affect of us & european downturn on indian stock market

Impact of happenings in US and Europe on Indian Stock

Market Presented ByPiyush ChawalaSukant PrustyAnurag NathSatish NaikManjushaaHemanth Kumar

Financial Crisis: Overview

Downturn in the world economy

Causes Housing Slump Subprime Mortgage

Crisis Financial Innovation

Impacts Bank Failures Home Foreclosures Federal Reserve Steps

in Changes in the Market

Events Bear Stearns Bailout Northern Rock/Bank of

England Countrywide

Solutions The Federal Reserve has

tried to take corrective measures

Regulation Problems with Regulation

Housing Slump

Housing Boom Housing prices were on the rise People bought and built more and more Thought it was a good investment Thought that home values would not decrease Took out second mortgages to use toward

consumer spending

Housing Bust Excess inventory Housing price correction Negative equity Foreclosures

Subprime Mortgage Crisis

Where did the subprime mortgage crisis start? Banks used to operate on a fractional reserve

system Today almost no reserve is required due to new

rules that the public doesn’t even know about Banks are able to issue more loans when they do

not have to keep a reserve on hand When they run out of qualified candidates, they

reduce the requirements, which leads to subprime mortgages

These loans slowly inflate the system, and create wealth that is not “real”

Subprime Mortgage Crisis

Mortgage originators sold the loans on the secondary market

No risk for the originators so little effort went into analyzing the borrower’s ability to repay

High risk and debt tolerance

Adjustable Rate Mortgages (ARMs) Rates are beginning to increase from

the low introductory rate

Financial Innovation

Financial innovation is the act of creating and then popularizing new financial instruments as well as new financial technologies, institutions ,and markets. Adjustable Rate Mortgages Investment Vehicles that went wrong

Mortgage Backed Securities (MBS)CDOs – Collateralized debt obligations

Not understood by investors

Financial Innovation

Financial innovations are optimal responses to various problems or opportunities

Many financial innovations that have been created in the recent past to respond to the financial boom were not fully understood

They were not adapted properly from the past, and when the financial sector crashed, these innovations responded negatively

2011 crisis Expense $3.8trillion income $2.3trillion

To meet deficit he borrows money in forms bonds instruments or even foreign government.

Total loans and interest adds up $14 trillion

Pays money of interest by loans. reduce spending or raise taxes

Call federal reserve ,create and deposit dollars.

2011 crisis Dollar value reduced inflation

Overseas manufacturing recession

Lead to stagflation

The day has come where the us can no longer buy pay bills.

European debt crisis

Introduction of Euro The European Union introduced the euro on January 1,

1999.

It benefited countries such as Portugal, Italy, Ireland,

Greece and Spain (together now known as the PIIGS)

Before introduction of Euro, they borrowed money at

interest rates much higher than the rates at which a

country like Germany borrowed.

When they started to use the euro they could borrow

money at interest rates close to that of Germany, which

was economically the best managed country in the EU

Cause for the crisis The rest of Europe, in effect, used Germany's

credit rating to indulge its material desires. They

borrowed as cheaply as Germans could to buy

stuff they couldn't afford

Inflation in the PIIGS countries was higher than

the rate of interest.

It means that, if the borrowing rate is 3 per cent

while inflation is 4 per cent you're effectively

borrowing for 1 per cent less than inflation.

Greece Debt Crisis European peripheral countries (PIIGS) racked up

enormous amount of debt in Euros.

The debt of Greece, currently amounts to around

160 per cent of it’s GDP. So, other than the

citizens, the governments also started to borrow.

A job which now pays 55,000 euros in Germany,

pays 70,000 euros in Greece, even with the fact

that Germany is a more productive nation.

It means more and more borrowing by the

government, when they already have so much

debt

Spain Debt Crisis Spain had the biggest housing bubble in the world.

To put things in perspective, Spain now has as

many unsold homes as the United States, even

though the US is six times bigger.

Most of these new homes were financed with

capital from abroad.

Spain's real estate debt comes to around 50 per

cent of its GDP. Every time there are default

threats, the European Central Bank (ECB), helps out

with a bailout.

Crisis Deepens.. Since the start of the financial crisis ECB has

bought, $80 billion of Greek , Irish ,Portuguese Govt

bonds and lent another $450 billion to various

European Govts and banks accepting virtually any

collateral, including Greek Govt bonds

Germany ECB rescue fund. In case of Greece, a

lot of German and French banks which have lent

money will be in trouble if Greece defaults

The German Govt gives money Rescue Irish

government Give money to Irish banks repay

their loans to the German banks

Crisis Deepens.. When a country prints currency in huge quantities,

the currency will not remain of any real value.

