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Vol 4 - Issue 2 | May 2010 | Rs.3.

50

Shifts in market profile


sprinkling of what could be genuinely described as large-cap stocks.
The most important takeaway for investors should be for asset allocation
purposes.
Today the top 50 stocks account for about 62% of the market cap on the
NSE and the top100 stocks account for about 77%.This profile of the means
It is important to have an allocation of between 65% – 80% in the large-cap
space.
Let us not forget that this part of the cap curve is less risky, more liquid, and
less volatile, suffers to a lower degree in downward phases and is made up
of more established and visible names with several possessing robust
financials.
The mid-cap space can, however, no longer be ignored. Even if we ignore
stocks below the 300th by market-cap on the NSE (there are several
The share of the top 50 stocks on the National Stock Exchange has declined
decent names in the sub-300 category, too), there is today room for
by a massive 17.7 percentage points since December 2000.There has been
dedicated mid-cap and small-cap portfolios.
an enhancement at every subsequent bucket of 50 and 100 stocks. The
accompanying table provides a snapshot of what has happened between As we move from the top 50 to the entire market, there is an increase of
December 2000 and March 2010 on the NSE; a more detailed year-by-year 3.5 percentage points in compounded annual return over a 10-year plus
analysis is available on page 27 of this publication. period. If you want to perform in line with the broad market, you cannot
These shifts have important implications for investors. ignore a part of the cap curve that is almost 25% of the market.

There has been a significant enhancement in market depth and breadth An investor should have exposures to this segment; the level will depend on
across the cap curve. risk appetite.
In December 2000 – we were still unwinding from the tech/media/telecom Risks in this part of the market are higher, but across market cycles over the
boom that had a global footprint – it would have been a challenge to even long term, returns should adequately compensate.This is clear even over the
think of a sizeable mid-cap allocation in a large-cap oriented portfolio. This period covered in this analysis, which had at least four different cycles.
is no longer the case. The numbers presented here are relevant for the equity part of an
To have 100 large-cap stocks is an additional source of comfort for investors’ portfolio and not the complete portfolio, which must have a
investors. This was not the case in 2000. Even the top 50 had only a sizeable fixed-income component.

Major shift over the past decade-more depth across the cap curve except at the top end of the Indian market
Market-Cap on the NSE Share in NSE Market Cap
Stock group by market cap Dec-00 Mar-10 CARG Dec-00 Mar-10 Change
Rs Crore Rs Crore % % % % Points
First 50 Stocks 420667 3755582 26.7 79.8 62.1 -17.7
Next 50 Stocks 50542 901369 36.5 9.6 14.9 5.3
Top 100 471209 4656951 28.1 89.4 77.0 -12.4
Next 100 (# 101 - # 200) Stocks 31902 636904 38.2 6.1 10.5 4.5
Next 100 (# 201 - # 300) Stocks 12027 305420 41.9 2.3 5.0 2.8
Rest of the stocks (# 301 onwards) 11942 448846 48.0 2.3 7.4 5.2
Total 527081 6048121 30.2 100 100
Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management
Sundaram BNP
Sundaram BNPParibas Asset Asset
Paribas Management: Investment Manager for Sundaram BNP Paribas Mutual Fund / Portfolio Management Services: Sundaram BNP Paribas Portfolio Managers
Management
Chart of the Month

Grantham’s Probability Tree


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m oor severe consequences
o
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This exhibit, used with permission, is taken from Jeremy Grantham's 1Q 2010 quarterly letter. The letter can be read in full at www.gmo.com.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Global Market Snapshot


A comparison in 2007 (close to peak), 2008 (close to bottom) & the present

Market Cap ( $ Billion) Share in World Market Cap (%) Returns (%) Distance
Region/Country from Peak
End Apr 2009 2008 2007 End Apr 2009 2008 2007 2010 2009 2008
2010 YTD (%)

World 47123 49722 31901 60880 100.0 100.0 100.0 100.0 -5.2 55.9 -47.6 -22.6
United States 14482 13748 10455 17660 30.7 27.7 32.8 29.0 5.3 31.5 -40.8 -18.0
Canada 1777 1609 992 1749 3.8 3.2 3.1 2.9 10.5 62.2 -43.3 1.6
Brazil 1270 1326 565 1273 2.7 2.7 1.8 2.1 -4.2 134.7 -55.6
Mexico 389 363 247 398 0.8 0.7 0.8 0.7 7.3 46.8 -37.9 -2.3
Chile 245 229 130 208 0.5 0.5 0.4 0.3 7.1 76.0 -37.5 17.8
United Kingdom 2994 2975 1981 4051 6.4 6.0 6.2 6.7 0.6 50.2 -51.1 -26.1
France 1758 1900 1480 2736 3.7 3.8 4.6 4.5 -7.5 28.4 -45.9 -35.7
Germany 1319 1371 1075 2208 2.8 2.8 3.4 3.6 -3.8 27.5 -51.3 -40.3
Switzerland 1062 1076 848 1217 2.3 2.2 2.7 2.0 -1.3 26.8 -30.3 -12.7
Japan 3760 3488 3268 4545 8.0 7.0 10.2 7.5 7.8 6.7 -28.1 -17.3
Honk Kong 2262 2268 1312 2655 4.8 4.6 4.1 4.4 -0.3 72.9 -50.6 -14.8
India 1412 1294 640 1813 3.0 2.6 2.0 3.0 9.1 102.3 -64.7 -22.1
Australia 1280 1253 652 1415 2.7 2.5 2.0 2.3 2.2 92.1 -53.9 -9.5
China + Others 13113 16823 8256 18952 27.8 33.8 25.9 31.1 -22.1 103.8 -56.4 -30.8
Data Source: Bloomberg;The last available figures for each year have been taken;Analysis: Sundaram BNP Paribas Asset Management. End December 2007 figures have been reckoned as a proxy for the peak as different countries reached the point on different dates.
Sundaram BNP Paribas Asset Management 2 The Wise Investor May 2010
India View Equity

Lacklustre trends
• Large foreign inflows could reduce inflation but could also cap market
earnings growth as commodity companies’ and technology earnings
suffer
• Lower foreign inflows would on the other hand imply that inflation and
fiscal deficit concerns would outweigh
There are similarly, several other contradictory forces in the market which
imply that there is a lack of clarity in any trend emerging.
Further, India’s infrastructure project is not picking up as much as expected
and performance in railways and highways leave much to be desired. The
silver lining is that power projects in the private sector are gathering steam
and there seems to be a higher degree of visibility in this segment. An early
resolution of KG-D6 gas pricing would also pave the way for some more
Satish Ramanathan power output to come on stream.
Head-Equity We are nowhere close to potential infrastructure spend or build out, as
Sundaram BNP Paribas Asset Management clearances still take time and the regulatory process complex.
Consequently, we have seen delays in road projects. We could also witness
higher foreign competition in infrastructure projects.
As regards the European debt crisis, a risk of default still exists, as there are
Indian markets put up an uninspiring performance last month, and
too many countries on the brink. There is a belief in the market that IMF
underperformed US markets as we had suggested it might as a near-term
can resolve this issue, but a default and a hair cut in debt would perhaps be
trend. That trend is expected to continue for some more time, as the
the final resolution. Many of these countries have high borrowings with low
earnings recovery in the US and improved economic data are yet to be
earnings and high unemployment implying a resolution of this crisis in not a
factored in fully by markets. India continues to outperform China and Brazil.
short one but could prolong for a sustained period of time.
This is primarily because of lower levels of concern as compared to China
The silver lining, if there were one, is that this problem is within Europe, and
and Brazil, whose economies are highly correlated on account of the
is in a way a set off between the richer and poorer countries.
Chinese commodity demand from Brazil. There is also the larger question
of Europe’s smaller countries enmeshed in debt traps for which solutions The European crisis, should serve as a reminder that the “spend and get out
seem difficult. of the slowdown” policy may boomerang for a variety of reasons, and that
Indian markets’ out-performance of peers in the emerging markets space there is no substitute for fiscal prudence. The current government strategy
has been on account of strong FII inflows as well as concerns about Chinese to spend and subsidize could invoke a sharp uptick in borrowing costs
momentum swell. Further, local institutions have also bought into stocks on impeding growth. These events occur suddenly and can impact market
account of lower exposure to equities. This has kept market momentum sentiments sharply.
going. As of now, the Government’s plans to raise capital from 3G auctions and
Inflation in India remains high and is an area of concern, but there are divestment are proceeding smoothly indicating that interest rates in the
indications that the monsoons this year will be better resulting in a higher system will be under check. With overall government debt above 80% of
crop output and lower prices. We are witnessing this trend in wheat and GDP, there will be issues from time to time that the government needs to
sugar already and may see this play out in other crops as well. resolve.
India will remain short on edible oil and pulses and hence movements in Consumption in India ended FY2010 on a strong note with record sales of
currencies or changes in output of oil seeds will impact the price levels. cars, televisions, phones, bicycles on the back of a confluence of factors-
There is an ongoing discussion that the level of subsidies for fuels needs to higher farm incomes, lower interest costs, and pent up demand due to delay
be limited implying that prices will have to be increased sharply by as much in purchases. Benefits of the Sixth Pay commission and other government
as 15-20%. schemes have resulted in this high growth. Will this sustain?
Whether the government has the resolve remains to be seen. Should this Historically, our studies suggest that growth is sustainable albeit on a lower
take place then inflation will remain higher for a longer period of time, but level. This is a year of some achievements – for the first time, two wheeler
government borrowing costs could drop quickly, enabling banks to sales crossed bicycle sales. Penetration levels remain low for most
outperform on account of their large portfolio of government bonds. consumer durables, as electricity is not available in most areas. With
The wheels-within-wheels suggest that the market will not perform on electricity becoming accessible, it would be reasonable to assume that the
account of several contradictory factors – next consumption boom is shaping up.
Sundaram BNP Paribas Asset Management 3 The Wise Investor May 2010
India View Equity Distilled Wisdom
Market Outlook: There is an overwhelming consensus that markets will 10 False Lessons from 2008 & 2009
continue to head higher. Mid-caps continue to outperform large caps.
Clearly, the signs of high liquidity are visible, in assets such as real estate, but Seth Klarman is the President of The Baupost Group, a Boston-based private

inflows into equity from domestic investors is subdued. The expectation is investment partnership. The firm has achieved investment returns of 20%
that investors are sitting on the fringes and will be sucked in once markets compounded annually over 25-plus years. He is also the author of Margin of Safety-
move sharply upwards. Risk Averse Investing Strategies for the Thoughtful Investor. In his latest annual letter,

Appealing as the logic may be, we remain concerned on the earnings Klarman describes 10 false lessons investors appear to have learned as of late 2009.

outlook for Corporate India. Corporate India is currently operating at one 1. There are no long-term lessons – ever.
of the highest margins on account of lower competition and trade 2. Bad things happen, but really bad things do not. Do buy the dips, especially the
restrictions. But margins can compress quickly as seen in the case of lowest quality securities when they come under pressure, because declines will
telecom. Capacities are coming up across many industries and could quickly be reversed.
become operational when demand is actually cooling off. This is especially
3. There is no amount of bad news that the markets cannot see past.
true in the auto industry.
4. If you’ve just stared into the abyss, quickly forget it: - the lessons of history can
Similarly, a lot of competition is coming in the private unlisted space, where
only hold you back.
the pressure for short-term profits is low. India’s corporate profitability and
ROE’s are among the best in the region on account of large supply 5. Excess capacity in people, machines, or property will be quickly absorbed.
constraints. Once this eases, profitability gets eroded for a long period of 6. Markets need not be in sync with one another. Simultaneously, the bond market
time. Hence, our concern is that volumes can keep going up for the industry can be priced for sustained tough times, the equity market for a strong recovery,
as per capita consumption increases, but company profits may remain and gold for high inflation. Such an apparent disconnect is indefinitely sustainable.
stagnant.
7. In a crisis, stocks of financial companies are great investments, because the tide is
The same holds true for refining and petrochemicals as well, as capacity bound to turn. Massive losses on bad loans and soured investments are irrelevant
additions were stalled on account of the credit crisis and are now nearing
to value; improving trends and future prospects are what matter, regardless of
completion. This will have a more lasting effect of weak margins. To counter
whether profits will have to be used to cover loan losses and equity shortfalls for
this trend of weaker margins, a number of mergers and acquisitions are
years to come.
being announced, especially in the commodities space. We will have to wait
8. The government can reasonably rely on debt ratings when it forms programs to
and watch if this indeed translates to superior pricing power when fresh
capacities come along. lend money to buyers of otherwise unattractive debt instruments.

We also remain worried on the amount of equity issuances that will take 9. The government can indefinitely control both short-term and long-term interest
place globally as companies try to repair their balance sheets. China and rates.
India will continue to remain capital hungry markets and any change in risk 10. The government can always rescue the markets or interfere with contract law
perception could dent market sentiments sharply. whenever it deems convenient with little or no apparent cost. (Investors believe
On a medium-term perspective, we are more optimistic. We think India is this now and, worse still, the government believes it as well. We are probably
becoming a more favoured destination, as money moves from some of the doomed to a lasting legacy of government tampering with financial markets and
mature markets to India. the economy, which is likely to create the mother of all moral hazards. The
Infrastructure development, although slow, will continue to become a larger government is blissfully unaware of the wisdom of Friedrich Hayek: “The curious
theme in the private sector. We are also positive on the consumption task of economics is to demonstrate to men how little they really know about
theme which will play an integral role in economic development as better what they imagine they can design.”)
infrastructure is rolled out. While markets are expensive on a short term Klarman’s Message to Investors: To not only learn but also effectively implement
basis, they are not, when adjusted for the growth potential. investment lessons requires a disciplined, often contrary, and long-term-oriented
We therefore recommend that investors continue to increase their equity investment approach, a resolute focus on risk aversion rather than maximizing
exposure during this period of consolidation. Thanks to the slow rate of immediate returns, as well as an understanding of history, a sense of financial market
development in India, the potential for growth is bigger for longer. That is cycles, and, at times, extraordinary patience.
an opportunity for investors, as corporate profitability will be more secular
Source: www.zerohedge.com (http://bit.ly/aAjdxN)
and remain so longer rather than it getting competed away.
The views presented by the author (s) do not necessarily represent that of
From a portfolio perspective, we are now looking at growth stocks with Sundaram BNP Paribas Asset Management. The article / posts have been
reproduced with permission or from reports available in the public domain in
sustainable cash flows rather than focus on companies where growth would order to provide readers access to a diverse range of views on the economy
entail equity raising. and asset markets.

Sundaram BNP Paribas Asset Management 4 The Wise Investor May 2010
India View Bonds

Calibrated tightening likely


prices and oil prices. Stance of Monetary Policy
Also, there are considerable lags between the • Anchor inflation expectations, while
uptrend in international and domestic prices
being prepared to respond
in the case of oil, steel etc, which may keep
appropriately, swiftly and effectively to
inflation elevated for a longer period.The end-
further build-up of inflationary
year target of 5.5% however looks achievable,
pressures.
with the high base effect kicking in by then.
• Actively manage liquidity to ensure that
INR has witnessed sharp appreciation in real
the growth in demand for credit by
terms and there is a degree of apprehension
both the private and public sectors is
that the current trend may persist given the
satisfied in a non-disruptive way.
capital inflows and high interest rate
differentials. The RBI has mentioned it as a • Maintain an interest rate regime
growing source of worry, given that export consistent with price, output and
K Ramkumar growth is still nascent. financial stability.
Head – Fixed Income Among recent developments, the Bank has The expected outcomes of the actions are:
Sundaram BNP Paribas Asset Management announced MSS ceiling of Rs 50,000 crore for • Inflation will be contained and
FY 2011. The RBI REER has now risen above inflationary expectations will be
the one standard deviation band of its 10-year anchored
average. Against this backdrop, there might be
• The recovery process will be sustained.
The Reserve Bank of India appears a few attempts on the part of the RBI to slow
increasingly confident of growth per se and the pace of rupee appreciation. • Government borrowing requirements
the overriding fear is that of inflation and the private credit demand will be
Clearly the RBI has launched itself onto a path
unbridled eating into growth. Inflation levels met.
of “calibrated” tightening; while policy rate
though elevated for over five months now hikes may be gradual and spaced out through • Policy instruments will be further
were initially driven by food prices. Food the year, RBI may not go too aggressive on the aligned in a manner consistent with the
prices are now receding and are expected to process in order to not jeopardize growth. evolving state of the economy.
decline further, post the Rabi crop. The central bank has assumed an 18% growth Market participants were expecting a 25 basis
Yet another bad monsoon year would be in deposits for the full year. Assuming the same points (a basis point is 0.01 per cent) hike in
detrimental to inflation as well as the fiscal and given the borrowing overhang, the system reverse repo, repo and CRR with a few
deficit. Expenditure estimates in the budget can support a credit growth of about 17- anticipating a 50 bps hike in either one of
for FY 2011 are fairly optimistic and factors in 17.5% comfortably. The indicative credit them. This led to participants approaching the
flat food subsidies. As far as core inflation is growth target is, however, higher at 20%. market with lot of caution. The 25 basis points
concerned, though the absolute levels are not This would make CRR hikes undesirable in uniform rate hike was thus received well by
alarming as yet, the trajectory is that of a the second half of FY11 and may mean an the market and led to a relief rally.
sharp upward move and prospects of further upward trend in deposit rates in a bid to ramp The current 10-year benchmark was
rise are increasing with excise duty hike, metal up mobilization. technically waiting to rally ever since a floating
RBI View on Growth & Inflation rate security was announced in the recent
auction, with the policy action being the only
Growth: Assuming normal monsoons and robust trends Inflation: The central bank appears worried about the
hurdle.The comfort from the monetary policy
in the industry and services sectors, RBI pencils in 8% GDP level as well as the shifting composition of inflation, with
growth in FY11, with an upward bias. Under risks to growth, non-food manufactured products inflation accelerating from announcement triggered and enhanced the
the Bank lists a fresh dip in global growth as the first one. In 0.7% in Dec 2009 to 4.7% in March 2010. More disturbingly, upward movement in prices.
this context RBI also mentions the possibility of buoyant the upside risks to inflation are on the rise, the RBI states. Looking forward, the relief rally may short-
capital inflows given the rising interest rate differential as a Despite the recently observed seasonal softening in food lived. The demand-supply mismatches, deft
challenge. Robust inflows has already led to 15% inflation, the bank suspects that structural shortages in management of the borrowing programme
appreciation of the Rupee in real terms in FY10 and is now certain commodities may limit the fall in prices. by the RBI and the sword of calibrated rate
a growing concern for exporters, whose fortunes are only Secondly the RBI is apprehensive on the upward in global
action (best case) will be back in focus and
beginning to turn, RBI warns. Other risks are in terms of a commodity prices as well as the return of corporate pricing
steep rise in global commodity prices, another bad power. Monsoon, oil prices as well as domestic demand shall determine the levels at which the
monsoon-the latter would put fresh upward pressure on pressures will be crucial to the inflation outlook, the Bank benchmark securities move. We expect the
food prices, dent the rural consumption significantly and concludes. The year-end estimate for WPI inflation is placed 10-year benchmark to move to a range of
upset the delicate fiscal arithmetic, RBI cautions. at 5.5%. 8.25%-8.50% over the next couple of months.
Sundaram BNP Paribas Asset Management 5 The Wise Investor May 2010
Perspective The outside view

