can you please briefly describe for the traders on your platform what security measures you have put in place to avoid a large scale hack going forward? Just as technology is evolving, the hackers and their techniques are also evolving. They are also constantly looking at counter attacks against our security measures. Most exchanges store their crypto pool offline in hardware wallets and it is not connected to the internet and hence is safe. We also administer traditional web layer security & blockchain security which armours the system from perils of session hijackings, SQL injections and DDoS attacks. We also have complete monitoring of all events and activities on the platform along with full record of this on a minute level. Koinex is the first multi-currency exchange with an open-book ledger format, in the country and within a short time the company grew to be one of the largest trading portal by volume, in the country. One of the key reason for their success is the cutting-edge technology, proprietary trading engine, wallet and platform architectures, grade A security, user-centric UI/UX and tons of user-demanded features that makes it seamless for the users. Do you plan on introducing more products such as alt coins going forward? Yes, we always are looking at enhancing our product offerings on the platform but these launches are strategic. A lot of due diligence is being done behind which new products to launch. We have an internal robust framework of many evaluation parameters to determine the relevance of the product in the market. The parameters include factors like details of the parent company, the tech platform, acceptance, market cap, volumes and investor backing, etc. Once the coin manages to score satisfactory results on these parameters we consider it for a launch on our exchange. This diligence also helps to weed out possible Ponzi coins and the ones which might benefit our customers in the long run. What are your thoughts on investor education? Do you plan to put up educational videos and regular analysis of market trends in the crypto space for your customers going forward? We encourage users to take a long-term view on what they buy. We have a lot of content which will help readers to understand the nuances of crypto-assets and blockchain technology. Our focus is to build awareness and debunk myths about crypto. However please note here that we do not share market intelligence or provide any buy or sell recommendations. When do you the market will be mature enough to take fiat ie. the Indian Rupee out of the picture. Do you believe if you offer XRP/BTC, there will still be substantial demand? Crypto to crypto exchanges exist in overseas market and this is something we will like to introduce as our users mature and the market gets bigger. Another question when it comes to efficient pricing (obviously liquidity has a lot to do with this) is what are your thoughts about the arbitrage opportunities that exist between domestic exchanges (like say BTC Zebpay & Koinex) as well as the price differential that exists between international markets and India. Every exchange is a local market and thus illiquidity can lead to different prices. Arbitrage opportunities do exist. We want to make it clear that all the bids and asks you see in the publicly available order book are our users and we do not do any market making or proprietary trading. The pricing mechanism is efficient and driven only by supply and demand dynamics. On the point about the premium of domestic crypto prices over the international USD price, we can again attribute that to strong demand for these assets. The stance in the crypto universe seems too binary: either people are for it or massively against it. What is your long term structural view in this space? Every new disruptive technology or innovation always faces a strong opposition because as a society we are averse to change. Technology will always be a step ahead because innovation comes first, followed by regulation. But like all other transformational technology, be it World Wide Web or artificial intelligence, even blockchain technology will bring a paradigm shift in our ecosystem. It is here to stay. Blockchain technology offers a transparent, secure and efficient peer to peer value transaction proposition which is a force to reckon with and will eventually attain mainstream acceptance.
Inflationary fears are growing and US rates continue to rise; Employment has become more flexible since the crisis of 2008/2009; Commodity prices have risen but from multi-year lows; During the next recession job losses will rapidly temper inflationary pressures. Given the official policy response to the Great Financial Recession – a mixture of central bank balance sheet expansion, lower for longer interest rates and a general lack of fiscal rectitude on the part of developed nation governments – I believe there are two factors which are key for stock markets over the next few years, inflation and employment. The fact that these also happen to be the two mandated targets of the Federal Reserve – full employment and price stability – is more than coincidental. My struggle is in attempting to decide whether demand-pull inflation can survive the impact of a rapid rise in unemployment come the next recession. Inflation and the Central Bankers response is clearly the new narrative of the financial markets. In his latest essay, Ben Hunt of Salient Partners makes some fascinating observations – Epsilon Theory: The Narrative Giveth and The Narrative Taketh Away: This market, like all markets, cares about two things and two things only — the price of money and the real return on invested capital. Or, as they are typically represented in cartoon form, interest rates and growth. …This market, like all markets, needs a positive narrative on risk (the price of money) or reward (the real return on capital) to go up. Any narrative will do! But when neither risk nor reward is represented with a positive narrative, this market, like all markets, will go down. And that’s where we are today. Does the Fed have our back? No, they do not. They’ve told us and told us that they’re going to keep raising rates. And they will. The market still doesn’t fully believe them, and that’s going to be a constant source of market disappointment over the next few years. In the same way that markets go up as they climb a wall of worry, so do markets go down as they descend a wall of hope. The belief that central bankers care more about the stock market than the price stability of money is that wall of hope. It’s a forlorn hope. The author goes on to discuss the way that inflation and the war on trade has derailed the global synchronized growth narrative. Dr Hunt writes at length about narratives; those who have been reading my letters for a while will know I regularly quote from his excellent Epsilon Theory. The narrative has not yet become flesh, to coin a phrase, but in the author’s opinion it will: My view: the inflation narrative will surge again, as wage inflation is, in truth, not contained at all. The trade war narrative hit markets in force in late February with the White House announcement on steel and aluminum tariffs. It subsided through mid-March as hope grew that Trump’s bark was worse than his bite, then resurfaced in late March with direct tariff threats against China, then subsided again on hopes that direct negotiations would contain the conflict, and has now resurfaced this past week with still more direct tariff threats against and from China. Already this weekend you’ve got Kudlow and other market missionaries trying to rekindle the hope of easy negotiations. But being “tough on trade” is a winning domestic political position for both Trump and Xi, and domestic politics ALWAYS trumps (no pun intended) international economics. My view: the trade war narrative will be spurred on by BOTH sides, and is, in truth, not contained at all. The two charts below employ natural language processing techniques. They show how the inflation narrative has rapidly increased during the last 12 months. I shall leave Dr Hunt to elucidate: … analysis of a large set of market relevant articles — in this case everything Bloomberg has published that talks about inflation — where linguistic similarities create clusters of articles with similar meaning (essentially a linguistic “gravity model”), and where the dynamic relationships between and within these clusters can be measured over time. Source: Quid.inc What this chart shows is the clustering of content in 1,400 Bloomberg articles, which mention US inflation, between April 2016 and March 2017. The graduated colouring – blue earlier and red later in the year – enriches the analysis. The next chart is for the period April 2017 to March 2018: Source: Quid.Inc During this period there were 2,400 articles (a 75% increase) but, of more relevance is the dramatic increase in clustering. What is clear from these charts is the rising importance of inflation as a potential driver of market direction. Yet there are contrary signals that suggest that economic and employment growth are already beginning to weaken. Can inflation continue to rise in the face of these headwinds. Writing in The Telegraph, Ambrose Evans-Pritchard has his doubts (this transcript is care of Mauldin Economics) – JP Morgan fears Fed “policy mistake” as US yield curve inverts: US jobs growth fizzled to stall-speed levels of 103,000 in March. The worldwide PMI gauge of manufacturing and services has dropped to a 14-month low. The average “Nowcast” tracker of global growth has slid suddenly to a quarterly rate of 3.2pc from 4.1pc as recently as early February. Analysts at JP Morgan say the forward curve for the one-month Overnight Index Swap rate (OIS) – a market proxy for the Fed policy rate – has flattened and “inverted” two years ahead. This is a collective bet by big institutional investors and fund managers that interest rates may be falling by then. …The OIS yield curve has inverted three times over the last two decades. In 1998 it proved to be a false alarm because the Greenspan Fed did a pirouette and flooded the system with liquidity. In 2000 it was a clear precursor of recession. In 2005 it signaled that the US housing boom was already starting to deflate. …Growth of the “broad” M3 money supply in the US has slowed to a 2pc rate over the last three months (annualised)…pointing to a “growth recession” by early 2019. Narrow real M1 money has actually contracted slightly since November. …RBC Capital Markets says this will drain M3 money by roughly $300bn a year… …Three-month Libor rates – used to set the cost of borrowing on $9 trillion of US and global loans, and $200 trillion of derivatives – have surged 60 basis points since January. …The signs of a slowdown are even clearer in Europe…Citigroup’s economic surprise index for the region has seen the worst four-month deterioration since 2008. A reduction in the pace of QE from $80bn to $30bn a month has removed a key prop. The European Central Bank’s bond purchase programme expires altogether in September. …The global money supply has been slowing since last September. The Baltic Dry Index measuring freight rates for dry goods peaked in mid-December and has since dropped 45pc. Which brings us neatly to the commodity markets. Are real assets a safe place to hide in the coming inflationary (or perhaps stagflationary) environment? Will the lack of capital investment, resulting from the weakness in commodity prices following the financial crisis, feed through to cost-push inflation? The Trouble with Commodities Commodities are an excellent portfolio diversifier because they tend to be uncorrelated with stock, bonds or real estate. They have a weakness, however, since to invest in commodities one needs to accept that over the long run they have a negative real-expected return. Why? Because of man’s ingenuity. We improve our processes and invest in new technologies which reduce our production costs. We improve extraction techniques and enhance acreage yields. You cannot simply buy and hold commodities: they are trading assets. Demand and supply of commodities globally is a complex challenge to measure; for grains, oilseeds and cotton the USDA World Agricultural Supply and Demand Estimates for March offers a fairly balanced picture: World 2017/18 wheat supplies increased this month by nearly 3.0 million tons as production is raised to a new record of 759.8 million Global coarse grain production for 2017/18 is forecast 7.0 million tons lower than last month to 1,315.0 million Global 2017/18 rice production is raised 1.2 million tons to a new record led by 0.3- million-ton increases each for Brazil, Burma, Pakistan, and the Philippines. Global rice exports are raised 0.8 million tons with a 0.3-million-ton increase for Thailand and 0.2- million-ton increases each for Burma, India, and Pakistan. Imports are raised 0.5 million tons for Indonesia and 0.3 million tons for Bangladesh. Global domestic use is reduced fractionally. With supplies increasing and total use decreasing, world ending stocks are raised 1.4 million tons to 144.4 million and are the second highest stocks on record. Global oilseed production is lowered 5.7 million tons to 568.8 million, with a 6.1-million-ton reduction for soybean production and slightly higher projections for rapeseed, sunflower seed, copra, and palm kernel. Lower soybean production for Argentina, India, and Uruguay is partly offset by higher production for Brazil. Cotton – Lower global beginning stocks this month result in lower projected 2017/18 ending stocks despite higher world production and lower consumption. World beginning stocks are 900,000 bales lower this month, largely attributable to historical revisions for Brazil and Australia. World production is about 250,000 bales higher as a larger Brazilian crop more than offsets a decline for Sudan. Consumption is about 400,000 bales lower as lower consumption in India, Indonesia, and some smaller countries more than offsets Vietnam’s increase. Ending stocks for 2017/18 are nearly 600,000 bales lower in total this month as reductions for Brazil, Sudan, the United States, and Australia more than offset an increase for Pakistan. It is worth remembering that local market prices can be dramatically influenced by small changes in regional supply or demand and the vagaries of supply chain logistics. Added to which, for US grains there is heightened anxiety regarding tariffs: they are expected to be the main target of the Chinese retaliation. Here is the price of US Wheat since 2007: Source: Trading Economics Crisis? What crisis? It is still near to multi-year lows, although above the nadir of the financial crisis in 2009. The broader CRB Index shows a more pronounced recovery, it has been rising since the beginning of 2016: Source: Reuters, Core Commodity Indexes Neither of these charts suggest that price momentum is that robust. Another (and, perhaps, more global) measure of economic activity is the Baltic Dry Freight Index. This chart shows a very different reaction to the synchronised increase in world economic growth: Source: Quandl In absolute terms the index has more than tripled in price from the 2016 low, nonetheless, it is still in the lower half of the range of the past decade. Global economic growth may have encouraged a rebound in Copper, another industrial bellwether, but it appears to have lost some momentum of late: Source: Trading Economics Brent Crude Oil also appears to be benefitting from the increase in economic activity. It has doubled from its low of two years ago. The US rig count has increased in response but at 800 it remains at half the level of a few years ago: Source: Trading Economics US Natural Gas, which might still manage an upward price spike on account of the unseasonably cold weather in the US, provides a less compelling argument: Source: Trading Economics Commodity markets are clearly off their multi-year lows, but the strength of momentum looks mixed and, in grains and oil seeds, global supply and demand look fairly balanced. Cost push inflation may be a factor in certain markets, but, without price-pull demand, inflation pressures are likely to be short-lived. Late cycle increases in commodity prices are quite common, however, so we may experience a short-run stagflationary squeeze on incomes. Conclusions and Investment Opportunities Whenever I write about commodities in a collective way, I remind readers that each market is unique, pretending they are homogenous is often misleading. The recent rise in Cocoa, after a two-year downtrend resulting from an increase in global supply, is a classic example. The time it takes to grow a Cocoa plant governs the length of the cycle. Similarly, the lead time for producing a new ship is a major factor in determining the length of the freight rate cycle. Nonetheless, at the risk of contradicting myself, what may keep a bid under commodity markets is the low level of capital investment which has been a hall-mark of the long, listless recovery from the great financial recession. I believe an economic downturn is likely and job losses will occur rapidly in response. I entitled this letter ‘Inflation or Employment’, these are the factors which will dominate Central Bank policy. Currently commentators view inflation as the greater concern, as Dr Hunt’s research indicates, but I believe those Central Bankers who can (by which I mean the Federal Reserve) will attempt to ensure they have raised interest rates to a level from which they can be cut, rather than having to rely on ever more unorthodox monetary policies. Originally Published in In the Long Run
Indian households have a historic impetus to invest in gold. The data usually sticks. For 15 years till 2016, the metal generated an annualized return of 13.7% - just below the Sensex annualized return of 14.0%. Bullion delivered a solid compounded annual growth rate of 9.6% since 1999, having witnessed it’s all-time high in 2011, only falling marginally since. Over the past half a decade, several analysts have predicted the emergence of gold bull markets in the upcoming years. Their predictions are mostly based on such past performance. Given the present volatility in global financial markets, relying solely on past data is risky. There are however a few significant drivers at play. I believe the current US-China trade war combined with an up-and-coming market for gold-backed cryptocurrencies can significantly increase the worldwide demand for gold. This upward thrust in demand may be the beginning of a long-term ‘sustainable’ gold bull market. US-China Trade War and The Petro-Yuan Rush Amidst the ongoing US-China trade war escalation, the Chinese government decided end of last month to issue the world’s first-ever Yuan-denominated oil futures contract. This may be an attempt to weaken the value of dollar by displacing it as the world’s reserve currency. The Yuan is backed by gold. This means that Yuan-denominated oil futures will allow trading investors to convert Yuan to gold and vice-versa. China is hence in effect is attempting to re-introduce the gold standard by allowing large-scale trading of oil for gold. This could create an unprecedented demand for bullion, leading to a significant increase in its prices. Investors refer to this as “Petro-Yuan Rush”, inspired from Venezuelan gold-backed cryptocurrency called “Petro Gold”, which was introduced in 2017 by the country as it waged an "economic war" against the United States seeking monetary and fiscal sovereignty. Gold-Backed Cryptocurrency and Islamic Finance Speaking on introduction of gold-backed cryptocurrencies, Sean Walsh, Founder of Redwood City Ventures, a crypto-asset investment firm said: “Rather than buying a cryptocurrency backed by gold, I’d just go buy the gold. Gold is a physical thing that you want to be able to hold in your hands, because that’s the point.” The fact that the first gold-backed cryptocurrency was launched in 1995 but failed to catch on until 2017, when suddenly there was a huge hype for Bitcoin and its prices shot through the roof, tells us that Sean Walsh is probably right about the utility and fate of gold-backed cryptocurrencies. Despite this, gold-backed cryptocurrency is of special interest to the Islamic investors. Islamic investors till date are barred from investing in cryptocurrencies, as they are not Shariah compliant investments. This is because products of financial engineering and speculation are against Islamic principles. However, a Dubai-based startup, “OneGram”, is offering gold-backed cryptocurrencies as a solution to this issue of religious permissibility. The company offers to store at least a gram of gold for each unit of OneGram cryptocurrency. Backing cryptocurrency by a physical asset such as gold, limits the speculation on its price, and keeps the minimum value of the cryptocurrency at least equal to the price of the gold. The limitation on speculation deems the investment Shariah compliant. The demand for gold-backed cryptocurrency is increasing amongst the Islamic investors in the Gulf and South-East Asia. Recently in January 2018, United Kingdom’s Royal Mint also launched gold-backed cryptocurrencies. Increasing popularity of cryptocurrency backed by gold also implies soon they would drive worldwide demand for physical gold. Moreover, crypto entrepreneurs facing regulatory backlash in countries such as China and India may find gold-back cryptocurrencies as a potential future. Conclusion Gold over the long term serves as an appreciating asset. However, the sudden rise in demand of gold-backed cryptocurrencies and the Petro-Yuan rush will act as strong catalysts in this growth. It is the right time to make investments in gold as the global markets prepare themselves for a long-term gold bull market.
