Investeurs chronicles 13

February 2011, Volume: 13Sensex 17700.91 Nifty 5303.55 Dollar 45.32 Gold 20280 Silver 50100 Crude Oil ($) 113.91 Investeurs Chronicles ,[object Object],Mahindra Satyam, formerly known as Satyam Computer Services, has agreed to pay $125 million to settle a putative class action suit filed against the company in a United States District Court. The litigation relates to the 2009 accounting fraud at Satyam Computer, which was later taken over by Tech Mahindra and renamed. More…..S-Band spectrum deal between ISRO's commercial arm Antrix and private firm Devas Multimedia was scrapped. The decision to annul the deal was taken at a meeting of the Cabinet Committee on Security (CCS) on the basis of a recommendation from the Space Commission. The annulment comes in the wake of a raging controversy over the deal for handing over 70 Mhz of S-Band spectrum to the private firm for Rs 1,000 crore More…Current Chronicles India's GDP growth is expected to slow down to 8.8% next fiscal from the impressive 9.2% projected for this fiscal. For FY12, when growth is expected to slow down because of poor rainfall and to the performance of the global economy. Growth in the agricultural and allied sector, industrial sector and in the services sector and its segments is expected to decelerate. However, the construction sector is expected to fare better in FY12 than in FY11.More…India's food price index rose to 11.49 percent and the fuel price index climbed 12.14 percent in the year to February 12, government data on 24th February showed. In the previous week, annual food and fuel inflation stood at 11.05 percent and 11.92 percent. More…Caraco Pharmaceutical Laboratories has entered into a merger agreement with Sun Pharmaceutical Industries, which has increased its offer price per share by 10.52%. Sun Pharma and its subsidiary Sun Global collectively own 75.8% of Caraco common stock.quot;
Upon completion of the transaction, Caraco will become a privately held company and its common stock will no longer be traded on the NYSE Amex,quot;
More…Global oil major BP will buy a 30% stake in Reliance Industries’ oil and gas blocks, including its trophy asset—the D-6 block—for $7.2 billion as part of a long-term deal that involves a total investment of $20 billion, making it the biggest-ever foreign investment in India. Reliance and BP will also form an equal joint venture to supply market and trade natural gas, including LNG. More… A simple one line revelation by the US department of Agriculture that the ratio of stocks to demand will fall this year to its lowest level since the mid 1970s, the last time world went through a food scarcity shows that we are increasingly losing ground against the food prices turmoil.Since July 2010, prices of many crops have risen dramatically. Prices of maize increased 74%; wheat went up by 84%; sugar by 77% and oils and fats by 57%. The only comfort point being rice prices, which remain fairly stable with prices in December 2010 less than 4% higher than the previous year.Who is to blame for high prices?Such astronomical high in food prices is not a new phenomenon for the world which has grappled with it as recently as in 2008. But there lies a major difference this time. In past, weather alone was responsible for causing high volatility in the prices of food item, this time it is both demand & supply factors to blame. Putting succinctly, this round of food price rise is due to three factors in play: Extreme weather conditions, financialization of food and higher demand for bio-fuels.Shocking weather conditions around the world, possibly linked to climate change is one of the key disruptors of food supply. Some of the key food producing provinces in China is facing their worst drought in 200 years. Flooding has absolutely devastated agricultural production in Australia and Brazil while Russia is still trying to recover from the horrific drought of last summer. Such berserk weather patterns have exerted an undue pressure on an already fragile global food system, where majority of the countries have reacted through export restrictions and panic buying. Moscow has banned most agriculture exports, while South Korea and the Philippines have suspended some of their import duties on food items such as fish and powdered milk.Cover StoryFood on fire: Skyrocketing food prices Top up these factors with increasing total world population (we are adding 80 million people each year) as also the spike in the number of people moving up the food chain, and we have a sure shot case of price surge at hand! The equation is actually quite simple: food is a relatively inelastic commodity in terms of demand; people eat notwithstanding the state of economy. Therefore, even if the demand remains steady but the supply pressures continue to worsen, food prices will have only one place to go – up! Why are we discussing it?Simply, because food security is the fulcrum of any type of political, economical, & social equilibrium!Keeping this in mind, the fear omnipresent currently is, if we are embarking on a global food crisis? Rising food prices, tight supplies, and intense food protests around the globe are pointing towards the looming danger. When people do not have enough to eat, they tend to become desperate. The consequences of food crisis go far beyond economics. The big question surrounding burning Middle East is more to do with why it is happening now. And there’s little question that sky-high food prices have been an important trigger.Cover Story Food on fire: Skyrocketing food prices Financial speculators are further