Infrastructure +
Baby Steps in Accountability EM Positive
to cover other institutions as well. In GREED & fear’s view the most exciting thing about the
What will come out of all these efforts is as Indian macro and micro story right now is the growing
likelihood that the next few years will see real progress
yet unclear. Even if these are politically driven
made in reducing supply bottlenecks in terms of the build
– the U S Congress is debating financial
out of infrastructure, most particularly in the area of
reform – they mark a much needed
power and roads, via a combination of private and public
beginning. The financial reform under sector financing.
discussion is not completely of the required In this context the present Indian Five Year Plan calls for
kind (for instance, the too-big-to-fail US$500bn of infrastructure investment through to March
instructions will almost stay intact). Yet even 2012. It appears that US$300-350bn of investment will
this process is facing stiff resistance from Wall happen during this period, implying a success rate well
Street firms. above the 50% norm during many past Plan periods. Most
S.Vaidya Nathan of the action is likely to be in power, roads and telecom
The ground appears to have been set for a
The Products Team where a 3G build-up will soon be under way.
Sundaram BNP Paribas Asset Management plethora of legal actions. Such moves and
The incentive for the private sector is that with supply so
their consequences are likely to play out for
limited in infrastructure, if execution can be achieved the
years. returns on such projects can be very attractive if not
The most surprising and annoying aspect of The one part of the U.S government that has enormous; particularly for those with “first-mover
been relentless in its efforts from 2008 to advantage” to use ghastly business school jargon.
the global financial crisis, which has now
objectively look into the causes for the Christopher Wood, Managing Director & Strategist of
officially rumbled on for almost three years,
financial problems - Special Inspector General CLSA Asia-Pacific, an independent research outfit and
has been complete lack of accountability. The
author of the weekly report GREED & Fear.
Federal Reserve Bank of New York (led by for the Troubled Asset Relief Program
Timothy Geithner till he became Treasury (SIGTARP – www.sigtarp.gov) headed by Within my personal portfolio, I have a stronger preference
Secretary) appears to have played a vital role Elizabeth Warren – has threatened to pursue for the already overpriced emerging market equities than
in propping institutions, which is now under the course of law against the New York Fed do my colleagues at GMO, and actually more than I should
scrutiny. and men who were its leaders. have as a dedicated value manager.This is because I believe
they will end up with a P/E premium of 25% to 50% in a
We have had the spectacle of governments In fact, Treasury Secretary Geithner tried in
few years, as outlined two years ago in “The Emerging
and central banks across the developed vain to get reporting jurisdiction over this
Emerging Bubble” (Letters to the Investment Committee
world providing guarantees with gay abandon body and was eventually forced to withdraw
XIV, April 2008).
and with no concern as to costs for his application to the court on this issue
The appeal of emerging market’s higher GDP growth
taxpayers. We have the U.S Federal Reserve following a robust defence by the SIGTARP compared with the slow growth of U.S. and other
now sitting on $1 trillion-plus of mortgage- Chief. SIGTARP’s efforts, too, could now have developed countries is proving as compelling as I
backed securities, which if marked-to-market, a deeper impact, as it is now accompanied by suspected, and I would hate to miss some modest
will carry punishing losses for taxpayers. baby steps in action by multiple parts of the participation in my one and only bubble prediction.
U S government. It is hard, though, for value managers like us to ever
There was no semblance of even an
overweight an overpriced asset, so we struggle on the
investigation. Encouragingly, this has now Only with accountability will any effort at
margin to find kosher ways to own a little more emerging
started to change. Over the past month, the financial reform have a semblance of meaning.
in order to give them the benefit of the doubt. I
Securities and Exchange Commission has Progress towards this end is important for
recommend that readers do the same. The urge to weasel
pressed charges against Goldman Sachs. the global economy and investors in India,
and own a little more emerging is a direct result of the lack
Criminal investigations have also started too. We live in an inter-connected world and of clearly cheap investment alternatives.
against the firm. Others have also filed law we escaped the consequences of the financial Jeremy Grantham, Co-Founder and Chief Investment
suits seeking compensation for dubious crisis only due to stellar work by the Reserve Strategist of GMO, in his latest quarterly report to
transactions. The net appears to be widening Bank of India. We may not always be so lucky. investors published in the last week of April.
Sundaram BNP Paribas Asset Management 6 The Wise Investor May 2010
By Invitation

From Financial Crash To Debt Crisis


default data going back only to 1980, when the most notably as was the case of the mortgage giants
underlying cycles can be half centuries and more, not Fannie Mae and Freddie Mac in the United States.
just thirty years. Indeed, in many economies, the range of implicit
Serial defaults & banking crisis: Exploiting the multi- government guarantees is breathtaking. Many
century span of the data, we study role of repeated governments find in a crisis that they are forced to
extended debt cycles in explaining the observed deal not only with their external debts (owed to
patterns of serial default and banking crises that foreigners) but those of private domestic borrowers
characterize the economic history of so many as well.
Carmen M. Reinhart countries—advanced and emerging alike. Famously, Thailand (1997), just prior to its financial
Serial default refers to countries which experience crisis, hid its massive forward exchange market
multiple sovereign defaults (on external or domestic interventions, which ultimately led to huge losses.
public or publicly-guaranteed debt—or both). These Hidden debt has loomed large in many sovereign
defaults may occur five or fifty years apart; these may defaults over history. At the time of this writing one
be wholesale default (or repudiation) or a partial only has to read the debacle in the financial press
default through rescheduling. concerning Greece’s hidden debts conveniently
facilitated by its underwriter Goldman Sachs.
Debt intolerance: This manifests itself in the extreme
duress many emerging markets experience at debt In principle, of course, lenders should realize the huge
Kenneth S. Rogoff
levels that would seem quite manageable by temptation for borrowers to hide the true nature of
advanced country standards. their balance sheet. Private information on debt can,
In the wake of the excess debt problems surrounding in principle, be incorporated into models. The many
Greece immediately in the past couple of months, “Safe” debt thresholds for highly debt intolerant
different margins on which governments can cheat
imminently facing more of the PIIGS group (Portugal, emerging markets turn out to be surprisingly low,
are a significant complicating factor.
Ireland, Italy, Greece and Spain) in the next few years perhaps as low as fifteen to twenty percent in many
Default & back to bad practices quickly: Another
and also staring the likes of U.S and U.K in the face, cases, and these thresholds depend heavily on a
noteworthy insight from the “panoramic view” is that
we present edited extracts from a March 2010 country’s record of default and inflation.
the median duration of default spells in the post–
report by Carmen M Reinhart & Kenneth S Rogoff- Debt intolerance likely owes to weak institutional World War II period is one-half the length of what it
the authors of the renowned book This Time Is structures and a problematic political system that was during 1800–1945 (3 years versus 6 years). The
Different – Eight Centuries of Financial Folly. makes external borrowing a useful device for duration of a default spell is the number of years from
This time is different The essence of the This time is developing country governments to avoid hard the year of default to the year of resolution, be it
different syndrome is simple. It is rooted in the firmly- decisions about spending and taxing and global through restructuring, repayment, or debt forgiveness.
held belief that financial crises are something that investors rightly suspicious about the government’s
A charitable interpretation is that crisis resolution
happen to other people in other countries at other motives.
mechanisms have improved since the bygone days of
times; crises do not happen here and now to us. We Simply put, the upper limit to market access is lower gun-boat diplomacy. After all, Newfoundland lost
are doing things better, we are smarter, we have when governments suffer from an intolerance to nothing less than her sovereignty when it defaulted
learned from the past mistakes. The old rules of repayment but not to borrowing. on its external debts in 1936 and ultimately became
valuation no longer apply. The current boom, unlike Hidden Debt: Our results here, as well a plethora of a Canadian province; Egypt, among others, became a
the many previous booms that preceded catastrophic vivid examples from the accompanying chart book British “protectorate” following its 1876 default.
collapses (even in our country-U.S) is built on sound suggest that more attention needs to be paid to A more cynical explanation points to the possibility
fundamentals, structural reforms, technological “hidden debt and liabilities.” In a crisis, government that, when bail-outs are facilitated by the likes of the
innovation, and good policy. Or so the story……. debt burdens often come pouring of out the International Monetary Fund, creditors are willing to
The economics profession has an unfortunate woodwork, exposing solvency issues about which the cut more slack to their serial-defaulting clients.
tendency to view recent experience in the narrow public seemed blissfully unaware. The fact remains the number of years separating
window provided by standard datasets. It is One important example is the way governments default episodes in the more recent period is much
particularly distressing that so many cross-country routinely guarantee the debt of quasi-government lower. Once debt is restructured, countries are quick
analysis of financial crisis are based on debt and agencies that may be taking on a great deal of risk, to re-emerge.
Source: From Financial Crash To Debt Crisis by Carmen M. Reinhart and Kenneth S. Rogoff, National Bureau of Economic Research http://www.nber.org/papers/w15795. Sub-titles have
been provided by the Editor of this publication to provide context, as the extracts are from a detailed 48-page report. The report is also recommended for insightful and quality charts.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 7 The Wise Investor May 2010
Focus Topic

The $ 100 Billion Question


pollutant. Systemic risk is a noxious by-
product. Banking benefits those producing Put in money terms, that is an output loss
and consuming financial services – the private equivalent to between $60 trillion and
benefits for bank employees, depositors, $200 trillion for the world economy and
borrowers and investors. between £1.8 trillion and £7.4 trillion for
But it also risks endangering innocent the UK.
bystanders within the wider economy – the
social costs to the general public from exactly) a $100 billion question. In the UK, the
banking crises. direct cost may be less than £20 billion, or
Public policy has long-recognised the costs of little more than 1% of GDP.
systemic risk. They have been tackled through Assuming a systemic crisis occurs every 20
a combination of regulation and, at times, years, recouping these costs from banks
prohibition. Recently, a debate has begun on would not place an unbearable strain on their
direct restrictions on some banking activities finances. The tax charge on US banks would
Andrew Haldane - in other words, prohibition. This is be less than $5 billion per year, on UK banks
Executive Director, Financial Stability recognition of the social costs of systemic risk. less than £1 billion per year.2 Total pre-tax
Bank of England Bankers are in uproar. profits earned by US and UK banks in 2009
This paper examines the costs of banking alone were around $60 billion and £23 billion
pollution and the role of regulation and respectively.
restrictions in tackling it. In light of the crisis, But these direct fiscal costs are almost
What is the right size for banks? Do we need this is the $100 billion question. The last time certainly an underestimate of the damage to
the kind of monster-sized banks we have today such a debate was had in earnest followed the wider economy which has resulted from
in the developed world – the ones that pushed the Great Depression. Evidence from then, the crisis – the true social costs of crisis.
the world to the brink, from which for now, from past crises and from other industries World output in 2009 is expected to have
governments appear to have pulled us back by helps define the contours of today’s debate. been around 6.5% lower than its
risking trillions of dollars. This debate is still in its infancy. counterfactual path in the absence of crisis. In
Andrew Haldane has been one of the rare While it would be premature to be reaching the UK, the equivalent output loss is around
persons in central banking systems of the policy conclusions, it is not too early to begin 10%. In money terms, that translates into
developed world who has outlined the problems sifting the evidence. What does it suggest? output losses of $4 trillion and £140 billion
as they are and the possible solutions; however Counting the Systemic Cost: An respectively. Moreover, some of these GDP
unpalatable they are to the banks and their important dimension of the debate concerns losses are expected to persist.
peers in the central banking system. In one such the social costs of systemic risk. Determining Evidence from past crises suggests that crisis-
speech last month, Haldane showcases the $ the scale of these social costs provides a induced output losses are permanent, or at
100 billion problem. We present the first part of measure of the task ahead. It helps calibrate least persistent, in their impact on the level of
edited extracts from his speech: the intervention necessary to tackle systemic output if not its growth rate. If GDP losses
The car industry is a pollutant. Exhaust fumes risk, whether through regulation or are permanent, the present value cost of
are a noxious by-product. Motoring benefits restrictions. So how big a pollutant is banking? crisis will exceed significantly today’s cost.
those producing and consuming car travel There is a large literature measuring the costs By way of illustration, Table 1 looks at the
services – the private benefits of motoring. of past financial crises. This is typically done by present value of output losses for the world
But it also endangers innocent bystanders evaluating either the fiscal or the foregone and the UK assuming different fractions of the
within the wider community – the social costs output costs of crisis. On either measure, the 2009 loss are permanent - 100%, 50% and
of exhaust pollution. Public policy has costs of past financial crises appear to be 25%. It also assumes, somewhat arbitrarily,
increasingly recognised the risks from car large and long-lived, often in excess of 10% of that future GDP is discounted at a rate of 5%
pollution. pre-crisis GDP. What about the present crisis? per year and that trend GDP growth is 3%.4
Historically, they have been tackled through a The narrowest fiscal interpretation of the Present value losses are shown as a fraction
combination of taxation and, at times, cost of crisis would be given by the wealth of output in 2009.
prohibition. During this century, restrictions transfer from the government to the banks as As Table 1 shows, these losses are multiples of
have been placed on poisonous emissions a result of the bailout. Plainly, there is a large the static costs, lying anywhere between one
from cars - in others words, prohibition. This degree of uncertainty about the eventual loss and five times annual GDP. Put in money
is the recognition of the social costs of governments may face. But in the US, this is terms, that is an output loss equivalent to
exhaust pollution. Initially, car producers were currently estimated to be around $100 billion, between $60 trillion and $200 trillion for the
in uproar. or less than 1% of US GDP. world economy and between £1.8 trillion
The banking industry is also a For US taxpayers, these losses are (almost and £7.4 trillion for the UK.
Sundaram BNP Paribas Asset Management 8 The Wise Investor May 2010
Focus Topic
Table 1: Present Value of Output Losses (% higher the discount rate and the lower the a coin big enough, these would be the two
of 2009 GDP) trend growth rate, the smaller the losses. sides of it.
Region Fraction of initial Second, this ratings difference has increased These results are no more than illustrative –
output loss over the sample, averaging over one notch in for example, they make no allowance for
which is permanent 2007 but over three notches by 2009. In subsidies
25% 50% 100% other words, actions by government during
arising on retail deposits. Nonetheless, studies
the crisis have increased the value of
UK 130 260 520 using different methods have found similarly-
government support to the banks. This
World 90 170 350 should come as no surprise, given the scale of sized subsidies. For example, Baker and
intervention. Indeed, there is evidence of an McArthur ask whether there is a difference in
Source: Bank Calculations
up-only escalator of state support to banks funding
As Nobel-prize winning physicist Richard
Feynman observed, to call these numbers dating back over the past century. costs for US banks either side of the $100
“astronomical” would be to do astronomy a Unsurprisingly, the average rating difference is billion asset threshold – another $100 billion
disservice: there are only hundreds of billions consistently higher for large than for small question.8
of stars in the galaxy. “Economical” might be a banks. The average ratings difference for large They find a significant wedge in costs, which
better description. It is clear that banks would banks is up to 5 notches, for small banks up has widened during the crisis. They calculate
not have deep enough pockets to foot this to 3 notches. This is pretty tangible evidence an annual subsidy for the 18 largest US banks
bill. of a second recurring phenomenon in the of over $34 billion per year. Applying the
financial system – the “too big to fail” same method in the UK would give an annual
Assuming that a crisis occurs every 20 years,
problem.
the systemic levy needed to recoup these subsidy for the five largest banks of around
crisis costs would be in excess of $1.5 trillion It is possible to go one step further and £30 billion.
per year. The total market capitalisation of the translate these average ratings differences
This evidence can provide only a rough guide
largest global banks is currently only around into a monetary measure of the implied fiscal
to systemic scale and cost. But the qualitative
$1.2 trillion. Fully internalising the output
picture it paints is clear and consistent.
costs of financial crises would risk putting
banks on the same trajectory as the The systemic levy needed to recoup these • First, measures of the costs of crisis, or the
dinosaurs, with the levy playing the role of the crisis costs would be in excess of $1.5 implicit subsidy from the state, suggest
meteorite. trillion per year. The total market banking pollution is a real and large social
It could plausibly be argued that these output capitalisation of the largest global banks is problem.
costs are a significant over-statement of the currently only around $1.2 trillion. • Second, those entities perceived to be
damage inflicted on the wider economy by “too big to fail” appear to account for the
the banks. Others are certainly not blameless lion’s share of this risk pollution. The public
subsidy to banks. This is done by mapping
for the crisis. For every reckless lender there from ratings to the yields paid on banks’ policy question, then, is how best to tackle
is likely to be a feckless borrower. bonds; and by then scaling the yield difference these twin evils.
If a systemic tax is to be levied, a more by the value of each banks’ ratings-sensitive As with size, the effects of liberalisation on
precise measure may be needed of banks’ liabilities. banking concentration were immediate and
distinctive contribution to systemic risk. One The resulting money amount is an estimate of dramatic. The share of the top three largest
such measure is provided by the (often the reduction in banks’ funding costs which US banks in total assets rose fourfold, from
implicit) fiscal subsidy provided to banks by arises from the perceived government 10% to 40% between 1990 and 2007 (Chart
the state to safeguard stability. Those implicit subsidy. 2). (Editor’s note: It was about 60% at the
subsidies are easier to describe than measure. end of 2009)
For UK banks, the average annual subsidy for
But one particularly simple proxy is provided the top five banks over these years (2007- A similar trend is discernible internationally:
by the rating agencies, a number of whom 2009) was over £50 billion - roughly equal to the share of the top five largest global banks
provide both “support” and “standalone” UK banks’ annual profits prior to the crisis. At in the assets of the largest 1000 banks has
credit ratings for the banks. The difference in the height of the crisis, the subsidy was larger risen from around 8% in 1998 to double that
these ratings encompasses the agencies’ still. in 2009.
judgement of the expected government
For the sample of global banks, the average This degree of concentration, combined with
support to banks.
annual subsidy for the top five banks was just the large size of the banking industry relative
Two features are striking. less than $60 billion per year. These are not
to GDP, has produced a pattern which is not
First, standalone ratings are materially below small sums.
mirrored in other industries. The largest
support ratings, by between 1.5 and 4 As might be expected, the large banks banking firms are far larger, and have grown
notches over the sample for UK and global account for over 90% of the total implied far faster, than the largest firms in other
banks. In other words, rating agencies subsidy. On these metrics, the too-big-to-fail
explicitly factor in material government industries. With the repeal of the McFadden
problem results in a real and on-going cost to
support to banks. The results are plainly and Glass-Steagall Acts, the too-big-to-fail
the taxpayer and a real and on-going windfall
sensitive to the choice of discount rate and problem has not just returned but flourished.
for the banks. If it were ever possible to mint
trend growth rate. Other things equal, the (To be concluded)