So the citizens money gold or will continue using

the euro.

People at the same time demanding their money

back. Will lead to a lot of banks collapsing.

Investors anticipating that their claims on the

Italian government would be redenominated into

lira would shift into claims on other euro-area

governments, leading to a bond market crisis

European elites’ Mistakes in managing the Greek debt problem

Admission of Greece to the euro in the 1st place.

ECB acceptance of Greek bonds as collateral

Despite high debt & deficits.

Investors charged near-zero spreads

Failure to send Greece to the IMF in early 2010.

Refusal to think about the likely

need for restructuring of the debt.

How an economy is effected by other economies

The crisis in the European and American economies (any economy) impacts other economies via three channels:

- Trade channel- Financial channel- Confidence channel

Trade channel When an economy falls into a recession, it

impacts the affected country’s trading partners too.

Falling household and business demand in the slump-hit economy hits the exports/imports of its trading partners.

The share of exports to EU (excluding UK) and imports from EU has fallen over the years.

In 1987-88, exports to EU constituted about 18.6% of total exports. This has declined to 17.5% by 2010-11.

Trade channel Trade channel can impact Indian external sector indirectly as

well. Most policymakers, economists and experts put forth the view

that India has been only marginally affected.

Two reasons were cited forth

First, India is a virtual non-entity in global trade as its share was less than 0.5%-0.7% of the total global trade volumes.

Second, share of developed economies in trade had declined. In 1987-88 developed economies contributed 59% of exports and in 2010-11 their share has declined to 34%.

Financial channel

The impact of turmoil in one economy’s financial markets is not merely transmitted to other markets, the quantum and direction of the movement is also more or less similar (decline in equity markets, rise in corporate bond spreads and depreciation in currency).

This is because cross border financial linkages have increased substantially over the years. Besides, the correlation between assets too has been rising across the world.

Financial channel

Apart from movement in financial markets, four kinds of financial flows could impact Indian financial markets:

1) Foreign Direct Investment: There are many American and European

companies which have investments in India. So, there has been a slowdown in FDI in India.

Already there has been a fall in FDI to 138462 crores in 2010-11 from 179059 crores in 2009-10.

Financial channel

2) Foreign Institutional Investment With a turmoil in global financial markets, FII

inflows will decline. We have a large number of global financial

firms which operate across the world and in case of a decline in one major market, there is a pull out from other markets as well.

FIIs pulled out nearly Rs 2,000 crore from the stock and debt market in September 2011, the second consecutive month in which overseas capital outflows were greater than inflows.

Financial channel

3) External Commercial Borrowings External commercial borrowings could

also decline if the European crisis spreads to other economies.

ECBs declined in the first stage of the crisis as well.

Already there has been a drop in the ECBs because of the fall in rupee.

Financial channel4) Remittances and NRI deposits

The deposits increase in the crisis periods Oct-Dec 2008 and Jan- Mar 2009 and decline thereafter.

It could be that NRI preferred to invest higher proceeds in India seeing crisis in their own economies. In case of remittances, we see a decline in crisis period Oct 08 – Mar 09 but see improvements as crisis eases.

There were huge concerns of remittances collapsing because of the crisis. In some countries they did collapse worsening poverty status.

In India, despite the decline it manages to remain in positive.

Confidence channel This channel shows confidence declines in

business and households seeing the global uncertainty.

So even if an economy’s macroeconomic conditions and outlook look favorable, the decline in confidence can disrupt the economic conditions.

Decline in confidence is also one of the reasons for decline in business investments which led to decline in overall Indian GDP growth.

Credit growth also declined because of decline in business investments.

RBI Governor Mr Subbarao has stressed on this channel on numerous occasions

Increasing integration of India with global economy

Apart from these three channels, Indian economy has become more global over the years.

The business and trade cycle of India has started to follow the cycles of advanced economies.

RBI Executive Director Deepak Mohanty in his speech explained the increasing correlation:

With increased global integration, the Indian economy now is subject to greater influence of global business cycles. The correlation between the cyclical component of the index of industrial production (IIP) of the advanced economies and India has risen to 0.50 during the period 1991-2009 from 0.20 in during the period 1971-1990


If the debt crisis spreads to other nations in Europe and their banking systems, European entities could start repatriating funds from Indian stock markets.