adding fuel to the fire. Big investors have become habitual of treating food as investments of portfolio investment & speculation. In 2003, index funds had $13 billion invested in commodities in US markets. By 2008, this had reached $317 billion, while a recent estimate by Barclays Capital shows that $60 billion was pumped in to the commodities market in 2010 generating a price rise. In August of 2009, Professor Jayati Ghosh, of the Centre for Economic Studies and Planning at Jawaharlal Nehru University in Delhi, compared food staples traded on futures markets with staples that were not, and discovered that foods that were not open to futures trading rose only a fraction as much as those that were.Increased demand for the bio fuels is another culprit. It takes land away from food production, and for food. Some 40 per cent of the US corn crop, enough to feed 350 million people goes to make fuel for cars. This is a serious cause of concern in emerging market, since people here spend 40-60% of their income on food. And if you think surging food prices only affect the world's poorest people, think again. Access to food is crucial to a country's economic, political and social stability, so food shortages create serious concerns for investors.The rate of the increase suggests the number of undernourished people, which last year was 925m, will now hit 1bn by the end of this year as the effect of spiraling prices filters through. This will create a risky preposition for food security of poor people and vulnerable groups, particularly women and children. For poor agricultural producers, high food prices are not necessarily harmful if they are net sellers of food, but increased price volatility can significantly undermine their income and thus food security.But, Shouldn’t poor farmers gain from high prices?High food prices, though a threat to the poor, should be a blessing in disguise for those who make a living from agriculture. However, that’s not the case because of limited access to land and water, along with rising input costs. In fact, many of the developing world farmers, who are growing for export but are net buyers of food – and they are among the hardest hit.Is this only about impact on poor?Certainly no! Besides pinching common man’s pocket, it also has major ramifications for the global business community. Unrest, triggered by food prices in countries around the world has the potential to derail recovery of global economy. For businesses, it means higher expenses due to surge in input costs and fear of loss of investments. Many multinational firms rely on emerging markets for much of their sales. So, if those consumers see their budget cut back, they may not buy some of the products made by the multinationals resulting in profit margins getting squeezed. Hence, if food prices remain high, and if consumers spend less on other goods, other parts of the economy might sufferWhat next?Global food prices hit a record high in January, surpassing the levels seen during the 2007-08 food crises. The surge in wholesale food prices is slowly filtering into retail prices in rich and poor nations alike, stoking inflationary pressures. Unless the governments do not resort to transparent, open and fair trade practices, policies & investments to promote agriculture productivity and steps towards curbing financialization, we will continue witnessing such crisis; each time of a higher magnitude, threatening socio-economic-political poise.As the Tunisian dictator Zine el Abidine Ben Ali discovered in January, there is no surer route to oblivion than to deny people access to affordable food! Cover Story Food on fire: Skyrocketing food prices nds from Middle East or yen present longer-term borrowings at fixed costs reducing variable elements for companies amid volatile market conditions. In calendar year 2010, issuance of bonds of this nature from Asia excluding Japan and Australia totaled a record high $89.7 billion, up from $70.6 billion in 2009. Corporate bond issuance rose to $43.6 billion from $31.8 billion.Of all, Asian borrowers are likely to raise even more money in offshore bond markets this year on the back of rising capital needs and a relatively low leverage allowing taking more debt. The offerings are expected to increase from junk-grade companies with more bonds denominated in a broader range of currencies. High-yield corporate bond issuance will likely continue to be dominated by Chinese real estate developers and Indonesian coal companies. Even bond issuance from banks is also likely to rise to meet the higher capital required by international standards. Amongst all of them, first-time corporate issuers are likely to surface, meeting keen interest from fund managers and other investors looking to increase their exposure to emerging markets in Asia. Chinese property developer Shui On Land Ltd. recently announced plans for a bond sale, saying it will issue notes to institutional investors in Asia and Europe to fund real-estate projects and acquisitions. Power-plant operator China Power Investment Corp. also is wading into the offshore yuan bond market. Some foreign companies and institutions, including Korea Development Bank, are also mulling offshore yuan issues. In Indonesia, Plantation group PT Bakrie Sumatera Plantations and state-owned gas and oil producer PT Pertamina are among Asian borrowers with plans to sell dollar-denominated bonds in the international market in 2011. Pertamina aims to raise $1.5 billion for capital expenditure whileG-3 Bonds - New kid on the Block?Emerging economies continue to outperform