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India: Exchange big hitters in battle for market share

India’s stock exchange heavyweights – the National Stock Exchange and the Bombay Stock Exchange – are gearing up for a fight for market share.

Spurred on by the threat of competition from new entrants and the prospect that India’s economy will continue to see growth of at least 7 per cent over the next few years, the NSE and BSE have announced a series of new products, hires and alliances.

India’s benchmark Sensex index has risen more than 70 per cent so far this year, making it one of the 10 best performing markets around the world. GDP, meanwhile, grew 6.1 per cent in the three months to the end of June, indicating the economy may have bottomed out.

The timing of the rebound, in the economy and stock market, could not be better for Madhu Kannan, chief executive of the BSE, the oldest of India’s more than 20 or so exchanges.

The appointment of Mr Kannan, who was only 36 when he took over in May, marked something of a change of strategy for an exchange that has been struggling to regain market share since its cross-town rival the NSE burst on to the scene nearly 15 years ago.

Before its arrival, the BSE had 80 per cent of the market. In 12 months the NSE hit the same level and the BSE has been trying to claw back market share ever since.

Mr Kannan hopes to upgrade the exchange’s technology, improve client relationships and make better use of its existing relationships with the Singapore stock exchange and Deutsche Börse.

In August, the BSE announced it had taken a 15 per cent stake in the newly formed United Stock Exchange to help drive the development and growth of both interest rate and currency derivatives markets. It will also start trading interest rate futures in the next couple of months.

But the NSE has pipped it to the post, becoming the first exchange, at the end of August, to resume trading in interest rate futures. A previous attempt to introduce the contract flopped in 2003 due to pricing issues and the regulator’s failure to allow banks to trade the product. The new contracts can now be traded by banks and are open to some foreign participation.

Ravi Narain, chief executive of the NSE, is upbeat about the exchange’s ability to grow and innovate and says he welcomes competition. He also wants the exchange to offer a full range of asset classes.

Since 2000, the NSE has, among other things, rolled out internet trading, exchange traded funds, a volatility index and currency futures. It is also looking at creating a platform for small and medium-sized enterprises, and appears to be responding to increased competition where it hurts. It said this month it would lower trading costs in futures and options and cash segments by 10 per cent.

Adding to the pressure on the NSE and BSE is the arrival of a significant new entrant to the market. The Multi Commodity Exchange of India, controlled by Indian markets entrepreneur Jignesh Shah’s Financial Technologies group, is poised to start its own stock exchange.

MCX-SX will form part of a portfolio offering trade in interest rate futures, ETFs and fixed income. The exchange already offers trading in currency futures.

Joseph Massey, chief executive of MCX-SX, believes there is room for another stock exchange at a time when the government is moving towards financial deregulation and is pushing to give India’s rural population the same access to financial services as their urban counterparts.

Currently 1.4 per cent of India’s population participates in the capital markets compared with 40 to 45 per cent in developed countries. In addition more than 90 per cent of exchange trade is confined to only 10 cities in India, according to the MCX.

Mr Massey says the scope for growth in the types of products on offer is also large, adding that while SME’s, currency, bonds and derivatives make up to 80 per cent of trade in other markets, many of these asset classes are still only in their infancy in India.

“Until recently the asset class in the public domain was equities. Other products were non-existent. Now we have the opportunity to provide different shades of investment products,” says Mr Massey.

Analysts say the combination of greater competition between the exchanges and strong fundamentals is great news for investors.

“The last 10 years have been remarkable. We’ve gone from being one of the least efficient markets to one of the most efficient. There are now 7,000 stocks listed,” says Sukumar Rajah, managing director and chief investment officer for Asian equities at Franklin Templeton Investments in India.

Mr Rajah says at the moment less than 5 per cent of personal savings in India are invested in the market. But with Indian GDP expected to grow at between 7 to 9 per cent on average over the next five to 10 years, he says the outlook for India is good.

“With this type of growth there is room for companies to expand . . . so for both local and global investors, this market will continue to be interesting.”

FT.com

Source: FT, 20.09.2009 by Mary Watkins

Filed under: Asia, Exchanges, India, News, , , , , , , , , , ,

Celent: More positive reviews for India shares

Celent is the latest to sing the praises of India’s stock market.

The Indian equity markets are showing signs of recovery, according to Celent, a Boston-based financial research and consulting firm. Although India’s equity market capitalisation is still some way off the 2007 high of $3.3 trillion, it is expected to exceed 2008 levels in 2009 at $1.9 trillion, the firm says in its latest report on India shares.