In recent years, some Indian conglomerates initiated or increased their stakes in American and European companies.

There could be decline of exports of goods and services to Europe and through the reduction of revenues or loss incurred from European-related operations of these companies.

The macro-economic impact could have a more severe effect on the Indian economy than the financial impact by repatriation of foreign funds.


The euro zone crisis could trip the fundraising plans of Indian companies at home and abroad and dent confidence, while euro’s weakness will hurt exporters selling in the currency.

Analysts fear the crisis in the euro zone would impact equity markets worldwide, including India, and companies may be forced to defer fundraising plans.

Meanwhile, a weaker euro is worrying exporters.

India's chief economist Kaushik Basu is of the view that the debt crisis in Europe may turn advantageous for the country's capital markets. This is because foreign investors would look to park their money in safe havens.

Investing Mantra

"An argument is made that there are just too many question marks about the near future; wouldn't it be better to wait until things clear up a bit?...face up to two unpleasant facts: The future is never clear [and] you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long term values."

- Warren Buffett

1st January 20112011 may be a choppy ride on Dalal Street

Sensex all time highs at 20561. RBI governor signals halt in interest rate

hikes after 6 continuous rates hikes reaching to 6.25%

India’s growth story intact at +8% But concerns are.. Rising interest rates,

soaring commodity prices, increase in borrowing costs, poor infrastructure, pressure on profit margin, expensive share valuation, record crude prices, large money raising targets.

05 AUGUSTThe World Sinks!

Sensex Falls by 387 points or 2.2%

DATE SENSEX

04August

17693

05 August

17305

5 AUGUST FALL Staying true to the age-old saying that 'when America

sneezes, the world catches a cold', the stocks markets across the globe on Friday plunged deep into red after an overnight crash in the US bourses.

The Dow tumbled 512 points -- its ninth deepest point drop ever -- as fear about the global economy spooked investors.

In India, the stock market plunged deep into red on worries over a possible recession in the US with the benchmark Sensex crashing by over 700 points at one time to slip below 17,000 level.

Economic Affairs Secretary R Gopalan attributed day's fall in markets to panic-like situation among investors due to negative news flow about the US economy.

08 AUGUSTFears take Lion’s Share

Sensex Falls by 315 points or 1.8%

DATE SENSEX

05August

17305

08 August

16990

8 AUGUST FALL

Fearful investors reacted to the United States losing its coveted AAA credit rating

Standard & Poor's downgrade of the US sovereign debt rating triggered a flight from risky assets in global stock markets.

"If the global economic situation worsens then there will be a flight to safety and money will be pulled out from all the markets including India," - Dipen Shah, head of private client research group at Kotak Securities

29 AUGUST Dalal Street gets a stimulus on Bernanke’s NO

Sensex rockets 567 pts on fed qe rejection

Sensex Rises by 567 points or 3.6%

DATE SENSEX

28August

15848

29 August

16416

29 AUGUST RISE

US Fed refrained from announcing another stimulus

Investors were relieved that America’s central bank has stopped short of launching a third bond buying programme, known as Quantitative Easing (QE)

It could have increased the flow of money into commodities and emerging markets, including India, stoking inflation.

The RBI on Monday unveiled the much awaited draft norms on new banking licences that will allow corporates to set up banks. Shares of non-banking finance companies jumped after the announcement

23 SEPTEMBERInvestors fret as stocks heads for weak end, Sensex

sheds 199 points in worsening global crisis, Rs breaches 50 as RBI refuses to intervene

Sensex falls by 199 points or 1.2%

DATE SENSEX

22 September

16361

23 September

16162

23 SEPTEMBER FALL

Global Policymakers tries to calm the market Rupee reached to a 28 month low of 49.90/$ Corporates and Bank want RBI to intervene

in the Forex market to stop the free fall of Rupee.

RBI deputy governor Subir Gokarn told “very narrow objective of smoothening what might be a very volatile market situation, nothing beyond that”

Rupee Down due to global dollar scarcity.