Source: Bank of England (www.bankofengland.co.uk) Speech link: http://bit.ly/cL4AKu


The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 9 The Wise Investor May 2010
Investing Environment

Asset Allocation
• 1 •

Asset allocation determines about 92 per cent of your portfolio performance Ask & Answer

2.1% • What are your investment objectives?


1.8%
4.6%
• When do you need funds and how much
at each stage?
Asset Allocation
• What is your risk-taking ability?
Individual investments selection • Can you take losses, and, if so, to what
extent?
Market timing
• What is your family income (investor and
spouse) available for spending and saving?
Others
• If you are self-employed, what are your
earnings, net worth and prospects for
your business?
• At what age are you starting to invest?
• How many years do you have to
retirement or stage when you wish you
9 91.5% to put your feet up?

What is Asset Allocation? • What proportion of your income can you


invest?
Identifying investment options for deploying your funds to ensure suitable
balance between lifetime goals, returns, risk, liquidity and diversification. • Do you have an inheritance available for
investing?
Graph Source: Financial Analysts Journal*
• Do you have elderly parents to support?
Lifetime goals demand financial planning • What is time plan for education and
marriage of children?

KEY • What is time plan to own a home?


LIFETIME
Managing Wealth
• Have you optimized tax-related
GOALS current creation to
investments?
requirement
&
enhance
lifestyle
• What proportion of current income will
emergency
you need in retirement to maintain
chosen life style?
Generate
returns that • At what age do you expect to complete
are A payment of home loans?
Financing
consistently comfortable
education
higher than
of children life at • Do you have a term insurance and
inflation retirement disability insurance?
• Do you have knowledge & time for direct
equity investment?
Owning a Leaving a
legacy of
• What is your tax status?
home
values and • Do you have a professional financial
wealth advisor?

Sundaram BNP Paribas Asset Management 10 The Wise Investor May 2010
India RBI-Speak

Key issues facing India


on the reform agenda that are relevant to the India’s approach to capital flows
Reserve Bank of India. India has followed a consistent policy on capital
The final thought that I want to leave with you account convertibility in general and on capital
as I finish is that the growth drivers that account management in particular. Our
powered India’s high growth in the years position is that capital account convertibility is
before the crisis are all intact. The challenge for not a standalone objective but a means for
the Government and the Reserve Bank is to higher and stable growth.
move on with reforms to steer the economy We believe our economy should traverse
to a higher growth path that is sustainable and towards capital convertibility along a gradual
equitable. path - the path itself being recalibrated on a
Capital flows dynamic basis in response to domestic and
Volatile capital flows have been a central issue global developments. Post-crisis, that continues
during the crisis, and continue to be so now as to be our policy. We will continue to move
Duvvuri Subbarao the crisis is ebbing. Emerging market towards liberalizing our capital account, but we
economies (EMEs) saw a sudden stop and will revisit the road map to reflect lessons of
Governor
Reserve Bank of India reversal of capital flows during the crisis as a the crisis.
consequence of global deleveraging. India’s approach to managing capital flows too
Now the trend has reversed once again, and has been pragmatic, transparent and
many EMEs are seeing net inflows - a contestable. We prefer long term flows to
consequence of a global system awash with short-term flows and non-debt flows to debt
India clocked average growth of 9 per cent per flows. The logic for that is self-evident. Our
liquidity, the assurance of low interest rates in
annum in the five years to 2007/08. That policy on equity flows has been quite liberal,
advanced economies over ‘an extended period’
growth momentum was interrupted by the and in sharp contrast to other EMEs which
and the prospects of robust growth in EMEs.
financial crisis which impacted India too, more liberalized and then reversed the liberalization
than we had originally thought but less than it The familiar question of how EMEs can
when flows became volatile, our policy has
did most other countries. Despite falling below maximize the benefits and minimize the costs
been quite stable.
6 per cent for one quarter, the growth for the of volatile capital flows has returned to haunt
the policy agenda. Historically, we have used policy levers on the
full year 2008/09 was a resilient 6.7 per cent.
debt side of the flows to manage volatility. This
Current estimates are that the economy had One little known aspect of capital flows, what
has been our anchor when we had to deal
grown between 7.2 and 7.5 per cent for the could perhaps be called the law of capital
with flows largely in excess of the economy’s
just ended fiscal year 2009/10 and that growth flows, is that they never come in at the
absorption capacity in the years before the
for 2010/11 will be 8+ per cent. The quick turn precise time or in the exact quantity you
crisis. This has been our policy when we saw
in sentiment following the uncertainty and want them. Managing these flows, especially if
large outflows during the crisis. And I believe
anxiety of the crisis period has seen the return they are volatile, is going to test the
this will continue to be our policy on the way
of the FAQ: When will India get on to double effectiveness of central bank policies of semi-
forward.
digit growth? For policy makers, the FAQ open EMEs.
translates to three nuanced questions: Tobin Tax
If central banks do not intervene in the foreign
• In the short term, how do we restore the exchange market, they incur the cost of The surge in capital flows into some EMEs
economy to its trend rate of growth while currency appreciation unrelated to even as the crisis is not yet fully behind us has
maintaining price stability? fundamentals. If they intervene in the forex seen the return of the familiar question - the
market to prevent appreciation, they will have advisability of imposing a Tobin type tax on
• In the medium term, how do we raise the capital flows. Both before and after the crisis,
trend rate of growth itself without additional systemic liquidity and potential
inflationary pressures to contend with. If they there are examples of countries, notably Chile,
compromising financial stability?
sterilize the resultant liquidity, they will run the Colombia, Brazil and Malaysia, which have
• How do we ensure that growth is inclusive? experimented with a Tobin tax or its variant.
risk of pushing up interest rates which will hurt
An over-analyzed country the growth prospects. Even as there are some lessons to be drawn
India is such an over analyzed country that it Capital flows can also potentially impair from the country experience, on the aggregate,
is difficult to be original. The answers to all the financial stability. How EMEs manage the it does not constitute a sufficient body of
three questions above are all out there in the impossible trinity – the impossibility of having knowledge for drawing definitive conclusions.
open, and they involve moving on with a host an open capital account, a fixed exchange rate Critics of Tobin tax contend that the tax is
of structural and governance reforms. and independent monetary policy - is going to ineffective, is difficult to implement, easy to
I want to use this platform provided by the have an impact on their prospects for growth, evade and that its costs far exceed the
Peterson Institute to comment on a few issues price stability and financial stability. potential benefits, and all this because financial
Sundaram BNP Paribas Asset Management 11 The Wise Investor May 2010
India RBI-Speak
markets always outsmart policy makers. Not just an inflation fighter • Second, it is important, even as targeting
Supporters of the tax argue that if designed The Reserve Bank is not a pure inflation quantitative indicators, to pay equal
and implemented well, the tax can be effective targetter. Some people have suggested that the attention to the quality of fiscal adjustment.
in smoothing flows and that evading controls is economy will be better served if the Reserve Improving Policy Effectiveness
not such a straight forward option as efforts to Bank becomes a pure inflation targetter. The The effectiveness of monetary transmission, the
evade require incurring additional costs to argument is that inflation hurts much more in process by which the central bank’s policy
move funds in and out of a country which is a country like India with hundreds of millions of
signals influence the financial markets, is a
precisely what the tax aims to achieve. poor people and that the Reserve Bank will be
function of both tangible and intangible factors.
In India, given the overall thrust of policy, we more effective at combating inflation if it is not
It depends on the depth and efficiency of the
are quite agnostic on the choice of different burdened with other objectives. This argument
financial markets. It also depends on the overall
instruments. The stereotype view is that we is contestable.
confidence and sentiment in the financial
have an express preference for quantity based Inflation targeting, characterized by a single system.
controls over price based controls. target (price stability) and a single instrument
(short term policy interest rate), has Typically, monetary transmission in emerging
A critical examination of our policy will show economies tends to be slower, reflecting
respectable academic credentials. An exclusive
that this view is mistaken. For example, on shallow financial markets and inefficient
commitment to inflation enhances operational
bonds we impose both a limit on the amount information systems. The monetary
effectiveness and enforces accountability. The
foreigners can invest as well as a withholding transmission mechanism in India has been
success of several developed economy central
tax. Similarly, our policy on external improving but is yet to fully mature. There are
banks in maintaining price stability in the years
commercial borrowing employs both price and several factors inhibiting the transmission
before the crisis has also given it intellectual
quantity variables. We have not so far imposed
credibility. process.
a Tobin type tax nor are we contemplating
one but it needs reiterating that no policy The unravelling of the ‘Great Moderation’ • First, India has a government sponsored
instrument is clearly off the table and our during the crisis has however diluted, if not small savings programme characterized by
choice of instruments will be determined by dissolved, the consensus around the minimalist administered interest rates and tax
the context. formula of inflation targeting. The crisis has concessions. Operating through a huge
shown that price stability does not network of post offices and field agents, the
Worldview changes on capital controls necessarily ensure financial stability. Indeed small savings scheme has an enormous and
The recent crisis has clearly been a turning there is an even stronger assertion - that there impressive reach deep into the hinterland.
point in the world view on capital controls. is a trade-off between price stability and Banks are typically circumspect about
The Asian crisis of the mid-90s demonstrated financial stability, and that the more successful reducing deposit rates in response to the
the risk of instability inherent in a fully open a central bank is with price stability, the more central bank’s policy rate signals for fear of
capital account. Even so, the intellectual likely it is to jeopardize financial stability. losing their deposit base to small savings.The
orthodoxy continued to denounce controls on Inflation targeting is neither desirable nor government too has not adjusted the rates
capital flows as being inefficient and ineffective. practical in India for a variety of reasons: • First, on small savings on a regular basis to offset
The recent crisis saw, across emerging it is inconceivable that in an emerging their competitive edge.
economies, a rough correlation between the economy like India, the central bank can drive
• Second, depositors enjoy an asymmetric
extent of openness of the capital account and a single goal oblivious of the larger
the extent of adverse impact of the crisis. development context. The Reserve Bank must contractual relationship with banks. When
Surely, this should not be read as a be guided simultaneously by the objectives of interest rates are rising, depositors have the
denouncement of open capital account, but a price stability, financial stability and growth. option of withdrawing their deposits
powerful demonstration of the tenet that prematurely and redepositing at the going
Government’s fiscal consolidation
premature opening hurts more than it helps. higher rate. On the contrary, when deposit
Fiscal consolidation is important for a number rates are falling, banks do not have the
Notably, the IMF published a policy note in of other weighty reasons apart from the option of repricing deposits at the lower
February 20102 that reversed its long held inflation dimension. The Government has rate because of the asymmetry of the
orthodoxy. The note has referred to certain initiated action on the recommendations of
contract. This structural rigidity clogs
‘circumstances in which capital controls can be the Thirteenth Finance Commission (TFC) on
monetary transmission. Banks are typically
a legitimate component of the policy response the revised road map for fiscal responsibility. In
to surges in capital flows’. unable to adjust their lending rates swiftly in
drilling down the road map, the Government
response to policy signals until they are able
Now that there is agreement that controls should also keep in view two relevant
to adjust on the
can be ‘desirable and effective’ in managing objectives:
capital flows in select circumstances, the IMF • First, fiscal consolidation should shift from • cost side by repricing the deposits in the
and other international bodies must pursue exclusive reliance on increasing revenues to next cycle.
research on studying what type of controls are focus on restructuring expenditures. The • Third, and importantly, monetary
appropriate and under what circumstances so consolidation effort should target slashing transmission is also impeded because of
that emerging economies have useful recurring expenditures rather than one-off large government borrowings and illiquid
guidelines to inform policy formulation. items. bond markets.
Source: http://bit.ly/dkjVbM Edited comments from the speech titled India and the Global Financial Crisis-Transcending from Recovery to Growth by
Dr. D. Subbarao, Governor, Reserve Bank of India at the Peterson Institute for International Economics, Washington DC, April 26, 2010.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 12 The Wise Investor May 2010
Thoughts From The Frontline

Scanning the financial system


Separate traditional banking and investment The bank lobbyists are winning and it's time for
banks. I want my commercial banks to be boring. those of us in the cheap seats to get outraged.
You know, traditional lending to customers, (And while this letter focuses on the US and
services, that type of thing. financial reform, the principles are the same in
CDS Threaten the System: What happened in Europe and elsewhere, as I will note at the end.
the last credit crisis was that interlocking credit We are risking way too much in the name of
default swaps among so many banks made the allowing large private profits.) And with no "but
ENTIRE system too big to fail. first," let's jump right in.
AIG basically sold naked options in the form of Last Monday I had lunch with Richard Fisher,
credit default swaps to all and sundry (in a unit president of the Federal Reserve Bank of Dallas.
basically created after Elliott Spitzer forced Hank Mr. Fisher is a remarkably nice guy and is very
Greenberg out, which allowed the unit to get out clear about where he stands on the issues. My
of control, yet another reason to not like Spitzer). pressing question was whether the Fed would
actually accommodate the federal government if
And nothing has changed. We again have credit
it continued to run massive deficits and turn on
John Mauldin default swaps (CDS) growing, and no one knows
the printing press.
Best-Selling Author, Recognized Financial Expert who could be overextended. Once again,
everyone could be dependent on everybody Fisher was clear that such a move would be a
and Editor of Thoughts From The Frontline mistake, and he thought there would be little
else, and we have no idea if there is a Bear,
Lehman, or AIG in these woods. sentiment among the various branch presidents
to become the enabler of a dysfunctional
As I have been pounding the table about for
Congress. But that brought up a topic that he was
years, we need to put CDS on an exchange.
quite passionate about, and that is what he sees
Too Big To Fail Must Go: We have large banks ASAP. I am not against CDS, per se. CDS are
that take massive risks, which allow them to pay good things, just like futures. But they must go to
huge bonuses to management and traders; and a transparent exchange.
then if they have problems the taxpayer has to There need to be position limits, just as there in Separate traditional banking and investment
take the losses. I can see why the banks like it. I futures and commodities. There needs to be very banks. I want my commercial banks to be
don't get this business model from a taxpayer's transparent pricing and commissions. And boring. You know, traditional lending to
point of view. someone needs to monitor who owns them and customers, services, that type of thing.
First, let me say that I thought, along with most of what risks they are taking.
the world, that repealing Glass-Steagall was a Why hasn't this been done? In a word, money.
good thing. OK, we tried that experiment and it Banks make huge commissions selling CDS, as as an attack on the independence of the Fed.
didn't work out so well. Where is the movement much as 2-3%, I am told. If they were on an The Fed must be independent: There are bills in
to separate commercial banks from investment exchange the commissions would be $10 a Congress that would take away or threaten the
banks? round turn. An enormous profit center would get current independence of the Fed.
blown up. So, the banks hire lobbyists to persuade
And I must admit, Glass-Steagall is not really the I recognize that the Fed is not completely
Congress not to regulate CDS. Dodd's bill
problem. It is just a part of the problem. The independent.
basically says we will deal with them later.
problem is that parts of these large banks are Even Greenspan said so this past week: "There's
essentially hedge funds, working with cheap The good news is that there is some effort to
regulate these derivatives in Congress. It should a presumption that the Federal Reserve's an
commercial deposit money and putting the entire independent agency, and it is up to a point, but we
bank at risk. have been done a year ago, but the sooner the
better. This shouldn't be all that partisan. It is are a creature of the Congress and if ... we had
I make a lot of my income helping investors find common sense. said we're running into a bubble and we need to
hedge funds and alternative investments. I like retrench, the Congress would say 'We haven't a
trading and traders, and we have a lot of client Time for reform we can believe in: Casey clue what you're talking about.'"
Stengel, manager of the hapless 1962 New York
money with them. There is good money to be Long-time readers know I do not have much time
Mets, once famously asked, after an especially
made there, if you are riding the right horse. for Senator Chris Dodd. He has threatened the
dismal outing, "Can't anybody here play this
But we don't put money with big investment game?" This week I ask, after months of worse viability of the Fed by holding up appointments,
banks, just private funds, and there is the than no progress, "Can't anybody here even spell actually risking the ability of the Fed to get an
difference. If our funds go bad, taxpayers don't financial reform, let alone get it done?" emergency quorum if the need arose.
bail us out. We are in danger of experiencing another credit His current proposal to give the President the
When I put on my taxpayer hat, I don't want to crisis, but one that could be even worse, as the ability to appoint the president of the New York
be taking the risk so some big bank can have a tools to fight it may be lacking when we need Fed is likewise a wrong-headed political power
trading desk and make large profits that only them. With attacks on the independence of the grab. He has openly proposed to have the
benefit their shareholders and management, and Fed, no regulation of derivatives, and allowing presidents of the local districts appointed by the
I have to pick up the pieces with my tax dollars banks to be too big to fail, we risk a repeat of the board of governors.These presidents are the only
when they fail. credit crisis. real check on the board.

