After US/UK, India facing its own subprime crisis?

rishab dhar · 5/19/11

Shocking results at India's largest bank (SBI)

http://online.wsj.com/article/SB10001424052748703509104576328590731459296.html

Real estate stocks (almost all) touching 52 week lows.

DLF (India's largest Real estate developer)
http://finance.yahoo.com/echarts?s=DLF.NS+Interactive#symbol=DLF.NS;range=1y

Unitech (Second Largest)
http://finance.yahoo.com/echarts?s=...=on;ohlcvalues=1;logscale=on;source=undefined

Big manufacturing companies, more specifically construction companies, facing massive slowdown, with stocks plummeting in many cases to new 52 week lows.

Largest Power Generation Company (NTPC)
http://finance.yahoo.com/echarts?s=NTPC.NS+Interactive#symbol=NTPC.NS;range=1y

Major Infra company (Reliance Infra)
http://finance.yahoo.com/echarts?s=...=on;ohlcvalues=1;logscale=on;source=undefined

People with no income record being given loans at 50% of their stated incomes.

Prices in Mumbai higher than in New York! ( rates/sq m approaching 10k euros or around $14k)
Similarly, in Delhi prices, in core areas, around $10k/sq meter.

Price to GDP per capita ratio at a staggering 1010- It will take an average person with an average current wage some 1010 years to buy a house in India. Even a GDP growth of 10% or income growth of 10% can't compensate for that.

http://www.globalpropertyguide.com/Asia/India/Country-Statistics

Are we going to see the end of the so called EM (BRICs) boom?

rishab dhar · 5/19/11

Here is the statistical data for generating a bond yield curve for India.

http://in.reuters.com/article/2011/05/19/markets-india-gilts-table-idINL4E7GJ16920110519

The yield curve as we see it is flattening dramatically in India, with RBI expected to raise rates by a further 75 bps this year, possibly resulting in an inverted yield curve.

hariadya · 5/19/11

rishab dhar said:
Here is the statistical data for generating a bond yield curve for India.

with RBI expected to raise rates by a further 75 bps this year, possibly resulting in an inverted yield curve.

woah 75 bps!
Also recently the petrol prices were increased by INR 5. I don't get it, 2 weeks back they increase the repo rates to dip the inflation and now they increase the petrol prices? I cook and I bought 100 grams of cumin seeds for $1!!! money is seriously losing its value.....

Tsotne · 5/19/11

rishab dhar said:
The yield curve as we see it is flattening dramatically in India, with RBI expected to raise rates by a further 75 bps this year, possibly resulting in an inverted yield curve.

This is to be expected. No surprise here. Prices of bonds at various maturities are becoming close to each other. The thing is that while there is a high volatility in interest rates the long term horizon for debt investment becomes approximately as attractive as the short term investment. This is an easy case for portfolio managers calculating the duration of the debt portfolio consisting of various debt securities as they can simply approximate the overall duration with the weighted sum of individual durations of the securities within the portfolio - since the yield curve is approximately horizontal which is not the case of course in normal situation.

darth · 5/19/11

hariadya said:
woah 75 bps!
Also recently the petrol prices were increased by INR 5. I don't get it, 2 weeks back they increase the repo rates to dip the inflation and now they increase the petrol prices? I cook and I bought 100 grams of cumin seeds for $1!!! money is seriously losing its value.....

u smell expensive - what perfume are you wearing? petrol !!

hariadya · 5/19/11

darth said:
u smell expensive - what perfume are you wearing? petrol !!

Its pretty obvious that rise in fuel prices will increase the living expenses thus affecting the inflation.

From my experience and also an excerpt from FT
"F+F (food and fuel), which are acting like BFFs, are rapidly rising in expense and as these commodities are so fundamental to day-to-day survival many of the worlds major economies are experiencing uncomfortably higher inflation as a result."

and even perfume has alcohol in it (fuel again) ....

rishab dhar · 5/19/11

The most worrying point is that banks are beginning to crumble; do remember that SBI was the first Indian bank to introduce those teaser interest rates-below prime (somewhat similar to ARMs), and the other banks followed suit after 6-12 months; if other banks follow suit, I guess India is a big big trouble.