The Mahabharat is one of the oldest and longest Epic poems in the world. The influence of the sacred text on Indian culture is deep and profound. Though the central story is that of the “Great War” and the circumstances that lead to it; it contains enormous life lessons all along. Bhagavad Gita, one of the most revered texts among Hindus, is also a part of the Mahabharat. Here we dig into this holy epic, unearthing some valuable investment lessons. Respect the Power of Time In the Bhagavad Gita, Krishna who is the avatar of Lord Vishnu proclaims that he is the Almighty Time. “I am time, the destroyer of all; I have come to consume the world”. – Bhagavad Gita This statement alone is indicative of the importance of time, which is equivalent to God. This is particularly true in case of personal finance. There exists the concept of ‘time value of money’, that is, a rupee today is worth more than a rupee an year later. Essentially, the value of money progressively degenerates with passing time. Inflation also eats away the value of a currency. Therefore, it is rational to select instruments of investments such, that the rates yielded by them overcome the effects of time decay and increase the overall value. Power of compounding helps build a large corpus through small contributions. A compound interest on your investments, yields interest on both principal and the accumulated interest. The “power” in the power of compounding materializes only when the investment has been made in the right financial instrument for the right amount of time. Time works both for and against an investor. It is the prime component in valuing and comparing investments. Time indeed is the real god in the world of finance. Goal Planning is Important Once, the young Pandavas and Kauravas were taken by their Guru Dronacharya for a test. The objective of the test was to assess the target hitting capacity of the students. They were supposed to hit the eye of an artificial bird hanging from a tree at a distance with an arrow. The brothers were excited to take the aim, but before they could start, the Guru asked them a simple question. “What do you see?”, he asked. Everyone but one, answered whatever they could see – the trees, sky, leaves etc., and they were not allowed to even aim the target. When Arjun’s chance to answer came, he replied that he could only see the bird’s eye and he was allowed to hit the target which he successfully did. The vital lesson from this short piece is, it is only once the target has been identified precisely, would there be any possibility of hitting it. The purpose of investment should be defined at the outset. This will enable one choose the appropriate route to be taken and efficiently plan the time available to complete it. For instance, a young person saving for his retirement would have a long time to achieve his goal. Therefore, it would be beneficial to allocate most of the funds for this purpose into equities. Equities are less risky in the long term and provide the best returns. On the other hand, a person who is about to retire in a few years should keep most of his investments in debt. Don’t get caught up in the unnecessary clutter while pinpointing your goals, it has to be marked and measured so that the most optimum route could be chosen to achieve it and a scale could be used to appraise it. Expert Advice is Always Helpful When Duryodhana was offered the mighty army by Krishna, he was delighted. He thought in the event of war, the huge army would be a much more useful asset than one Krishna. Arjun who was much more knowledgeable always wanted Krishna by his side, even though Krishna would not fight the war. Eventually, he became Arjun’s “Saarthi” or charioteer and advisor all through the war. Arjuna was one of the wisest men of his time, yet he chose someone who would drive him through the war literally and mentally. Krishna was a righteous guru and Arjun was the perfect disciple. Arjun and Krishna prevailed while Duryodhan perished at the end of the war. Thus, it's very important to take advice from an expert when it comes to managing your finances and investments. The aim should be to achieve the righteous goal, here, in this case, it is the corpus for whatever purpose one is saving. A good financial advisor would take you through the volatility of markets, through its ups and downs, and make sure your ultimate investment goal is fulfilled. There are several instances in the Mahabharat emphasizing the importance of a virtuous and candid advisor. There would have been a sure and brutal defeat for the Pandavas if Krishna would not have convinced Arjun to fight the war. Likewise, a good financial advisor would help you make decisions when you are in doubt, recommend solutions for your financial problems and help you choose the right path when you are struck by indecision. He would be stoic, objective and clear towards the course that should be taken. Don’t Venture into Unknown Territory Yudhisthira agreed to gamble (Dyut) with Duryodhana, despite knowing nothing about the game. Shakuni was a notorious expert of the game; it was as if the dices followed his command, and he was to play on behalf of Duryodhana. As expected, Yudhisthira began to lose. At the end of the game, he lost his everything – his wealth, his wife and his brothers to the game. The humiliation of the Pandavas and harassment of their wife Draupadi ensued. The real seed of Mahabharat or the Great War was planted as Pandavas took oaths to destroy Kauravas. The lost wealth and properties of Yudhisthira were reinstated by Gandhari, mother of Duryodhana, through a boon to Draupadi. But Yudhisthira again played the game and this time too he lost. The Pandavas were to be banished for thirteen years. The lessons that an investor can take from this excerpt are numerous. The first is to never try investments, which you personally do not understand, without the help of a skilful advisor. Many people invest in products just on the promise of returns and often get duped. Be very clear about the risk-return profile of the financial products and also of the reputation of issuing companies. The lure and excitement in products that are volatile like derivatives, which have a very high risk-return profile, compel many to invest in them. Equipped with little knowledge and meagre resources at their disposal, they end up on the losing side. Subsequently, these people blame the market. Manage your emotions and learn from the history so that the past mistakes are not repeated. Another major point of focus is to measure the capacity of the risk that you can take without being insolvent and the risk that the prospective investment may offer. Even in the worst case scenario, it should not affect your normal well being. Many people in the euphoria of bull market start investing in equities at higher valuations and get shocked when a little correction or a bear phase occurs. They go beyond their risk tolerance levels during a Bull Run and suffer great anxiety and stress when they see their investment value going down below the initial investment. Sometimes a Little Sacrifice is good for the Ultimate Goal Karna had a special weapon given as a boon by Indra. This weapon was being preserved by him to kill Arjun. When Karna was wreaking mayhem on the battlefield and seemed unstoppable, Krishna urged Pandavas to let Ghatothkach fight him instead of Arjun. This was done as the exotic weapon in possession of Karna was a deadly threat to Arjun. Ghatothkach was the son of Bheem and a powerful warrior; he fought with great valour and forced Karna to use the weapon on him. This weapon could only be used once and as a corollary, it was impossible to kill Arjun or defeat Pandavas now. Ghatothkach was killed and was a major loss to the Pandavas but during that time winning the war was the supreme objective and for that Arjun’s presence throughout the war was essential. An investor who wants to be a winner in the Kurukshetra of markets and attain financial freedom has to make crucial sacrifices. He has to make rational decisions based on logic and reason. A good starting point will be to start saving according to the financial plan, forego dispensable expenses and invest in a sustained and disciplined manner. Only then can one invest successfully and emerge as a smart investor. There are numerous characters in the Mahabharat and each of them have distinct characteristics – unique, with peculiar philosophies and idiosyncrasies. Similarly, every individual has a different expectation from his investment. However, this must be backed by a clarity of goals, strong determination and complete devotion. Mahabharat is a giant body of work that has knowledge and wisdom sprinkled generously throughout. Here we have discussed a few of them that will inspire us towards financial prudence. Financial well-being can only be ensured by taking informed decisions, followed by apposite action. The advantage of superior knowledge is fully realized only when it is applied appropriately.
Retirement is not the end of an active life. Instead, it marks a period where you can finally enjoy an abundance of leisure, pick up on hobbies, travel, or just do things you couldn’t do before. A general increase in life expectancy and standard of living has made this phase longer and healthier. But retirement can be painful and depressing too, especially if one’s financial security is in doubt. Many retirees find themselves helpless, not having saved enough. While some are forced to hold on to their jobs for longer, others are at the mercy of their children or relatives. Strangely, planning for retirement is a lowly ranked financial goal for India’s working population. Not paying sufficient attention to it is a sure-shot way to chaos, especially when one is not at his/her best health. Seeds of investments planted in earlier years are the only way to reap fruits of prosperity later in life. The article discusses the fundamentals of retirement planning. In India, the central and the state government provide retirement benefits to their employees in the form of regular pensions. On the other hand, employees of most private organizations and those working in the informal sector have no such facility. They must plan their retirement themselves. With the disintegration of the joint family, they no longer have a support system to depend on. Though there are a few government schemes and regulations to help people save and accumulate a retirement corpus, in most cases they are ineffective. Take the example of tax benefits under section 80C of the Income Tax Act. People invest in financial products to avail tax exemptions. But in a haste to save taxes, they end up purchasing financial instruments which are inferior or less suitable for their needs. The importance of retirement planning in early stages of life has a significant impact on accumulated value and yet people choose to neglect it. Even those who do plan timely often miss out on certain important factors such as inflation or asset allocation, thereby ending up with inadequate money. Goal-based planning is still not mainstream. Let’s look at a few commonly over-looked points: Starting Early Individuals underestimate the power of compounding. The effect of starting early, even with a small amount can be significant. An INR 5, 000 monthly SIP in an equity mutual fund started at the age of 25 would be worth INR 7.4 crores by the time you hit 60. The same SIP if started when you are either 30 or 40 would be worth INR 3.5 crores or INR 76 lakhs respectively upon retirement (assuming 15% annual return). Likewise, an INR 5, 000 monthly investments in the Public Provident Fund (PPF) at the age of 25 could be worth INR 1.2 crores on retirement, while the same investment if done at 40 would be only worth INR 31 lakhs. The following graph presents the amount accumulated at the age of 60 by three different financial instruments if INR 5,000 monthly investment is made by individuals of different ages. The rates of returns (per annum) are taken to be 8.5%, 8.25%, and 15%, for a Recurring Deposit (RD), PPF, and Equity mutual fund respectively. The amounts are shown in INR crores. Another advantage of starting early is the ability to take greater risks in the search for better returns e.g. by investing a part of one’s portfolio into equities. Risk appetite only goes down with increasing responsibilities and health constraints. Estimating the Required Amount The amount of money required for a comfortable retirement should be estimated keeping in mind the rate of inflation, the desired standard of living as well as present income. You can arrive at a ballpark figure by calculating the future value of your current monthly income, as at retirement. Take this amount and calculate the present value of each monthly installment, required during the non-earning period (20 to 30 years), at the inflation-adjusted real rate of interest. Since this estimate just gives a reference point, the plan must be monitored regularly. Inflation is the ultimate wealth destroyer. To put it in perspective, INR 11.4 lakhs would be equivalent to INR 1.0 crore, in today’s terms, after 30 years. If INR 50,000 is your present monthly expenditure, 30 years from now, you would require INR 4.4 lakhs per month to maintain the same standard of living. Inflation, assumed here at 7.5% per annum (roughly the long-term average for India) is the sole reason behind value erosion. False notions such as expenses go down after retirement (expenses rarely go down and instead tend to increase due to higher medical expenses) or the pension should suffice has pushed many people towards financial stress when they are at their most vulnerable point. A pension is only half of one’s last drawn salary – and it cannot be sufficient to maintain one’s existing lifestyle. The remainder has to come from investments. Creating a Good Plan There are various financial products with different risk-return profiles available in the market. Many find themselves unable to understand these products or the associated jargon of the financial world. With little time spent on research, they end up buying the wrong product or one with lower returns like ULIPS etc. For such people, an experienced financial advisor, who could help in building a sound portfolio as per the risk appetite and return expectations of their client, is a very important resource. The assistance of a financial advisor could add tremendous value to the overall portfolio as it would be managed dynamically. People who are wary of the stock market must overcome their illogical fear and allocate a part of their savings towards equities. A little allocation towards stocks will help them understand the volatility of the markets and, realize that in the longer term, equity market can lead to true wealth creation. To beat inflation, a portion must be allocated to equities, especially through mutual funds. Some Investment Options Available for Retirement Planning: Equities & Equity Oriented Schemes: This is one asset class that has been consistent in beating inflation and creating wealth at a faster pace. Though direct equity exposure could be quite risky, investing in equity mutual funds which are professionally managed diversified portfolios can offer great long-term returns. Investors can invest in mutual funds as they please – monthly, yearly or a lump sum. However, a disciplined approach is recommended. Systematic Investment Plans or SIPs as they are popularly called form one such approach to create wealth in the long term by investing in mutual funds in an organized, continuous and periodic way. EPF/PPF: These are essentially debt instruments which provide a safety net but with a lower rate of return amounting to 8.5% per annum. EPF is for salaried people with the employer and employee contributing 12% of the basic (plus dearness). PPF is used by self-employed people to create a long-term corpus. Both EPF and PPF are tax efficient products where contributions are deductible under section 80C and, interest, as well as the principal, is accumulated tax-free. These products are good for risk-averse investors, but even for them investing entire savings in such product could lead to low accumulation at the retirement. National Pension Scheme (NPS): NPS is a pension scheme regulated by the Central Government. While all Central Government employees are mandatorily covered by this scheme, it is open to all Indian citizens on a voluntary basis. Since one portion of the NPS is invested into equities, the scheme does not offer guaranteed returns. But at the same time, it can earn higher than traditional tax-saving investments like PPF. NPS has been around for a few years now and has managed to deliver an average of 8%-10% annualized returns. An additional deduction for investments of up to INR 50,000 is available for NPS under subsection 80CCD (1B). This is over and above the deduction of INR1.5 Lakh available under section 80C of Income Tax Act. People who are still confused should consult a professional financial adviser so that they start saving for their retirement the right way. People who are about to retire and have not planned well for their retirement should start managing their finances immediately and take help from advisers if they cannot figure out the way forward. Creating a robust plan is a start, but managing it year after year, modifying it when required is of utmost importance. Life after retirement can be a long pleasant vacation for people who have been meticulous and dedicated to achieving their retirement goal.
