I Will Remain Invested in Indian Stocks

The media today (i.e., 28th September 2010) has reported that the foreign fund inflows into Indian equities have increased 49 percent this year. This is making Indian equities to reach the skies. This liquidity driven momentum, as against fundamental factors which are not necessarily very positive, makes one a bit worried at this point of time.

The BSE Sensex has become the most expensive in Asia and also amongst the BRIC markets. BSE Sensex Price to Earnings multiples are nearly 20, while Hang Seng is trading at 14 and Shanghai at 18 times. Brazil markets are trading at 15 times their earnings and Russian RTS $ index is trading at 9 times the earnings. In comparison, Dow is trading at 14 times, S&P 500 at 15 times and FTSE at 16 times. The rise in BSE Index since the beginning of this year is nearly 15%, as against 2% of Hang-Seng, (-) and 20% of Shanghai.  During the same period, Dow went up by 4% and FTSE by 3%.

Overseas funds bought a net 1340 crore rupees of Indian equities on September 24, taking total investments in the Indian stocks this year to 82,160 crore rupees, as per SEBI. This is almost equivalent to the record inflows of 83,420 crore rupees in 2009.

There are many worrying signs. One report in Wall Street Journal states that Indian banking sector has entered a high risk phase by lending to realty companies. The Common Wealth Games fiasco has exposed the country’s soft underbelly  i.e., the acute infrastructure problems that lead to huge amounts of losses in productivity (estimated at 2% of GDP). The current account deficits are at the highest in the last 50 years. On the other hand, we are seeing good growth in Indian GDP. We have also seen reports that some of India’s leading FMCG companies are investing over 1800 core rupees in the coming months to expand capacity. IT Companies are looking to do good business in the coming months. Auto sales are booming.

In conclusion, while one can reasonably say Indian equity market will continue to see growth over a longer term horizon, a correction in near term is likely. I will continue to remain invested but would put my money in SIPs on index funds.

Basel III – Some Details

The minimum capital requirements, as detailed in 12th September 2010 announcement are as under:

  • Increasing the minimum common equity requirement from 2% to 4.5% of Risk Weighted Assets (RWA). This will be phased in by 1st January 2015.
  • The Tier 1 Capital Requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4% to 6% over the same period.
  • In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7% of RWA.
  • The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during the periods of financial and economic stress.
  • A countercyclical buffer within a range of 0% – 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances.
  • The purpose of the countercyclical buffer is to achieve a broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth.
  • The Minimum Capital Adequacy Ratios are as under: Core Tier 1: 7% (including a 2.5% capital conservation buffer), Tier 1: 8.5% (including a 2.5% capital conservation buffer), Total: 10.5% (including a 2.5% capital conservation buffer) 

The standards could have broad implications for the amount and cost of credit available around the world, as banks adjust their balance sheets and business plans to comply. Banks will have two years to meet the basic requirements proposed by the committee, though some of its provisions will not be implemented for up to eight years.
The new rules, agreed to by major Global Regulators on Sunday, 12th September 2010, would make banks roughly double the amount of capital set aside as a buffer against possible losses, slash stockholder dividends and executive pay if that stockpile falls short, and limit lending during economic boom times. Combined, those measures are intended to shape the behavior of bank managers and investors in unexplored ways – trying, for example, to have them curb lending in good times in the hope that asset bubbles won’t give way to a costly bust.
The agreement settles one of the key outstanding issues in the world’s response to the recent crisis.
Some financial industry analysts and groups have argued that the stricter standards would slow lending and economic growth. In a statement released after the meeting, the committee acknowledged that the new requirements would force banks, particularly the world’s larger ones, to raise a “significant amount of additional capital.” But they said the increased stability of the entire system would be worth any short-term crimp in lending.
Jean-Claude Trichet, head of the European Central Bank and chairman of the committee of central bankers and regulators that approved the new standards, said the proposals “are a fundamental strengthening of global capital standards. . . . Their contribution to long-term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery.”
Major U.S. bank regulatory agencies, including the Federal Reserve, endorsed the changes in a press release Sunday afternoon.
U.S. Treasury Secretary Timothy F. Geithner said the Treasury welcomed the group’s work and would begin reviewing the details. Geithner has often endorsed higher capital standards as central to a stronger financial system.