Imagine - People losing confidence in a nationalized bank SBI) -almost unthinkable. It could lead to bank runs or worse something similar to Ireland, where government decided to bail out banks and saw its bonds crash overnight.

rishab dhar · 5/19/11

@ Tsotne

Well the fund managers, including FIIs, who are single biggest source of funds in Indian equities, will realize that government bonds, including short term paper - 3 Month and 6 month, are yielding 8%+ per annum, and will withdraw all/most of the money from equities and invest into bonds, thereby exacerbating the current fall in Indian equity markets.

hariadya · 5/19/11

rishab dhar said:
@ Tsotne

Well the fund managers, including FIIs, who are single biggest source of funds in Indian equities, will realize that government bonds, including short term paper - 3 Month and 6 month, are yielding 8%+ per annum, and will withdraw all/most of the money from equities and invest into bonds, thereby exacerbating the current fall in Indian equity markets.

The FII flow has cut back, obviously it would, increase in repo means there will be less money in the market. If there is less money in the market then there will be less FII investment..

http://www.indiainfoline.com/MarketStatistics/FII-Activity

Tsotne · 5/19/11

rishab dhar said:
3 Month and 6 month, are yielding 8%+ per annum

That's what I said above:

...long term horizon for debt investment becomes approximately as attractive as the short term investment.

As for the impact on equity market, I should disagree your reasoning. If the interest rate volatility increases, it'll become more safe to invest in equities rather than relying on erratic swings between high and low earnings associated with bonds, so investors will not escape putting their money into equity. You are on the side of an idea that, loans are worth 50% and more, so investing in debt market will pull out of equity funds and the stock market keeps crashing, but we should also take into account the volatility of the interest rates and the expectation how long it's gonna remain on that level. If the uncertainty of the overall market condition forces the interest rates to fluctuate then my above reasoning is rational since investors are feeling safer while avoiding fluctuating securities in uncertain conditions. So equity market is not in harm just because of high interest rates.

rishab dhar · 5/19/11

@hariadya

Great data. It was but natural that FIIs will put money into debt, and not into equity.

I think that with rising interest rates the situation will be even more precarious. With RBI raising repo rates to 8%, we can easily expect borrowing rates @ 11-12% or higher. Now, as we know it, majority of mortgages, including real estate ones, in India are Floating rate based, unlike Germany. This rise in interest rates could further worsen the situation by increasing default rates on all kinds of mortgages, thereby pricking India's sub prime real estate bubble, started by SBI, sometime in 2012.

rishab dhar · 5/19/11

@Tsotne

I can assure you that equities are way way way more volatile in India than debt. Rising or falling 2-3% in a day, even now, is not a big deal in India. Such a move would easily cause panic in US- 3% move is 350-400 points move on the dow.

Further, did I mention that most stocks in India,unlike in US, don't pay dividends, so you are basically living on capital gains.

Did I also mention that fees associated with buying and selling of ETFs are very high. Further, liquidity in equities in Indian equity markets are nowhere close to that in US.

Stocks,even blue chips, can crash 30-40% in a matter of days without you even noticing. Just look at the above charts that I submitted.

You cannot treat Indian debt markets like most of other European markets, especially the so called PIIGS for the following reasons:

1) Like Japan, the biggest Investors in Indian debt markets are Indians, indirectly through banks, who are forced to put around 24% of their funds in the bonds, and Insurance companies such as LIC.
2) Indians are young, so we can expect government spending to be funded quite easily.
3) Public debt to GDP ratio is just 60%.

But Indian equity markets are not the same, they are driven primarily by FIIs.

Tsotne · 5/19/11

rishab dhar said:
@Tsotne

I can assure you that equities are way way way more volatile in India than debt. Rising or falling 2-3% in a day, even now, is not a big deal in India. Such a move would easily cause panic in US- 3% move is 350-400 points move on the dow.

Are you sure your very first post above is not suggesting that debt market will fluctuate more than equity (2-3% a day)? Or the debt will remain at the same level as it is now for long? What if tomorrow the market realizes that interest rates are overvalued and cut the rates by 10-20%... The economic situation suggests interest rates to be more volatile than the equity markets. And fluctuation in rates always works in favor of equity.

rishab dhar · 5/19/11

You are on the side of an idea that, loans are worth 50% and more, so investing in debt market will pull out of equity funds and the stock market keeps crashing

I'm sorry, but I could get what you said here.

rishab dhar · 5/19/11

Falling rates benefits debt holders, if I am right, as it causes bond prices to rise higher. In addition, you also get the interest rate on the principal.

Conversely, rising rates causes erosion of wealth of the debt holder, if the fall in bond price is greater than the interest earned.

rishab dhar · 5/19/11

I saw that rates in US treasuries were extremely volatile in late 2008, with 3 month yield going into negative on the day TARP passage failed, but instead, equities literally collapsed. Why?