US bond yields have risen from historic lows, they should rise further, they may not; The Federal Reserve is beginning to reduce its balance sheet, other Central Banks continue QE; US bonds may still be a safe haven but a hawkish Fed makes short duration vulnerable; Short dated UK Gilts may be a safe place to hide, come the correction in stocks. US Bonds I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody. – James Carville 1993 Back in the May 1981 US official interest rates hit 20% for the third time in 14 months, the yield on US 10yr Treasury Bond yields lagged somewhat and only reached their zenith in September of that year, at 15.82%. In those days the 30yr Bond was the global bellwether for fixed income securities; its yield high was only 15.20%, the US yield curve was inverted and America languished in the depths of a deep recession. More than a decade later in 1993 James Carville, then advisor to President Bill Clinton, was still in awe of the power of the bond market. But is that still the case today? Back then, inflation was the genie which had escaped from the bottle with the demise of the Bretton Woods agreement. Meanwhile, Paul Volker, then Chairman of the Federal Reserve was putting into practice what William McChesney Martin, one of his predecessors, had only talked about, namely taking away the punch bowl. Here, for those who are unfamiliar with the speech, is an extract; it was delivered, by Martin, to the New York Bankers Association on 19th October 1955: "If we fail to apply the brakes sufficiently and in time, of course, we shall go over the cliff. If businessmen, bankers, your contemporaries in the business and financial world, stay on the sidelines, concerned only with making profits, letting the Government bear all of the responsibility and the burden of guidance of the economy, we shall surely fail. … In the field of monetary and credit policy, precautionary action to prevent inflationary excesses is bound to have some onerous effects–if it did not it would be ineffective and futile. Those who have the task of making such policy don’t expect you to applaud. The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up." Back in the October 1955 the Discount rate was 2.30% and the 10yr yield was 2.88%. The economy had just emerged from a recession and would not embark on its next downturn until mid-1957. Today the US yield curve is also unusually flat, especially by comparison with the inflationary era of the 1970’s, 1980’s and 1990’s. In some ways, however, (barring the inflationary blip in 1951-52) it looks similar to the 1950’s. Here is a chart showing the 10yr yield (blue – LHS) and US inflation (dotted – RHS): Source: Trading Economics I believe that in order to protect the asset markets (by which I mean, principally, stocks and real estate) the Federal Reserve (charged as it is with the twin, but not mutually exclusive, objectives of full-employment and stable prices) may decide to focus on economic growth and domestic harmony at the expense of a modicum of, above target, inflation. When Fed Chairman, Martin, talked of removing the punch bowl back in 1955, inflation had already subsided from nearly 10% – mild deflation was actually working its way through the US economy. Central Bank Balance Sheets Today there are several profound differences with the 1950’s, not least, the percentage of the US bond market which is held by Central Banks. As the chart below shows, Central Banks balance sheet expansion continues, at least, at the global level: it now stands at $14.6trn: Source: Haver Analytics, Yardeni Research Like the Fed, the BoJ and ECB have been purchasing their own obligations, by contrast the PBoC’s modus operandi is rather different. The largest holders of US public debt (principally treasury bonds and treasury bills) are foreign institutions. Here is the breakdown as at the end of 2016: Source: US Treasury As of November 2017 China has the largest holding of US debt – US$1.2trn (a combination of the PBoC and state owned enterprises), followed by Japan -US$1.1trn, made up of both private and public pension fund investments. It is not in the interests of China or Japan to allow a collapse in the US bond market, nor is it in the interests of the US government; their ability borrow at historically low yields during the last few years has not encouraged the national debt to decline, nor the budget to balance. Bond Markets in Europe and Japan The BoJ continues its policy of yield curve control – targeting a 10bp yield on 10yr JGBs. Its balance sheet now stands at US$4.8trn, slightly behind the ECB and PBoC which are vying for supremacy mustering US$5.5trn apiece. Thanks to the persistence of the BoJ, JGB yields have remained between zero and 10bp since November 2016. As of December 2017 the BoJ owned 46.2% of the total issuance. The ECB, by contrast, holds a mere 19.2% of Eurozone debt. Another feature of the Eurozone bond market, during the last couple of years, has been the continued convergence in yields between the core and periphery. The chart below shows the evolution of the yield of 10yr Greek Government Bonds (LHS) and German Bunds (RHS). The spread is now at almost its lowest level ever. This may be a reflection of the improved performance of the Greek economy but it is more likely to be driven by fixed income investors continued quest for yield: Source: Trading Economics By contrast with Greece (where yields have fallen) and Germany (where they are on the rise) 10yr Italian BTPs and Spanish Bonos have remained broadly unchanged, whilst French OATs have seen yields rise in sympathy with Germany. Hopes of a Eurobond backed by the EU, to replace the obligations of peripheral nation states, whilst vehemently denied in official circles, appears to remain high. Japanese and European economic growth, which has surprised on the upside over the past year, needs to prove itself more than purely cyclical. Both regions are reliant on the relative strength of US the economic recovery, together with the continued structural expansion of China and India. The jury is out on whether either Japan or the EU can achieve economic terminal velocity without strong export markets for their goods and services. The one country in the European area which is behaving differently is the UK; yields have risen but, it stands apart from the rest of the Eurozone; UK Gilts dance to a different tune. Uncertainty about Brexit caused Sterling to decline, especially against the Euro, import prices rose in response, pushing inflation higher. 10yr Gilt yields bottomed in August 2016 at 50bp. Since then they have risen to 1.64% – this is still some distance from the highs of January 2014 when they tested 3.09%. 2yr Gilts are different matter, with a current yield of 71bp they are 63bp from their lows but just 22bp away from the 2014 high of 93bp. Conclusions and Investment Opportunities From a personal investment perspective, I have been out of the bond markets since 2013. My reasoning (which proved expensive) was that the real-yields on the majority of markets was already extremely negative and the notional yields were uncomfortably close to zero. Of course these markets went much, much further than I had anticipated. Now I am tempted by the idea of reallocating, despite yields being lower than they were when I exited previously. Inflation in the US is 2.1%, in the Euro Area it is 1.3% whilst in Japan it is still just 1%. As a defensive investment one should look for short duration bonds, but in the US this brings the investor into conflict with the hawkish policy stance of the Fed; that is, what my friend Ben Hunt of Epsilon Theory dubs, the Inflation Narrative. For a contrary view this Kansas City Fed paper may be of interest – Has the Anchoring of Inflation Expectations Changed in the United States during the Past Decade? In Japan yields are still too near the zero bound to be enticing. In Germany you need to need to go all the way out to 6yr maturity Bunds before you receive a positive yield. There is an alternative to consider – 2yr Gilts: Source: Trading Economics UK inflation is running at 3% – that puts it well above the BoE target of 2%. Rate increases are anticipated. 2yr Gilt yields have recently followed the course steered by the US and Germany, taking out the highs last seen in December 2015, however, if (although I really mean when) a substantial stock market correction occurs, 2yr Gilt yields have the attraction of being near the top of their five year range – unlike 2yr Schatz which are nearer the bottom of theirs. 2yr Gilts will benefit from a slowdown in Europe and any uncertainty surrounding Brexit. The BoE will be caught between the need to quell inflation and the needs of the economy as a whole. 2yr Gilts also offer the best roll-down on the UK yield curve. The 1yr maturity yields 49bp, whilst the 3yr yields 83bp. With inflation fears are on the rise, especially in the US and UK, 2yr Gilts make for an uncomfortable investment today, however, they are a serious contender as a safe place to hide, come the real stock market correction. Originally Published in In the Long Run
Editor's Comment: American business magnate, investor and philanthropist Warren Buffett recently published his Annual Letter to the shareholders of Berkshire Hathaway, Buffet’s multinational conglomerate-holding company headquartered in Omaha, United States. These letters, which have now been written for more than 50 years are closely scrutinized by analysts and investment professionals for priceless musings on investing, business and economy. In this year’s edition released on the 24th of February, Warren Buffett focused on the conglomerate’s future plans, investments, and troubles with accounting, while giving out invaluable investment advice. In a world where investors are drowning in information but starving for wisdom, we are incredibly lucky to receive an annual doze of distilled investing wisdom straight from one of the greatest masters of the craft, that too for free! They say the greatest education is watching the masters at work. One such master piece comes in the form of Warren Buffett’s Annual Letter to shareholders. I honestly believe there is much more wisdom packed in those 20 odd pages than that can be found in many books put together. I poured over Buffett’s latest Annual Letter, and here are 10 nuggets of wisdom I could find. I have made no attempt to comment on these gems as that would be a futile exercise. The risk of diluting such distilled wisdom does not elude me. So sit back, read these gems slowly, pause and reflect on each one of them. Hope you find them as useful as I found them to be. In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business;opportunities for internal growth at attractive returns; and, finally, a sensible purchase price. Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need. The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own. Betting on people can sometimes be more certain than betting on physical assets. Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions. Performance comes, performance goes. Fees never falter. Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential. Stick with big, “easy” decisions and eschew activity Knowledge comes from learning, wisdom comes from living. Let us strive to apply this investing knowledge. Happy investing!!! Originally Published in Stock and Ladder
With 36% of its population likely to be suffering from major depression at any given time, India, as per a WHO report, is one of the world's most depressed nations. However, a majority of Indians lack awareness about mental health. So much so that many of them often miss the signs of depression that they themselves or their close ones are struggling with. According to National Crime Records Bureau, there is an average of 371 suicides committed daily in India. Though the Mental Health Act passed by Parliament in December 2017 is a step closer to fight depression, the ground realities which speak of social stigma, poor infrastructure and alarming low psychiatrist-patient ratio put a question mark on the country’s readiness to combat the challenge. The recent unfortunate news of popular Indian stand-up comedian Kapil Sharma undergoing heavy medication for depression has once again brought to the fore the fragility and vulnerability that lies beneath the surface of sometimes seemingly “normal” people. And the most tragic part is that the number of such “seemingly normal people” is dangerously increasing in India. Anyone and everyone stand susceptible to depression. According to an ASSOCHAM report, 42.5% of corporate employees in India suffer from depression and the rate has increased by 45-50% between 2008 and 2015. In another shocking disclosure, the Global Burden of Disease Study reveals that depression was one of India's biggest causes of early deaths in 2015. Amidst such grim statistics, the Mental Health Act passed by Parliament in December 2017 is a welcome long-awaited move to address the issue of depression. However, with several policy and regulatory hurdles, India’s fight against the silent killer, it seems, is going to be a long battle. The Dark Clouds The Mental Health Act, according to Institute of Human Behaviour and Applied Sciences (IHBAS) Director Dr Nimesh G Desai, is “aspirational, but partly unrealistic” as though the law makes access to treatment a “right” for mentally ill people, “delivering it is a challenge”. The IHBAS is the only Government mental health hospital in the national capital. Experts opine that social stigma attached to mental health is the biggest challenge in the fight against depression. In majority of the cases, even if a person is aware that there are some psychological issues which need to be addressed, the social stigma surrounding the disorder makes it difficult for that person to seek psychiatric help and sweeping the issue under the carpet seems a more feasible option. According to a Government statistics, only 20% people currently are able to access mental healthcare. What is more ironical is that even as 60 million people in India, as per a study done by The Economist Intelligence Unit, are suffering from some sort of mental health disorder, there are only around 43 mental hospitals in the country. Even more frightening is the Central Government’s admission in the Lok Sabha about the abysmal shortage of psychiatrists in India. According to the Ministry of Union Health and Family Welfare, there are only 3,827 psychiatrists in the country against the required number of 13,500. Also, there are less than 900 psychiatric social workers and 1,500 psychiatric nurses against the 37,000 and 1,500 needed. This gap, according to Dr Kersi Chavda, Consultant Psychiatrist of Mumbai-based PD Hinduja National Hospital and Medical Research Centre, is due to the fact that not many seats for post graduation in psychiatry are available in medical or teaching colleges in India. Additionally, bureaucracy and regulatory hurdles are making it difficult for the system to deliver, opines Desai in an interview to Sunday Guardian. Citing an example, he says while IHBAS currently produces eight MDs annually, it can easily produce 15-20 MDs a year. Due to this shortage, the psychiatric treatment cost is also soaring in India. Though this issue can partly be resolved if insurance is made available for mental health but the challenge, as Desai says, is to “make insurance companies comply” with the Mental Health Act. The Silver Lining However, all is not lost. According to the Indian Journal of Psychiatry, “the major depressive episodes are treatable in 70–80% of patients”. Also, there is a growing awareness and acceptance, albeit to a minuscule extent, among the millennial generation in India regarding mental health. They are no longer shunning topics related to the issue. Conversations regarding depression are now taking place more in the open and in social media as well. Adding to this growing positive atmosphere is the effort of some budding entrepreneurs in India whose aim is to make mental health care accessible and affordable to all. Of late, the country has seen emergence of start-ups like YOURDost, ePsyclinic, InnerHour, Wysa, nSmiles, HealthEminds, Seraniti, GrowthEX, TrustCircle and Trijog which are bringing effective psychiatric therapy and counselling to one’s doorsteps through online platforms in the form of apps, web and video chats and phone calls. The Path Ahead Some courageous youngsters in India have already taken the maiden step by bringing the issue of mental health in the limelight and now it is up to us how we take it further. There is not an iota of doubt that it is the mandate of the Government to address the infrastructure, policy and bureaucratic hurdles in regards to the mental health issue in the country, but at the same time, we also have to bring a paradigm shift in our attitude and develop a more open mindset on mental health. And to begin with, let’s not throttle our inner voice. Let’s speak to someone! The Fact Sheet The number of people suffering from mental health issues in India is larger than the population of Japan As per a WHO statistics, the burden of depression is 50% higher for females than males and the average age of onset of depression is 31.9 years in India According to Indian Journal of Psychiatry, 75% of working women suffer from depression or general anxiety disorder due to long working hours coupled with strict deadlines The Global Burden of Disease Study predicts that depression will be the second leading cause of disability worldwide by 2020. It also states that around 9% of the population in India suffers from mental illnesses and it is likely to reach 20% by 2020 According to a WHO report, India spends approximately 0.06% of its health budget on mental healthcare, whereas most developed nations spend above 4% of their budgets on mental health research, infrastructure, frameworks and talent pool
Mark Zuckerberg’s testimony could easily be one of the most viewed videos in the recent days. Recovering from the shock wave, nations around the globe have been prompt to raise their guards in the aftermath of the recent Facebook Data Breach incident, when the technology giant allegedly granted Cambridge Analytica, a British political consulting firm access to personal data of as many as 87 million Facebook users during the 2016 US elections without their consent. General Data Protection Regulation (GDPR) The European Union (EU) has taken the lead in curating a privacy law of its own (surprisingly beating the United States which houses most of the technology giants across the globe), one that is likely to set an international precedent for all countries to follow. EU is set to implement its General Data Protection Regulation (GDPR) on May 25th, replacing the Data Protection Directive, which went into effect in 1995. Inarguably one of the most complex and robust legislatures around data protection and privacy, GDPR lays down a baseline set of standards for all companies – those located within the territorial boundaries of EU and even those located outside EU, who store or process data of individuals who reside in EU. Terms and Conditions Applied Once put in place, the GDPR shall grant EU residents the right to discern and determine how their personal data is being stored, processed, used and transferred. GDPR defines personal data as any data that allows an individual to be identified, including names, address, birthdate or identification number as well as IP address, location data or any type of pseudonymous data. GDPR is prescriptive and rigid in its instructions to organizations in what they need to ensure that they comply with the rules. On the outset, ‘Terms and Conditions’ while collecting the user’s data should be “unambiguous”, and “specific”. Catch-all clauses, which bundle consent such as “your data will be used to improve our services”, shall not be permitted anymore. Companies need to clearly lay out the purposes for which the user’s data is being obtained. The organization is required to obtain consent from the user every time there is a change in the usage of the data or an upgradation in the product. Users must also be allowed to seamlessly revoke consent. GDPR sets rules for how companies share data after it’s been collected, pushing companies to rethink how they approach analytics, logins, and, above all, advertising. In Case of A Breach Users can now closely monitor how their personal data is being processed and transferred across international borders. The law mandates companies to notify their users within 72 hours in case of any data breach and ensure that all steps are taken to remedy the situation. Right To Be Forgotten The new data protection act also lets users erase their personal data under certain circumstances, under the Right to Erasure Act. Users shall be granted the right to demand a copy of their data held by the organization, ask for the information to be corrected and demand it to be deleted if needed be. The Watchdog Besides these, organizations have to appoint a “data-protection officer” (DPO), an ombudsman who will report directly to top management, ensure that the guidelines are abided by, train the staff and conduct internal audits. Penalties Other than the stern guidelines, what sets GDPR apart from all preceding privacy laws in EU is the significant financial penalties which the law can impose on organisations for not complying with GDPR. The penalty for non-compliance can be as high as €20m or 4% of a company’s global annual revenue — whichever is greater. GDPR is undoubtedly posed to bring about an overhaul in the way in which data is handled. It will prompt organizations to reconsider the framework within which they collect, save, manage, process and transfer data – that is, from point of origin to point of consumption. Teething Troubles Some obvious teething pains are expected with a regulation of this extent and magnitude. One such problem flagged by companies with legacy consumer data systems is that it is difficult to exactly know where the regulated consumer data is stored. Personal data can be hidden in a wide range of places, including backup drives, unstructured data, log-in details and social media data. A mammoth task which lies ahead of these legacy companies in of the implementation of the law will be to ensure that all data is harmonized and sanitized. According to a survey conducted by PricewaterhouseCoopers, 68% of US-based companies expect to spend anything between $1-$10 million to meet GDPR requirements. Another 9% expect to spend more than $10 million. Critics also argue that any kind of restriction on technology shall stymie innovation, especially affecting firms which use subject data as the main input for development of their technology. The Loophole No regulation is without gaps or loopholes. Not surprisingly, Facebook was one of the first to identify a loophole in this legislation. Facebook is set to switch its data controller entity for all non-EU non-US users from Facebook Ireland to Facebook USA, in an attempt bypass GDPR for non-EU data. Therefore, by moving the information of 1.5 billion users in Africa, Asia, Australia, and Latin America out of EU, it suggests that Facebook intends to follow the law in spirit, but not in letter. The Road Ahead For those who are bound by the legislation and don’t have a way out, GDPR will require an ongoing supervision and governance of data. Post the initial compliance heavy-lift, all organisations must going forward ensure that their data collection and processing systems are in accordance with the GDPR guidelines. What Does This Mean For India Indian Information Technology Industry and IT-enabled services derive about 30% of its revenues from Europe. With EU set to roll out the new legislation, this sector will undoubtedly be the most affected. However, since India is currently in the process of building an express legislation which regulates data protection and privacy, GDPR can become an interesting roadmap to follow. As the nation paces towards becoming a truly “Digital India”, especially with the government undertaking initiatives such as Aadhaar, IndiaStack and DigiLocker, EU could be the torchbearer.