DOW V/S SENSEX

30th September 2011

Date Sensex %Change

4th January 2010

17558 --

3rd January 2011

20561 +17%

30th September 2011

16453 -20%

Sensex

YTD July to Date Year to June

952.17 978.45 654.74

Dow

YTD July to Date Year to June

504.63 646.31 287.99

Deviation

The impact of Europe on Indian Stock Market

1st March 2011Sensex rose 623 points , biggest gain in 22 months, From 17823.4 to 18446.5


1st March 2011


1st March 2011• The reason behind this rise was

Government’s lower-than-expected fiscal deficit estimate for 2011-12

The government pledged to contain fiscal deficit in 2011-12 at 4.6% of GDP compared with 5.1% in 2010-11

But the rising crude oil prices raise doubts on whether the government would meet its budget shortfall target, so the investors were a bit sceptical.


18th August 2011Sensex fell by 371 points to 16,469.79, its lowest level in nearly 15 months.


18th August 2011The reason for this drop

European markets fell sharply amid deepening fears of major global economies, including the US dipping into recession again

Renewed Eurozone debt crisis also dragged the index down


24th June 2011SENSEX ended the day 513.19 points higher at 18,240.68


24th June 2011Reasons Greece won the consent of international

lenders for a five-year austerity plan intended to avoid looming bankruptcy

Its prime minister pledged to push radical economic reforms through parliament.

JPMorgan and Goldman Sachs slashed forecasts for crude prices in the third quarter after the International Energy Agency announced the release of 60 million barrels of oil


19th Sept 2011The SENSEX continued to fall and closed at 16745.35


19th Sept 2011Investors feared a Greek default within weeks after International lenders told Greece on Monday

that it must shrink its public sector and improve tax collection to secure a vital 8 billion euro rescue payment

Greece's prime minister cancelled a US trip to chair an emergency cabinet meeting at home

German Chancellor Angela Merkel suffered a regional election loss

EU finance ministers also failed to make progress on the debt crisis


20th Sept 2011The BSE Sensex shot up 354 points to cross the 17k mark to reach 17099.28


20th Sept 2011The reasons Hope of weakening rupee would boost

earnings of the IT companies and a firm global trend Infosys, rose by 3.22% and TCS gained 3.94%

Greece expected to clinch the release of a 8 billion euro ($11 billion) aid that it needs to avoid running out of cash next month.

S&P downgraded its rating on Italy by one notch to A/A-1 but European Central Bank buying Italian debt also aided the sentiment.

Britain's FTSE was up 1.22 percent at 5,323.93 points


22nd Sept 2011SENSEX crashed 704 points to 16,361-its biggest single-session loss in over two years


22nd Sept 2011


22nd Sept 2011The reasons Fresh signs of slowdown in manufacturing

activities in China and Germany. IMF warned that Europe's sovereign debt crisis

risks tearing a giant hole in banks' capital. In Europe, questions about the ability of the

euro zone to manage some of its countries' heavy debt remain, stock losses amounted to a fall of over 21 percent for the year-to-date.

The slide was further aggravated by the weakness of the Indian rupee.

The FTSEurofirst 300 fell more than 4 percent, FTSE 100 lost 5 percent


27th Sept 2011Sensex jumped 472.93 points or 2.95%

to 16,524.03


27th Sept 2011The events that led to the rise are Hope of euro zone officials would act to corral

Greece's debt woes and prevent another banking crisis.

The parliaments of Finland and Germany were set to vote on the approval to extend the powers of the euro zone rescue fund considered critical to bailing out Europe’s weak economies.

The new plan was to leverage the €440-billion rescue fund, known as the European Financial Stability Facility (EFSF), to help struggling European nations avert debt defaults

A positive opening at European markets also helped buying sentiments.

Movement of FTSE and SENSEX

Reasons for low impact on Indian economy

The slow pace of financial reforms taking in India

Cautious approach towards permitting foreign investments in Indian business sectors

Bureaucratic hurdles & regulatory constraints Indian companies have major outsourcing

deals with American & European companies. India’s export to US and European countries

has grown substantially in the past few years.


Full but gradual opening of current account.

Capital account and financial sector: More calibrated approach towards opening up.

Equity flows encouraged Debt flows subject to ceilings and

some end-use restrictions. Capital outflows: progressively

liberalized External commercial borrowing is subject

to Strict rules and regulations.


Macro ceiling stipulated on portfolio investment in Govt. Securities and Corporate Bonds by FIIs.

Imposition of prudential limits on Banks, such as inter-bank liabilities, borrowing and lending, money market, assets

Implementation of Basel II.

Banks credit quality remained high.

Less percentage of NPA .

Thank You

affect of us & european downturn on indian stock market

Economy & Finance