Analysis - Mumbai attacks rattle already shaky investors

By Rina Chandran and Tony Munroe

MUMBAI/HONG KONG (Reuters) - The attacks that left dozens dead in India's financial capital have dealt a fresh blow to the country as an investment destination, but India's size and growth will retain their allure over the long term.

India's shine had already been dulled as foreign portfolio investors fled from risk around the globe, helping send the country's once-soaring stock market down 55 percent this year. Tight liquidity, a battered currency and a slowing in its once-scorching economic growth add to the gloom.

The attacks on two luxury hotels and other targets were a reminder that risk in India extends beyond the red tape and crumbling infrastructure that investors accepted as a cost of doing business in the world's second-most-populous country.

"In the near term this highlights the risk of investing in markets which have instability of some form or the other," said Ashish Goyal, Chief Investment Officer at Prudential Asset Management in Singapore.

India, like other emerging and developed markets, has endured militant attacks before and managed to bounce back. Goyal said the long-term picture for India changes only if the latest attack hurts business, slows the economy and scares off foreign firms.

"It could raise the cost of security, it could raise the effectual cost of doing business, and at the margin that's not positive, but doesn't fundamentally alter the investment view or the perceived risk of investing in India," he said.

The timing of the attacks, which comes as the central bank struggles to defend a weakening rupee and stabilise credit markets, may hurt more than previous attacks, wrote Nikhilesh Bhattacharyya, an associate economist at Moody's Economy.com.

"This means that capital outflows will have a greater impact than they did in the past, though history suggests that any reaction to attacks in Mumbai will only be temporary," he said.

India's central bank expects the economy to expand by 7.5-8 percent in the 2008/09 fiscal year, but many private economists and some government officials see growth closer to 7 percent.

"We don't think there is any immediate impact on the Indian economy, although longer term, it will get that much harder to attract and retain foreign capital, at the margin," said Daniel Chui, Head of Investor Communications at JF Asset Management.

"Sentiment in India, particularly Mumbai, will be dented even more," he said from Hong Kong.

BRAVE FACE

Indian Trade Minister Kamal Nath on Thursday said he was confident the deadly attacks would not slow investment.

"This does not have an economic component," he told Reuters.

His confidence was echoed by Jan Masiel, a member of the European Parliament, who is visiting Mumbai with a trade delegation of eight.

"I don't think this affects India's image as a good place to do business in ... neither do we consider India to be an insecure or unsafe country to be in," said the Polish national, who was waiting to go back into the Taj Mahal Hotel, at the centre of the hostage drama and where many died.

Some investors said that after the initial shock of the attacks wears off, attention will return to the fundamentals.

"India's fiscal position is not in particularly good shape, so this is my focus instead of the political," said Clement Ho, chief investment officer with Hang Seng Investment Management in Hong Kong, which invests a small portion of its $10 billion portfolio in India.

Markus Rosgen, head of Asia Pacific equity research at Citigroup, said that the political unrest in Thailand is proportionately more damaging to that country's markets. In the MSCI Asia index that excludes Japan and Australia, Thailand has a weighting of 2.2 percent, compared with 10.2 percent for India.

"As a global investor, as an Asia investor, I can ignore Thailand now. It's become very small in terms of market cap, relative to my index. But I can't do the same for India."

(Additional reporting by Narayanan Somasundaram in Mumbai and Jeffrey Hodgson in Hong Kong)

source:© Thomson Reuters 2008 All rights reserved

Is Indian industry slipping into recession?

By D.H.Pai Panandiker, President RPG Foundation

There are certainly apprehensions. The Advisory Council to Prime Minister had warned earlier that industrial recession is likely and recent signals only support that view.

Not that recession is inevitable. If right measures are taken at the right time industry should be able to bounce back.

Industrial production in September was up 4.9 per cent. That certainly is improvement over the 1.4 per cent growth in August.

What is of concern is that 9 out of 17 industrial groups had negative growth. They constitute a third of the industrial sector.

Whether the improvement in September will continue in future months is doubtful because there are other signals that are blinking red.

Look at exports. They were down 15 per cent in October after a mere 10 per cent increase in September. Many export industries like textiles, leather products, gems and jewellery have been hard hit and forced to retrench workers.

Exports take up about 12 per cent of the industrial production. As such a drop of 15 per cent in exports equals to a drop of 1.8 per cent in industrial growth.

Look at tax collections. Excise duty is the most relevant and collections from that declined 8.7 per cent in October after 3.8 per cent decline in September.

Excise collections have not always been commensurate with the growth of industrial production. Nevertheless, the fall in collections is ominous.

Look at corporate balance sheets. Forty one per cent of the companies announcing their July-Sept results registered a fall in profits mainly because of the 40 per cent increase in interest payments, apart from almost a rise in the cost of raw materials.