The higher education system in India is seemingly close to becoming a commodity – available for sale at your nearest university for a hefty price! End of last month, the Ministry of Human Resource Development (MHRD) declared over 60 universities, including Jawaharlal Nehru University (JNU), Banaras Hindu University (BHU), and Aligarh Muslim University (AMU), “autonomous”. As per the new proposal of the University Grants Commission (UGC), these institutes of higher education must now sustain on a 70:30 funding mix, with 70% to still come from the government. However, public grants are now to be replaced by loans courtesy the restructured Higher Education Funding Agency (HEFA), an MHRD-backed non-profit entity structured to provide low-cost capital to public universities. In the words of Prakash Javadekar, HRD Minister, the government is “striving to introduce a liberalised regime in education”, where institutions are granted decision-making freedom with regard to operational (curriculum, programmes, hiring, distance learning etc.) as well as financial (fee structures, spending, funding) matters. The Education Minister of India asserts the emphasis will be on “linking [the said] autonomy with quality.” While all that sounds very promising, it is key to understand that the “cost” of this promised higher quality and autonomy should not be a lack of access. It is feared that withdrawn support to government universities would inevitably cause disruption in the disbursement of salaries to faculty, introduction of “self-financing courses” and a hike in fees hitting the students. That is primarily the argument of the Delhi University Teachers’ Association (DUTA), which has been protesting against this unprecedented move. In their defence, the idea that government universities are being “granted financial autonomy” with reduced funding does appear disingenuous. An increase in fees would be a natural outcome. While the argument in favour of a liberalised regime is understandable, the solution, in its present form, does appear to set a precedent for privatisation of India’s top government universities. Any dilution in the vision of these distinguished institutions, whose mission has always been to provide a quality future to anyone with merit, irrespective of their economic leanings, would be a travesty. The origins of the present debacle can be linked to the government’s attempts of aligning our education sector with the World Trade Organisation’s (WTO) General Agreement on Trade and Services (GATS), to which India is a signatory. Many experts disagree with GATS’ push towards educational liberalisation, arguing this sector, similar to healthcare, cannot be treated as a unidimensional ‘tradable commodity’. At our present lack of economic parity, access to education should remain a higher priority. Each country has its own model with regard to education. Germany and Sweden follow a 100% subsidised model while the United States prefers a profit-driven quality focused system. The system in India presents a paradox. Our highest quality, merit-focused, and most economical institutions are usually state-owned. Private setups have a varied quality and are unanimously expensive. And they have never created the backbone of our system. Case in point is that out of 800 universities in total only 260 universities are Private. The rest are Central, State or deemed Universities. Institutes such as IITs, IIMs and AIIMS are autonomous in nature, i.e. they enjoy full freedom in deciding courses, course structure, admission criteria and fees. Central universities are governed by the Department of Higher education (DHE) under MHRD and are centrally funded, while the State universities as the name suggest are state-funded and managed. But it isn’t like the government is spending a lot. As per the CAG reports brought to notice in parliament between 2016 and 2017, the total tax collection of INR83,497 crore under the secondary and higher education cess (levied since 2006-07) lies unspent. What is more appalling is that the budgetary allocation for education has been reduced from 3.7% of GDP (2017-18 revised estimates) to 3.5% (2018-19) of GDP! Aside from increasing state spending, India can definitely open its ‘market’ to private and foreign universities, granting them full and real freedom to be run as for-profit organisations. Shaking the funding model of government universities in a bout to privatise is not a solution. Moreover, the government can consider encouraging big corporations to invest in education, either through their Corporate Social Responsibility (CSR) allocations, but preferably as core investments. Tax breaks, subsidised land & infrastructure, along with viability gap funding should act as possible sweeteners. Contributions can also be channelized through an industry-regulated and managed education-oriented fund, from which universities of national importance can seek grants and in turn build research and employment partnerships with the investee companies. Long-term problems require long-term solutions. And shrugging responsibility, withdrawing support, and leaving an industry with a natural social objective to the free-wheeling forces of capitalism isn’t one.
Stung by criticism over the INR12,000 crore PNB scam, the Government of India is all set to present the Fugitive Economic Offenders Bill before the parliament. The Bill was first announced last year by Finance Minister Arun Jaitley following the liquor baron Vijay Mallya’s escape to London in the aftermath of his alleged INR9,000 crore loan default. With diamond czar Nirav Modi following the white collar crime trail out of the country after fleecing another Public Sector Bank (PSB), the government has come under increasing flak for being unable to stop the repeated flight abroad of economic offenders. What is the Bill? The Fugitive Economic Offenders Bill allows the government to confiscate the assets of those ‘economic offenders’ who have fled the country, without the need for them having been pronounced guilty by a court of law. The fugitive in this case, will not be able to contest the confiscation of his assets. The provisions of the Act would be applicable only in cases where the quantum of fraud has been determined to be in excess of INR100 crore, and would not be limited to cases of fraud or loan default alone but would also cover tax evasion, benami properties, black money and corruption. The need for the Bill was felt as economic offenders routinely escape the country leaving law agencies clawing at thin air. The provisions of the Bill will not be effective retrospectively - which means Modi’s and Mallya’s assets aren’t going under the hammer anytime soon. However, it could prove to be an effective deterrent for crimes of this scale in the future. So Why is There So Much Debate Surrounding the Bill? While a commendable legislation on the surface, the Bill is likely to get considerably diluted as experts deem many of its provisions to be unreasonable and unconstitutional. For instance, the sale of an accused’s assets without a trial to decide whether the person was, in fact, guilty of the said crimes is likely to meet with stiff resistance as it goes contrary to the basic tenets of the Indian Constitution and justice wherein a person is considered innocent unless proven guilty. Another provision which is likely to be challenged is the blanket ban on contesting the confiscation of property by the deemed offender as it goes against set judicial principles. How Do Other Countries Deal With Fugitive Economic Offenders? While the Bill sounds like a revolutionary piece of legislation in India, similar Acts have been in place in most countries in the developed world for a long time. So while confiscation without conviction might seem a little extreme, it isn’t exactly an entirely new practice. Clear precedents exist in many countries such as the US, EU, and Malaysia. In fact, the United Nations (UN) itself endorses confiscation without conviction, albeit under specific circumstances. The United Nations Convention against Corruption, for instance, encourages states to confiscate such properties as they believe may have been accumulated due to the proceeds of corruption without a conviction in cases in which the offender cannot be prosecuted for reasons of flight, death, absence or in other appropriate cases. (Article 54-C) Even within the Indian legislative framework, the provision for seizure of property of economic offenders is not an entirely novel feature of this Act. The existing Prevention of Money Laundering Act (PMLA) provides for confiscation of property without conviction as long as there is a reason to believe that non-attachment of property is likely to frustrate proceedings under PMLA. However, this clause has seldom been used as it is time-consuming and cumbersome, and can be challenged in a court of a law, causing the investigation to be bogged down in the legal dragnet. As a result, the PMLA has proved to be totally ineffective in preventing the flight of economic offenders to foreign shores. Where the Fugitive Economic Offenders Bill goes beyond these legislations is in mandating that the confiscation of property would not be limited only to those accumulated using the proceeds or benefits of the crime under investigation but can be extended to cover all the accused’s assets in India and abroad. In this perhaps, the Bill is unique among all the existing anti-corruption and money laundering laws in the world. Treating the Symptoms, Avoiding the Cause What remains undisputed though is that the Bill is not directed towards addressing the core problem of Non-Performing Assets (NPA) in India’s PSBs that caused the twin Mallya and Nirav Modi scams in the first place. Corruption in India is systemic wherein the rich and the influential are able to manipulate questionable policies enacted by the government to swindle public funds. Punitive action, in the form of stringent legislation merely attempts to sweep up after the damage has been done without tackling the root cause of the problem. In the present case, both Vijay Mallya and Nirav Modi cases are outcomes of policy and governance lapses that led to creation of the NPA problem in the banking sector. Thus while legislation like the Fugitive Economic Offenders Bill is commendable and a welcome step in combating corruption, it appears to ignore the root cause of the illness while treating the symptoms.
Amidst skeletons tumbling out post the infamous Nirav Modi scandal, the Union Cabinet’s decision to setup a National Financial Reporting Authority (NFRA) regulating Chartered Accountants (CAs) in India is considered as a way forward in monitoring the financial audit of large companies. However, the big question is, can the super regulator recover the money lost in frauds? If the answer is no, then isn’t it more logical to strengthen the existing system rather than creating another layer of bureaucracy through NFRA? The idea of NFRA is not new. The constitution of the independent regulator was a key recommendation of the Companies Act 2013, which came into force on April 1, 2014, but its establishment stayed in limbo. It is quite evident that the Union Cabinet’s decision to set up the NFRA earlier this month has been prompted by the INR12,636 crore PNB scam that went undetected by auditors. The power of the super regulator, which will oversee accounting standards and auditing norms at all listed and large unlisted companies, includes initiation of a probe into professional matters or misconduct of any member or a firm of chartered accountants. It also has the authority to impose penalties and debar a CA member or a firm. Several observers have opined that the move is a knee-jerk reaction which will add to another layer of red tape. The Institute of Chartered Accountants of India (ICAI), the self regulatory body for CAs, has opposed the formation of NFRA on grounds that it would not be prudent to draw any conclusion against the profession until the disciplinary inquiry is concluded in the PNB matter and the role of all those who acted in fiduciary responsibility was established. Factors Favouring NFRA Set Up The set up of the NFRA also indicates a lack of trust in ICAI to effectively address malpractices indulged in by recalcitrant members. Till now, the ICAI has had the monopoly on scrutinising audit quality and granting licenses to CAs to practice and regulating them. However, proponents of the NFRA argue that ICAI itself is to be blamed for creating a trust deficit, due to a failure to fulfil its oversight obligations. In spite of frauds after frauds such as Kingfisher, Satyam, Enron and Ketan Parekh being coming to light, ICAI continues to remain a cosy club of professionals chosing to ignore the blows dealt to its reputation by fellow members’ transgressions. According to government data, of the 1,972 disciplinary cases considered by the ICAI till now, only the auditors of Satyam have been permanently disqualified from membership. In all other cases, the guilty members have been merely reprimanded. Another factor which is in favour of the NFRA is the fact that over 50 countries across the world have moved away from self regulation and created independent audit regulators. Notable amongst them are the Public Company Accounting Oversight Board (PCAOB) in the US and the Financial Reporting Council (FRC) in the UK. There is a wider belief that self regulation works only up to a point and the market fails quickly in a self regulatory mechanism because of the inherent conflicts. Why Reinvent The Wheel? Notwithstanding the arguments in favour of setting up of the NFRA, the question remains why to reinvent the wheel when two empowered institutions, Reserve Bank of India (RBI) and ICAI – both of which are products of Parliamentary discourse – already exist to tackle bank scams. Isn’t it necessary to fix accountability on these institutions and also streamline them so that they perform their duties, for which they are meant, in a more responsible and efficient manner? The PNB fraud highlights lacunae not only in auditing but also in the enforcement of banking regulation. Had ICAI and RBI, the banking regulators, been tough and proactive, scams like this could have been detected much earlier. And, yet, both the institutions are comfortably protected in their ivory towers while the government is busy making a new body which might step over the foot of the Securities and Exchange Board of India (SEBI) which also has the oversight powers over audit firms of listed companies. Suggestions to Prevent Financial Fraud ICAI argues that while it can penalise individual CAs, it cannot act against auditing firms indulging in corrupt practices. Against this backdrop, a Delhi-based CA, Sandeep Sharma, advocates revisiting the CA Act to give some legal teeth to the toothless tiger so that it can act against its erring members. A paper titled “Frauds in the Indian Banking Industry”, which was published by IIM Bangalore has also listed several suggestions to prevent financial frauds. The report suggests that banks should employ the best available IT systems and data analytics so as to ensure effective implementation of the red flagged account and early warning signals framework suggested by the RBI. As evident in the PNB scam, a good technology system could have made it impossible or at least extremely difficult for Nirav Modi and Mehul Choksi to bypass controls. The paper also suggests setting up of special fraud monitoring agency by respective banks. This move will require banks to improve their human resource management policies and hire experts trained in fraud detection. Third, the regulator should design stringent measures so that CAs and auditors who figure in bank frauds are not able to get away with fraudulent financial statements. And for that, it is necessary to conduct investigations in a given time frame. The RBI should nip fraud in the bud by ensuring that rules are being effectively implemented by banks and in case of violation, it should take strong punitive action. In a radical use of technology to reduce fraud, Professor Jayanth R Varma of IIM Ahmedabad suggests the use of blockchain technology to make banking transactions more transparent. The technology would enable every link in the chain to be scrutinized publicly. The shibboleth of bank secrecy, Varma opines, should not be a cause for concern as borrowers themselves disclose information about large financing transactions in public statements. Wait And Watch Coming back to the NFRA issue, unfortunately, there have been instances in the past where setting up of agencies did not resolve an issue but only added up to files being piled up. The creation of the Serious Fraud Investigation Office (SFIO), post the Enron scam, to crack down on economic offences is a glaring example in this regard. There was no need to set up SFIO when SEBI and Excise and Customs departments were already there. The redundancy of the SFIO can be well gauged by the fact that as per an official data, since its formation in March 2007, the SFIO has investigated less than 100 cases and submitted less than 20 reports. Moreover, none of these cases was taken up suo motu. Nevertheless, it is too early to say whether the NFRA will able to prevent financial frauds or it will become yet another redundant agency. Till then, ‘wait and watch’ is the only option left with us!