Sundaram BNP Paribas Asset Management 13 The Wise Investor May 2010
Thoughts From The Frontline
Let's do a brief recap. There are seven Federal How did that work out? Monetary policy is not
Reserve governors, including a chairman and vice- something you roll the dice on. Quick Thoughts on Goldman
chairman. There are twelve bank districts with Goldman Sachs is all over the news after
being charged with fraud. The way I see it,
The key here is that any attempt to politicize
independent boards that choose their district
this is essentially a charge that there was
the Fed any more than it already is must be
president. The Federal Open Market Committee
not full disclosure. And it appears to me
resisted. (That does not mean, however, that
oversees monetary policy and is composed of
that that is true. It also is true that
they should not be more transparent, along the
the seven governors and five of the district
Goldman will argue (or I think they will)
lines of my friend Ron Paul's bill. Sunshine is a
presidents.
that only very sophisticated investors who
good thing.)
signed very lengthy offering documents
The president of the New York district is always And This Thing About Leverage: The problem of
were involved, and they should have
one of the five, and the other four are rotated too big to fail is ultimately one of leverage. If a
known better. They were also reaching for
among the remaining eleven. Note that the seven small bank fails, no one really notices. If a giant
yield.
governors are appointed by the President and bank fails and puts the system at risk, it costs us a
But this is just the tip of the iceberg. I was
must be approved by the Senate. Further, the lot. I have a simple proposal to mitigate the
writing about these "CDOs Squared" in
board of governors appoints three members to problem.
late 2006, and many of these were done
each of the nine-member boards of directors of
Why not reduce the allowable leverage the larger
in 2007. It was obvious to me (and
the local districts.
a bank gets? This would clearly reduce their risk
Dodd wants to give the President the right to and encourage them to only make prudent bets others) that they were going to blow up. I
appoint the president of the New York District. (otherwise known as loans), as their risk capital often wondered who was buying the
My response is "Not no, but hell no!" The would be limited. If they wanted to make more equity tranches of these synthetic CDOs.
President (from whichever party) gets to appoint loans, then they could raise more capital or retain Last week I read a very interesting report
a majority as it is. I prefer a small token of more earnings. from propublic.org about a hedge fund
independence. And while the selection of a called Magnetar, which basically did the
district president is of course political, it is at least same trade as in the Goldman deal. And
now local and not national politics. they did those deals with nine banks. You
Further, when a local board narrows its choices can read the whole article at
http://www.propublica.org/feature/the-
In the next crisis, we will not have the tools
for district president to a few candidates, it
magnetar-trade-how-one-hedge-fund-
available to stem the tide that we did the last
submits those choices to the national board of
helped-keep-the-housing-bubble-going.
time. Rates are already low.
governors for comments, which are of course
taken seriously. (There has been at least one The financial institutions are once again
occasion when a board submitted only one name soaring on new profits, with almost 30%
and the governors asked for alternatives, and the of total corporate profits and a huge
proportion of the growth in profits
Would that hurt earnings and shareholders and
local board reasserted that this was their only
coming in the last 12 months.
limit share prices? Yes. And I don't care. If I'm not
choice. The governors backed down.)
Side bet: Goldman and at least 8 other
getting the dividends, then I don't want to be
banks are going to have serious litigation
A Fed governor is supposed to serve for 14 years, made to pick up the tab if there is a crisis. The
costs, if they don't actually have to eat the
and the terms are staggered. That way, no world of privatizing the gains and socializing the
losses of the investors in these synthetic
President gets to appoint more than a few risks must become a thing of the past.
CDOs.
governors and cannot stack the board in favour What Happens If We Do Nothing?: What
Understand, these were not
of certain policies. That has changed with Obama. happens when we have the next credit crisis,
securitizations of actual mortgages. They
Dodd held up two nominations by Bush for when a major sovereign government defaults, as I
were securitizations of derivatives that
several years, and with the resignation of Vice- think will happen? It will be a body blow to many
acted like these mortgages, and the worst
Chairman Kohn, President Obama now gets to banks, especially in Europe.
tranches of them to boot. On top of their
appoint four governors, and he has almost three
Once again, we could have banks worried about
loan losses, there could be tens of billions
years left in his term.
lending to each other or taking letters of credit,
of losses to investors in the CDOs they
Let me be clear. There are a lot of things not to which would be a disaster for world trade and
sold.
like about the Federal Reserve System. I think it the recovery we are now in.
This will play out over years.
was Milton Friedman who said we would be
As ProPublica noted, the hedge funds did
better off with a computer determining That we (and Europe and Britain) have taken so
nothing illegal. If the housing market had
monetary policy. In the next crisis, we will not long to enact real reform has the potential to
continued to go up another year or two,
have the tools available to stem the tide that we really put the world at risk. In the next crisis, we
most of them would have imploded while
did the last time. Rates are already low. will not have the tools available to stem the tide
waiting for the market to break. More
that we did the last time. Rates are already low.
We are stuck with this system. But what would be
than a few funds did. It can be a difficult
far, far worse is a system that was directly Do you think we could pass another TARP? The
controlled by Congress or the President, whether Fed's balance sheet is already bloated. It could get thing to bet on the end of the world and
Republican or Democrat. Politicians think in very much worse unless we get financial reforms that then have to wait.
short election cycles. have some bite. The issue is disclosure. I wonder if the
All this debating about a consumer protection ratings agencies knew. Would that have
changed their views?
I do not want the same people who gave us
agency and where it should be and all the other
I hope someone writes an in-depth
Freddie and Fannie and now $400 billion in

investigative book about this. I'll buy it..


taxpayer losses, who pass entitlement bills that trivia is wasting time. Fix the big things. Credit
we cannot pay for, to have the power of the default swaps. Too big to fail. Leverage. Then
printing press. "Roll the dice," said Barney Frank, worry about the details. And leave the Fed
John Mauldin
on Freddie and Fannie and low-income loans. alone.

John@FrontLineThoughts.com Copyright 2009 John Mauldin. All Rights Reserved John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts
From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 14 The Wise Investor May 2010
Perspective Global

Weakness Begets Weakness: Banks to Sovereigns to Banks


number of hurdles that essentially guarantee all time high in euros. Gold is a prudent asset
nothing will happen until all other avenues of to own in times of crisis, and it's possible that
rescue are exhausted. Judging by the recent a portion of the Greek deposit withdrawals
increase in yields on 10-year Greek bonds, were reinvested into the precious metal.
Greece may soon need more than a loan The fact remains, however, that if the Greek
package proposal to solve its fiscal problems. government cannot stem the outflows of
One aspect of the Greek situation that has deposits soon, the EU will have no other
been obscured by all the recent political choice but to undertake a real sovereign
wrangling is the crisis' impact on the Greek bailout with all its bells, whistles and arduous
Eric Sprott protocols.
banks. Although the banks were supposed to
be rock solid after all the government- It's a vicious spiral from financial crisis to
injected capital they received (not to mention sovereign debt crisis to banking crisis, and
zero-percent interest rates and generous there is no reason it can't spread to other
lending terms from the European Central European countries suffering from similar
Bank), data shows that Greek bank deposits fiscal imbalances. With Spain and Portugal
have fallen 8.4 billion euros, or 3.6 percent, in next in line with their own sovereign debt
two months since December 2009. issues, we can expect depositors in these
David Franklin countries to make similar runs to the bank for
With no restraints on capital flows within the
European Union, Greek savers are free to their cash.
The Greek debt situation has been an transfer their assets elsewhere. Given that "Guaranteed by Government" is truly
interesting case study for students of the bank deposit guarantees in Greece are the
sovereign bond markets. If there's a lesson to responsibility of the national government
be learned from Greece's experience thus far rather than the European Central Bank, we You see the connection here? Greece
it's that sovereign bailouts are far more suspect Greek citizens are pulling money out experienced a financial crisis, followed by a
complicated than bank bailouts. of their banks because they question their sovereign crisis, followed by another financial
crisis.
They require more sophisticated negotiations government's ability to honour its domestic
and proposals and involve an extra layer of deposit guarantees.
diplomacy that makes them especially difficult We envision Greek depositors asking
to accomplish. As we write this, the European beginning to lose its potency in this
themselves how a government that can't
Union has recently announced new lending environment. The International Monetary
raise enough money to stay solvent can then
Fund (IMF) seems to be preparing for such a
terms to support the Greek government, turn around and guarantee their bank
scenario with its recent announcement of a
with great efforts made to assure the markets deposits? It's a fair question to ask. tenfold increase in its emergency lending
that these new terms do not constitute a
The Greek bank stocks have been thoroughly facility.
'bailout'.
punished throughout the crisis. An index The IMF's New Arrangements to Borrow
The problem with the Greek situation is that consisting of the four largest Greek bank (NAB) facility is designed to prevent the
an actual bailout would involve an almost stocks shows an average decline of 47% since "impairment of the international monetary
impossible coordination among all the major November 2009. The deposit withdrawals system or to deal with an exceptional
powers within the EU. It would require the from these banks have been so damaging to situation that poses a threat to the stability of
unanimous pre-approval of all the EU heads their respective balance sheets (remember that system." The NAB facility has grown from
of state. bank leverage?) that the Greek banks have US$50 billion to US$550 billion with the
It would involve the European Commission, asked to borrow 17 billion euros left over mere stroke of a pen.
the European Central Bank and the from a 28 billion euro support program
Does the IMF know something that the
International Monetary Fund (IMF) all visiting launched in 2008.
market doesn't? Is this a pre-emptive
Greece to perform financial assessments. And You see the connection here? Greece measure to repel an attack by bond vigilantes'
finally, it would involve at least seven EU experienced a financial crisis, followed by a on Europe's fiscally-weakened countries?
countries affirming support through sovereign crisis, followed by another financial Sovereign Debt: In our examination of the
parliamentary votes - all of this before a single crisis. Greek situation this past month, we kept
euro is spent. There is no doubt that the Greek crisis has coming across various sovereign credit
A true bailout involves an almost impossible helped drive the gold spot price to its recent
Sundaram BNP Paribas Asset Management 15 The Wise Investor May 2010
Perspective Global
ratings. In an effort to better understand the in South Africa's resource endowment. revenue will be spent on the major
Greek situation, we decided to look at how A significant contributor to South African entitlement programs and net interest costs
the ratings agencies generate their actual GDP is derived from mining, particularly gold by 2020." This is news!
rankings and built our own model to mining. While South Africa has been the In less than ten years, using reasonable
determine a country's credit risk. largest producer of gold until very recently, assumptions, there will essentially be no
We used common metrics such as GDP per their below-ground reserves have not been money left to run the US government - 93%
Capita, Government Budget Deficits, Gross revised since 2001 when the country held of all tax revenues the US government
Government and Contingent Liabilities, the 36,000 tonnes of gold (or about 40% of the collects will go to pay social security, Medicare,
inflation rate and incorporated a simple debt global total). Medicaid and interest costs on their national
sustainability metric in order to generate our Recent stats from the United States debt.
own sovereign ratings. What we discovered in Geological Survey (USGS) estimate that This implies no money left over for defense,
the process was quite puzzling. South Africa now has only 6,000 tonnes homeland security, welfare, unemployment
It should first be noted that the rating worth of economic gold reserves remaining. benefits, education or anything else we
agencies are in the business of offering their Further review by Chris Hartnady, a former associate with the normal business of
'opinions' about the creditworthiness of associate professor at the University of Cape government. And the US government is rated
bonds that have been issued by various kinds Town, using similar techniques to those of M. AAA!?
of entities: corporations, governments, and King Hubbert (the Peak Oil theorist), suggests
The historian Niall Ferguson recently wrote
(most recently) the packagers of mortgages that South Africa could have only half of the
that, "US government debt is a safe haven the
and other debt obligations. These opinions gold reserves estimated by the USGS.
way Pearl Harbor was a safe haven in 1941."
come in the form of 'ratings' which are If these new estimates are correct, South
expressed in a letter grade. It's hard not to agree given the foregoing
Africa could have 90% less gold than claimed statements by the GAO. The risk inherent to
The best-known scale is that used by - and it's not even factored into our BBB- investors, of course, is what happens when the
Standard & Poor's ("S&P") which uses AAA rating! So what's South African debt really bond market begins to realize and react to
for the highest rated debt, and AA, A, BBB, BB, worth? An 'A+' from the ratings agencies this new level of risk.
for debt of descending credit quality.
In a speech earlier this month, Jürgen Stark,
In our opinion, as they relate to sovereign
who is a member of the board of the
debt, the ratings provided by the agencies are The ratings agencies can opine all they want, European Central Bank, stated, "We may
highly suspect. While these agencies claim to but it seems clear to us that the only true AAA
already have entered into the next phase of
provide ratings that consider the business asset to protect your wealth is gold
the crisis: a sovereign debt crisis following on
credit cycle, there appears to be very little
forward-looking information actually factored the financial and economic crisis."
into their credit models. In some cases, the The activities of the IMF would confirm this
agency ratings end up looking absurdly seems far too generous based on our cursory statement. The question we must now ask
optimistic. review of the country's fundamentals. ourselves is whether "backed by government"
This of course should come as no surprise - The rating agencies' ranking of the United actually means anything anymore. In the
we all remember the sub prime mortgages States is even more disconnected from reality. depths of the 2008 crisis it was the
that were rated AAA that are now worth To believe that the US sets the benchmark governments that stepped in to provide a
pennies on the dollar. for sovereign debt credit ratings is guarantee on financial assets. It was the
preposterous. While we have written ad governments that backed our savings
While there were some similarities in our
nauseam about the excessive debt issuance accounts, money market funds, day-to-day
rankings (for example, our model ascribed
AAA ratings to the local currency debt of by the United States, we found a recent business banking accounts, as well as debt
Australia, Canada, Finland, Sweden, New update written by United States Government issued by US banks.
Zealand which matched the ratings given by Accountability Office (GAO) to be But what happens when confidence in the
S&P), we found some glaring inconsistencies particularly instructive. government guarantee begins to erode?
in the rating results for less fiscally prudent The update noted the US's budget deficit We've seen what happened to Greece.
countries that left us scratching our heads. equivalent to 9.9% of GDP in 2009 - the Leverage inherent in the banking system
A good example is South Africa. The agencies largest 10 since 1945 - and stated that elevated a bank run, equivalent to a mere 3.6
currently rate South Africa an A+ entity, while without significant policy changes the US percent of deposits, into another full blown
our model calculated a 'BBB-' rating for its government would soon face an banking crisis. In our view it's time for
debt using our estimates. 'BBB-' is the lowest "unsustainable growth in debt". investors to acknowledge sovereign risk.
'investment grade' rating for local currency This was not news to us. It goes on to state, The ratings agencies can opine all they want,
sovereign debt - one level above junk. We however, that using reasonable assumptions, but it seems clear to us that the only true
arrived at this rating without having factored "roughly 93 cents of every dollar of federal AAA asset to protect your wealth is gold
Authors: Eric Sprott & David Franklin: The authors are a part of Sprott Asset Management (www.sprott.com). Source: This article is reproduced (with
permission) courtesy John Mauldin and InvetsorsInisght.(JohnMauldin@InvestorsInsight.com). Copyright 2009 John Mauldin. All Rights Reserved
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 16 The Wise Investor May 2010
Economic Crisis Effects

Life in the time of the Great Recession


The title is not original. It is a take off from Love in the Time of Cholera by Gabriel Garcia Marquez, Nobel Prize winning author from
Columbia, who was also recently selected as the most influential writer of the past 25 years for this book. Pardon that indulgence on our part,
but we felt this best captures what you are about to read.
Even as equity markets led by Wall Street have charted a major rally on the back of liquidity since March 2009, the ground reality on Main
Street is different. Read this eleventh part of how the Great Recession is touching lives in many-a-different way.