Naturally, the advance corporate tax collections shrank; so also retained earnings which fund new investment.

Why has industry been exposed to such cold winds?

There are three main reasons.

First, inflation diverted a larger part of the consumer expenditure to food articles. That reduced demand for industrial goods.

Second, the increase in interest rate sharply raised the EMI in respect of house loans and consumer credit. Construction activity nearly stopped; production of cars dipped 6.6 per cent and of commercial vehicles 35.9 per cent in October.

Third, exports shrank but may revive a little if the rupee remains depreciated.

Currently, growth in both investment and consumption is depressed and hits precisely the industrial sector.

If no decisive action is taken soon, industry is quite likely to slip into recession. What is required is a resurgence of demand.

Pump priming is one way out.

But that may not work because investment by Government takes time. The decision making process is slow and implementation of decisions even slower.

A better option is for the Government to cut excise duties and for the Reserve Bank of India (RBI) to reduce CRR and repo rate. These measures will instantly increase demand and help industry to bounce back without any loss of employment.

(You can e-mail Dinker H. Pai Panandiker at: dpanandiker@hotmail.com. The views and opinions expressed are the writer’s own and not those of Reuters. The article above is not intended to be a financial advisory. Readers must seek specific advice from experts before making investment decisions.)

Brazil mulls its own bailout as it heads to G20

Brazil, home to Latin America's largest economy, may be the next country to announce an economic stimulus plan, a move that could inject a measure of stability into its equity and currency markets, analysts said.

Alfredo Coutino, Latin American economist at Moody's Economy.com, said he expects "an aggressive" fiscal stimulus for next year that could include tax deductions, subsidies, and more spending on social programs," in addition to already announced liquidity-boosting measures.

Latin American neighbors Chile and Mexico have already announced more than $6 billion in extra spending designed to shore up their economies. Fellow emerging-markets powerhouse China is pumping $586 billion into its economy.

A comprehensive stimulus package is "the missing piece" from Brazil, Coutino said.

An announcement could come as soon as the completion of this weekend's emergency meeting of the Group of 20 in Washington, D.C.

Brazil's Central Bank President Henrique Meirelles told Bloomberg earlier this week that the country will consider a stimulus package after first evaluating the impact of its previous efforts to loosen its credit markets.

Brazilian finance minister Guido Mantega has supported a package that spreads funds on infrastructure and social programs, as well as doles out tax breaks, Coutino said.

A message to the markets

Like China's, a Brazilian stimulus plan could include outlays on some previously announced or modified projects.

The market is a market of perception and sometimes it takes proper packaging to have something interpreted the right way," he said.

Brazil landed this year's chairmanship of the G20, a rotating position, just as the global securities markets buckled under an international credit crisis and the world economy headed into what threatens to be a prolonged recession.

Brazil's benchmark equity index, the Bovespa, has lost roughly 44% since the beginning of the year, largely because of the index's heavy weighting from commodity-related stocks, such as oil giant Petroleo Brasiliero

Risk appetite for emerging market assets has waned in part due to the swift drop in commodity prices, which had supported fast growth in resource-rich countries like Brazil. Prices of metals and energy have tumbled since the summer as expectations of a global recession mounted, and the U.S. dollar gained against its rivals.

When the credit market crisis began to accelerate, Brazilian President Luiz Inacio Lula da Silva frequently voiced confidence that its economy would be shielded from the credit-market crisis that kicked off in the U.S. and Europe, noting that Brazil had foreign reserves of more than $200 billion.

But stresses began to show up in Brazil's financial system in the past few months, and the central bank and the finance ministry issued a number of measures to stave off the effects of the credit crisis.

The government spent $23 billion to defend the slide of its currency, the real, against the U.S. last month. It pulled back capital requirements on banks have been pulled back, scrapped a tax on foreign investments, and granted government-run banks authorization to purchase stakes in other financial institutions. Brazil also gave the auto industry a credit extension of 4 billion reals after automobile sales fell in October, the first decline in two years.

Cooling GDP, halted projects

Despite these efforts, concerns are growing about the impact the credit crunch is having on Lula's Growth Acceleration Plan. He launched the five-year, $250 billion program last year to improve the country's infrastructure and keep gross domestic product growth at about 5% a year.

Brazil recently reduced its 2009 gross domestic output forecast for growth of 3.7% to 3.8%, from its previous estimate of about 4.5%.

Plus, investors have been unsettled by some recent events, including the cancellation of nearly $2 billion port project in Sao Paulo by LLX Logistica, a firm privately run by Brazilian billionaire Eike Batista, and the delay of an auction by the government for the construction of a high-tension power line from the Amazon basin to Sao Paulo.

"The news flow has been negative in terms of Brazil's ability to fund some of the plans, and that perception needs to be reversed," Riedel said.