Celent is the latest to sing praises for India’s stock market. Earlier this month, Credit Suisse unveiled a new target of 17,000 for India’s Bombay Stock Exchange benchmark index (Sensex). In June, BNP Paribas recommended its clients to reduce their exposure to China, which it has lowered to neutral from overweight, and increase their allocations to India, where the bank remains overweight. BNP Paribas’ own target for the Sensex is 16,500. The Sensex closed at 15,160.24 on Friday.

The key findings of the Celent report include:

India is one of the main emerging equity markets. The country’s leading stock exchange, National Stock Exchange (NSE) is ranked third in terms of the number of equity trades of individual exchanges. The Bombay Stock Exchange (BSE) is also one of the leading exchanges worldwide, and the Indian market continues to hold further promise, as the economy is expected to grow 5-6% even in the current economic downturn.

The NSE is expected to overtake the Bombay Stock Exchange (BSE) in market capitalisation in 2009. Already far ahead in turnover, the NSE is expected to further its lead. It has already cornered the exchange-based debt markets and the equity derivatives business and become the exchange of choice in India.

The NSE is preferred by foreign institutional investors (FIIs), while retail investors, domestic brokers, and sub-brokers prefer the BSE. NSE turnover is two times that of the BSE because FIIs hold on to shares for a shorter period of time than their local counterparts.

India’s debt market is underdeveloped. In spite of growth, the Indian corporate debt market is far behind developed and emerging economies worldwide. At an expected turnover value of $70 billion in 2009, it is equal to less than 10% of the government debt market.

In the equity derivatives market, volatility has meant that the investors prefer to trade more in index derivatives because they are far more liquid than stock futures and options. Index futures and options now comprise 64% of the trading done in futures and options. Just like equities, the equity derivatives market has also recovered, and the turnover in the fiscal year 2010 is expected to be around $3 trillion, close to the figure in FY 2008. The growth in turnover and volume has made NSE one of the top 10 derivatives exchanges in the world. Having one of the highest growth rates in 2008 (56%), it is expected to do even better in the future. Interestingly, in spite of being more complex a product than cash equity, the equity derivatives market is quite popular with retail investors, and they had more than 50% of the market share consistently throughout the period of June 2008 to May 2009. This bodes well for the breadth of participation in the market.

The equity derivatives market is dominated by the NSE, due to the superior use of technology and better strategy. Also, the NSE has a high growth rate, and it is expected to break into the global top five by volume in the near future. In 2008, it had a trade volume of 590 million contracts and grew by 55.4% over the previous year. This made it the eighth largest derivatives exchange in the world.

Stock futures and options are not very liquid. The stock futures developed as the number of stocks traded has gone up from around 30 to 40 stocks to between 150 and 200. However, stock options are illiquid, except in the case of leading companies, meaning that a lot of transaction volume is driven by a few signatures. This situation could be worrisome in the long run, and there is certainly room for improvement.

Index futures and options dominate the NSE’s equity derivatives portfolio. Reasons for this include: recent volatility in the global markets, the participation of retail investors (comprising 53% of the turnover in the NSE in May 2009) in the derivatives market, and the fact that it is easier for investors to use index futures and options.

Currency futures have started promisingly. In the period between October 2008 and June 2009, the total volume traded on the NSE and MCX-SX was 132 million contracts, which compares favourably with 577 million exchange-traded currency futures globally in 2008. The combined monthly volume was above 29 million contracts for the two Indian exchanges.

Interest rate futures are expected to be reintroduced before the end of 2009. The Indian capital markets have been undergoing incremental reform, and once currency futures have established themselves, the Reserve Bank of India, the central bank, the Securities and Exchange Board of India (Sebi), and the capital market regulator plan to establish new regulations and reintroduce interest rate futures.

For the interest rate futures market to succeed, banks should be allowed to trade. Futures failed miserably in 2003 because the banks were only allowed to hedge. As the main participants in these markets, banks should be allowed to trade and build up the demand-side of the market.

Volatility is high, and a product such as NSE’s volatility index would be useful. NSE has come out with a volatility index, which is a market-wide index. At present, it is not available for trading. However, it is important that NSE soon introduce trading in an index because this will be very useful for market modelling and will help investors cope with the uncertain capital markets better.

Foreign institutional investment has begun to reverse its decline in recent months. FII drives the Indian equity markets. There is a high correlation of0.38 between the between the performance of the Sensex and FII over the period of January 2004 and May 2009, and it had been affected by the recent crisis. However, April and May 2009 have been the first months with positive net monthly investment in equity in more than a year. There are signs that these investors are rediscovering their faith in Indian equity markets. The share of Asian FIIs has risen, comprising 25% of all the registered FIIs in India, closely following the US, which has 29%.