Showdown with Monster Banks: “We are many and group's member businesses (there are more than 150 daughter's private school, a custom-made suit and,
they are few -- and today they have to deal with us!" of them) will hang in their storefronts in the coming most recently, a couple of visits to the dentist.
yelled an organizer at a San Francisco march and rally weeks, as well as postcards scattered at cash registers Bartering gives Donovan a way to use his talent _
on Tuesday afternoon aimed at calling out Wells Fargo and other spots around town. instead of having to pay cash _ to get things he might
for its predatory lending practices. At Somerville Local First's annual street festival in June, never buy for himself.
A crowd of a few hundred pissed-off consumers local bankers will be on hand to answer questions and Bartering, trading goods or services rather than
responded boisterously by repeating a catchy chant: help people open new accounts. charging cash, is an ancient practice. But it's gained
"Hey, big banks, where's our dough? Working families Somerville Local First is one of about 130 local popularity during the economic meltdown that left
have a right to know!" business alliances that have sprung up over the last few many short on cash but rich in talent or treasures. The
The San Francisco showdown at Wells Fargo was the years to counter the power of big corporations and number of online barter ads has increased 100 percent
first of a series of events to be held throughout the urge people to choose locally made products and since 2008, according to published reports.
country this week, bearing down at the big banks' independent businesses more often. In 2008, about 250,000 North American companies
annual shareholder meetings to demand action on conducted barter transactions worth more than $16
All together, these groups count more than 30,000
everything from foreclosure prevention, job creation billion, according to the International Reciprocal Trade
businesses as members, from farmers and retailers to
and an end to predatory consumer practices. Association, based in Portsmouth, Va. businesses
builders and bankers, and there's growing evidence
Added together, these protests will bring together the that their efforts are having a measurable impact on around South Carolina's capital also are using barter _
largest number of people yet in the fight against the people's buying habits. trading a meal for carpet cleaning or trophies for
too-big-to-fail banks that foisted the recession on landscaping and painting.
Demand rises for support but donations are down:
consumers while reaping bailout money and facing Homeless on streets & in shelters surge: Mayor
This winter, for the first time in at least 24 years,
little to no consequences for their misdeeds. Bloomberg is replacing the head of the Department of
Muncie Mission's Attic Window clothing inventory was
The financiers who've captured the American nonexistent. Zero, zip, nada. Homeless Services in New York as the number of
economy are about to get more worried, however, as homeless on the streets and in shelters continues to
a broad coalition of community and labour groups "This is the first year, literally, our clothing got down to surge.
have launched a series of rallies and marches calling for zero," executive director Ray Raines said. "The first time
we ever completely emptied our shelves, our surplus Robert Hess took over the agency four years ago after
bank accountability. a successful stint in Philadelphia and vowed to "fulfil the
supply."
Businesses Embrace Move Your Money: Across the mayor's commitment to ending homelessness as we
country, independent business groups that have been The economy continues to keep demand high for used know it within five years." Since then, homelessness has
urging people to "buy local" are now making "bank clothing, furniture and appliances. Donations, however, surged as the economy tanked - and critics say Hess'
local" an increasingly prominent part of their message, don't always match demand. Thrift store donations plans to change homeless prevention efforts failed the
bringing new grassroots visibility and organizational tend to be cyclical. People give more during warm people who needed them most.
infrastructure to the Move Your Money movement. weather.
Bloomberg pledged to reduce homelessness by two-
"The message that big banks don't have our interest at Now that spring is here, clothing donations at Attic thirds by offering new carrots and sticks to help the
heart and small, local banks do is really resonating," said Window are up and a surplus once again exists, but homeless live on their own. Many of those who got out
Joe Grafton, executive director of Somerville Local furniture and appliance donations still are down. Raines of shelters were unable to keep their new apartments,
First, a two-year-old coalition of independent thinks this is just another example of people saving however, and ended up needing more city help.
businesses in Somerville, Massachusetts. money by holding onto more expensive items longer New York counts more than 36,000 people in the
This year, Somerville Local First devoted the back instead of upgrading with newer replacements. shelter system, and had no place for all of them on
cover of its widely-distributed local business guide to a Around the country, non-profit groups say the some cold nights last winter when the number of
message that urges people to move their money and slumping economy has affected donations, especially in homeless broke records. That doesn't include an
makes the case that switching to a local bank or credit states that have been hit hardest by the recession. estimated 3,111 sleeping on the streets.
union is an important way to support hometown Bartering moves more to the mainstream: As Bumper Crop of First-Time Food Gardeners: One of
businesses and your local economy. recession drains bank accounts, people turn to the healthiest by-products of the recession has been a
Support local economy & hometown business: This bartering. Over the past 30 years, Columbia artist Jeff nationwide bumper crop of first-time food gardeners.
message will also be featured in posters that the Donovan has bartered for artwork, tuition for his According to the country's leading seed company, W.
Sundaram BNP Paribas Asset Management 17 The Wise Investor May 2010
Economic Crisis Effects
Atlee Burpee & Co., there were 7.7 million new They may say the recession's over, on paper or on the "I did the best with what they (the county
gardeners trying their hand at growing vegetables in nightly news. Palumbo's electronic stack of résumés commissioners) gave me. If it wasn't enough, don't
2009. says otherwise. "It's simply amazing to me, and I still blame me, don't blame this department," said Sheriff
They were spurred to action by a desire to save can't believe it," he said, "that from age 14 up into their Billy Johnson. Johnson said he is suing the
money, as well as health and food safety concerns and 60s this many people are dying to be a minimum-wage commissioners to get a determination of whether he
possibly the widely publicized White House vegetable dog-kennel assistant." should use his limited budget to carry out obligations
garden. "Speeding 'Cushion' Dwindle, tickets rise: The defined by law or put more patrol cars on the streets.
George Ball, Burpee's chairman, predicts that 2010 will recession may be claiming a new victim: the 5-10-mph "I just can't do it anymore," he said. "I have to have the
be another banner year for home-grown vegetables, "cushion" police and state troopers across the USA court explain to the commissioners and to me what my
due to a renewed interest in gourmet cooking and the have routinely given motorists exceeding the speed
statutory duties are." The Ashtabula County Jail has
introduction of exotic new varieties. limit.
confined as many as 140 prisoners. It now houses only
As cities and states scramble to fill budget gaps with 30 because of reductions in the staff of corrections
Medical parole to cut California's prison expenses:
revenue from traffic citations, "not only are the officers. All told, 700 accused criminals are on a waiting
The man in charge of upgrading the quality of health
(speeding) tolerances much lower, but the frequency of list to serve time in the jail.
care in California's overcrowded prisons has an idea
a warning instead of a ticket is way down," says James
for taxpayers: medical parole. Ashtabula County is the largest county in Ohio by land
Baxter, president of the National Motorists Association,
J. Clark Kelso, the federal court-appointed prison a Wisconsin-based drivers' rights group that helps its area. Ashtabula County Common Pleas Judge Alfred
health receiver, suggests that California could stop members fight speeding tickets. Mackey was asked what residents should do to protect
spending millions of dollars a year if officials could grant themselves and their families with the severe cutback in
"Most people, if they're stopped now, are getting a
parole to a handful of inmates who are comatose or law enforcement.
ticket even if it's only a minor violation of a few miles
otherwise severely incapacitated.
per hour," Baxter says. He cites anecdotal evidence of "Arm themselves," the judge said. "Be very careful, be
"I am keenly aware, as are the courts," Kelso said, "that drivers being pulled over at slower speeds. vigilant, get in touch with your neighbours, because
a dollar that we can save in the prison health care we're going to have to look after each other."
L.A’s Services Shut Down Plans: After raising taxes
program is a dollar that can be spent on other and fees, again and again and again, the city is broke and Spurt in appraisal/valuation fraud: The Mortgage Asset
important priorities for the state, such as education,
money for children, the elderly, other health care Research Institute (MARI), whose subscribers represent
programs." 70% of the mortgage finance space, reports appraisal
Homeownership rate dips for second Q in a row fraud is taking a larger proportion of trickery alleged in
An aide in Kelso's office said that, conservatively, the to 67.2%-still a ways to go before mean- suspicious activity reports filed with the Financial
prison system could save $213 million over five years reverting to pre-bubble norm of 64%-David Crimes Enforcement Network. In 2008, suspected
by paroling just 32 inmates identified as severely Rosenberg, Chief Economist, Gluskin & Sheff appraisal/valuation fraud stood at 22% of mortgage
incapacitated.
fraud reports. In 2009, that jumped to 33%, said MARI.
Who & how many want to be a kennel helper:
Searching For Jobs? Just How Bad Is It?: Want a job Mayor Villaraigosa is blaming the city council for not “It is not surprising given the current state of the
scooping poop? 260 people do. They applied for a job hiking fees yet again. Having run the city into the housing market,” said Darius Bozorgi, CEO of Veros, an
opening on Craigslist posted by Guy Palumbo, owner ground, Villaraigosa calls for shutting down some city appraisal software provider to mortgage lenders and
of Roscoe's Ranch, a 24-kennel outfit. Please consider departments amid budget crisis. the secondary market. “Appraisal fraud was masked in
Recession's untold story Los Angeles Mayor Antonio Villaraigosa called Tuesday the past by rapidly appreciating housing market,” added
You want to be the kennel helper? You're on the hook for all city agencies -- except for police, other public Bozorgi. “In a rapidly depreciating market, appraisal
for the poop. You'll spend part of every day scooping safety and revenue-generating departments -- to close fraud is more apparent.”
it up (if all digestive systems work as designed) or for two days a week starting April 12 because of the Homeownership at 10-year low though still above
mopping it (when they don't). city's continuing budget crisis. long-term average: Fewer Americans own homes in
"Usually I get high-school kids applying. Or maybe a "We have to act, and we have to act quickly," Q110 than in any quarter since the beginning of 2000,
college kid for the summer. I've never seen anything like Villaraigosa said at a press conference. according to data from the Census Bureau.
this." says Palumbo. Villaraigosa's call comes one day after executives with The seasonally adjusted homeownership rate fell to an
the city's Department of Water and Power said they average of 67.2% percent of qualifying Americans who
Who now wants to be a dog-kennel assistant?
would recommend not sending a promised $73.5- own homes in Q110, dropping 1bp from 67.3% in Q
• A laid-off graphic designer million contribution to the city's beleaguered treasury
409. It was the lowest rate since the 67.1% mark in the
• A freelance photographer. because the City Council recently declined to grant a
first quarter of 2000. The rate reached its height in
• Two out-of-work teachers sent résumés. desired electricity rate increase.
Q105 at 69.2%, according to the Census.
• Someone in their mid-40s who had worked as a Arm Yourself, Depend on Neighbours, Judge’s advice:
In Q110, there were more than 19 million vacant
financial controller at an environmental services In the ongoing financial crisis in Ashtabula County, the
homes in the US. Vacancies held off the market did
company. Sheriff's Department has been cut from 112 to 49
cross 7,000 for the first time however, increasing 5%
• Past customer-service reps from WaMu, AT&T, J.C. deputies. With deputies assigned to transport
from the last quarter of 2009.
Penney and Sprint. prisoners, serve warrants and other duties, only one
patrol car is assigned to patrol the entire county of 720 Vacancies in rental housing had a more drastic change,
• Retail clerks and cashiers. square miles. increasing 10.6% nationwide in Q110 from 10.1% in the
• Out-of-work waiters. first quarter of 2009.

Sources: Alternet, Financial Armageddon, The Star Press, McClatchy, NYC News, Mish Global Economic Analysis, The Los Angeles Times, Housing Wire
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 18 The Wise Investor May 2010
Insight

The Magnetar Trade


How One Hedge Fund Helped Keep the the chances of that happening, according to deals. Merrill Lynch, Citigroup and UBS all did
Bubble Going? In late 2005, the booming U.S. several people with direct knowledge of the multiple deals with Magnetar. JPMorgan
housing market seemed to be slowing. The deals. They say Magnetar pressed to include Chase, often lauded for having avoided the
Federal Reserve had begun raising interest riskier assets in their CDOs that would make worst of the CDO craze, actually ended up
rates. Sub-prime mortgage company shares the investments more vulnerable to failure. doing one of the riskiest deals with Magnetar,
were falling. The hedge fund acknowledges it bet against in May 2007, nearly a year after housing
Investors began to balk at buying complex its own deals but says the majority of its short prices started to decline. According to
mortgage securities. The housing bubble, positions, as they are known on Wall Street, marketing material and prospectuses , the
which had propelled a historic growth in involved similar CDOs that it did not own. banks didn't disclose to CDO investors the
home prices, seemed poised to deflate. Magnetar says it never selected the assets role Magnetar played.
And if it had, the great financial crisis of 2008, that went into its CDOs. Many of the bankers who worked on these
which produced the Great Recession of Magnetar says it was "market neutral," deals personally benefited, earning millions in
2008-09, might have come sooner and been meaning it would make money whether annual bonuses. The banks booked profits at
less severe. housing rose or fell. (Read their full the outset. But those gains were fleeting. As it
statement). Dozens of Wall Street turned out, the banks that assembled and
At just that moment, a few savvy financial marketed the Magnetar CDOs had trouble
engineers at a suburban Chicago hedge fund professionals, including many who had direct
dealings with Magnetar, are skeptical of that selling them. And when the crash came, they
helped revive the Wall Street money were among the biggest losers.
machine, spawning billions of dollars of assertion.
securities ultimately backed by home They understood the Magnetar Trade as a Some bankers involved in the Magnetar Trade
mortgages. bet against the subprime mortgage securities now regret what they did. We showed one of
market. Why else, they ask, would a hedge the many people fired as a result of the CDO
When the crash came, nearly all of these collapse a list of unusually risky mortgage
securities became worthless, a loss of an fund sponsor tens of billions of dollars of new
CDOs at a time of rising uncertainty about bonds included in a Magnetar deal he had
estimated $40 billion paid by investors, the worked on. The deal was a disaster. He shook
investment banks who helped bring them housing?
his head at being reminded of the details and
into the world, and, eventually, American Key details of the Magnetar Trade remain said: "After looking at this, I deserved to lose
taxpayers. shrouded in secrecy and the fund declined to my job."
Yet the hedge fund, named Magnetar for the respond to most of our questions. Magnetar
Magnetar wasn't the only market player to
super-magnetic field created by the last invested in 30 CDOs from the spring of 2006
come up with clever ways to bet against
moments of a dying star, earned outsized to the summer of 2007, though it declined to
housing. Many articles and books, including a
returns in the year the financial crisis began. name them. ProPublica has identified 26.
bestseller by Michael Lewis have recounted
How Magnetar pulled this off is one of the An independent analysis commissioned by how a few investors saw trouble coming and
untold stories of the meltdown. Only a small ProPublica shows that these deals defaulted bet big. Such short bets can be helpful; they
group of Wall Street insiders was privy to faster and at a higher rate compared to other can serve as a counterweight to manias and
what became known as the Magnetar Trade. similar CDOs. According to the analysis, 96 keep bubbles from expanding.
Nearly all of those approached by ProPublica percent of the Magnetar deals were in default Magnetar's approach had the opposite effect
declined to talk on the record, fearing their by the end of 2008, compared with 68 -- by helping create investments it also bet
careers would be hurt if they spoke publicly. percent for comparable CDOs. against, the hedge fund was actually fueling
But interviews with participants, e-mails, The study was conducted by PF2 Securities the market. Magnetar wasn't alone in that: A
thousands of pages of documents and details Evaluations, a CDO valuation firm. (Magnetar few other hedge funds also created CDOs
about the securities that until now have not says defaults don't necessarily indicate the they bet against. And, as the New York Times
been publicly disclosed shed light on an quality of the underlying CDO assets.) has reported, Goldman Sachs did too.
arcane, secretive corner of Wall Street. From what we've learned, there was nothing But Magnetar industrialized the process,
According to bankers and others involved, illegal in what Magnetar did; it was playing by creating more and bigger CDOs.
the Magnetar Trade worked this way: The the rules in place at the time. And the hedge Several journalists have alluded to the
hedge fund bought the riskiest portion of a fund didn't cause the housing bubble or the Magnetar Trade in recent years, but until now
kind of securities known as collateralized debt financial crisis. But the Magnetar Trade does none has assembled a full narrative.
obligations -- CDOs. If housing prices kept illustrate the perverse incentives and reckless
rising, this would provide a solid return for behavior that characterized the last days of Yves Smith, a prominent financial blogger
many years. the boom. who has reported on aspects of the
Magnetar Trade, writes in her new book,
But that's not what hedge funds are after. Magnetar says it invested in 30 CDOs from "Econned," that "Magnetar went into the
They want outsized gains, the sooner the the spring of 2006 to the summer of 2007. At business of creating subprime CDOs on an
better, and Magnetar set itself up for a huge least nine banks helped the hedge fund hatch unheard of scale. If the world had been
win: It placed bets that portions of its own these deals, and Merrill Lynch, UBS and Citi all spared their cunning, the insanity of 2006-
deals would fail. did multiple deals. 2007 would have been less extreme and the
Along the way, it did something to enhance At least nine banks helped Magnetar hatch unwinding milder’.
Authors: Jesse Eisinger and Jake Bernstein of ProPublica; Copyright & Source: ProPublica – Journalism in the public interest (www.propublca.com) Read the complete article at: http://bit.ly/9oonuP
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 19 The Wise Investor May 2010
Insight