Editor’s comment: In the wake of recent incidents of fraudulent lending and lack of managerial prudence, the banking system in India is in dire need of structural and policy reforms which would ensure greater transparency and accountability in the credit system. While introducing the Insolvency and Bankruptcy Code 2016 and creating a Bank Investment Company (BIC), to act as a bank-holding company to consolidate all government stakes in PSBs is an attempt towards improving bank governance; the creation of a secondary loan market will help in diversification of risk and mark-to-market valuation of credit, thus leading to greater transparency and data availability. Issues with bank lending standards and the lack of transparency with bank loans in India is a problem that has been evident for a while. Repeated incidents of lending malpractices tell us that creating transparency and liquidity in the bank loan market in India isn’t a choice but a necessity for the country. Transparency and liquidity, the two much-needed features can be created via a fully functioning and deep secondary market in bank loans in India. While this process will take years to complete, the government must start today. The fundamental problem with the absence of a secondary bank loan market in India is “moral hazard”. The problem of “moral hazard” leads to some lenders in banks making loans with little or no “skin in the game” with lower lending standards than ideal. To add to the problem, the bank that originates the loan holds on to the entire loan on its balance sheet with little or no transparency about the loan quality. Poor lending standards are encouraged and discovery of problematic loans is too late in the credit cycle. Invariably a corporate with poor credit can borrow from multiple banks, even as good quality corporates get crowded out of the market. Essentially, a bank loan market with little or no secondary market liquidity in India leads to aggregation of risk with a few banks and very little transparency on loan quality information. This is one of the major reasons for Non-Performing Assets (NPAs) and lending malpractices. Trading in bank loans to some extent is a must to resolve the issue of poor lending standards. A liquid and deep secondary bank loan market would go a long way in improving lending standards. The lender would have strict regulations in terms of how much of the originated loan they can hold on to their balance sheet. This would induce the lender to maintain higher standards of lending, since they will have to get other investors to partake in the loan eventually. This is where independent credit rating agencies will have to come in to assist investors in loans to analyse and rate the loans in question. This rating by the third-party rating agency will not only be on the credit of the corporate involved in the loan, but also on the actual loan covenants and collateral involved. A loan specific rating will assist investors to invest in loans made by banks. Such investors investing in the loans will lead to both higher quality lending a well as diversification of risk with each lender holding a smaller proportion of the total risk. The secondary market in bank loans should start with certain standardized loan formats that can be traded. Eventually the market needs to build on these standardized formats. Once the market gets liquidity, variants of the standardized loan format can be introduced. The aim of the market must be to create a “mark-to- market” for bank loans. In the more developed capital markets independent valuation agencies such as Markit provide month end pricing on loans. Indian policymakers will have to come up with measures such as month end pricing to begin the process of mark-to-marking loans to a secondary market price. This will create data transparency in the market and a demarcation of credit in terms of quality, assisting investors and lenders to gauge credit quality. The current situation of an opaque market with very little clarity on credit leads to poor lending decisions in a loose credit cycle and penalisation of good borrowers in a poor credit cycle, hence leading to economic losses both ways. Mark-to- market valuation of loans will also ensure that information is priced in by the market in a gradual way, instead of the sudden information spurts in the current situation. In summary, bank loans must be established as an asset class with greater liquidity. The three features of a standard asset class are a wide investor base, transparent pricing and some level of liquidity. A secondary market will help in diversification of risk and mark-to-market valuation of loans. Both factors will create transparency and data availability, therefore rewarding borrowers with good credit quality and penalising poor credit quality borrowers. A well drafted and effectively implemented secondary bank loan framework will go a long way towards shoring up the banking system in India. Originally Published in Financial Express
The directive by the Finance Ministry that Public Sector Banks (PSBs) must start conducting forensic audits on all loan accounts above INR50 crore reflects an urgency on part of the government to reduce the mounting number of Non-Performing Assets (NPAs). In common parlance, a forensic audit is a branch of audit focused on fraud detection by assessing the company’s internal controls and determining whether any lapses in such mechanisms could have resulted in corrupt practices. Forensic audits in companies may be at two levels. One, a curative forensic audit may be assigned to an independent investigator to conduct a truthful investigation of the suspected fraud. At another level, a preventive forensic audit may be adopted by companies to make structural changes which can create adequate checks and balances to combat crimes in the future. Such an audit is necessary to deter illegal activity emanating from ideas of greed and an often entrenched organisational attitude that 'fraud is not a crime'. Both types of audit are costly affairs with significant consequences for the companies' bottomline. Such audits may inculcate an environment of mutual suspicion that may hinder risk-taking, critical for economic expansion and job creation. Given the magnitude of NPAs lumbering Indian banks at present, lending is understandably constrained. Forensic audits may heighten risk aversion further, impeding good businesses from getting access to credit. A culture of suspicion may set into the banks, resulting in even lower lending by banks. The lack of loans may force companies to delay critical capital expenditure investments, dampening production and reducing job creation. Despite forensic audits potentially slowing down the economy, they are worth the short-term pain if lessons learnt from them can be implemented to reduce the occurrence of frauds in the future and lead to the resolution of broader structural issues plaguing the Indian Bank. Forensic audit must teach us a lesson or two regarding the type of frauds that have occurred, the length of time of the concealment of frauds, and methods adopted to conceal them. More importantly, mechanisms must be developed to identify such frauds in advance and and a road-map must be created to prevent the recurrence of such frauds in the future. If a comprehensive approach towards creating a policy framework is adopted, then the potential short-term pain of the forensic audits is worth it. Forensic audits can add significant value only if, in addition to the audit, we look to resolve other structural issues in the Indian banking system. Some problems that deserve attention are a lack of information sharing regarding credit quality amongst banks, delayed recognition of NPAs, a mismatch of assets and liabilities on the bank balance sheets, and lending by PSBs to sectors they aren’t technically equipped to understand. Banks need to have a better system to share information on borrowers wherein a borrower, classified as a defaulter by one bank is not allowed to borrow from any other bank. A better flow of inter-bank information via a centralised database of borrowers would allow PSBs to better track credit quality of borrowers. Credit registries are essential mechanisms in this regard especially for expanding transaction-based lending technologies. Nationalised banks created credit bureaus several years ago, but with limited reach and functionality, they are no cause for cheer. Robust credit registries will create a database that banks can use to develop credit scores to predict repayment based on borrower characteristics. Also, information sharing will significantly assist banks to identify NPAs early in the cycle, thereby avoiding a significant build-up of NPAs. Even though some loans to the infrastructure sector have become non-performing, one must acknowledge the role of PSBs in infrastructure creation. PSBs must not end lending entirely to the infrastructure sector. Instead, policymakers should think of how they could improve lending to the infrastructure sector. PSBs with short-dated liabilities are not equipped to finance long-dated infrastructure assets. Any move away from infrastructure financing will be a gradual process. Specialised institutions and policy framework that allow private capital to fund infrastructure will be required. Lending to specialised infrastructure projects requires significant technical expertise, which PSBs generally lack. Without the necessary expertise, banks risk funding sub-optimal projects. It is crucial for PSBs to identify sectors where they are technically qualified to finance versus which they are not. To summarise, measures such as forensic audits are useful only if the learnings are used to frame better policies and implement substantial structural reforms. Without meeting the two conditions, forensic audits risk being another policy that fail to live up to their full potential. Originally Published in Firstpost
The Federal Reserve continues to raise rates as S&P earnings beat estimates; The ECB and BoJ maintain QE; Globally, corporations rely on US$ financing; Nonetheless, signs of a slowdown in growth are clearer outside the US. After last week’s ECB meeting, Mario Draghi gave the usual press conference. He confirmed the continuance of stimulus and mentioned the moderation in the rate of growth and below-target inflation. He also referred to the steady expansion in money supply. When it came to the Q&A he revealed rather more: It’s quite clear that since our last meeting, broadly all countries experienced, to different extents of course, some moderation in growth or some loss of momentum. When we look at the indicators that showed significant, sharp declines, we see that, first of all, the fact that all countries reported means that this loss of momentum is pretty broad across countries. It’s also broad across sectors because when we look at the indicators, it’s both hard and soft survey-based indicators. Sharp declines were experienced by PMI, almost all sectors, in retail, sales, manufacturing, services, in construction. Then we had declines in industrial production, in capital goods production. The PMI in exports orders also declined. Also we had declines in national business and confidence indicators. I quote this passage out of context because the entire answer was more nuanced. My reason? To highlight the difference between the situation in the EU and the US. In Europe, money supply (M3) is growing at 4.3% yet inflation (HICP) is a mere 1.3%. Meanwhile in the US, inflation (CPI) is running at 2.4% and money supply (M2) is hovering a fraction above 2%. Here is a chart of Eurozone M3 since 1999: Source: Eurostat The recent weakening of momentum is a concern, but the absolute level is consistent with a continued expansion. Looked at over a rather longer time horizon, here is a chart of US M2 since 1900: Source: Hoisington Asset Management, Federal Reserve The letters A, B, C, D denote the only occasions, during the last 118 years, when a decline in the expansion (or, during the 1930’s, contraction) of M2 did not lead to a recession. 17 out of 21 is a quite compelling record. Another concern for markets is the flatness of the US yield curve. Here is the 2yr – 10yr yield differential since 1990: Source: Factset, Mauldin Economics More importantly, for international borrowers, the 6-month LIBOR rate has risen by more than 60 basis points since the start of the year (from 1.8% to 2.5%) whilst 30yr Swap rates have increased by only 40 basis points (2.6% to 3%). The 10yr – 30yr Swap curve is now practically flat. Also worthy of comment, as US Treasury yields have risen, the relationship between Bonds and Swaps has begun to normalise – 30yr T-Bond yields are only 40 basis points above their level of January and roughly at the same level as in the spring of last year. In April 2017 In Macro Letter – No 74 – US 30yr Swaps have yielded less than Treasuries since 2008 – does it matter? I wrote: Today the IRS market increasingly determines the cost of finance, during the next crisis IRS yields may rise or fall by substantially more than the same maturity of US T-bond, but that is because they are the most liquid instruments and are only indirectly supported by the Central Bank. It looks like I may have to eat my words, here is the Bond vs Swap table revisited: Source: Investing.com, Interestrateswaps.com, BBA What is evident is that the Bond/Swap inversion in the longer maturities has closed substantially even as shorter maturity spreads have narrowed. Federal Reserve policy has been the dominant factor. Why is it, however, that the effect of higher US rates is, seemingly, felt more poignantly in Europe than the US? Does this bring us back to protectionism? Perhaps, but in less contentious terms, the US has run a capital account surplus for many years. Outside the US investment is closely tied to LIBOR financing costs, these have remained higher, except in the longest maturities, and these rates have risen most precipitously this year. Looked at another way, the higher interest rate policies of the Federal Reserve, despite the continued largesse of other central banks, is exporting the next recession to the rest of the world. I ended Macro Letter – No 74 back in April 2017 – saying: Meanwhile, although interest rates have risen from historic lows they remain far below their long run average. Pension funds and other long-term investors still require 7% or more in annualised returns in order to meet their liabilities. They are being forced to continuously increase their investment risk and many have chosen to use the swap market. The next crisis is likely to see an even more pronounced unravelling than in 2008/2009. The unravelling may not happen for some while but the stresses are likely to be focused on the IRS market. One year on, cracks in the capital markets edifice are beginning to become more evident. GDP growth has started to rollover in the US, Eurozone and Japan. Yields are still relatively low but the absolute increase in rates for shorter maturities (e.g. the near doubling of US 2yr yields from 1.25% to 2.5% in a single year) is guaranteed to take its toll on corporate interest servicing costs. US capital markets are the envy of the world. They are deep and allow borrowers to finance far into the future. The rest of the world is forced to borrow at shorter tenors. A three basis point narrowing of 5yr spreads between Swaps and Bonds is hardly compensation for the near 1% increase in interest rates, or, put in starker terms, a 46% increase in absolute borrowing costs. Conclusion and Investment Opportunities How is the rise in borrowing costs impacting the US stock market? Volatility is back, but earnings are robust. Factset – S&P 500 Earnings Season Update: April 27, 2018 – described it thus: To date, 53% of the companies in the S&P 500 have reported actual results for Q1 2018. In terms of earnings, more companies are reporting actual EPS above estimates (79%) compared to the five-year average. If 79% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting actual EPS above estimates since FactSet began tracking this metric in Q3 2008. In aggregate, companies are reporting earnings that are 9.1% above the estimates, which is also above the five-year average. In terms of sales, more companies (74%) are reporting actual sales above estimates compared to the five-year average. In aggregate, companies are reporting sales that are 1.7% above estimates, which is also above the five-year average. If 1.7% is the final percentage for the quarter, it will mark the largest revenue surprise percentage since FactSet began tracking this metric in Q3 2008. The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report), year-over-year earnings growth rate for the first quarter is 23.2% today, which is higher than the earnings growth rate of 18.5% last week. Positive earnings surprises reported by companies in multiple sectors (led by the Information Technology sector) were responsible for the increase in the earnings growth rate for the index during the past week. All 11 sectors are reporting year-over-year earnings growth. Nine sectors are reporting double-digit earnings growth, led by the Energy, Materials, Information Technology, and Financials sectors. We are more than halfway through Q1 earnings (I’m writing this letter on Wednesday 2nd May). Results have generally been above forecast and now the Fed seems conscious that they must not be too hasty to reverse the effects of both zero rates and QE. Added to which, while US stocks have been languishing mid-range, European stocks have recently broken out of their recent ranges to the upside, despite discouraging economic data. The US stock market looks less expensive than it did in January 2017, when I wrote Macro Letter – 68 – Equity valuation in a de-globalising world. Then I was looking for stock markets with a low correlation to the US: they were (and remain) hard to find. Other indicators to watch which exert a strong influence on stocks include the US PMI Index – last at 54.8 up from 54.2 in March. Above 50 there is little cause for concern. For the Eurozone it is even higher at 55.2, whilst throughout G20 no economy is recording a PMI below 50. The chart below shows the Citigroup Economic Surprises Index (blue) vs the S&P500 Forward P/E estimates (red): Source: Yardeni Research, S&P, Thomas Reuters, Citigroup Economic surprises remain positive rather than negative for the US. In the Eurozone it is quite another matter: Source: Bloomberg, Citigroup A number of economic indicators are pointing to a slowdown, yet US stocks are beating estimates. To judge from price action, the market appears to be unimpressed by earnings. I am reminded of the old adage, ‘When all the buyers are in the market it’s time to sell.’ From a technical perspective it makes sense to be patient, but the market has failed to rise substantially on a positive slew of earnings news. This may be because there is a more important factor driving sentiment: the direction of US rates. It certainly appears to have engendered a revival of the US$. It rallied last month having been in a downtrend since January 2017 despite a steadily tightening Federal Reserve. For EURUSD the move from 1.10 to 1.25 appears to have taken its toll. On the basis of the CESI chart, above, if Wall Street sneezes, the Eurozone might catch pneumonia. Originally Published in In the Long Run
The Federal Reserve continues to tighten and other Central Banks will follow; The BIS expects stocks to lose their lustre and bond yields to rise; The normalisation process will be protracted, like the QE it replaces; Macro prudential policy will have greater emphasis during the next boom. As financial markets adjust to a new, higher, level of volatility, it is worth considering what the Central Banks might be thinking longer term. Many commentators have been blaming geopolitical tensions for the recent fall in stocks, but the Central Banks, led by the Fed, have been signalling clearly for some while. The sudden change in the tempo of the stock market must have another root. Whenever one considers as the collective view of Central Banks, it behoves one to consider the opinion of the "Central Bankers' bank", the Bank for International Settlements (BIS). In their Q4 review they discuss the paradox of a tightening Federal Reserve and the continued easing in US national financial conditions. BIS Quarterly Review – December 2017 – A paradoxical tightening?: Overall, global financial conditions paradoxically eased despite the persistent, if cautious, Fed tightening. Term spreads flattened in the US Treasury market, while other asset markets in the United States and elsewhere were buoyant… Chicago Fed’s National Financial Conditions Index (NFCI) trended down to a 24-year trough, in line with several other gauges of financial conditions. The authors go on to observe that the environment is more reminiscent of the mid-2000’s than the tightening cycle of 1994. Writing in December they attribute the lack of market reaction to the improved communications policies of the Federal Reserve – and, for that matter, other Central Banks. These policies of gradualism and predictability may have contributed to, what the BIS perceive to be, a paradoxical easing of monetary conditions despite the reversals of official accommodation and concomitant rise in interest rates. This time, however, there appears to be a difference in attitude of market participants, which might pose risks later in this cycle: …while investors cut back on the margin debt supporting their equity positions in 1994, and stayed put in 2004, margin debt increased significantly over the last year. At a global level it is worth remembering that whilst the Federal Reserve has ceased QE and now begun to shrink its balance sheet, elsewhere the expansion of Central Bank balance sheets continues with what might once have passed for gusto. The BIS go on to assess stock market valuations, looking at P/E ratios, CAPE, dividend pay-outs and share buy-backs. By most of these measures stocks look expensive, however, not by all measures: Stock market valuations looked far less frothy when compared with bond yields. Over the last 50 years, the real one-year and 10-year Treasury yields have fluctuated around the dividend yield. Having fallen close to 1% prior to the dotcom bust, the dividend yield has been steadily increasing since then, currently fluctuating around 2%. Meanwhile, since the GFC, real Treasury yields have fallen to levels much lower than the dividend yield, and indeed have usually been negative. This comparison would suggest that US stock prices were not particularly expensive when compared with Treasuries. The authors conclude by observing that EM sovereign bonds in local currency are above their long-term average yields. This might support the argument that those stock markets are less vulnerable to a correction – I would be wary of jumping this conclusion, global stocks market correlation may have declined somewhat over the last couple of years but when markets fall hard they fall in tandem: correlations tend towards 