The role of domestic institutional investors (DIIs) and the retail investors is becoming more prominent in the Indian markets.

Retail investment will grow as technology improves and reach increases. While it may be some time before the retail investors become the main driver of the markets, they are becoming stronger, and the advent of exchanges such as the NSE and recently, MCX-SX will improve the possibility of domestic savings being invested in capital markets.

Indian capital markets are advanced technologically but need to continuously improve to be competitive internationally. Strategic partnerships with the world’s leading exchanges and an understanding of the importance of technology to improve both price and speed, is crucial. The exchanges need to work continuously to ensure they remain attractive destinations for international capital.

Supervision and innovation in the capital markets can be improved. Sebi has done a great job in fostering the rapid development of Indian capital markets. However, market manipulations need to be dealt with severely, and Sebi needs to play a more active role. Due to the late development of the Indian market, the regulator has so far been prudent, but as the Indian markets get more globalised and mature, Sebi could introduce innovations such as alternative trading venues to add breadth to and modernise the Indian capital markets sooner than would have been possible a decade ago.

Market-making should be allowed to provide greater depth and liquidity to the markets. Presently, market-making is not permitted by Sebi, possibly because it might be very complicated to monitor. However, it is an internationally accepted practice that is essential for the development of the markets, and Sebi should introduce it sooner rather than later.

Source:AsianInvestor.net,10.08.2009  Rita Raagas De Ramos

Filed under: Asia, Exchanges, India, News, , , , , , , , ,

‘Bubble-Mania’ in Shanghai Spreads to Global Markets

The S&P-500 Index, a global bellwether for the world stock markets, extended its best five-month winning streak since 1938, by advancing through the psychological 1,000-level, and is up nearly 50% from its 12-year low set on March 10th. The S&P-500 gained 7.4% in July, its best monthly performance since 1997, even as average earnings per-share tumbled -32% and sales slid -16% from a year ago.

Industrial commodities, often viewed as barometers for global economic trends, have also moved sharply higher. So far this year, copper has soared by +96%, nickel is up 62%, and zinc is +50% higher. China, which buys two-thirds of the world’s seaborne iron ore shipments, boosted imports 30% in the first seven-months of this year to 353-million tons, lifting its spot price to $91 /ton, up from $60 per ton in February. Crude oil rose above $71 /barrel this week, doubling in value since December.

In hindsight, while the “Group of Seven” (G-7) economies in North America, Europe, and Japan, were experiencing the most severe economic contractions since the Great Depression of the 1930’s, coupled with unemployment rates ratcheting upward to multi-decade highs, the emerging economic giant – China – was demonstrating its prowess, with the most ambitious stimulus plan the world has ever seen, to rescue its juggernaut economy from the brink of social disaster and unrest.

In a little more than nine months, the pendulum of investor sentiment in Asia has swung from the extreme of terrifying panic and fear, to the opposite side of the emotional spectrum – hope and unbridled greed. The Shanghai stock market index has surged +90% this year, owing its good fortune to 1.2-trillion of bank loans clandestinely funneled into the stock market by brokerage firms, leaving it awash with yuan and lifting share prices above what economic reality can support.

China’s ruling Politburo is demonstrating to the world its command and control over its stock market and economy. Over the past few years, Beijing has proven its ability to either massively deflate a stock market bubble, as seen in 2008, and the wizardry to re-inflate a stock market bubble this year. Beijing is following the Greenspan – Bernanke blueprints, – turning to massive money printing to re-inflate bubbles in asset markets, in order to jump start an economy from the doldrums, or in this latest case, from the grip of the Great Recession.

A relatively healthy banking system enabled the Chinese central bank to work its magic. China’s M2 money supply is growing at a record +28.5% annualized rate, and the money supply surge is coinciding with big rallies in stocks and property, spilling over into neighboring Hong Kong. State-controlled Chinese banks extended 7.4-trillion yuan ($1.2-trillion) of new loans in the first half of this year, equal to 25% of China’s entire economy – helping to fuel a powerful Shanghai red-chip rally.

One of the beneficiaries of the explosive growth of the Chinese money supply is the Shanghai gold market, which is trading near 6,600-yuan /ounce, and is also tracking powerful rallies in industrial commodities. China is poised to overtake India as the world’s top gold consumer this year, and there is speculation that Beijing will quietly buy the gold which the IMF wants to sell in the years ahead.

China, the world’s biggest gold mining nation, is seeking to boost gold output by 3% to 290-tons this year, far less than the 400-tons it consumed last year. Thus, China could become an even bigger importer of the yellow metal in the months ahead, helping to cushion inevitable corrections in the gold market. Given the trade-off between expanding growth and fighting asset-price inflation, Shanghai traders are betting that Beijing will opt to blow even bigger bubbles in asset markets.