Can China save the world by consuming more? NO


Summary: Would an increase in Chinese But if the savings glut hypothesis is correct, above analysis is too simple-minded, as it is
domestic demand meaningfully improve US then the reduced saving in China will lead to based on an "Econ 101" Keynesian multiplier
and European employment prospects? This an increase in real interest rates in the world, framework. So let us ask what a more
column says that Chinese policy has a potentially reducing investment and growth sophisticated model would tell us.
relatively small impact on developed and making it more costly for governments to
economies' macroeconomic circumstances. It The model proposed in N’Diaye, Zhang, and
service their debt. Zhang (2010) is a multi-country model used
estimates that major reduction in Chinese
With anaemic growth and growing fiscal by the IMF, among others, to study
saving would improve US employment by less
than one quarter of a percentage point. deficits in many economies, these would not interactions between countries and regions
be a welcome development at present. In of the world economy.
“China is making all of us poorer” writes Paul other circumstances, however, higher real
Krugman in his blog at the New York Times What makes it particularly useful for our
interest rates might be desirable.
(Krugman 2010). He is referring to the purposes is that it contains the US, the
current account surplus of the Chinese To get a sense of the quantitative importance Eurozone, and China among the building
economy draining aggregate demand from of policy changes in China on the rest of the blocks, the relative sizes of all economies are
the rest of the world and leading to lower world let us contemplate the consequences calibrated to actual data, and production and
employment and income. Krugman is not of China reducing its external trade patterns (both in final and intermediate
alone in attributing extraordinary importance saving/investment gap, i.e. its current account goods) reflect those found in the data.
to economic developments in the Middle balance, by, say, 5% of Chinese GDP. As
China’s GDP represents about 10% of the It shows that while the decline in saving in
Kingdom. China will have a large impact on China’s own
The savings glut hypothesis – the idea that rest of the world’s GDP, the improvement in
the current account balance for all other current account balance, the spillover effects
high saving in China depressed world’s on the other regions in the model are very
benchmark real long-term interest rates in countries taken together would be 0.5% of
GDP. Let us assume that each economy in the small. In particular, the improvement in the
2006-07, thus contributing to a housing current account balances of the Eurozone
boom in the US and investors' purchases of rest of the world will get an equal
improvement in its current account balance and US are each on the order of 0.1% of the
securities backed by subprime mortgages in corresponding GDP levels.
their "search for yield" – is another example (as a percentage of its GDP) as a result of the
of the view that developments in China have increased imports of China. Given the small spillover effects on current
large macroeconomic impacts on the rest of How large will be the impact on GDP? account balances, it should come as no
the world. Assuming a multiplier of 1.5 we would get an surprise that the impact on GDP and
The economic logic behind these arguments increase in US GDP by 0.75%.[ Although it employment are equally tiny. For example,
is not at issue. High savings, whatever the obviously is helpful, it is hardly a change that the employment rate in the Eurozone
source, do reduce demand and will therefore will qualify as a major source of a recovery, increases by 0.33 percentage points and in
have a dampening effect on economic activity especially since the improvement in the US the US by 0.11 percentage points. Similarly,
in the short and medium term. They also current account would be phased in over the impact on real interest rates is negligible.
increase the supply of loanable funds and several years. Conclusion: Policies in China will not solve
hence reduce real interest rates. If we use Okun’s Law to calculate the effect the income and employment problems in
Putting the two arguments together does on employment we would conclude that the the Eurozone and the US. These problems
lead to a dilemma, however. Suppose the unemployment rate in the US would decline have to be tackled principally by measures
Chinese authorities were able to steer the by about 0.25% ((0.75/3), not much bigger internal to these economies.
economy towards more "domestic-demand- than a rounding error. Of course, Chinese authorities do have good
driven economic growth" by encouraging
domestic consumption. What about the offsetting effect of higher reasons to take actions that increase incomes
interest rates that would be the consequence and consumption of Chinese households,
What would be the consequences for the of reduced savings in China? Similar thereby improving their standard of living.
rest of the world? Greater consumption in arguments to those just made suggest that Indeed these are explicit policy objectives of
China would mean greater imports as some the offset is likely to be small because China the Chinese government.
of the expenditures would surely fall on is not yet big enough, relative to the world
goods produced abroad. Exports of the rest Author Background: Hans Genberg is an
economy as a whole, for a plausible change Adviser at the Representative office for Asia
of the world would increase leading to in its savings to have a quantitatively
greater employment and incomes, as and the Pacific of the Bank for International
important impact. Settlements, having previously been Executive
Krugman’s argument would have it.
A rebalancing of demand in the Chinese Director, Research at the Hong Kong
Another way of saying the same thing is that
economy large enough to virtually eliminate Monetary Authority, Director of the Hong
a reduction in saving in China, which is simply
the flip side to the increase in consumption, its current account surplus would not make Kong Institute for Monetary Research and
would reduce the surplus in its balance of the rest of the world wealthy.The flip side of Professor of international economics at the
trade and hence represent an improvement course is that the current deficit is not Graduate Institute of International Studies in
in the trade balance of the rest of the world. making us materially poorer. Geneva, Switzerland. Wenlang Zhang is a
The improved balance of trade would add to A more sophisticated estimate: It may be Senior Manager in the Research Department
aggregate demand. objected that the quantitative aspect of of the Hong Kong Monetary Authority.
Hyperlink to this article: http://www.voxeu.org/index.php?q=node/4937 Source: www.voxeu.com (VoxEU.org is a policy portal set up by the Centre for Economic Policy
Research (www.CEPR.org) in conjunction with a consortium of national sites)
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 20 The Wise Investor May 2010
Blog Picks

Clarity on the state of l’affaire Goldman


Ten Things You Don’t Know (or were synthetic CDO were added and removed. Why?
No Criminal Charges
misinformed by Media) About The Goldman What ACA was doing was gaming the ratings Blogger reacting to CBS story on `No criminal
Case - I have been watching with a mixture of agencies for their investment grade, Triple AAA charges in AIG collapse:
awe and dismay some of the really bad analysis, ratings approval. Their expertise (if you can call it
sloppy reporting, and just unsupported Do you think the paper shredders and 'delete
that) was knowing exactly how much junk they keys' were working overtime?
commentary about the Goldman Sachs case. I could include in the CDO to raise yield, yet still
put together this list based on what I know as a Do you think the Justice Department was
get investment grade from Moody’s or S&P. They highly motivated to nail the guy who could
lawyer, a market observer, a quant and someone
are hardly an innocent party in this. probably implicate the biggest of the TBTF
with contacts within the SEC. (Note: This
# 5 This was only one incident: The Market banks and their enablers in the government?
represents my opinions and no one else’s).
sure as hell doesn’t think so — it whacked 15% Do you think the American President was just
# 1 This is a Weak Case: Actually, no. Its a very playing you when he said, "I did not run for
off of Goldman’s Market cap. The aggressive SEC
strong case. Based upon what is in the SEC office to be helping out a bunch of fat cat
posture, the huge reaction from Goldie, and the
complaint, parts of the case are a slam dunk. The bankers on Wall Street."
short-term market verdict all suggest there is
claim Paulson & Co. were long $200 million Do you think Joe knows where a lot of the
more coming
dollars when they were actually short is a bodies are buried - on Wall Street and in
material misrepresentation-that’s Rule 10b-5, and If it were only this one case, and there was London and Washington?
its a no brainer. The rest is gravy. nothing else worrisome behind it, Goldman Do you think it pays to be a 'Friend of Lloyd'
would have written a check and quietly settled and a feeder source of campaign contributions
# 2 Robert Khuzami is a bad ass, no-
nonsense, thorough, award winning this. Their reaction (some say over-reaction) to most of the Congress?
Prosecutor: This guy is the real deal — he belies that theory. I suspect this is a tip of the Do you think the people are just itching to
busted terrorist rings, broke up the mob, took iceberg, with lots more problematic synthetics vote out every incumbent in November?
down security frauds. He is now the director of behind it. Do you think the spineless lack of serious
SEC enforcement. # 6 The Timing of this case is suspect. More investigation and reform is setting the US up
coincidental, really. The Wells notice (notification again for another, even bigger, financial scandal
He is fearless, and was awarded the Attorney
from the SEC they intend to recommend and crisis?
General’s Exceptional Service Award (1996), for
enforcement) was over 8 months ago. The White You might be right.
“extraordinary courage and voluntary risk of life
in performing an act resulting in direct benefits to House is not involved in the timing of the suit Blog: Jesse Café Americain Blogger: Jesse
the Department of Justice or the nation.” itself, it is a lower level staff decision. (Arthur Cutten) Source: http://bit.ly/aIVjwh

When you prosecute mass murderers who use # 7 This is a Complex Case: Again, no. Parts of The prosecutor in this case is Robert Khuzami.
guns and bombs and threaten your life, and you it are a little more sophisticated than others, but His legal reputation is that he is a very thorough,
kick their asses anyway, you ain’t afraid of a group this is a simple case of fraud/misrepresentation. very precise, meticulous litigator. If he decided to
of billionaire bankers and their spreadsheets. He The most difficult part of this case is likely to turn recommend bringing a case against the biggest
is the shit. My advice to anyone on Wall Street in on what is a “material omission.” Paulson’s role in baddest investment house on Wall Street bank, I
his crosshairs: If you are indicted in a case by selecting mortgages may or may not be material assure you he has a major arsenal of additional
Khuzami, do yourself a big favor: Settle. — that is an issue of fact for a jury to determine. evidence you don’t know about. Yet.
# 3 Goldman lost $90 million dollars, hence, But complex? Not even close. # 9 This case is Political: I keep hearing that
they are innocent: This is a civil, not a criminal # 8 The case looks thin: What we see in the phrase, due to the SEC party vote. It is incorrect.
case. Hence, any mens read — guilty mind — complaint is the bare minimum the prosecutor What that means is the case is not political, it
does not matter. Did they or did they not violate has to reveal to make their case. What you don’t means it has been politicized as a defense tactic.
the letter of the law? That is all that matters, see are all the emails, depositions, interrogations, There is a huge difference between the two.
regardless of what they were thinking or their and phone taps, to name a few, that the # 10 I’m not a lawyer, but . . . Then you should
P&L. prosecutors know about and Goldman does not. not be ignorantly commenting on securities
# 4 ACA is a victim in this case: Not exactly, During the litigation discovery process, this litigation. Why don’t you pour yourself a tall glass
material slowly gets turned over (some is held of ….up and go sit quietly in the corner.
they were an active participant in ratings gaming.
Look at the back and forth between Paulson’s back if there are other pending investigations into Blog: The Big Picture Blogger: Barry Ritholtz
selection and ACAs management. 55 items in the Goldman). Source: http://bit.ly/cAq1Li
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 21 The Wise Investor May 2010
Blog Picks
Absent: Ethics, Fiduciary Responsibility, Separation of Duty
I gave an example a while ago where fund managers at two large broker Being Wrong Vs. Being Early
dealers told me they do not collect fees if client positions are in cash. Thus, Todd - You've been cautious on the market since the summer. Yes, you
whether or not those managers I spoke with thought that being invested could very well be right and early. However, when something you think
was the correct thing to do, there was intense pressure to invest client would happen does not, it begs the question why? Is it because the
money not only from the manager holding cash, but also from upper parties holding the keys have a different motivation and agenda?
management at these firms.
Are they able and willing to continue or change course? What are
That my friends is the origin of "you can't time the market, so be 100% in other factors that have so far been ignored, which could have
100% of the time, for the long haul." Over the long haul, Wall Street wants contributed to a different conclusion? We, as reactors, have our own
you all in all the time so it can collect fees. decisions to make.
Worse yet, clients are steered to speculative products because those are
That is where I am at this point—trying to make a decision based on
the ones that make the broker dealers the most money.
confusing information. What I think should have happened has not.
The corruption, greed, and lack of ethics in the industry is appalling. Where Should I wait for the situation to become clearer? Or should I be
is the Fiduciary Responsibility? "early" and take the action, and accept possibility of risk and being
I am tired of ethics (or lack thereof) that allows front running and betting "wrong?"
against clients whether legal or not. I am tired of corporations talking about
It is a philosophical question as well as a practical one. You are very
"walls" between their proprietary trading units and their investment groups.
much aware of the cost of being "early" or "wrong". That is why I am
In practice the walls are invisible, if they exist at all.
interested in your opinion.- Minyan A
Moreover, I am tired of accounting rules that allow hundreds of billions of
Minyan A- Very well said; the context of time is correct, as is the multi-
dollars of assets to be held off balance sheets (Citigroup had $1 trillion in
linear equation of the markets, human emotion and intellectual agility.
off balance sheet assets at one point), and I am tired of mark-to-fantasy
We used to say the destination we arrive at pales in comparison to the
pricing (Goldman has more level 3 assets than anyone else).
path that we take to get there. For me, I attempt to execute against
In client relationships, the first and most important thing is to never do
that dynamic with my trading portfolio.
or advise a client in any way that is not in their best interest. Instead, we
have ethics that allow (even encourage), making profits at client expense. In my long-term bucket -- which has been in cash since well before the
crisis began when equity markets were 30+% higher -- I'm
We need a complete ethics overhaul but we will not see it until people are
comfortable with that posture as it's a longer-term nest egg I cannot
thrown into prison and corporations have to choose which business they
afford to lose. The only difference between being wrong and early is
want to be in as opposed to the current state of affairs where anything for
whether you're there to collect on your bet, even if the bet is not
a profit is acceptable.
making a bet.
• Firms give advice based on how much profit the firms will make on it
Opportunity cost is the other side of discipline; that doesn't sugarcoat
• Firms trade their own books to the detriment of clients
the 'miss,' but if I’ve learned anything over the course of my career,
• Firms make upgrades and downgrades after they take positions
it’s that opportunity cost is a lot easier to make up for than losses.
themselves
There is a scenario where the big picture concerns don't manifest for
• Firms front-run trades
a few years. That's what corporate credit markets are telling us but I
• Firms engage in dark pools believe the crisis has evolved into the socioeconomic spectrum. I wince
• Firms deemed too big to fail take advantage by upping leverage at the notion of being branded a dire wolf—take me at my word, I've
• Firms like Goldman Sachs have access to Fed funds at low interest rates bet big on the upside over the course of my career.
to do whatever the hell they please Some of the smartest people I know are raging bulls and that fact isn't
Sadly, this business screws the client for a fee time and time again because lost on me. The unknown variable is amorphous, dependent on social
there is no ethics, no sense of fiduciary responsibility, and no walls on mood, risk appetites and struggling sovereign nations around the
separation of duty to prevent fraud. world.
Instead, we have rules, procedures, and bailouts by taxpayers designed to Not sure if this makes sense but I most certainly hope it helps. Have
make sure the playing field is not level. This is not a free-market concept and an awesome holiday stretch.- Todd
desperately needs to change.
Blog: Minyanville Blogger of this post: (of mid-December 2009) Todd
Blog: Mish Global Economic Analysis Blogger: Mike Shedlock Source: Harrison, CEO of Minyanville Source: http://bit.ly/aOTsOn
http://bit.ly/b4rfBU
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram BNP Paribas Asset Management 22 The Wise Investor May 2010
The Book of Choice