developed economies thanks to fiscal and monetary reforms and favorable secular and demographic trends. This has made them significantly less vulnerable to external shocks compared with past cycles. This contrasts sharply with advanced countries that are now being threatened with sovereign credit rating downgrades due to persistent fiscal deficits, slower economic growth and growing debt stocks. Thus, exposure to emerging market makes lot of sense for investors looking to enhance their returns while lowering risk. At the same time tightening liquidity conditions and hardening interest rates are driving emerging market corporate houses and banks to raise funds overseas resulting in win - win situation for both. Emerging market borrowers generally chose between equity-linked convertible loans, external commercial borrowings and the bonds to raise funds overseas. Of the three, one of the markets gaining momentum is the G3 Bond market. The G3 bonds, denominated in the U.S. dollar, euroOpen Forum Bakrie Sumatera plans to raise $200 million to refinance debt. Indonesia state-owned utility PT Perusahaan Listrik Negara has a funding requirement of around IDR20 trillion ($2.2 billion) and–in a break with the past–plans to raise those funds offshore through a sale of bonds denominated in the Indonesian rupiah, a first for the international bond market.Curious Case of IndiaIndian companies have been making large acquisitions and investments in overseas operations across sectors, and since the interest on dollar loans is lower than rupee loans, many prefer to raise funds overseas. Companies still explore all the options, but many have been scathed by the convertible bond experience since 2006-07 leading to growing interest in G3 Bond market.Talking of G3 Bond market in India, you will be surprised to know that it was almost non-existent till 2009 and is expected to be over $10 billion in calendar year 2011. Indian banks and corporate leaders like Reliance Industries and Aditya Birla Groups have set benchmarks for investors and issuers from India alike. The most hailed candidates for G3 bonds are companies with a credit rating higher or equal to the sovereign rating, public sector units and banks. For banks, the time to market can be as short as a week, because the rating and disclosures are always in place as a result of regulations, but for companies, the process requires longer gestation and more analysis because the cost of getting the ratings, doing the ground work and road shows is substantial. Open ForumThe G3 bonds market brings to fore a whole new set of investors. Low US dollar interest rates and faith in the India growth story is bringing even risk-averse investors into the G3 bond market for Indian issuers. The last quarter of 2010 was a little slow, but the demand has once again picked up since mid-January. In January, Rural Electrification Corporation (REC) raised $500 million at a fixed interest rate of 4.25% by issuing overseas bonds. Bank of India (BoI) on February 9 priced a total of $750 million in the G3 bond market, representing the first US dollar bond issuance from an Indian bank in 2011.Indian Overseas Bank has announced intent to issue similar bonds this year. Canara Bank is holding a series of meetings with investors in preparation for a potential international dollar bond sale, joining other Indian issuers. Investors are expecting other banks to raise funds overseas, including Axis Bank Ltd., IDBI Bank Ltd., and Syndicate Bank Ltd. For smaller Indian banks, the market may prove especially challenging during the rush. Indian banks have tended to tap the same part of the yield curve--around five years--pushing up the costs of five-year debt. Further, as per market experts, pricing of these bonds was somewhat higher than other instruments and cost differential is expected to decline further in 2011. Thus, with liquidity being the key attraction for buyers in the bond market together with the combination of the search for yield and the search for emerging-market exposure, 2011 appears all set to witness boom in G-3 bond market. Russia may tweak Arctic park border for oil firms: WWFIn January 2011, BP -- seeking to recover from the impact of the 2010 Gulf of Mexico oil spill -- and Russia's state-run major Rosneft said they would drill for oil in three huge offshore blocks in the Arctic Kara Sea. Two of these blocks, according to a World Wildlife Fund (WWF) map, encroach on waters that are part of a protected national park and are home to polar bears and whales.The government ministry argues that the border has yet to be demarcated, while the environmental group said it was fixed when the park was created in 2010.Russian Railways will sell sterling debt to upgrade networkRussian Railways plans to raise at least £1bn with a sterling bond issue as Russia's state-owned rail operator looks to raise money to finance the upgrade of its network ahead of the World Cup in 2018. Russian Railways sold its first dollar-denominated bond last year, raising $1.5bn (£924m), as well as borrowing a further Rb30bn in the domestic rouble bond market. Sterling-denominated bond issues by emerging market companies still remain relatively rare compared with dollar and euro bonds. Less than £10bn of debt has been issue in sterling in the past decade by emerging market companies, compared with nearly£200bn in euro-denominated bonds and more than £700bn in dollar bonds.Petrobras may delay Japan refinery investmentBrazilian state-controlled oil major Petrobras may delay investment plans to upgrade its Nansei Sekiyu refinery in Japan