100%: Source: BIS, BOML, EPFR, JP Morgan The BIS’s final conclusion: In spite of these considerations, bond investors remained sanguine. The MOVE* index suggested that US Treasury volatility was expected to be very low, while the flat swaption skew for the 10-year Treasury note denoted a low demand to hedge higher interest rate risks, even on the eve of the inception of the Fed’s balance sheet normalization. That may leave investors ill-positioned to face unexpected increases in bond yields. *MOVE = Merrill Lynch Option Volatility Estimate Had you read this on the day of publication you might have exited stocks before the January rally. As markets continue to vacillate wildly, there is still time to consider the implications. Another BIS publication, from January, also caught my eye, it was the transcript of a speech by Claudio Borio’s – A blind spot in today’s macroeconomics? His opening remarks set the scene: We have got so used to it that we hardly notice it. It is the idea that, for all intents and purposes, when making sense of first-order macroeconomic outcomes we can treat the economy as if its output were a single good produced by a single firm. To be sure, economists have worked hard to accommodate variety in goods and services at various levels of aggregation. Moreover, just to mention two, the distinctions between tradeables and non-tradeables or, in some intellectual strands, between consumption and investment goods have a long and distinguished history. But much of the academic and policy debate among macroeconomists hardly goes beyond that, if at all. The presumption that, as a first approximation, macroeconomics can treat the economy as if it produced a single good through a single firm has important implications. It implies that aggregate demand shortfalls, economic fluctuations and the longer-term evolution of productivity can be properly understood without reference to intersectoral and intrasectoral developments. That is, it implies that whether an economy produces more of one good rather than another or, indeed, whether one firm is more efficient than another in producing the same good are matters that can be safely ignored when examining macroeconomic outcomes. In other words, issues concerned with resource misallocations do not shed much light on the macroeconomy. Borio goes on to suggest that ignoring the link between resource misallocations and macroeconomic outcomes is a dangerous blind spot in marcoeconomic thinking. Having touched on the problem of zombie firms he talks of a possible link between interest rates, resource misallocations and productivity. The speaker reveals two key findings from BIS research; firstly that credit booms tend to undermine productivity growth and second, that the subsequent impact of the labour reallocations that occur during a financial boom last for much longer if a banking crisis follows. Productivity stagnates following a credit cycle bust and it can be protracted: Taking, say, a (synthetic) five-year credit boom and five postcrisis years together, the cumulative shortfall in productivity growth would amount to some 6 percentage points. Put differently, for the period 2008–13, we are talking about a loss of some 0.6 percentage points per year for the advanced economies that saw booms and crises. This is roughly equal to their actual average productivity growth during the same window. Source: Borio et al, BIS Borio’s conclusion is that different sectors of the economy expand and the contract with greater and lesser momentum, suggesting the need for more research in this area. He then moves to investigate the interest rate productivity nexus, believing the theory that, over long enough periods, the real economy evolves independently of monetary policy and therefore that market interest rates converge to an equilibrium real interest rates, may be overly simplistic. Instead, Borio suggests that causality runs from interest rates to productivity; in other words, that interest rates during a cyclical boom may have pro-cyclical consequences for certain sectors, property in particular: During the expansion phase, low interest rates, especially if persistent, are likely to increase the cycle’s amplitude and length. After all, one way in which monetary policy operates is precisely by boosting credit, asset prices and risk-taking. Indeed, there is plenty of evidence to this effect. Moreover, the impact of low interest rates is unlikely to be uniform across the economy. Sectors naturally differ in their interest rate sensitivity. And so do firms within a given sector, depending on their need for external funds and ability to tap markets. For instance, the firms’ age, size and collateral availability matter. To the extent that low interest rates boost financial booms and induce resource shifts into sectors such as construction or finance, they will also influence the evolution of productivity, especially if a banking crisis follows. Since financial cycles can be quite long – up to 16 to 20 years – and their impact on productivity growth quite persistent, thinking of changes in interest rates (monetary policy) as “neutral” is not helpful over relevant policy horizons. During the financial contraction, persistently low interest rates can contribute to this outcome (Borio (2014)). To be absolutely clear: low rates following a financial bust are welcome and necessary to stabilise the economy and prevent a downward spiral between the financial system and output. This is what the crisis management phase is all about. The question concerns the possible collateral damage of persistently and unusually low rates thereafter, when the priority is to repair balance sheets in the crisis resolution phase. Granted, low rates lighten borrowers’ heavy debt burden, especially when that debt is at variable rates or can be refinanced at no cost. But they may also slow down the necessary balance sheet repair. Finally, Borio returns to the impact on zombie companies, whose number has risen as interest rates have fallen. Not only are these companies reducing productivity and economic growth in their own right, they are draining resources from the more productive new economy. If interest rates were set by market forces, zombies would fail and investment would flow to those companies that were inherently more profitable. Inevitably the author qualifies this observation: Now, the relationship could be purely coincidental. Possible factors, unrelated to interest rates as such, might help explain the observed relationship. One other possibility is reverse causality: weaker profitability, as productivity and economic activity decline in the aggregate, would tend to induce central banks to ease policy and reduce interest rates. Source: Banerjee and Hoffmann, BIS Among the conclusions reached by the Central Bankers bank, is that the full impact and repercussions of persistently low rates may not have been entirely anticipated. An admission that QE has been an experiment, the outcome of which remains unclear. Conclusions and Investment Opportunities These two articles give some indication of the thinking of Central Bankers globally. They suggest that the rise in bond yields and subsequent fall in equity markets was anticipated and will be tolerated, perhaps for longer than the market would anticipate. It also suggests that Central Banks will attempt to use macro-prudential policies more extensively in the future, to insure that speculative investment in the less productive areas of the economy do not crowd out investment in the more productive and productivity enhancing sectors. I see this policy shift taking the shape of credit controls and increases in capital requirements for certain forms of collateralised lending. Whether notionally independent Central Banks will be able to achieve these aims in the face of pro-cyclical political pressure remains to be seen. A protracted period of readjustment is likely. A stock market crash will be met with liquidity and short-term respite but the world’s leading Central Banks need to shrink their balance sheets and normalize interest rates. We have a long way to go. Well managed profitable companies, especially if they are not saddled with debt, will still provide opportunities, but stock indices may be on a sideways trajectory for several years while bond yields follow the direction of their respective Central Banks official rates. Originally Published in In the Long Run
Editor’s Comment: Against the backdrop of the ongoing Trade Wars, it becomes more pertinent than ever to participate in a discussion on globalization and free trade. Below are experts from an interview with Jean-Marc Daniel, Associate Professor of Economics at ESCP around the ongoing discourse on anti-globalization, protectionism and rejection of free trade. Despite the current upturn in world trade, the return of a protectionist rhetoric since 2008 threatens the future of free trade. How do you analyse the rejection of free trade, which manifests itself in the economic policy of certain states (United States, Great Britain)? What is striking, and relatively new, is that the dominant power, namely the United States, is assuming the leadership of protectionism. The return to grace of protectionist theories is due to public opinion associating free trade with delocalization, then delocalization to deindustrialization, even if the loss of industrial jobs is due more to robotization than to delocalization. By the end of the 19th century, this kind of false equation applied to agriculture had already led to protectionism, a protectionism embodied in France by Jules Méline. Since the 2008 crisis, global economic recovery remains uncertain. Do you think free trade can save the economy? 2008 was a cyclical crisis similar to that of 1974/1975 or 1992/1993, even if each of these cyclical downturns has specific aggravating factors (oil shock in the 1970s, financial slackness in 2008). The problem is that, from cycle to cycle, each recovery is weaker than the previous one. Potential growth, i. e. growth independent of ups and downs, continues to decline. In France, we went from 5% in the 1960s to 1.3% today. This slowdown affects all developed countries, which have in common the fact that they are close to the so-called "technological frontier". But there are countries whose potential growth remains strong because they are in the catch-up phase. The free movement of capital allows them to access the most efficient technologies and the free movement of goods allows developed countries to find new markets: thus, global growth is doubly successful. From 1985 to 2014, the growth in world trade was higher than the growth in world economy. This is no longer the case, since the growth rate of world trade is now below the growth rate of the global economy. Is free trade less dynamic? The slowdown in world trade is due to three factors. First of all, its growth phase due to its liberalization is rather behind us. During this phase, each country specializes according to its comparative advantage. As a result, it abandons some productions, which increases its imports; at the same time, the outlets of the activities it keeps are increasing sharply. Once this process is completed, international trade reaches cruising speed. Secondly, world trade has a strong industrial and energy component. However, relative prices for this type of products are falling. Since 2014, the oil counter-shock has been spectacular. This leads to a mechanical decline in the weight of international trade in GDP. While statisticians do take into account the impact of these price distortions, their correction is not perfect. Finally, people are becoming receptive to discourses on "made in" and "economic patriotism". The trade surpluses of some countries (China, Germany) are often seen as an attack on the national interests of their trading partners. Do you think trade surpluses affect global economy? One country’s deficit is another country’s surplus. Responsibilities for global imbalances are therefore shared. In economy, we demonstrate that an external surplus reflects an excess of savings and a deficit reflects an excess of consumption. The Japanese, the Germans, and for some time now the Chinese, have been accumulating surpluses on the United States, surpluses that they invest there by buying US public debt. For example, the American consumer lives on German or Asian labour, while the latter, whose average age is constantly increasing, hopes that he or she will retire and live off American taxes. There is something unhealthy about both American recklessness and the illusions of aging countries. How do you see Europe's place in both world trade and the world economy? The EU 28 is the world's leading economic power. Moreover, it has a high educational level and a real dynamic of innovation. However, it has two weaknesses: on the one hand, its demographics, which is a common point with Japan, and a certain lack of coherence in economic policy-making on the other hand, which hampers its flagship project, the euro. This article was first published by the International & European Institute, ESCP Europe, and is republished with permission. Click here for the original article.
Editor’s Comment: Below are excerpts of an exclusive interview with Pascal Lamy, a French political consultant and businessman, and former Director-General of the World Trade Organization (WTO) around the ongoing discourse on anti-globalization, protectionism and rejection of free trade. Pascal Lamy Numerous phenomena attest to the disenchantment with free trade: the rise of protectionism and populism in Europe and the United States, the Brexit, the growing anti-globalization discourse among populations... Will the rejection of free trade be increasingly acute in the future? First of all, there is no free trade. Nowhere is there free trade, because trade is always constrained by distance, taxes and controls on compliance with standards. It's a false controversy, an intellectual pretentiousness. These fights over free trade are therefore largely fantasized. What exists in reality is a trade openness movement, which has accelerated and slowed down over the course of history. Overall, history has shown that there is a growing trend towards more open trade, because, for reasons well explained by David Ricardo and Josef Schumpeter, the international division of labour is quite rational. However, this process of openness can be painful from an economic and social point of view: it is efficient, but at the cost of transformations due to less severe competition for the strong than for the weak. Returning to the question, there is indeed a rise of anti-globalization and protectionist discourses. The reason for this is simple: the systems for reducing social insecurity, most of which date back to the industrial revolution, have not kept pace with the increasing strength of globalisation. This protectionist and isolationist wave is more pronounced in the United States because the American social system is the less performant among developed countries. 60% of Americans are still in favour of trade openness, but a large section of the population blame globalisation for the downward social mobility they are experiencing: this is the section that Donald Trump has managed to rally. He is taking steps towards a return to mercantilism, which is the Middle Ages of commercial thought. It's an absurd and minority view, but it sometimes found an expression in history, and Donald Trump brought it back into fashion, in thought, and increasingly in action. I am one of those who think that if he persists in this approach, it will affect US growth in the long term, even though it is on tax steroids. However, when we look at the figures, this protectionist rhetoric have little or no influence on reality at this stage, since international trade is increasingly opening up. That is why I do not believe in the theory of deglobalisation. The structural factors that are the main drivers of the current phase of globalisation will continue to operate as trade increases. Thanks to technological revolutions, these factors will continue to produce efficiencies. Data flows are growing exponentially: although they are still poorly measured, they are an essential component of globalization. Where there has been de-globalization and re-regulation is in the financial system following the 2008 crisis. Is this rejection of free trade justified? Has free trade harmed more than it helped? The trade openness movement is embraced by almost every country in the world: most countries are WTO members, with a few exceptions, most of which are temporary. The question that arises is under what conditions the efficiencies generated by trade openness bring welfare. But the benefits produced by free trade and their distribution between winners and losers is a highly controversial subject, with different approaches depending on levels of development, collective philosophies and economic theories. This is why opinions on free trade are often correlated with the size of countries and the quality of the social security system (difference between Nordic countries and countries such as Russia or the United States). It all comes down to the issue of fair trade, which is an ambiguous concept because it is subjective. The rejection of free trade is stronger today than it has been for a long time, but it has emerged in the past: in the 1990s and 2000s, civil society organizations considered that free trade had negative effects on development. This thesis has been undermined because the reality has shown that developing countries benefit greatly from globalization because they have many comparative advantages. They are the strongest advocates of open trade, even if it means pursuing it with moderation. China is the best example. The Doha Development Agenda, launched in 2001, has seen little progress since the failures of Seattle, Cancún and Hong Kong. Why are multilateral trade negotiations stalling? It is true that the Doha Development Agenda has moved at a slower pace than would have been expected. But there has been progress: a very technical but major agreement on trade facilitation was reached in 2013 in Bali to simplify customs procedures. If there have been many bottlenecks, it is mainly because the United States and China do not agree on whether China is a developed country or a developing country, and to which WTO regime it should be subject: the Americans say that China is a rich country with many poor people and China replies that it is a poor country with many rich people. This situation is unlikely to improve, especially when we see Trump's attitude on these issues. Obama had already weakened the system by participating in the blocking of negotiations for agricultural reasons. Trump goes further by challenging the WTO disciplinary system and its tribunal, calling them unbalanced against the US. You have been Director General of the WTO. How can we reform this organisation to make it more efficient and transparent? The WTO is much more sophisticated than other international organizations, notably because of the quality and complexity of its implementation, monitoring and dispute settlement processes: the WTO tribunal has no equivalent elsewhere in the world, because it renders binding judgments. But at the same time, the WTO is a medieval organisation: for example, the secretariat is a simple notary at the service of the Member States, it is not allowed to make proposals, which is a Westphalian way of operating. To make the WTO more effective, it must be transformed into an institution, such as the WHO (World Health Organization) or the ILO (International Labour Organization), i. e. it must allow experts, who are more competent than diplomats on certain subjects, to examine the options and make proposals. Based on your experience as European Commissioner, what is the EU's place in world trade? The European Union “fell” into trade when it was little. From the beginning, it was built on the ideological commitment to trade openness and reducing barriers to trade. The European Community started with the idea of a customs union, which was the outline of the current common market, and was enshrined in 1957 in Article 133 of the Treaty of Rome. Trade policy has logically been federalised, which gives the European Parliament almost the same prerogatives as the Council of Ministers in approving and supervising the trade agreements negotiated by the Commission. The EU has always been at the forefront on these issues, it has been very open and competitive, especially on goods and services, much less on agriculture. It has always pursued an aggressive commercial policy and, thanks to its negotiating skills, has evolved into a mini-multilateral organization. What about France in a globalised world? France has a special coefficient in globalisation, but this potential is little exploited. In my book Quand la France s'éveillera (Odile Jacob, 2014), I explain that the French have always had a problem with trade, except for a short period during the Second Empire, at the time of the free trade agreement between Cobden and Chevalier. Today, nobody in France knows Michel Chevalier, while everyone knows Jules Méline, who is at the origin of the Méline Tariff (protectionist measures on agricultural products). The problem dates back to the French Revolution, which profoundly changed the structure of agricultural production. Yet, we have had thinkers in favour of trade openness, such as Frédéric Bastiat. How do companies integrate free trade? It has always been true that trade is regulated by states, but its main operators are companies. 60% of international trade is intra-firm. Within themselves, companies organize free trade: when they have integrated value chains, they localize them according to comparative advantages by reducing the cost of distance. What will be the future developments of trade opening? In recent years, there has been a great evolution in the regulation of international trade. In the past, barriers to trade have been designed to protect producers from foreign competition. This logic is disappearing, partly because the fragmentation into value chains is increasing: this is a model where specialized skills are the main source of export value. Similarly, barriers to trade are no longer in customs duties, but in the costs of adjusting production or exports to different regulatory systems, norms and standards. We have moved from a logic of producer protection to a logic of consumer protection: the obstacle is no longer one of protection but one of precaution. This new precautionary approach justifiably raises very politically sensitive problems, such as data protection, GMOs, hormones and environmental protection. The political economy of trade opening is therefore changing fundamentally. Trade openness will require a much more harmonised treatment of the precautionary principle in the future. This article was first published by the International & European Institute, ESCP Europe, and is republished with permission. Click here for the original article.
