Kevin Harcourt – Center for Alternative Fuels

By: Sidharta Chatterejee
The ‘Vaso-Pressing’ effects constricting the life channel of the capital markets-the ‘Liquidity’, due to credit market squeeze in response to the US sub prime mortgage crisis, has eased since the Fed cut interest rates. The rate cut by 50 bps, has been something more than expected by the analysts and market participants alike. Global equity markets reacted sharply to this effect as they saw bulls running all the way with Dow Jones and other emerging markets reaching new highs.

Well, it may sound something like this. It’s edifying, though remarkable sustained growth in the emerging economies coupled with liquidity support from the OECD countries has removed domestic barriers of trade and businesses. Globalization has, in fact brought our world ever closer with both human and capital resources crossing barriers like never before. It has also brought around increased competitiveness among the emerging economies with each mastering in its own track. With an average World GDP growth rate of around 4.5% and of countries like China (11.9%) ,last quarter and India (9.3%), developing in their fastest pace ever since their economic liberalizations, with other emerging nations already having been joined this economic growth bandwagon.

Abundance of liquidity is lush in the capital markets, fuelling asset price bubbles in one way, and helping mobilize untapped resources in every nook and corner of this world the other way. The emerging markets like Vietnam, BRICS, Thailand, Indonesia, Malaysia, Ukraine, Eastern Europe and Africa, all have been the breeding ground for emerging business opportunities, with PE(Private Equity), Venture Capital funds and other investors migrating like microbes to seek wealth. It’s not about host and parasite relationship, but it’s about true collateral, mutual and cultural benefits that businesses are emigrating from their source of origin to these new found lands—the once ignored economies have turned out to be the land of opportunities. Truly, some economies have already become the investor’s paradise and a global manufacturing powerhouse. Opportunistic business ventures with broad vision have emulated the markets.

This has been possible due to ‘Trading Resources’, from across the world, with once liquidity crunched countries like China and India seeking immobilized minerals in African nations, where they have been investing vigorously with their newfound liquidity (money). Well, back in the 80’s when China and India had only minor share of global GDP, that’s around 3% each, it has rocketed to 15.3% (China) and 6.3% (India). The projected share of China and India is likely to grow by 2030, according to some analysts’ when they will constitute nearly 22% of the world GDP. China will probably rein the SE Asian economy as the largest manufacturing hub in the region.

Global Equity Markets

The total value of emerging market equity in 1986 was around $ 238 billion, among 33 countries compared to $ 1.8 trillion in 1995, as per IFC and is likely to touch $ 22 trillion dollar by 2010. The global equity market capitalization, according to recent published data in June2007, is being lead by North America and Europe, with a combined share of 76% of the total share, the US having a substantial share of 44% and the BRICS comprising only 4-6%. This may change dramatically once the policy makers of the emerging economies open their windows to the winds of the foreign equity players for investing substantially in these emerging equity markets. Though there has been much concern in emerging economies where increased domestic liquidity fuelling inflation and asset price bubble, the notion that too much money chasing too few goods are likely to change once these countries ride the consumer evolution boom.

Investors have seen stellar gains from equity investments in the emerging ,markets (EMs), and the reason that more and more private equity players are turning toward soft growth scenario in Latin America, Eastern Europe and the Asia-Pacific region that have been experiencing equity bubbles in recent times. China has been one such example, where each day, about 3, 00,000 people have been opening trading accounts for stock trading, that’s about 36% comapared to India’s 4.5%. This has created a bubble that has been much concern for the policy makers as enormous liquidity is chasing the stock markets. The other instances being India and Brazil, which have seen substantial FII foraying into the equity market investments.

The comparative analysis of the segmented equity market returns of China, India, Brazil, Ukraine, Hong Kong, Russia and other countries has revealed remarkable similarities among themselves. All these economies are racing past each other; all are having stock market bubbles with promising economic growth and rapid business development environment. From beneath this entire story, the US sub prime problem stepped up wiping out substantial wealth values from the global equity markets. The recent turmoil changed the dynamics of the market return trends as a three year has experienced some jitters.