Analysts say a fiscal stimulus won't do much good without help from the central bank, however.

It recently left its key interest rate on hold at 13.75%.

"If they do not relax monetary conditions in the coming months, the effectiveness of any stimulus will be reduced," Coutino of Moody's Economy.com said.

Another shoe to drop

Bad credit-card debt could be next shot to economy, researcher says

CHICAGO (MarketWatch) -- Credit-card debt is on the brink of imploding and will be the next storm to hit the fragile finance industry, an investment research firm predicted this week.

According to Innovest StrategicValue Advisors, banks will charge off $18.6 billion in delinquent credit-card accounts in the first quarter of 2009 and $96 billion in all of 2009, more than double the research firm's forecast for all of this year.

nnovest projects that amount would be high enough to damage some of the biggest card issuers.

Credit-card charge-offs are "defying gravity" when compared with the problems in the mortgage market, according to Gregory Larkin, senior banking analyst for Innovest. But that will change as they catch up with mortgage charge-offs, which have spiked eightfold since the third quarter of 2007.

"If history is any indicator, there should be an equivalent surge of credit-card charge-offs very soon," he said, though he concedes that an eightfold increase would be very aggressive.

Comparatively, charge-offs reached $4.2 billion in the first quarter of this year and $3.2 billion in the same period a year before, according to the Federal Reserve, which only reports non-securitized debt. Innovest's projections include all credit-card debt, which the firm believes is double what the Federal Reserve reports. For all of 2007, charge-offs tallied $26.6 billion, according to Innovest's calculations, and the firm estimates they will reach $41.5 billion at the end of this year.

The jump in credit-card charge-offs is linked in part to the credit crisis now in play. As banks have tightened lending standards, they have mostly done away with the once-popular roll-over options -- usually at 0% introductory rates -- that allowed borrowers with delinquent accounts to get new cards elsewhere. Larkin believes all that bad credit is going to surface quickly and could have a similar impact as the mortgage crisis has had on banking.

A matter of scale

But credit-industry analysts shake those prognostications off, noting that the number of dollars involved in credit cards loans versus mortgages is substantially lower.

"Defaults on $2,000 or $5,000 in credit-card debt are entirely different than someone defaulting on a $500,000 mortgage," said Greg McBride, senior financial analyst for Bankrate.com.

"I'm skeptical that the magnitude of credit quality is going to be as severe as some say," he added.

The average credit-card debt is $2,200, according to the Federal Reserve. On a revolving basis, there was roughly $970 billion owed on credit cards at the end of July. However, because many people use credit cards for the rewards programs and pay off their debt each month, it's unclear how much of that total is actually outstanding.

What's more, as delinquencies rise -- and they will because of the weakness of the economy -- credit-card issuers will take steps to stem the tide. That will include cutting credit off from problem borrowers and tightening restrictions on new cards.

"Banks already are starting to minimize their risk and drop their credit limits that they extend to people and especially those at a higher risk," said Bill Hardekopf, a partner at LowCards.com. Read more.

American Express, for example, upped its loan-loss reserves to $2.6 billion in the second quarter compared with $1.4 billion in the year-ago period.

In the second quarter, Capital One's provisions for loan losses nearly doubled to $1.1 billion compared with $535 million in the second quarter last year.

"There's no doubt there's going to be pain in the credit-card markets," said Justin McHenry, research director with IndexCreditCards.com. "But I don't see anything to the magnitude of what we've seen in the mortgage market.

"This is a different financial animal in terms of how much is being loaned out," he added. "And credit-card companies can take that credit and cut it in half. That's a tool that they have."

Larkin admits that Innovest's projections run against the financial tide: "I think they're wrong," he said.

Companies could take a hit

Laura Nishikawa, Innovest's consumer finance analyst, said the credit-card crisis will hit earnings, in particular at companies that glean high percentages of net revenue from their U.S. credit-card revenues.

"Companies that have pursued aggressive portfolio growth and higher yields at the cost of prudent risk management will struggle to manage rising loan losses, which will definitely cut into earnings or even worse," she said.

Nishikawa is also worried about companies that target lower-income consumers and use delinquencies and late payments as a means of making money.

"Delinquent borrowers become cash-flow generators," she said. "At the extreme end, the goal becomes, 'How do we get borrowers into delinquent status as soon as possible, in order to maximize returns?'"

J.P. Morgan and Amex are what Nishikawa considers best of class, while Capital One has an unsustainable business model that's based on penalty pricing -- high fees for missed payments, shooting interest rates for surpassing limits -- and that she thinks has a high exposure to subprime credit-card holders and low payment rates.

"When the economy turns bad, this strategy clearly cannot be sustained," she said.

"While a hit to topple credit cards may not topple the bank completely, it will cut into core earnings," she added.

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