Industrial Commodities Eyeing Shanghai

China’s super-easy monetary policy is designed to offset the damage to its export-dependent regions, which are suffering from the collapse in global trade. Beijing is also spending 4-trillion yuan on infrastructure projects, equal to roughly 15% of its economic output per year, to create jobs and stoke economic growth. So it was of great interest to global traders, when the Shanghai red-chips suddenly plunged -5% on July 29th, the biggest daily loss in eight-months, on rumors that Beijing would curb bank lending in the second half of this year.

The Shanghai index is prone to sudden shake-outs, with the index trading at 35-times earnings, and Shenzhen’s small-cap shares trading at 45-times earnings. The Shanghai red-chip index has evolved into the locomotive for key industrial commodities, such as crude oil, base metals, and rubber. Industrial commodities rebounded from a nasty one-day shake-out on July 29th, after the People’s Bank of China wasted little time in denying rumors swirling in the media that it was considering the idea of enforcing quotas on bank loans.

The prospects for Chinese corporate earnings growth are of critical importance, with the Shanghai stock index flying higher in bubble territory. Large-scale industrial companies in 22 Chinese provinces saw their profits decline -21.2% in the first half to 894.14 billion yuan, but the decline rate was less from the first quarter’s 32% slide, and nowadays, “less bad,” means signs of recovery.

The most optimistic scenario calls for Chinese industrial profits to rebound to an annualized growth rate of +30% in the fourth quarter, due to the government’s massive stimulus. China’s Bank of Communications predicts the economy’s growth rate will accelerate to a pace of +9% in the third-quarter and +9.8% in the fourth-quarter. China’s crude steel output would surely top 500-million tons this year, equaling 40% of the world’s total production.

Korea Joins Alignment of B-R-I-C-K

Upbeat markets in China are helping underpin the BRIC nations, including Brazil, India, and Russia, which have the four best performing stock markets this year. Brazil’s Bovespa Index is up 79%, India’s Sensex Index is up 63%, and Russia’s RTS Index has gained 62-percent. The S&P-500 Index by comparison, is up 9.4% this year, while Japan’s Nikkei-225 index is up 7.5-percent.

One could add Korea to the alignment of B-R-I-C-K stars, since the Kospi Index has rebounded by 72% above its November low, emerging as the most favored market among global investors. With growing appetites for risky assets, global investors have rushed to snatch up Korean Kospi shares, particularly those in the information technology (IT) and the auto sectors. Foreigners were net buyers of $4.7 of Korean stocks in July, much larger than net-purchases of $2.6-billion of stocks in Taiwan, $1.9-billion shares in India, and $1.29 billion shares in South Africa.

“Money has no motherland, financiers are without patriotism and without decency, – their sole object is gain,” observed Napoleon Bonaparte. Highlighting the fickle nature of speculators, – foreigners bought a record $18-billion of Korean securities in the second-quarter of this year, or 24-times more than $750 million the previous quarter. In the third and fourth quarters of 2008, foreigners sold $17.9-billion and $17.4-billion, respectively, at the height of the global financial turmoil.

Foreign buying of Korean equities knocked the US-dollar 28% lower against the Korean-won, and the Japanese yen has tumbled 20% to 12.8-won, since March 10th, when global stock markets bottomed out. “Carry traders” are active in Seoul, and profiting from a stronger won. In a world where G-7 central banks are pegging rates at record low levels, it does not take much imagination to envision the Federal Reserve, the ECB, and the Bank of Japan underwriting rallies in the emerging currencies of Brazil, Russia, India, and Korea, just as Tokyo pumped massive liquidity straight into New Zealand and Australian dollars during its flirtation with the hallucinogenic drug – “Quantitative Easing” (QE) between 2001 and 2006.

Virtuous Cycle Swings in the Kremlin’s Favor

The resilience of China’s economy has rekindled the de-coupling debate, which hinges on the premise that the emerging economies in Brazil, Russia, India, China, (BRIC) can grow in spite of a declining G-7 economies. The so-called BRIC countries accounted for half of global growth in 2008 – China alone accounted for a quarter, and Brazil, India, and Russia combined equaled another quarter. Furthermore, the IMF notes that BRIC “accounted for more than 90% of the rise in consumption of energy products and metals, and 80% of grains since 2002.”