China Shakes The World


possible only in a nation that is driven by a workers and managers complained, were
dictatorial political system. This is true today, they obliged to take a day off out of respect
too. And that is what vests China Shakes The for local laws.
World with context that could be relevant # 3 - So when the profit margins on Lifan’s
through the next decade, too.
motorbike business were squeezed, Yin’s
The book - an easy read – could leave the response was not to retreat but to attack. He
reader in awe. While there is much to admire branched out into buses, mineral water, paint
in the China growth story, do not, however, thinner, imported wine, newspapers, duck-
fail to note the political context. Also do not down jackets and a successful Chinese
miss the fact that for all the hoopla over its
football team that bore his company’s name.
10%-plus growth rate in GDP, Chinese stocks
He had been reading management books by
offered a compounded annual return of just
Jack Welch, the then CEO of General Electric,
6.9% between 2000 and 2009. Here are a
few edited anecdotes from the book: whose photograph could be seen on the
cover of pirated translations of his books
# 1 - By the time I got there, there was only
selling all over China.
the scar. A scar of ochre earth twenty- five
times the size of a football field. A dozen Diversification, he said, helps company
excavators pawed ponderously at the soil as weather downturns in the business cycle.
if absently searching for something lost. Nevertheless, it was clear that if his core
The place where one of Germany’s largest business of motorbikes was to survive, he
steel mills had stood since before World War would need to find a new source of revenue
Two was now reduced to a few mounds of and sales growth. The answer was obvious:
twisted metal scrap. I approached a man in exports.
The news is dominated by Greece and China. worker’s overalls by the side of the road. Any company that could survive in the
One is in a mess – a similar fate may He was hoisting a huge metal segment of a cauldron of Chinese competition surely had a
eventually beckon several developed world pipeline onto the back of a truck. After he chance overseas. His selected battleground
nations of the west & Australia, too, through had settled it in place, I called over to him. He was Vietnam, where Lifan came face to face
this decade), the other is rocking on the back said he had dislodged, lifted and loaded with Honda.
of massive government spending. Yet there fourteen segments like this already and now The Japanese company’s market share was
are concerns that China is entering bubble there were only three left, enough for around 70 per cent in Vietnam when Lifan
territory. Irrespective of what view one takes another week’s work.
made its first forays, but Yin had the obvious
of the Chinese equity and real estate markets, Then it would all be over. I asked him where advantage of price. His opening salvo was to
as an economic player, China has taken its the pipeline was going. He straightened his offer bikes that looked virtually identical to
place at the top table. back and made as if to throw something in a those of Honda but cost one-third as much. It
There have been several books on China in gentle arc far into the distance. `China’ he proved a powerful lure and within three
the past year or so – it is obviously a thriving said.
years, Lifan had outstripped its old rival.
business, given the interest overseas in the # 2 - According to ThyssenKrupp, the Horde
# 4 - A month or so later we were back in
country. We have, however, featured this plant would have been closed regardless of
month a book that dates to 2006. In China Haagen-Dazs and she informed me that the
whether a buyer for it had been found. But
Shakes The World- The Rise of a Hungry others have had their doubts. The Chinese deliberations on joining the WTO were
Nation, author James Kynge takes us through pounced so quickly on the purchase, signing proceeding. When I asked her when and how
the emergence of China as a major player in to buy it just one month after the plant was they had resumed, she replied that they had
the global economy through several idled, that some in Horde suspected a never stopped. ‘We are prepared to make
anecdotes from different parts of the world. behind-the scenes deal. concessions to benefit ourselves in the long
In a book that is notable for the depth of Whatever the truth, it was not the Chinese run,’ she said.
ground-level research, Kynge provides many- acquisition so much as the events that were It is this flexibility and pragmatism, visible in
an-example of the various ways in which the to follow that stunned the local population. China’s transformation over and over again,
rising economic prowess of China has As if out of nowhere, nearly a thousand that supplies the counter-argument to future
emerged and how it has impacted Chinese workers arrived. They dosed down scenarios full of doom and gloom. China is
people/towns/cities/industries/finances in in a makeshift dormitory in a disused building perhaps too much wedded to the world, too
different parts of the world. in the plant and worked twelve hours a day deeply insinuated into its organizations and
What this showcases is a relentless and throughout the summer. Seven days a week. treaties, and too dependent on others to bite
coordinated process at work, obviously Only later, after some of the German the hands that feed it.

Book: China Shakes The World – The Rise of a Hungry Nation. Author: James Kynge Paperback: 256 pages Publisher: Phoenix ISBN-10: 0753821559 ISBN-13:
978-0753821558 Price: Rs 428 at www.flipkart.com (a discount of 15% and free delivery in India). Comment and pick of extracts by S.Vaidya Nathan

Sundaram BNP Paribas Asset Management 23 The Wise Investor May 2010
Taking note of

Greece & Goldman


Civil and criminal investigations stalk Goldman’s ‘God’s Work’

A few months ago, the CEO of Goldman Sachs, Lloyd Blankfein had in an
interview (http://bit.ly/1TPRAO) with The Times of London in November
2009 suggested that his firm was doing God’s Work. Now its reputation is
on the line. It battles an SEC civil suit charging the firm with selling to
investors, assets, which had been shorted with the firm’s help by a hedge
fund. Criminal investigations have also been commenced by different arms
of the U.S government. The stock has shed about 20% of its market-cap
following the twin announcements last month. Goldman’s approach in
selling such products and its consequences were superbly captured in a
cartoon `If Goldman Sachs made cars” – Peter Bagley at comics.com
(Check it at out at this link http://bit.ly/97c5Hw of Investment Postcards
from Cape Town - Prieur du Plessis’s international investment blog)

A German bank has become the first to stop dealing with Goldman after
these developments. The moves are likely to lead to more law suits in the
years ahead and this is a story that could potentially run for years. This story
may not also be confined just to Goldman and there are indications that
other big firms are also under investigation. These moves mark a welcome
first baby-step towards accountability for perpetrating the financial crisis and
Bailed-out Greece could eventually default its attendant woes. For a pithy comment that captures the situation nicely,
take note of this view:
The EU and IMF have announced a 110 billion euro - roughly $146 billion
- rescue plan for Greece, attached to an austerity plan that unions American taxpayer: With all the bail-outs and help homeowners
immediately denounced as "savage”. programs and misfiring unemployment plans, you have very
Greece is a beautiful country, but its economy is not a model of precious little money left. And if you believe in God, you should
flexibility. heed this warning going forward: If Goldman Sachs is doing God’s

Anecdotally, having been, in my earlier years, among a train full of work, then the American people can’t afford God’s work

passengers tossed out near a field in the middle of the night upon anymore.
arriving at the Greek border, hoofing it in the dark to the nearest
The Automatic Earth (http://bit.ly/cqvgYp)
town, bumming a ride to Thessaloniki, and eventually hiring a taxi to
drive the full length of the country to Athens with five chain- Poetic Fit, too: There is a neat fit in our picks this month. When Greece
smokers who refused to crack a window, while every other form of was trying to become a member of the Euro Zone, Goldman Sachs helped
transportation was on a nationwide strike, I suspect that budget it hide the true state of its finances by structuring instruments that made
discipline to the extent required will not be easily implemented, and Greece’s finances look better than what they were and made it possible for
may be so hostile to GDP and tax revenues as to make default the country to `comply’ with the norms for entry into the Euro zone.
inevitable in any event. Greece is in a mess today and Goldman may be headed towards a like
John Hussman – CEO, Hussman Funds (www.hussmanfunds.com) denouement, at least in terms of damage to its reputation.
Sundaram BNP Paribas Asset Management 24 The Wise Investor May 2010
Voices
It is a malaise and the end of an era. We have created a hunger just to make money, speculative money and damn the consequences
almost – we are either all investing in houses or stocks, soon to be Chinese stocks. But, it has also created a Pavlovian response where
every crisis was an opportunity to buy more. I think time is receding, it is passing, and it is leaving us behind. My difficulty is that I do
not sell dreams. I live in the real world.
Hugh Hendry, hedge fund specialist and a co-founder of investment boutique Eclectica

The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really,
suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better
it would be if the bankers took the losses just as they do the profits. Happily, there's a ready-made and time-tested solution. If their
bank fails, let the bankers themselves fail.
James Grant, publisher of the Grant’s Interest Rate Observer
I never lose sleep with my big gold position, but I do lose sleep when I have a big dollar position. I always see pullbacks in gold as
buying opportunities because what I’ve discussed are the big forces really moving things. There are very few people on this planet that
understand the big macro picture behind the movement to gold. We’re now in a 10-year bull market in gold. We ran a twenty-year
bear market, so it might be a twenty-year bull market.
Fred Hickey, author of the High-Tech Strategist newsletter
This decline after the August peak should be far more serious and we believe it will be the start of a major market rout continuing
into the middle of 2011, at a minimum. The deflationary recession that will accompany this market collapse, at least in the
developed world, will put extreme pressure on the Eurozone and the EMU structure. The second half of this decade
will witness a very different world.
John Taylor, CIO of FX-Concepts, the world's biggest FX fund.

I still have a deep, deep concern about the leverage in the banking system. I look at the inability of governments who are spending
vast amounts of money to generate much growth in GDP. I can give the example of running a $1.5 trillion deficit last year and GDP
goes up $200 billion. So we are not getting much bang for the buck but we still owe the buck at the end of the year. I also worry
about what's going on in China.
Eric Sprott, CEO & Senior Portfolio Manager, Sprott Asset Management

I have stated openly that I expect the UK 1970s experience of almost 30% inflation to be repeated in my lifetime. I also expect this
to be reached in countries that got nowhere near this 30% rate in the 1970s. But despite my belief that we will see a paradigm change
over the next decade or so, I continue to retain our heavy overweight for government bonds.We are now only one cyclical failure
from falling into outright deflation.
Albert Edwards, Strategist at Societe Generale who saw the crisis coming.
The financial world is on the wrong track and that we may be hurtling towards an even bigger boom and bust than in the credit crisis.
The success in bailing out the system on the previous occasion led to a super bubble, except that in 2008 we used the same methods.
Unless we learn the lessons, that markets are inherently unstable and that stability needs to the objective of public policy, we are facing
a yet larger bubble.
George Soros, Chairman of Soros Fund Management.

Well, always with these things, we're often early and it appears we're early here (on China) too. But the good news for office building
bubbles is that they're pretty tangible. So when you see the apartments stop selling, when you stop seeing foundations being laid, and
holes in the ground, when you see the cranes not going up anymore, buildings being half-complete - that'll tell you you're at the end.
Jim Chanos, President, Kynikos Associates & famed short-seller.

At some point the bubble will burst. Hopefully for all our sakes its sooner rather than later. The longer we are forced to wait, the bigger
the bubble will be and the more horribly damaging the bursting process will be. And if we are forced to wait and the bubble gets
anywhere like the one that went pop in late 2007 I have ZERO idea who will credibly be able to bail us all out the next time round
- certainly not our governments.
Bob Janjuah, Chief Market Strategist, Royal Bank of Scotland & early caller on ongoing crisis

Things look a lot grimmer when one gets two hours outside of Tokyo to places like Hokkaido. As the government’s fiscal position has
steadily weakened, the jobs have become far scarcer. True, there are beautifully paved roads all around, but they go nowhere. As the
population ages and shrinks, more people will retire and start selling government bonds they are now lapping up. At some point, Japan
will face its own Greek tragedy.
Kenneth Rogoff, Author of This Time is Different, Eight Centuries of Financial Folly.
Source: Investment Week, Washington Post, Financial Times, Wall Street Cheat Sheet, Zero Hedge, CNBC, The Economist/Reuters, Business Insider, Project Syndicate. Note: Andrew Odlyzko of
the University of Minnesota has produced a couple of fascinating new papers* on contemporary forecasting during the British railway booms of the 1830s and 1840s.
Sundaram BNP Paribas Asset Management 25 The Wise Investor May 2010
The journey, over 30 years, of Rs 100 invested in the Sensex
Years Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010 13176 13234 14118 14143

2009 7591 7162 7820 9185 11780 11674 12622 12619 13795 12804 13634 14068

2008 14216 14159 12601 13925 13222 10843 11563 11731 10359 7884 7324 7771

2007 11350 10421 10529 11174 11715 11801 12526 12339 13928 15979 15597 16341

2006 7990 8353 9086 9700 8376 8546 8654 9423 10032 10441 11032 11105

2005 5281 5408 5230 4957 5409 5794 6150 6287 6955 6357 7079 7570

2004 4588 4565 4503 4555 3834 3863 4165 4182 4497 4569 5022 5318

2003 2618 2645 2456 2384 2562 2905 3055 3419 3587 3952 4063 4703

2002 2667 2869 2794 2689 2518 2614 2406 2562 2409 2376 2601 2720

2001 3485 3421 2903 2835 2925 2784 2682 2614 2265 2408 2648 2628

2000 4193 4388 4028 3752 3571 3825 3447 3606 3295 2989 3220 3199

1999 2671 2605 3012 2679 3193 3335 3659 3945 3838 3580 3723 4032

1998 2597 2918 3136 3227 2969 2618 2587 2363 2499 2265 2264 2461

1997 2725 2942 2707 3094 3025 3428 3468 3122 3143 3063 2868 2947

1996 2362 2732 2712 3082 3000 3071 2849 2831 2609 2548 2328 2485

1995 2915 2756 2627 2524 2700 2616 2728 2696 2814 2758 2412 2505

1994 3224 3452 3044 3017 3079 3292 3397 3696 3448 3439 3322 3165

1993 2159 2266 1837 1709 1766 1794 1875 2121 2183 2154 2604 2708

1992 1855 2280 3451 3131 2421 2481 2174 2442 2655 2278 2028 2107

1991 791 983 941 995 1053 1023 1315 1447 1519 1522 1533 1538

1990 550 545 629 640 645 685 832 1005 1144 1043 964 844

1989 547 535 575 629 557 638 577 591 603 601 556 627

1988 356 330 321 380 467 470 486 478 534 527 570 537

1987 446 443 411 386 372 350 394 389 362 363 347 356

1986 482 529 462 482 504 488 480 442 474 464 403 422

1985 232 245 285 312 322 385 415 377 350 384 400 425

1984 200 202 198 190 194 201 204 201 214 216 209 219

1983 179 176 170 173 191 191 190 192 190 191 193 204

1982 177 184 175 182 184 171 174 172 184 179 184 190

1981 118 129 140 150 143 170 168 156 165 168 173 183

1980 100 103 104 102 101 98 104 113 108 105 113 119

1979 100 102 100 101 93 94 96 100 93 96

Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management Analysis: S Vidhya
Sundaram BNP Paribas Asset Management 26 The Wise Investor May 2010
Analysis

Growth Across The Cap Curve


The Cap-Curve Over The Past Decade - Market cap of different parts of the NSE-listed stocks
Stock group by Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 March-10 Change
market cap Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Rs Crore Times
Market-Cap Threshold (Rs Crore)

50th Stock 1650 1197 1803 4270 6454 8936 13192 28330 10767 24993 26033 15.8

100th Stock 636 432 622 1598 2272 3733 5389 11269 4742 9224 11040 17.4

200th Stock 160 141 198 507 838 1446 2093 4625 1645 3838 4187 26.1

300th Stock 87 66 88 247 403 807 1235 2577 854 1934 2179 25.1

First 50 420667 360550 440036 857785 1116723 1542520 2232901 4023795 1959009 3664004 3755582 8.9

Second 50 50542 36857 49977 128229 187160 286343 417539 851703 374882 811167 901369 17.8

Top 100 471209 397407 490012 986014 1303883 1828863 2650440 4875498 2333891 4475171 4656951 9.9

Next 100 (# 101 - # 200) 31902 23563 35262 88556 131575 219309 340934 694419 268354 579526 636904 20.0

Next 100 (# 201 - # 300) 12027 9356 14042 34934 59316 109921 156962 341971 119713 279142 305420 25.4

Rest (# 301 onwards) 11942 9283 10596 27286 53968 123882 208574 539752 173305 406243 448846 37.6

Basket of NSE Stocks 527081 439609 549912 1136790 1548742 2281975 3356910 6451640 2895264 5740082 6048121 11.5

# of NSE Stocks 674 699 628 648 710 826 949 1162 1279 1310 1351 2.0

Average Market Cap Per Stock 782 629 876 1754 2181 2763 3537 5552 2264 4382 4477 5.7

The Cap-Curve Over The Past Decade - Share in market cap of different parts of the NSE-listed stocks
Stock group by Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 March-10 Change
market cap % % % % % % % % % % % P-Points
First 50 79.8 82.0 80.0 75.5 72.1 67.6 66.5 62.4 67.7 63.8 62.1 -17.7

Second 50 9.6 8.4 9.1 11.3 12.1 12.5 12.4 13.2 12.9 14.1 14.9 5.3

Top 100 89.4 90.4 89.1 86.7 84.2 80.1 79.0 75.6 80.6 78.0 77.0 -12.4

Next 100 (# 101 - # 200) 6.1 5.4 6.4 7.8 8.5 9.6 10.2 10.8 9.3 10.1 10.5 4.5

Next 100 (# 201 - # 300) 2.3 2.1 2.6 3.1 3.8 4.8 4.7 5.3 4.1 4.9 5.0 2.8

Rest (# 301 onwards) 2.3 2.1 1.9 2.4 3.5 5.4 6.2 8.4 6.0 7.1 7.4 5.2

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 -

The Cap-Curve Over The Past Decade - Growth in market cap of different parts of the NSE-listed stocks
Stock group by Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 March-10 CAGR
market cap % % % % % % % % % % % %
First 50 - -14.3 22.0 94.9 30.2 38.1 44.8 80.2 -51.3 87.0 2.5 26.7

Second 50 - -27.1 35.6 156.6 46.0 53.0 45.8 104.0 -56.0 116.4 11.1 36.5

Top 100 - -15.7 23.3 101.2 32.2 40.3 44.9 84.0 -52.1 91.7 4.1 28.1

Next 100 (# 101 - # 200) - -26.1 49.7 151.1 48.6 66.7 55.5 103.7 -61.4 116.0 9.9 38.2

Next 100 (# 201 - # 300) - -22.2 50.1 148.8 69.8 85.3 42.8 117.9 -65.0 133.2 9.4 41.9

Rest (# 301 onwards) - -22.3 14.1 157.5 97.8 129.5 68.4 158.8 -67.9 134.4 10.5 48.0