Sub Prime Effect

The effect of the sub prime crisis has been quite far reaching and dramatic. The resulting credit squeeze and debt markets crisis has towed down the market sentiments across the platform leaving some investors losing some of their wealth invested in the equities, due to correlated stock market down turn. Asia-wide, markets tumbled and hedge funds reported losses from their mortgage-backed bonds (MBS) bond exposures that are trading in various markets. The risk appetites of the investors have come down as more of them have turned towards government securities and bonds as safer havens. Bonds prices are seen to be rising with tight liquidity condition and market volatility remaining high.

Central banks across the world are trying to cushion the market jitters by providing liquidity in this hour of crisis, while the US Fed has cut its bank rate in late august. There has been an overall fear of an US and global economic slowdown as investors is wary about their burses. Nevertheless, with the economic fundamentals strong in the emerging markets, much of this shock would be absorbed by the growth appetite of bigger emerging markets like China and India. It’s to be seen how the corporate sectors reacts to this crisis, as some mega deals by private equities are in the stake. The debt market outlook is not satisfactory, as investors are cautious about debt market portfolios, particularly the Asset Backed Securities (ABS) markets and the Leveraged Buyouts (LBO) deals.

The recent turmoil in the sub prime markets has brought in many queries, after which the Fed and the Bush administration has taken over the tasks of mortgage reform policy to safe-guard the borrowers from their woes. Financial markets can never be immune to undesired events, and one needs better information transparency to foresee any such events in the near future.

Global capital flow analysis toward the emerging markets shows a perennial Increasing trend in the last couple of decades. The data shows the total port-folio of equity capital as well as FII inflow to major emerging nations. Of the major economies, Europe seems to have taken the lead in attracting the largest share of capital, followed by U.K. and the emerging markets.

Emerging Asia -- China

In purview of China’s emergence as a manufacturing hub in Asia, her export has increased many folds in recent years. Recently published data from Bloomberg indicates that China’s imports of intermediate goods from Asian region have marginally dropped as China is self supplying her intermediate goods due to import substitution. This could mean unfavorable reactions from Asian suppliers of these intermediate goods as countries like Thailand, Malaysia, Singapore, and Indonesia depend heavily on Chinese imports of their raw processed goods. The components for electronic industry has seen a huge demand both from domestic and international markets, as parts like servomotors, laser components, DVD heads, piezo-electric devices are the building blocks of CD/DVD players, MP3/MP4 players, etc. China has boosted its component business activity in the coastal Guangdong regions, like Shenzhen, and Guangzhou, the reason behind drop in China’s component import. According to industry analysts, there might be two reasons : Firstly, to develop its own component and intermediary industry, secondly, meet the growing domestic and international demand, thirdly, cheaper alternatives to its imports, and lastly, buffering the emerging markets currency appreciation against the Yuan/$.

Indian Frontier—Sustained Growth

What India may not be having some well planned central business districts with towering skyscrapers , but it does not seems to be stopping the business growth and enthusiasm in India. Well, India is on its way for categorized and well planned much needed infrastructure ventures and real estate investments, as did exactly what took place in China in the early eighties-1980. Truly, the need of this hour is better infrastructure, road and town planning and a few highly centralized business districts. And it is this promising growth opportunities that investors put money into and see those spiraling into profitable returns.

The market susceptibility to the US sub prime has turned the focus on the Indian subcontinent, with India playing a major role in growth economics and corporate fundamentals. India, with its second largest consumer market in Asia (ex-Japan), boasts the breeding ground for SME and entrepreneurship activities. The pace of economic growth has been quite outstanding, with above 9% real GDP growth and strong economic fundamentals driving the services and the manufacturing sectors. Recent FII dynamics (outflow and inflow) and a large domestic capital market fuelled by liquidity from domestic institution investments have seen increased liquidity poured into mutual funds and insurance companies, thus buffering somewhat from the international market volatility. Though it is difficult to decouple India’s economy from the US, there has been no such direct effect seen in response to the US Sub prime mortgage market collapse. FII s have pulled out around $2billion from the markets in July-August ’07, but thanks to the domestic ‘capex ‘growth and the shock absorbing effects by mutual funds and equity investments, India did actually decoupled itself somewhat from the global effects. It’s also the reason that caused record appreciation of rupee, which have seen to be trading at below rupee 40.00 levels (39.75) against the dollar due to sustained demand and increased appetite for Indian currency, and assets – a big pie to foreign investment funds and venture investors.