The Indian Stainless Steel industry is the second largest in the world, next to China. It expects to grow at around 8-9% to achieve production of about 5.5 MTPA by 2022 from the present level of about 3.5 MTPA. Though positive policy support from ‘Make in India’ and ‘Smart Cities Mission’ is expected to provide the much needed impetus to the sector, the industry argues that custom duty on key raw materials is hindering its growth. The industry has been pushing the government for a level playing field. As Finance Minister Arun Jaitley gears up to present the Union Budget 2018 on February 1, the stainless steel industry has demanded that the government should remove import duty on ferro-nickel and stainless steel scrap – key raw materials used in the production of stainless steel. In a pre-budget statement issued to the media, president of the Indian Stainless Steel Development Association (ISSDA), apex industry body of stainless steel sector, KK Pahuja said, “It is absolutely necessary to preserve competitiveness of Indian Stainless Steel Industry at a time when government is building new trade relations with other countries and we appeal to the Finance Ministry to remove basic custom duty on both Ferro-Nickel and Stainless Steel Scrap.” ISSDA’s demand also finds resonance in the All India Induction Furnaces Association (AIIFA), the secondary steel industry body which also urged the government to remove 2.5% import duty on steel melting scrap in the upcoming budget. FERRO-NICKEL Nickel and ferro-nickel are among the main raw material to produce stainless steel. Since nickel is practically unavailable in India, the metal is imported, either in pure ingot or scrap form, from Indonesia and China. According to an estimate, India imports around 30,000-35,000 tonnes of nickel, in both the categories, annually. On April 1, 2017, government had abolished the import duty on nickel. However, ferro nickel, which attracts 2.5% tax, was not exempted. According to Pahuja, removal of custom duty on pure nickel did not help the industry much as most of the metal used by stainless steel makers is in the form of Ferro-Nickel. Nickel is used by the stainless steel industry to manufacture industrial and utensil grade materials. The cost of stainless steel production in India is directly proportional to the nickel prices and the amount of its use. STAINLESS STEEL SCRAP As per a Steel Ministry data, of the total 52 million tonnes (MT) steel produced through electric route in the financial year 2015-16, around 28 MT steel was produced from scrap. According to a media report, India imports around 7 MT of scrap which leaves with a need to internally generate over 23 MT of steel scrap annually. Against this backdrop, the ISSDA budget wish list released to the media states, “Since all stainless steel is produced through electric furnaces, stainless steel scrap is the main raw material which also provides cost effective source of alloying elements like Chrome and Nickel. The scrap is also not available in the country and has to be imported. Therefore, the custom duty for stainless steel scrap should also be made zero from current 2.5%.” DEMAND STIMULATION In spite of being the second largest producer globally, India is still a net importer of stainless steel and alloy steel used in high-end applications. Also, as per an ISSDA statement, the per capita consumption of stainless steel in India is 2 kg against the world average of 6 kg. Therefore, there is a huge potential for growth in this sector. According to Draft National Steel Policy 2017, the demand of steel, including the stainless form, will grow threefold in the next 15 years to reach a demand of 230 MT- 240 MT by 2030-31. However, stimulation of domestic demand will require adequate policy measures by the government and active participation by the steel industry. Construction and manufacturing sectors such as rural development, urban infrastructure, Railways and Roads and Highways are the key focus areas for stainless steel demand growth. As such, usage of steel in all buildings and structures needs to be encouraged and the overall cement : steel ratio in construction of buildings in the country needs to be reduced. The first step in this regard, experts say, would be to mandate greater use of stainless steel in government projects. According to a FICCI report on steel industry, to spike domestic demand, the government needs to increase steel usage in making railway station, foot over bridges, rail coaches, construction of steel based railway colony buildings especially in earthquake prone areas, construction of dedicated freight corridors and superfast rail corridors and construction of more steel bridges. It will not only boost domestic demand, but also save time and capital expenditure. Low steel consumption in rural areas is also an area of concern. According to the FICCI report, the current per capita steel consumption in rural areas is only 10 kg as compared to India’s overall per capita steel consumption of 61 kg. So there is a large scope for increment in steel usage in rural areas. According to industry experts, government needs to take special steps to sensitize the rural population about advantages of using steel in construction and create necessary infrastructure to ensure steel products reach them.
Grab, a Singapore-based ride-hailing, ride-sharing, and logistics company announced its acquisition of Uber's Southeast Asia business on 26 March 2018. Following the announcement, there were several articles by Singapore mainstream news broadcasters highlighting that the Competition and Consumer Commission of Singapore (CCCS) was not notified about the deal. Hundreds of Uber staff were told to pack up and leave within 2 hours, leaving drivers worried about their car rental contracts and the future in general. Based on all these articles, it is obvious that Grab has not considered all of its stakeholders’ needs and concerns or identified actions to address them before announcing the acquisition of Uber, followed by the shutdown of the app to the public. As a result, many stakeholders were thrown off by Grab’s swift announcement and actions. Grab has been presented with more time to plan for a better merger and acquisition (M&A) process considering the CCCS's recent directive to extend shutdown date of the Uber app from 8 April to 7 May, and a push to both companies to maintain part of their operations until the ongoing investigation concludes. Source: Grab Facebook Page As such, Grab (and other organisations about to engage in M&A) might want to take the below pointers into consideration when planning and managing their current and future M&A. As organisations such as Grab and Uber grow their businesses in today’s rapid pace of disruptive change, it is easy for them to lose sight of what is key in each stage of evolution. What made Grab and Uber successful in a very short period of time was the fact that they came out with a brilliant concept and provided an alternative in the market as market leaders. However, given what has happened with its recent acquisition, it seems that Grab and Uber might have overlooked the importance of execution. In other words, while the focus on concept and speed has led to the success of Grab and Uber, a lack of focus on execution and accuracy has led its recent M&A to disaster. At the end of the day, Grab and Uber need to be aware that it is ultimately about making things happen, thus, execution and accuracy are as important as concept and speed. While it is undeniable that Grab and Uber have done a pretty good job of communicating the deal to their customers through email communications, news release and a well-designed artwork stating “Grab & Uber Are Coming Together To Serve You Better”, the same cannot be said for their communication with other stakeholders such as internal employees and contractors (i.e. Uber drivers). Shortly after the public announcement, Uber employees were told to just leave the office and wait for updates, as reported by The Straits Times. It was later highlighted by Channel NewsAsia that issues such as registration, contract, and reward systems were yet to be ironed out. All these assertions by Uber employees and drivers make it clear that an effective M&A communication plan with employees and drivers was found wanting. In the normative sense, Uber employees and drivers should have been communicated with before the M&A announcement was made public. By paying little attention and focus in this regard, Grab and Uber risk projecting the image that they are only focused on profits and have lost sight of its people. Humans are ultimately the heart of any organisation and so they should never lose sight of that. Next, although the entire Grab management team is likely to be involved in managing the acquisition, the human resources (HR) function has a role that is particularly important. A high-performing HR function can be a valuable business partner in providing clarity to the management team to chart the end-to-end execution details (i.e. milestones, owners, timelines etc.) for its post-merger activities. This would include key elements such as change management, employee communication plan, compensation and benefits, harmonization plans, immersion programs for Uber employees and drivers etc. Considering the fact that Grab did not have the email addresses of Uber employees, said it will 'try' to offer positions to all Uber staff in the region and changed incentives around the announcement, raises questions on Grab’s post-merger plan. As Benjamin Franklin once said “If you fail to plan, you are planning to fail”. Hence, it is important that Grab had come up with a well thought through execution (post-merger) plan during the initial preparation stages. Last but not least, technology-driven organisations such as Grab and Uber might prefer to hire only people who are creative and innovative, as they are to align with the culture of the organisation. However, hiring people who possess similar characteristics to work together might not do the organisation any good. According to a study by Deloitte in 2013, diverse teams (i.e. people possessing different characteristics) outperform their peers by 80% in team-based assessments. Ned Herrmann, the father of brain dominance technology, described such diverse teams as whole brain teams whereby each team member has a different preferred thinking style (whether it is rational, practical, relational, or experimental) that can be leveraged by the group. It is only when a whole brain team with its diverse thinking preferences is at work that a company can perform at its best. It is therefore highly recommended that Grab gets people of different thinking preferences onboard to improve its execution capabilities. Just like overcoming any other business challenges, Grab needs to identify and understand the key priorities and critical success factors in each M&A stage in order to attain a smooth and successful acquisition with Uber.
US retail giant Walmart wins a $16bn bid to acquire 77% of Flipkart, thereby culminating with it the largest ever cross-border M&A transaction in India. Tiger Global and SoftBank, major investors in the Indian e-commerce company, are expected to exit. Both still hold significant stakes in Ola and Snapdeal. Ola also has the backing of Chinese Investment Company Tencent, much like its payments compatriot Paytm, majorly owned by Chinese internet major Alibaba. Alibaba’s affiliate company Ant Financial recently invested $200m into Zomato. Indian start-ups are dependent on foreign capital. Period. Over 1,000 Indian tech startups emerged in 2017, making us the third largest startup ecosystem in the World as per a NASSCOM report. Startup India and Digital India have provided a much-needed boost, but domestic capital has been found to be lacking, if not absent. Why Foreign First? As per estimates, almost 90% of funds that flow into Indian venture capital (VC) and private equity (PE) are of a foreign origin. This figure was 98% about five years ago. Domestic investment has been slow to pick up. It would be naïve to assume a lack of interest. Domestic share of investment in start-ups has only gone up with a lock-down in deployed capital towards the corporate sector courtesy our banking system’s twin balance sheet conundrum. However, fund sizes are comparatively small, and appetite is limited to $100m, almost negligible vs. $100bn+ funds created by players such as SoftBank. Naturally, a smaller fund size means a reduced risk appetite. This results in domestic players being more conservative, following the curve instead of beating it. Sky-high valuations, often driven by interlopers, make them uncomfortable. The recent acquisition war between Walmart and Amazon to buy Flipkart at an eye-watering $20bn valuation very early ruled out the possibility of any domestic interest. Foreign VCs also bring a solid brand, an international network, sector knowledge, and higher valuations! A lower cost of capital and larger fund sizes tones down their return expectations and payback periods. Easier terms to deploy invested capital combined with reduced interference in decision-making act as a sweetener. Government Needs to Share the Risk! The government needs to upgrade its role from not only being an enabler but a risk sharer. As per a TiE report, only a small proportion of startups get funded. Considering the market lacks domestic capital, and foreign investments come only during growth phase, nascent ventures face a crunch. Globally, sovereign wealth funds and pension funds are active startup investors. India’s public-sector managed pools such as Life Insurance Corporation of India (LIC) and Employees’ Provident Fund (EPF) in contrast are quite conservative. Removing restrictions and releasing this liquidity is an idea worth considering. The government announced a SIDBI headed INR10,000cr Fund of Funds plan for startups. This was launched to motivate Alternative Investment Funds (AIFs) float startup-oriented schemes. The disbursement has remained sluggish making the initiative lack effect. This has been a pattern across state funds created to support startups. There is a dire need to cut down bureaucratic hurdles. If one digs deep into this problem, the over-cautious attitude of bureaucrats sitting over state funds is not because of traditional red-tape but for the excessive fear of being seen in wrong light if the investment goes south. The government, therefore, needs to ensure a much larger participation of private professionals in making swift decisions to ensure efficiency of such policy initiatives. Listing in India has remained another roadblock faced by the startup community in accessing market capital. Most companies prefer listing abroad than to go through complex procedures in India. Government and SEBI must come together to simplify the listing process to have smoother access to the capital markets. Government can always amend tax laws to incentivize venture capital investments, especially with imposition of rules like angel tax causing tax terrorism! There is no doubt that the Indian startup ecosystem requires much more domestic capital infusion. If the government is willing to take a step forward to become a risk sharer and successfully mobilize confidence from the private sector, there is nothing that can stop the Indian startup ecosystem from becoming the brightest star in the global entrepreneurial environment.
On 7th March 2003, Broadway musicians went on a strike. The League of American Theatres and Producers proposed to reduce the minimum orchestra size requirements from 24-26 to as low as 7 members, with a virtual orchestra filling the gaps. For the next four days, musicians sat on a strike outside famous Broadway theatres, joined by many well-known actors and performers. The city lost $7 million during those four days forcing Mayor Bloomberg to intervene, re-assess the minimum number of musicians to 18-19, and hold that number steady for the next ten years. We have all seen the early warning signs of automation and how it could put people out of jobs. But then, nothing really has changed in our labour laws. The gig economy is growing to encompass all shades of workers, from blue collars to highly paid professionals in every field. The law remains horribly inadequate. The ‘Gig’ Economy is HUGE Artists and entertainers have always been part of the gig economy. Some of them are lucky to get a commission to do a large mural or painting which offers a steady income flow for the duration of the project. But today, the gig economy is embracing people beyond showbiz. When my teacher in school offered extra classes at home, she told my parents that she had a large family to support and a teacher’s meagre salary was inadequate. She was doing the gig to be able to support the family. I live in an apartment complex where several housewives have signed on to an app called FoodyBuddy. FoodyBuddy is a platform that aims to connect buyers (Foodies) and home chefs (Buddies) who live around them. Several stay-at-home moms have found a fantastic option to showcase their skills. They have all joined the gig economy. Sudeepa had worked with a telecom major for years. She has recently been laid off by her company but has started coaching students. She is not making as much as she used to but is much happier and has more control over her time. I have been a gig economy worker since October 2016. I enjoy the creative freedom and the ability to choose projects which interest me. I coach leadership teams and work with organizations on their digital transformation. Being a gig worker allows me to do creative things, travel, and write. There are many shades of gig-economy workers. At the lowest end of the skill pyramid, you have the Uber Drivers or the carpenter who you can fetch through HouseJoy or UrbanClap. LinkedIn is full of white collar gig workers. They range from consultants, lawyers, executive coaches, designers and IT specialists. Today, Bansi would have been called a “gig economy worker”. He went by a less glamorous term – casual labour. Every morning he would go to the gates of the factory and offer himself to do the back-breaking work. There were days he would get a daily wage, and then there were days he was not that lucky. Two years back, Bansi moved to Bangalore and started working with a startup to deliver food. He rides a bike and is often seen weaving his way through the traffic. He delivers pizzas. He is a gig worker. A year later they shut down. Bansi is taking driving lessons and hopes to become a driver with a cab-hailing service. He has spent his life in the gig economy. The UK based Lawyers On Demand (LOD), which was established in 2007 now has more than 600 lawyers — the business has doubled in the last three years and the market is booming. Experfy offers data scientists, data engineers, data analysts, and visualizers. Sparehire.com has 5500 professionals listed. More than 3.5 million people have registered as freelancers from India on Freelancer.com. Leadership Dilemmas of Dealing with Gig Workers Have you ever thought about what is common to bus drivers, bank tellers, cashiers, telephone operators, assembly line factory workers, stock traders, soldiers, journalists? Automation in varying degrees is impacting their jobs. From augmenting to elimination, there is a wide spectrum of what automation is doing to jobs that have employed millions of people around the world. Is there anyone who is safe from the march of robots? A job that is super-specialized and done by a handful of people is safe because it is not economical to automate. Jobs that deal with rapidly changing environments are also safe from automation. Being a great leader of people is unlikely to be threatened by automation. But there are dilemmas that leaders are facing as they deal with gig economy workers. Brand Matters If poaching someone who is already employed elsewhere is tough, it is tougher to find people who are freelancers. The personal brand of the professional matters more and more. Brand building is a painstaking process that takes years of work. Start early. Create a body of work and make it easy for people to find you. Making your brand searchable on social media helps. Leaders must encourage their employees to create strong personal brands without feeling threatened. Invest in Soft Skills Soft skills matter for everyone, but for the gig worker, soft skills can prove to be ‘the’ differentiating factor between one gig and the next big one. Being able to negotiate your terms without putting off the other person matters a lot. Being able to work and collaborate with a cross-section of professionals is a common skill for all successful gig workers. Open Talent Economy Leaders need to be able to work with the open talent economy where the core full-time workers are augmented by the gig economy workers and this includes academics, interns, consultants etc. The leaders have to be talent magnets to be able to get the best of the open-talent pool. Laws Are Lagging Behind Gig economy is a one-sided contract. The employers pay for the time the skills used. But staying updated costs time and money since gig economy workers do not have access to the Learning & Development departments the way regular employees do, nor do they have the opportunity to build pension funds, medical insurance leave alone wealth creation opportunities like ESOPs. This is where the government needs to create laws that govern gig-workers. The gig economy works great if you have a financial cushion built in. Then it is a great way to explore the hidden talents you never knew you had. But being a gig worker is also full of insecurity, loneliness and income volatility. The unorganized blue collar workers have always lived without the safety net regular work provides. As 30-40% of the workforce of our country is joining this new world of work, it is time to rethink the labour laws. This article first appeared in People Matters, March 2018 issue Find me on Twitter @AbhijitBhaduri Visit my website at http://www.abhijitbhaduri.com/
The very concept of business has been repackaged as ‘Entrepreneurship’ in the Millennial age. Derived from the French word, ‘entreprendre’, meaning ‘to undertake’, entrepreneurship adds a sense of adventure to the drab notion of business, combining qualities of development, organization, and management. In literal terms, it means to take on financial risks in the hope of profit. Social Entrepreneurship, on the other hand presents a rehash, seeking to develop, fund and implement solutions to social, cultural, or environmental issues. The inception of a social enterprise can be traced back to a social problem, and to the objective of finding a sustainable solution to it. Instead of a conventional framework of profit and return, social enterprises are assessed by the scale of their impact across a matrix of social parameters, including but not limited to job creation, skill development, empowerment, etc. The concept is premised upon the emerging trend of the triple bottom line, a concept which seeks to broaden the focus on the financial bottom line by businesses to include social and environmental responsibilities. The Indian Context Source: User: (WT-shared) Jtesla16 at wts wikivoyage [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], from Wikimedia Commons Social impact and entrepreneurship are deeply rooted in our ethos. Ventures such as Amul, Lijjat Papad and FabIndia starting within a decade after independence. The trio of these enterprises set a paradigm for generation of upcoming social entrepreneurs. Amul and Lijjat Papad started as cooperatives run by milkmen and women respectively, FabIndia was started to bridge the gap between retail market and craftsmen & artisans. What has changed over a century is the sheer number of social enterprises and the sectors which they target. As per a British Council survey, 57% of existing social enterprises in India are setup 5 years ago or even earlier with the primary focus around skill development and education. Source: State of Social Enterprise in India, British Council 2016 Apart from focusing on specific sectors, most social enterprises aim to generate employment and increase awareness of social taboos amongst the citizens. A lot of them create direct employment opportunities for the disadvantaged and transfer essential skills to vulnerable groups of society. A substantial number of these enterprises have women leadership and eventually the statistics for gender equality in workforce for them are, in general, better than at most commercial enterprises. Nevertheless, there are some major issues plaguing this sector, funding being the most significant. Funding Woes While most “commercial” start-ups avail funding via Angel investments, venture capital, crowdfunding, banks, etc., funding for for-profit social enterprises is a big challenge as investors generally don’t prefer risky ventures without a promise of a requisite return. Non-profit social enterprises (NGOs) still have it easy with structured access to philanthropic disbursements and tax breaks. But for-profit social enterprises find it incredibly hard to convince investors to back them without the surety of high returns. Social investing at the end of the day is a specialist domain, requiring a fit in appetite and expectations. The process for for-profit social enterprises to avail capital often calls for an assessment of their to-date social impact. This makes it difficult for budding companies to raise funds for their pilot. Many entrepreneurs complain of a lack of awareness and understanding within the investment ecosystem. Shortage of managerial & technical skills thanks to lack of talent, an ignorance within the general public are other roadblocks these enterprises face from time to time. To add up to this, social enterprises also face regulatory constraints when securing capital from foreign investors. Foreign Contribution Regulation Act (FCRA) guidelines are although comprehensive but too cascading and time consuming. Recent amendments are not helpful either. Restriction imposed on proportion of foreign funds that could be used for administrative expenses by Civil Society Organisation (CSOs) and licence expiry-renewal processes are uncalled for and daunting. All the challenges converge to a general apathy to the empathy model adopted by social enterprises. Government Schemes Source: By Lisrael22 - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=44054106 The government has implemented a number of schemes in the past few years to nurture a niche for blooming start-ups. Department of Financial Services of the Ministry of Finance and Ministry of Micro Small & Medium Enterprises have framed key policies for Skill Development and Entrepreneurship. But again there has been a very few social entrepreneurship specific policies barring a few lines on fostering Social Enterprises. An umbrella scheme for all entrepreneurial ventures, Start-up India was launched to offer an initial corpus of INR2500 crore and total corpus of INR10,000 crore over four years. Its implementation has been disappointing. With only 10% of the total fund disbursed and only 75 start-ups funded, the figures definitely cast a gloomy shadow on a generation which look forward to start their own enterprises, leave alone social ventures. There have been some excellent initiatives though, one such being the India Inclusive Innovation Fund (IIIF) which was launched with a INR500 crore corpus, to provide investment to innovative ventures that are scalable, sustainable and therefore profit-making, but also address social needs of the citizens at the bottom of the pyramid. While conventional venture capital asks for an Internal Rate of Return (IRR) of over 20%, IIIF seeks a much lower threshold of 12%. Many more such programmes are needed. Along with these initiatives, new incubators and innovation centres have been designed at National Institutes to mentor social entrepreneurs and to supplement start-ups in their growth phase. Holistic approach for honing skills in youth, at present is the prime objective of government’s schemes. Better implementation of funding and support schemes hence becomes essential. Future Looks Bright India has become the third largest start-up ecosystem in the world. Online platforms and media give greater reach to these enterprises. YourStory and other similar online platforms along with National dailies and magazines such as Outlook, India Today feature social story segment as well. The rise of forums and networks is enabling social entrepreneurs to engage with other stakeholders. National Entrepreneurship Network supports student entrepreneurs across colleges and institutions in India. Another benign initiative, Jagriti Yatra (‘Awareness Journey’), an annual train journey that takes hundreds of young Indians from small towns and villages, on a 15-day, 8,000-kilometre national journey to familiarize them with social and business entrepreneurs around the country. Although, an inclusive growth of investors and enterprises needs to be seen, many young entrepreneurs are adopting a hybrid model, i.e., combining aspects of both Non-profit and For-profit ventures to gain some flexibility. The creation of an initiation fund which would make it easier to fund pilot projects in the social space would be key. Skilled youth with the right skill set would bridge the talent gap for such enterprises. As per the British Council Report on Social Enterprises in India, more than 2 million social enterprises already exist in India. A sustainable ecosystem, with concurrent connections between social enterprises, investors and incubators and government looks plausible. However unless the vacuole between Government, investor community, and people at the bottom of pyramid is filled, any zealous push by motivated social entrepreneurs would be a half measure.