The virtuous cycle of events are now swinging back in the Kremlin’s favor, as global speculators flock back into hard-hit resource shares trading in Moscow. Russia’s central bank cut its main interest rates for the fourth time in less than three-months, after Moscow said the local economy contracted an annual 10.2% in the January-May period. Bank Rossii lowered the refinancing rate a half-point to 11% following on initial reduction on April 24th and two further cuts on May 13th and June 5th.

The Russian rouble has rebounded 16% against the US-dollar, since the first quarter, as Urals blend crude oil rebounded towards $70 a barrel, and base metals surged higher, boosting demand for Russia’s currency, a world leader in commodity exports. Russia is the world’s second-largest oil exporter behind Saudi Arabia, and supplies a quarter of Europe’s natural gas needs. Russia is also the world’s largest nickel and palladium miner, the second largest platinum miner, and the fourth-largest iron ore miner, behind Brazil, Australia, and India.

After reaching a record high of $597-billion last August, Moscow’s foreign currency reserves were dramatically depleted in the second-half of 2008, as the central bank spent more than $200-billion supporting the Russian rouble and bolstering the capital position of domestic banks. This year’s rebound in Urals blend crude oil has improved the Kremlin’s coffers, to the tune of $404-billion today. China, the world’s second-largest oil guzzler, imported 3.83-million barrels per day in July, or 25% more than a year earlier, the fastest pace in nearly two-years.

The BRIC nations are rethinking how their US-dollar currency reserves are managed, underlining a power shift from the United States, which spawned the global financial crisis. Russian chief Dmitry Medvedev has repeatedly questioned the US-dollar’s future as a global reserve currency. China is allowing companies in its southern provinces of Yunnan and Guangxi to use yuan to settle cross-border trade with Hong Kong and Southeast Asia to reduce exposure to the US-dollar.

India Weathers the “Great Recession”

Reserve Bank of India chief Duvvuri Subbarao says India’s modest dependence on exports will help Asia’s third largest economy, to weather the “Great Recession” and even stage a modest recovery later this year. Even during the depths of the October massacre in the Bombay Sensex Index, India managed to maintain a 5.3% growth rate in the fourth quarter, and India’s banking system had virtually no exposure to any kind of toxic asset, manufactured in the United States.

India’s factory output contracted by a slim 0.25% in January, the first decline this decade, and export earnings had fallen for six straight months. In January exports were 16% lower from a year earlier tumbling to $12.3-billion. So the Reserve Bank of India (RBI) scrambled to rescue the Bombay stock market, by slashing its lending rates six times from September thru April, by a total of 425-basis points.

click to enlarge

The Indian Sensex index began to decouple from Wall Street and Tokyo in early May, after it rallied 14% for its biggest weekly gain since 1992, when Indian Prime Minister Manmohan Singh won a second term. Bombay stocks soared with enthusiasm at the prospect that Singh’s new government, shorn of Communists, would privatize up to $20-billion of state-owned assets, increase foreign investment in highly profitable crown jewel companies, begin deregulation of banking and financial services, and gut restrictions on the closing of factories.

India’s factory sector, measured by the Purchasing Mgr’s Index, held strongly at a reading of 55.3 in July, or 2-points higher than China’s, signaling a strong industrial recovery in the second half of this year. If the decoupling of China, India, Russia, and Brazil becomes a reality, it could be good for the developed G-7 nations, as growing wealth in BRIC nations could, in theory, increase demand for goods made in battered nations like Japan, Germany, and the United States.

A decoupling between the emerging BRICK nations and the more developed G-7 economies would mean a huge shift in the global financial markets, away from the traditional pattern of emerging markets dancing to the tune of G-7 economies, which still account for 60% of global GDP. Instead, increasing independence could lead to a greater sphere of influence of the emerging giants, led by Beijing.

In the United States, Fed chief Bernanke is pumping a “bailout bubble” for Wall Street, similar to the policies of his mentor “Easy” Al Greenspan, who inflated the housing bubble, the sub-prime debt bubble, and the high-tech bubble. It’s a never ending cycle of boom-and-busts of bubbles, engineered by central banks. The revival of the “Commodity Super Cycle,” might already be in motion, and if a global economic recovery gains traction, soaring input costs would begin to crimp the profit margins of the giant Asian industrialists.

All the liquidity that’s been unleashed into the global banking system would play havoc with accelerating inflation. History shows that central banks won’t pre-empt inflation by withdrawing liquidity early. Instead, the money printers tend to inflate bubbles to dangerous proportions. Add to the mix, the vast leverage of the US-dollar and Japanese yen carry trades, it’s going to be a wild ride for the US Treasury bond market, which is increasingly dependent upon the whims of BRICK.

Source: SeekingAlpha, 05.08.2009 by Gary Dorsch

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