Tsotne · 5/19/11

rishab dhar said:
I'm sorry, but I could get what you said here.

You are on the side of an idea that, loans are worth 50% and more, so investing in debt market will pull out of equity funds and the stock market keeps crashing

=

You suggest that since loans are expensive, like 50%, investing in debt securities is profitable for investors. That causes large pool of investment funds in equity to be withdrawn in order to be moved into debt. I think this was your opinion (if I don't miss anything here). Correct?

rishab dhar said:
Falling rates benefits debt holders, if I am right, as it causes bond prices to rise higher. In addition, you also get the interest rate on the principal.

Falling rates causes the value of bond to increase, but the volatility of the interest rates makes it uncertain whether it moves in favor of investor or against him.

Tsotne · 5/19/11

rishab dhar said:
I saw that rates in US treasuries were extremely volatile in late 2008, with 3 month yield going into negative on the day TARP passage failed, but instead, equities literally collapsed. Why?

Don't you see any other variables causing debt and equity to change? They are not only interdependent securities. In 2008, equity market itself was in harm. Do not consider equity as an only alternative source for debt and vise versa. The rates on US Treasury securities were volatile doesn't at all suggest that its alternative investment source were not volatile. So how could one move his funds to equity when equity market itself was fluctuating along with real estate and commodities.

rishab dhar · 5/19/11

Falling rates causes the value of bond to increase, but the volatility of the interest rates makes it uncertain whether it moves in favor of investor or against him.

I mentioned the reasons for much lower volatility in our debt market in post #12.

The number of short term investors are very limited in Indian debt markets. As it is, most of the investors are either forced to invest,that is, they don't have a choice but to invest, or long term pension funds. Individuals cannot trade Indian debt, at-least not directly, and FIIs are much smaller proportion of our debt markets, more like 5%, but FII's contribute about 50-60% to the liquidity of our equity markets.

Further, to indeed deter those FIIs from investing into debt markets, the following things must be true.

1) The degree is volatility is at-least greater than the interest earned, which in this case would be 2% for 3 months or 4% for 6 months.

2) The equity markets being less volatile than debt markets. Now as we DO NOT have well developed ETF markets like US, the most direct route is through direct investing into stocks, but as the charts above show that individual stocks can cause you to loose,even in a good market, close to 90% of your capital, which is almost unforeseeable in debt markets, unless there is an absolute default by the government.

You suggest that since loans are expensive, like 50%, investing in debt securities is profitable for investors. That causes large pool of investment funds in equity to be withdrawn in order to be moved into debt. I think this was your opinion (if I don't miss anything here). Correct?

I meant more like deploying excess cash rather than taking out loans to invest. I just see this - government debt is yielding 8.2% on the year, but equity yields nothing (no dividends in most stocks, and even if it is, it is usually less than 1%) and is more risky (I can loose 90% even on a large cap stock in a year (see Reliance comm or DLF or Unitech). Just see Oct 2008, for precedence. Government debt in India was way way more stable than equities (the entire Index collapsed 60% in a month).

Now risk analysis would say "Given past precedence and that Government of India is almost certain to not default, I would invest in debt, because equities are way more risky"

rishab dhar · 5/19/11

Don't you see any other variables causing debt and equity to change? They are not only interdependent securities. In 2008, equity market itself was in harm. Do not consider equity as an only alternative source for debt and vise versa. The rates on US Treasury securities were volatile doesn't at all suggest that its alternative investment source were not volatile. So how could one move his funds to equity when equity market itself was fluctuating along with real estate and commodities.

The volatility in other asset-equity was much less, until yields collapsed on bonds (3 and 6 month). The real collapse in equity and volatility only started in October.

This was in response to

And fluctuation in rates always works in favor of equity.

I meant to say the same thing that you mentioned in first quoted text. Individual stocks are way way more volatile in uncertain time such as those in 2008.

Do not even compare the US stock markets to Indian stock markets. In the past 3-4 years, atleast 4-5 times Indian stock market trading was halted a result of sudden crash, with 3 of those occurring in 2008 and one in 2009. It means that you wouldn't even get a chance to sell your asset, let alone comparing volatility to debt.

Don't think about commodity investing in India, I have seen several times that trading on these commodities was BANNED by the government to control speculation.

You see, in uncertain times, you want the most liquid asset, and that asset in India is government debt.