due to uncertainty over rising oil prices, a company official said on 24th February 2011.The company was expected to make a decision by the end of last year as to whether to revive a plan to upgrade the refinery in Japan to step up product exports to China.South Africa: Grindrod suffers 12% profit dropAfrica's biggest shipping company Grindrod posted a 12% fall in full-year profit on 24th February 2011, as the stronger rand ate into its overseas earnings while increased competition depressed freight rates.Grindrod, which is diversifying away from shipping to freight and logistics, has suffered in recent years as the global economic downturn eroded appetite for raw materials and put pressure on freight rates.South Africa: Gordhan's job push welcomedMost aspects of Finance Minister Pravin Gordhan's 2011/12 budget, tabled in the National Assembly on 23rd February, were broadly welcomed by political parties. For the poor, the budget expanded spending on housing,rural development, better community services and social assistance grants. For workers, it emphasized job creation and spending on the quot;
social wagequot;
, including access to health services, education, social security, transport and municipal infrastructure. For the business sector, it expanded investment in modernizing infrastructure and transport logistics, accelerating further education and skills development, and supporting research, technology and industrial investment.BoT closely monitoring rising inflationThe Bank of Thailand (BoT) is closely monitoring the accelerating rise in the country’s inflation rate as the trend has continued for a few months.Ms Atchana indicated that a more worrying factor lay in the fact that the accelerated inflation rate could have been caused by people’s expectation of higher inflation. The deputy governor however viewed that the inflation pressure was coming from all directions including the recovering global economy, global crude oil price, agricultural crop prices, increasing minimum wages, rising salary of government officials and high liquidity in the monetary system.Emerging Markets Growth in world trade of metallurgical coal, particularly in the Asia-Pacific region, is forecast to increase in 2011, with higher exports from Australia and Canada. World trade is forecast to increase by 8 percent to 260 million metric tons in 2011. However, despite increase in supply, demand pressures would exert pressure on coal prices.Import demand growth will mainly come from developing Asian economies, particularly China and India. China's imports in 2011 are forecast to increase by a 19 percent to 44 million metric tons whereas India’s imports of metallurgical coal are forecast to increase by 15 percent to 30 million metric tons in 2011. Underpinning these increases is forecast growth in India's steel production and limited domestic metallurgical coal supply. Elsewhere, imports of metallurgical coal by OECD economies have grown as a whole; imports by the Republic of Korea, Japan and the European Union are forecast to increase by a further 14 percent, 10 percent and 4 percent, respectively.With India in perspective, local coal production in 2011 is expected at 554 million tonne while demand is likely to be 696 million tonnes, leaving a gap of 142 million tonnes. The consumption of coal is projected to rise by nearly 40 percent over the next five years and almost to double by 2020. Coal consumption is expected to increase to 315 MT over the forecast period. In India, slightly less than 60% of the projected growth in coal consumption is attributed to the increased demand of coal in the electricity sector while the industrial sector accounts for most of the remaining increase. The use of coal for electricity generation in India is expected to increase by 2.2% per annum during 2002–25, thus requiring an additional 59 000 MW of coal-fired capacity.With China taking up nearly half of global coal demand and India’s cravings rising too, the spot prices in Asia had recently hit $225 a metric ton. That’s much higher than the $85 paid for annual contracts just two years ago. Chinese coal demand has pushed prices to a two-year high of $115 a metric ton. That marks a 65% rise from early 2009 lows. In the first half of 2011, hard coking coal prices are forecast to average around $200/mt, representing a six percent increase on the 2010 average of $191/mt. WorldIndia(Thousand short tons)2005200920052009Production65532127679787473266611444Consumption64963347577379504908685648Black Gold - Outlook on COALOutlook Call Rates as on 25h February 2011 5.60%-6.80%CommoditiesAluminum (1 kgs) 112.95Copper (1 Kg) 426.05Zinc (1 kg)111.15Steel (L) (1000kg)29400.00As on 25th February 2011ForexForward Rates against INR as on February 25, 2011Spot Rate1 mth3 mth6 mthUS45.4545.7546.2346.93Euro62.6963.0863.6964.53Sterling73.0573.5174.2375.23Yen55.5455.8156.4357.34Swiss Franc48.9449.2849.8350.61Source: Hindu BusinessLineLibor Rates as on February 25, 2011Libor %1 mth3 mth6 mth12 mthUS0.260.310.460.79Euro0.821.041.321.69Sterling0.610.801.111.57Yen0.130.190.340.56Swiss Franc0.130.170.240.52Forward Cover % as on February 25, 20111 mth3 mth6 mthUS 8.84%7.23%6.74%Euro8.35%6.73%6.08%Sterling8.50%6.83%6.19%Yen9.00%7.54%7.10%Swiss Franc9.20%7.63%7.05%Source: Hindu BusinessLine ,[object Object]

(1)Franklin Resources Inc (owner of Franklin Templeton)(2) Infosys (3)Spectramind (4)Eurex (5)Real Madrid (6)Macquarie Bank (7)Betapharm of Germany (8) Takafumi Horie (9) Rabobank of Netherlands (10) J P Morgan.Answer of Quiz: 11

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