If you ask an economist trained anywhere in the world what the ideal percentage of ownership in a joint venture is, the answer will most likely be – more than 50% – to enjoy the extra rights and privileges. In our study of family-run businesses, we have come across one that would only enter into a joint venture (JV) in a 50:50 partnership. Tolaram Group offers an interesting corporate success story of using joint ventures strategically to compete in international markets sustainably. Source: tolaram.com Tolaram Group is a family business conglomerate, more than 60 years old, with a diversified portfolio in consumer goods, digital services, energy and infrastructure. They started their journey in 1948 in Indonesia from where they expanded to Singapore, Africa, Asia, and Europe. Unlike most family firms that are considered to be conservative when it comes to global expansion, Tolaram Group actively looks forward to expanding globally in line with the views of their founding father, Group Chairman Mohan Vasvani, whose advice was to: “Go global in order to avoid putting all the eggs in the same basket” In 1988, Tolaram Group decided to venture into consumer goods and they convinced the biggest family business of Indonesia, Indofoods (owned by Salim Group) to export Indomie noodles to Nigeria. Today, Tolaram Group has successfully made Indomie noodles a staple food and a major brand in Nigeria with its automated production plant, supported by its vast logistics, distribution and retail channels. This JV was an equal partnership between Tolaram Group and Salim Group and has been successfully managed for more than 20 years. Initially, Indofoods wanted 51% but Tolaram Group insisted on an equal partnership as they strongly believed that the employees of both the organisations involved in the JV would feel more responsible and accountable towards making the equal partnership work. In 2015, Tolaram Group Africa Pvt. Ltd, a part of Tolaram Group, signed two more JVs as 50:50 partnerships. First, with one of the largest dairy companies in the world, Arla Foods of Danish origin - to manufacture, distribute and market milk products catering to the needs of Nigerians. Second, with Kellogg Company of US origin - to develop and distribute breakfast foods and snacks to the West African market. This article is based on a series of interviews with the top management of Tolaram Group who belong to the second and the third generations of the family business to uncover the philosophy behind their 50:50 partnerships and the strategic advantage that it offers them in this competitive world. When asked about the rationale behind pushing for 50:50 partnerships in Africa, the group CEO of Tolaram, Sajen Aswani remarked: “50:50 partnerships are common for us. All our joint ventures have always been 50:50. No one party dominates. You both have to make it work. So one can’t say I am superior in any way. I didn’t even bother asking them for that extra 0.1%. Because it has to be that both parties have absolutely as much to lose and as much to gain from this venture. Then it works…..People on the ground are the ones who make it work. Their loyalty must only be to their professions. Not to one partner or the other.” Mohan Vasvani, Chairman, Tolaram Group Source: tolaram.com Tolaram Africa has maintained its relationship with Indofoods, Indonesia’s biggest conglomerate of Chinese descent over the last 25 years in an equal partnership and intends to continue with their 50:50 rule in the African continent. They consider their family as insurgents in Africa and the institutional shareholders like Indonesia-based Chinese family business Indofoods, European cooperative Arla, and the American multinational Kellogg as incumbents. “So we bring growth, we bring entrepreneurship and we bring acceleration of growth because we know how it is done in those emerging markets. What they are looking for is emerging market footprint and we have operational capacity within emerging markets. What they do have is R&D, what they do have is the brand, what they do have is the product. What we have is the terrain knowledge, what we have is the speed. So the combination of these, what they like and what I like, is what I hope will steer the business forward. So, it’s not one set of skills that is superior to the other. I consider them equally important” said Sajen Research has shown that almost half of JVs involving cross-border partners end up in failure to meet strategic and financial expectations of at least one of the partners (Multiple Water Street Partners, 2008-2015). Establishing an equal partnership amongst organisations offers several advantages towards the success of the JV. Employees of each organisation feel equally empowered to do their job as none of the partners can claim superiority over the other in terms of their values, organisational culture and/ or business practices. There is a shared responsibility and accountability to perform well so that the JV can work efficiently and profitably. The CEOs of the partnering companies (in the case of non-family firms) may aim for short term gains for themselves and their organisations (favoring the neoclassical economist view of aspiring for majority shareholdings) but most employees are interested in the long term success of the JV and a secure future for themselves. This is where the 50:50 partnership helps to make sure that the success of the JV becomes an equal responsibility for both the parties involved. For the Tolaram Group, family values of treating every member of the organisation as equal, and stewardship of the organisation, are what dictate the decision behind choosing an equal partnership. The company aims to ensure that even if the head of the partnering company changes, an equal partnership will create an insulation for all the employees in the long term. Source: dufil.com Tolaram Group’s practice of signing an equal partnership with the Salim Group gave them complete autonomy of operating as per the customer demands and market dynamics of Nigeria, thus overcoming a major factor responsible for the failure of any international JV of not evolving with the market (Kwicinsk, Ernst, and Bamford, 2016). They used every marketing tactic possible to make Indomie a household name in Nigeria so much so that most Nigerians today consider Indomie as synonymous with the word “noodles”. Haresh Aswani, managing director of Tolaram Nigeria, commenting on the various 50:50 JVs that Tolaram Group is a part of said, “the relationship is good, very good I must say and it’s been a give-and-take relationship where we learn from them and they learn from us. But operationally they don’t interfere. No interference at all in our operations on the ground.” On reviewing the literature on family businesses, one can confidently state a few unique characteristics of family businesses. Key ones are long-term orientation and stewardship in order to preserve their socio-emotional wealth and ensure family sustainability. Tolaram Africa and their strategy towards expansion through equal partnerships offer an interesting interpretation of these characteristics while handling JVs with big business conglomerates of varied origins. Since Tolaram Group has successfully established 50:50 JVs with organisations having different ownership models, ranging from a family business conglomerate of Indonesia to a European dairy cooperative to an American multinational, their motivation and strategies offer interesting and important lessons for managing JVs globally. The core learning for other organisations is to balance control among partnering companies that sends signals of independence and empowerment to the employees of all parties involved and thus foster long term commitment. It offers a good strategy for long term sustainability of any partnership, especially in light of the fact that more than 30% of JVs result in a failure in the first five years (Multiple Water Street Partners, 2008-2015). Co-written with Dr Divya Bhutiani, a Postdoctoral Research Fellow at Nanyang Business School’s Centre for Business of Culture.
The conflict of interest charge on ICICI and the Kochhar clan has only added another layer to the crisis afflicting the banking sector in India. The allegation, stripped of all embellishment, is simple. Did ICICI Bank go wrong in lending to a counterparty when its CEO’s spouse had an ongoing business relationship with the same? Can the same CEO’s extended family (i.e. brother-in-law) advise ICICI’s debtors? It is not a matter of legality which I’m sure any killer attorney would argue against. It is a matter of propriety which comes with a high office. And being CEO of one of India’s largest private sector (also listed) banks is a sufficiently high office. As the top management officer appointed by the Board and by extension the shareholders, the onus is on you. Financial institutions are familiar with the concept of “conflict checks”. Any global investment bank would conduct them to ensure they (or their subsidiary/branch) are not advising on the opposite of a transaction, or do not hold a significant trading exposure, before accepting a mandate to advice a client on say a M&A situation. Such mechanisms should naturally apply to senior management, especially for an organisation like ICICI – not promoter owned/controlled but widely held by institutional investors including big mutual funds and foreign bodies. What disclosures are the likes of Mrs Kochhar supposed to mandatorily make regarding her family and extended family’s business interests? At what frequency? How is that being recorded and monitored? How is this information actioned upon within the company’s compliance function? Should the Board wait for investigations to conclude before taking any concrete actions? Corporate officers should be held to the same standards of scrutiny and probing usually reserved for public servants/politicians. Just as the latter is held responsible for tax payer’s money, the former is answerable to stakeholders. They naturally carry the burden of reputational risk for the organisation they represent and shareholder value will continue to erode till uncertainty looms, either around their own actions or their future with the company. That is why the Board expressing support (even informally) for the CEO when multiple agencies are kicking off investigations is premature and irresponsible. That is why Chanda Kochhar should have resigned or been asked to step down by now. Deepak Kochhar (Chanda Kochhar's husband) in an interview with India Today argues, “Where is the conflict of interest? ICICI Bank will have relationship with all top corporates in India. If I can’t touch any corporate who deals with ICICI, is it fair to me? Can I function like this? I am a Bajaj MBA and a Harvard alumnus. I am an educated professional. Should I sit at home just because my wife is CEO of ICICI Bank?” When your wife is the CEO of one of India’s Systemically Important Banks which can tap global capital markets as it pleases, you should touch very carefully. Full disclosure: I have a savings and current account with ICICI Bank which I do not intend to shut down in light of recent events. They don’t ask me to come to their branch each time I change my address, which in itself is priceless.
Exercise and nutrition go hand-in-hand to maintain a good health; the former takes care of muscles, bones and joints, while the latter provides energy and helps one to get rid of excess fat. One can for sure lose significant weight even without exercising, but that is not a holistic approach towards fitness. Exercise should be an integral part of a healthy lifestyle. It has important advantages – elevation of mood, a feeling of wellbeing, improved stamina, an athletic body configuration, flexibility and strength. Without a healthy diet, it rarely results in a significant fat loss. Nevertheless, it does contribute to fat loss and overall wellbeing when combined with a balanced diet.
In focus this time is an oil exploration and production enterprise which sits on oil reserves whose value is 10x the price given to the company by the stock market. Presenting Selan Exploration Technology, an investment opportunity which is undiscovered, under-valued and unlikely to reduce in price. Learn how to invest safely, grow your money and retire early. Subscribe to my YouTube channel here.
We caught up with Vinay Raj Somashekar, Co-founder and Chief Designer of Emflux Motors, a Bengaluru-based start-up at the launch of Emflux One: India's 1st Electric Superbike. Vinay shares the vision and process behind Emflux One's gorgeous design. Blending aesthetics of aggression with a sense of calmness and beauty (which typically personifies Electric) always poses a challenge. Vinay describes the journey of his team starting from ideas on paper to close collaboration with engineers and material experts finally culminating in this beast breathing life at the Auto Expo 2018. Emflux One (600-650cc segment) promises a top speed of 200 Kmph on full charge with a similar quanta of range. Its acceleration is an eye-watering 0-100 Kmph in 3 seconds. Since charging remains a primary concern in the electric segment, the company plans to install 1,000 high-speed charging units capable of juicing up the bikes upto 80% of their battery capacity in less than 36 minutes! Moreover, the company aspires to translate tech beyond hardware by integrating real-time diagnostics, safety alerts, drive modes and cross-bike connectivity in its prop software platform accessible to the rider. The company will manufacture only 199 units for domestic users. Release expected by March 2019. Pricing at INR6L-11L (subject to add-ons) Read more on Emflux Motors and Emflux One here.
Our tribute to the 2017 Nobel Prize Winner in Economic Sciences. Richard Thaler's contributions to understand the complexities of decision-making has virtually created a new field of study called Behavioural Economics. Humans as per Dr. Thaler are not always rational and their decisions are often driven by behavioural traits and information asymmetry of the real world. Richard Thaler is a vocal proponent of the Nudge Theory, which focuses on making small adjustments in the environment of people to drive their behaviour. He joins other great contributors to the study of human behaviour, including Daniel Kahneman, Amos Tversky and Gary Becker. Here we try to explain his basic theories of limited rationality, lack of self-control and social preferences. Hope you enjoy it.
Credit Default Swaps (CDS) serve a key purpose, aside from acting as a hedging or speculative financial instrument. Their price (i.e. CDS Spread) is an indication of investor sentiment regarding probability of a debt issuer defaulting. Higher the spread, more is the perceived risk of default.
India's corporate tax rate has been reducing in an intermittent but unidirectional fashion since 2003, from a peak of 37% to 30% for the latest fiscal. What tax rate should we aspire to reach to strike a balance between a fiscal viability and commercial considerations?
India's latest corporate tax rate stands at 30%. While the headline rate has dropped by 7% in the last decade and a half, it is still the 5th highest corporate tax rate amongst Emerging and Developing Economies.