India, thus have recently been going through rapid investment phase in businesses, and real estate sector have seen real surge in activities, with the cities and towns in Indian horizons in verge of transforming themselves into dazzling skylines to reckon with in the coming years.

Trading Global Resources--Go where the markets are!

Though the bounty of nature is immense, but with an unending demand for materials, resources have become scarce, in comparison to mankind’s ever increasing demand. This demand is for food, energy, oil, precious minerals and everything that has economic value (commodities). Global finance is, in fact, trading resources, or commodities and these resources are scattered in different parts of the world, thus mobilizing them demands both capital and human migrations. The human capital, the best known capital resource that mobilizes the world, just as the muscles move the bones and tuned by the nerves moving those muscles, need energy to perform tasks. This energy for the financial world is ‘capital’, more so liquidity- or money that literally mobilizes the resources. The demand-supply imbalance has created some scanty resources priceless and some others soaring sky-high. Oil is one such, as demand for oil is here to grow since having limited capacity as reserves. This has caused crude oil price shock, as crude oil is trading above $80 /bbl (per barrel) which were trading at $ 74.15 in June 07. Rightly, it can be assumed that oil is moving this world, as much of the markets are being affected by rise in crude oil prices. These factors have also resulted in commodities price volatility. There has been considerable rise in global market risk factors along with the trade and investment boom , and risk management of investment portfolios have taken the prime seat of analysis amongst the investors’ classes.

It’s the concept behind the story that ‘grows where the market is, sought where the opportunity lies’. The emerging equity markets are the next hot bed for the geeky investors as they diversify their portfolios through global managed equity funds investing in stock markets over a wider platform, rather that the US alone.

Beyond Liquidity—Global Warming

The Bigger threats to global economy, the natural disasters, Tsunami and the melting icebergs!

Some things cannot be ignored and need sincere thoughts on the matter of global trade, business and our society. And that is global warming. With manifold increased CO2 emission rates polluting our mother planet, the audiences, policymakers, environmentalists, scientists and the general people to speak, all have turned to this ever threatening human created mayhem. Industrial frontrunners like the US and major developed economies have sounded alert on a big scale to tackle the problem of global warming. China has been blamed much to dismay about contributing significantly to the green house gases, but considering the rapid pace of industrial production creating byproducts as industrial wastes, which has been both polluting the air and water. The rising sea levels pose a major emoting threat to islanders and coastal areas of major economies. The Kyoto protocol drawn up did significant in cutting down carbon emissions by providing carbon credits to those countries emitting lower greenhouse gases. Things beyond the liquidity are as important to the financial markets as the world economy have become intrinsically complex, highly integrated and more regulated . Political uncertainties on the Mid-East gulf frontier and the Iran nuclear crisis as well as the Latin American bureaucracy have had considerable effects on the global financial markets. The North Korean nuclear program issue has been a lot of concern for the Asia-Pacific political stability as though the crisis seems too have weaned down somewhat now as due to the historic summit between the North and the South Korean counterparts after seven long years. Overall, the financial markets are in search of the so called; ‘Financial Stability’.

As one of the bigger financial downturns the markets experienced after the 1997 Asian financial crisis and the 1998 Russian debt crisis when the LTCM went bankrupt on bad currency arbitrage bettings,the current US sub prime mortgage market failure have affected the financial markets substantially. Though the market still does not have clear account of the defaults and exposure to the sub prime, according to some, around $650 billion or more of ARM loans to be reset next year, time will convey the routing of financial risks into the global markets. For the investors and the invested alike, they have to remain cautious yet active since the developed and the emerging markets have coupled themselves due to globalizing trade investments. And with all of these in the background, we have to accept and act accordingly to the unforeseen events looming across the horizon, both natural and man-made, something’s 'beyond liquidity'.