Total - -16.6 25.1 106.7 36.2 47.3 47.1 92.2 -55.1 98.3 5.4 30.2

Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management Analysis: Satish Mahadevan
Sundaram BNP Paribas Asset Management 27 The Wise Investor May 2010
Best & Worst Performers Global
Month/Year/Category MSCI MSCI 2009 One Three Six One Three Five
Emerging Market World YTD Month Months Months Year Years Years
Apr-10 Best 1020 1199 Indonesia Indonesia Turkey Indonesia Indonesia Gold Brazil
Worst China Honk Kong Russia Honk Kong Japan Japan Japan
Mar-10 Best 1010 1201 Indonesia Turkey Turkey Mexico Indonesia Gold Brazil
Worst Taiwan Gold Taiwan Taiwan Gold Japan Japan
Feb-10 Best 936 1133 Gold Crude Japan Russia Indonesia Gold Brazil
Worst Taiwan Turkey China Japan Gold Japan Japan
Jan-10 Best 934 1119 Russia Turkey Turkey Russia Indonesia Gold Brazil
Worst Brazil Brazil Honk Kong Honk Kong Gold Japan Japan
Dec-09 Best 989 1168 Brazil Turkey Crude Indonesia Brazil Gold Brazil
Worst Dow Jones Gold Korea Japan Dow Jones Japan S&P 500
Nov/09 Worst 953 1149 Brazil Gold Brazil Indonesia Indonesia Gold Brazil
Worst Japan Japan Japan Japan Japan Japan Japan
Oct/09 Best 914 1106 Indonesia Crude Russia Indonesia Indonesia Gold Brazil
Worst U.S (Dow) Korea Japan Japan US (Dow) Japan US (Nasdaq)
Sep/09 Best 914 1127 Indonesia Brazil Russia Indonesia Indonesia Brazil Brazil
Worst Gold Japan Crude Crude Commodity UK US (Dow)
Aug/09 Best 839 1086 Indonesia Turkey Turkey Indonesia Gold Brazil Brazil
Worst US (Dow) Hong Kong Russia Gold Russia Russia US (S&P 500)
Jul/09 Best 844 1045 Indonesia Indonesia India Indonesia Gold China Brazil
Worst UK Commodity Gold Gold Russia Russia US (Nasdaq)
Jun/09 Best 761 964 Crude Indonesia India Crude Turkey China Brazil
Worst UK Russia Gold UK Russia Russia UK
May/09 Best 773 970 Russia India Russia Indonesia Gold Brazil Brazil
Worst US (Dow) US (Nasdaq) Gold US (Dow) Russia Japan Japan
Apr/09 Best 663 893 Brazil Russia Russia Indonesia Gold Gold Brazil
Worst US (Dow) Gold Gold Crude Russia Russia Japan
Mar/09 Best 570 805 Crude Korea Crude Gold Gold Gold Brazil
Worst Dax Gold Dax Crude Russia Russia Taiwan
Feb/09 Best 499 751 Gold Taiwan Gold Gold Gold Gold Gold
Worst Mexico Korea Mexico Russia Russia Russia Taiwan
Jan/09 Best 530 839 Crude Crude Gold Gold Gold Gold Gold
Worst South Africa South Africa Russia Russia Russia Russia Taiwan
Dec/08 Best 567 920 Gold Indonesia Gold Gold Gold Gold Gold
Worst Russia Crude Crude Russia Russia Russia Taiwan
Nov/08 Best 527 893 Gold Gold Gold Gold Gold Gold Brazil
Worst Russia Crude Russia Russia Russia Russia Taiwan
Oct/08 Best 571 957 Gold UK US (Dow) Gold Gold Gold Brazil
Worst Russia Indonesia Russia Russia China Japan Taiwan
Sep/08 Best 787 1182 Gold Gold US (Dow) Crude Crude Gold Brazil
Worst India Russia Russia Russia China Japan Taiwan
Aug/08 Best 956 1345 Crude Turkey Crude Crude Crude Brazil Brazil
Worst India Russia India India Europe Europe US (Dow)
Jul/08 Best 1042 1367 Crude Turkey Crude Crude Crude Brazil Brazil
Worst India Russia India India Europe Europe US (Dow)
Jun/08 Best 1087 1402 Crude Gold Crude Crude Crude Brazil Brazil
Worst India India India India Europe Europe US (Dow)
Dec'07 Best 1246 1589 Brazil India India India Brazil Brazil Brazil
Worst Japan China Japan Japan Japan US (S&P 500) US (Dow)
Europe: MSCI Europe; Commodity: S&P GSCI Index; Rank based on returns in $ terms.Date Source: Bloomberg Analysis: A Preetha
Sundaram BNP Paribas Asset Management 28 The Wise Investor May 2010
Best & Worst Performers India
Month/Year/Category S&P S&P 2009 One Three Six One Three Five
CNX Nifty CNX 500 YTD Month Months Months Year Years Years
Apr-10 Best 5278 4368 Consumer Durables Consumer Durables Consumer Durables Consumer Durables Consumer Durables Metals Capital Goods
Worst Realty Oil & Gas Public Sector Realty Oil & Gas IT Healthcare
Mar-10 Best 5249 4313 Consumer Durables Metals Consumer Durables Metals Metals Metals Capital Goods
Worst Realty Public Sector Realty Realty FMCG IT IT
Feb-10 Best 4922 4128 Consumer Durables Consumer Durables Consumer Durables Metals Metals Metals Capital Goods
Worst Realty Realty Realty Realty FMCG IT Healthcare
Jan-10 Best 4882 4156 Consumer Durables Consumer Durables Small-Cap Small-Cap Metals Metals Capital Goods
Worst Realty Realty Realty Realty FMCG IT Healthcare
Dec-09 Best 5201 4329 Metals Small-Cap Metals Auto Metals Metals Capital Goods
Worst FMCG FMCG Realty Capital Goods FMCG IT Healthcare
Nov/09 Best 5033 4145 Metals Metals Metals IT Metals Metals Capital Goods
Worst FMCG Reality Reality Reality FMCG IT Healthcare
Oct/09 Best 4712 3853 Metals FMCG Healthcare Metals Metals Oil & Gas Capital Goods
Worst FMCG Realty Realty Oil & Gas Oil & Gas IT Healthcare
Sep/09 Best 5084 4119 Auto Banks Small Cap Realty Auto Oil & Gas Capital Goods
Worst FMCG FMCG FMCG FMCG Oil & Gas IT Healthcare
Aug/09 Best 4662 3840 Auto Realty IT Realty Auto Oil & Gas Banks
Worst Healthcare FMCG Oil & Gas FMCG Capital Goods IT Healthcare
Jul/09 Best 4636 3764 Metals Auto Realty Metals Auto Oil & Gas Capital Goods
Worst Healthcare Capital Goods Oil & Gas FMCG Realty IT Healthcare
Jun/09 Best 4291 3470 Metals IT Realty Metals Public Sector Banks Capital Goods
Worst FMCG Realty FMCG FMCG Realty IT Healthcare
May/09 Best 4449 3580 Auto Realty Auto Power FMCG Oil & Gas Capital Goods
Worst Consumer Durables FMCG Consumer Durables Consumer Durables Realty Consumer Durables Healthcare
Apr/09 Best 3474 2663 Auto Realty Auto Power FMCG Oil & Gas Capital Goods
Worst Consumer Durables FMCG Consumer Durables Consumer Durables Realty Consumer Durables Healthcare
Mar/09 Best 3021 2295 Auto Metals Auto FMCG FMCG Oil & Gas Capital Goods
Worst Realty FMCG Realty Realty Realty Small-Cap Auto
Feb/09 Best 2764 2113 Auto Auto Auto FMCG FMCG Oil & Gas Capital Goods
Worst Realty Realty IT Realty Realty Consumer Durables Metals
Jan/09 Best 2875 2209 Oil & Gas Oil & Gas Power FMCG FMCG Oil & Gas Capital Goods
Worst Realty Realty IT Realty Realty Small-Cap Auto
Dec/08 Best 2959 2296 FMCG Realty FMCG FMCG FMCG Oil & Gas Capital Goods
Worst Realty IT Metals Metals Realty Auto Metals
Nov/08 Best 2755 2093 FMCG FMCG FMCG FMCG FMCG Oil & Gas Capital Goods
Worst Realty Realty Realty Realty Realty Auto Metals
Oct/08 Best 2886 2226 FMCG IT FMCG FMCG FMCG Oil & Gas Capital Goods
Worst Realty Realty Realty Realty Realty Small-Cap Metals
Sep/08 Best 3921 3059 FMCG FMCG Public Sector Healthcare FMCG Oil & Gas Capital Goods
Worst Realty Realty Metals Realty Realty Small-Cap Healthcare
Aug/08 Best 4360 3489 Healthcare Banks Healthcare Healthcare Healthcare Oil & Gas Capital Goods
Worst Realty Small-Cap Realty Realty Realty Small-Cap Healthcare
Jul/08 Best 4333 3457 Healthcare Public Sector Healthcare Healthcare Oil & Gas Capital Goods Capital Goods
Worst Realty IT Realty Realty Realty Auto FMCG
Jun/08 Best 4041 3203 Healthcare Capital Goods Healthcare Healthcare Oil & Gas Capital Goods Capital Goods
Worst Realty Realty Realty Realty Realty Auto FMCG
Dec'07 Best 6139 5355 Power Consumer Durables Small-Cap Metals Power Capital Goods Capital Goods
Worst IT Capital Goods IT IT IT Healthcare IT
Rank based on returns in INR terms. Sector Information is based on BSE Indices; Data Source: Bloomberg; Analysis: Sundaram BNP Paribas Asset Management Analysis: A Preetha
Sundaram BNP Paribas Asset Management 29 The Wise Investor May 2010
Performance Tracker Global
Year-To-Date One Month Three Months Six Months One Year Three Years Five Years
Index
Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank

S&P 500 6.4 9 1.5 12 10.5 10 14.5 9 36.0 16 -19.9 21 2.6 23


Dow Jones 5.6 11 1.4 13 9.3 14 13.3 10 34.8 18 -15.7 19 8.0 21
Nasdaq Composite 8.5 5 2.6 8 14.6 4 20.3 4 43.3 14 -2.5 12 28.1 18
Nikkei 225 4.8 12 -0.3 18 8.4 17 10.2 17 25.3 25 -36.5 25 -89.9 25
Dax 3.0 15 -0.3 17 9.4 13 13.3 11 28.6 24 -17.2 20 46.6 15
FTSE 100 2.6 17 -2.2 24 7.0 21 10.1 18 30.9 22 -13.9 17 15.7 20
S&P GSCI Index Spot 4.8 13 3.7 6 13.1 7 10.7 16 50.3 12 15.9 8 55.5 14
MSCI World 2.6 18 -0.2 16 7.1 20 8.4 21 34.2 19 -24.0 22 6.7 22
MSCI Europe 2.1 19 -1.4 23 5.2 24 9.3 20 29.0 23 -33.1 24 -0.7 24
MSCI Asia ex-Japan 2.9 16 1.9 10 9.6 12 10.1 19 48.3 13 5.0 10 72.1 12
Crude 11.4 2 5.8 3 22.0 2 15.6 8 75.1 4 28.4 4 74.3 10
Gold 7.5 7 5.9 2 9.1 15 12.8 12 32.8 21 73.8 1 171.5 4

Emerging Markets (MSCI Indices)

BRIC 0.4 21 -0.5 19 8.5 16 7.2 23 56.1 8 14.1 9 155.1 5


Brazil -1.8 24 -1.3 22 10.3 11 7.5 22 63.2 7 44.7 3 244.2 1
Russia 5.9 10 -0.8 21 3.4 25 11.9 13 65.3 6 -28.6 23 65.8 13
India 6.7 8 1.8 11 12.7 8 19.6 5 81.9 2 18.5 7 179.3 3
China -2.2 25 -0.6 20 7.1 19 0.7 24 38.3 15 20.5 5 153.6 6
Korea 8.6 4 5.6 4 14.1 6 18.5 6 53.8 9 -1.7 11 73.4 11
Taiwan -1.4 23 2.5 9 5.5 23 11.2 15 35.8 17 -3.3 14 17.7 19
Singapore 1.1 20 3.0 7 7.6 18 11.7 14 52.4 10 -14.5 18 40.5 16
Honk Kong -0.7 22 -2.9 25 6.1 22 -0.2 25 33.8 20 -3.1 13 32.8 17
Indonesia 16.6 1 6.0 1 14.3 5 27.0 1 95.2 1 55.4 2 213.0 2
Mexico 7.6 6 -0.1 15 14.7 3 20.6 3 67.6 5 -6.3 16 114.0 8
South Africa 4.7 14 0.6 14 10.6 9 15.7 7 52.2 11 -3.4 15 78.6 9

Turkey 9.5 3 3.9 5 28.4 1 22.4 2 77.2 3 19.9 6 116.0 7

Top Performer Indonesia Indonesia Turkey Indonesia Indonesia Gold Brazil


Worstt Performer China Honk Kong Russia Honk Kong Nikkei 225 Nikkei 225 Nikkei 225

Source: Bloomberg; P/E: Price-to-Earnings ratio; P/B: Price-to-Book ratio; 12-M: 12 Months; Returns is in percentage and in U.S. Dollar terms for each period and not on an annualised basis. Analysis: A Preetha
Sundaram BNP Paribas Asset Management 30 The Wise Investor May 2010
Performance Tracker India
Year-To-Date One Month Three Months Six Months One Year Three Years Five Years
Index
Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank

Cap-Curve Indices
BSE Sensitive Index (Sensex) 0.5 18 0.2 20 7.3 16 10.5 17 54.0 19 26.6 19 185.3 8

S & P CNX Nifty 1.5 16 0.6 18 8.1 12 12.0 16 51.9 20 29.1 18 177.4 11

Nifty Junior 6.7 6 2.9 7 11.0 7 21.0 8 109.8 5 47.2 6 175.4 12

Nifty 100 2.3 12 0.9 15 8.6 10 13.4 13 59.4 17 31.8 15 — —

CNX Mid-Cap 8.5 4 4.6 6 11.9 5 22.5 5 108.8 6 53.7 5 181.0 10

BSE Mid-Cap 7.0 5 5.6 4 10.4 9 19.5 10 104.5 7 24.0 21 135.6 18

BSE Small-Cap 10.2 3 8.4 2 11.8 6 30.4 2 133.6 3 31.6 16 139.8 17

BSE 100 1.6 14 0.8 16 7.7 14 12.6 15 61.6 16 33.4 13 183.1 9

BSE 200 2.3 13 1.4 13 8.0 13 13.6 12 66.5 13 33.9 12 171.6 13

BSE 500 2.9 11 1.8 10 8.2 11 14.7 11 70.1 12 32.6 14 169.8 14

S & P CNX 500 0.9 17 1.3 14 5.1 19 13.4 14 64.0 14 29.3 17 158.7 16

Sector Indices

BSE Auto 4.9 8 1.7 11 12.2 3 23.7 4 123.0 4 56.0 4 201.7 6

BSE Banks 11.2 2 4.7 5 15.5 2 19.5 9 96.2 9 62.1 2 218.3 5

BSE Capital Goods -0.6 20 -0.4 21 6.9 17 9.0 18 77.4 10 42.0 10 326.8 1

BSE Consumer Durables 22.7 1 10.1 1 22.3 1 38.7 1 164.3 1 26.0 20 195.6 7

BSE FMCG 3.1 10 1.6 12 5.6 18 2.4 22 37.4 22 59.8 3 158.8 15

BSE Healthcare 6.5 7 0.3 19 12.2 4 22.1 6 74.2 11 44.3 8 120.1 21

BSE IT 3.3 9 2.3 9 7.6 15 21.1 7 101.2 8 6.0 22 127.5 20

BSE Metal 1.5 15 -1.7 22 10.7 8 26.7 3 156.5 2 79.6 1 220.9 4

BSE Oil & Gas -5.2 22 -2.3 23 -0.2 21 5.2 21 22.0 23 39.1 11 238.5 2

BSE Public Sector -4.4 21 0.8 17 -3.8 23 8.5 20 55.4 18 42.3 9 128.3 19

BSE Power -0.6 19 2.8 8 3.6 20 8.8 19 50.1 21 45.3 7 222.7 3

BSE Realty -9.5 23 6.6 3 -0.3 22 -8.8 23 63.9 15 — — — —

Top Performer Consumer Durables Consumer Durables Consumer Durables Consumer Durables Consumer Durables Metal Capital Goods
Worst Performer Realty Oil & Gas Public Sector Realty Oil & Gas IT Healthcare

Source: Bloomberg; P/E: Price-to-Earnings ratio; P/B: Price-to-Book ratio; 12-M: 12 Months; Returns is in percentage for each period and not on an annualised basis. Analysis: A Preetha
Sundaram BNP Paribas Asset Management 31 The Wise Investor May 2010
Equity Chart Book
MSCI World MSCI Emerging Markets

1600
1600
1400
1400
1200
1200 1000

1000 800
600
800
400
600 200
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Open 1422 High 1682 Low 689 Close 1199 Open 496 High 1338 Low 246 Close 1020

MSCI Brazil MSCI Russia

1600
4300

1100

2300
600

300 100
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Open 874 High 4728 Low 278 Close 3558 Open 223 High 1642 Low 139 Close 843

MSCI India MSCI China

780 100
680
580
480
50
380
280
180
80 0
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Open 160 High 694 Low 701 Close 500 Open 34 High 104 Low 13 Close 63
The horizontal in each graph indicates the average level of the respective index since January 2000 Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management
Sundaram BNP Paribas Asset Management 32 The Wise Investor May 2010
%

4
6
8
USD Million

10
12
14

3
5
7
% 9
11
13
15
Dec/01 Jan/00
Jul/00

10000
70000
Jun/02

130000
190000
250000
310000
370000
Jan/00 Dec/00

Open 35.1
Open 8.05
Dec/02

Open 11.23
Jul/00 Jun/01
Jan/01 May/03 Dec/01
Jul/01 Nov/03 Jun/02
Jan/02
May/04 Dec/02
Jul/02
Nov/04 Jun/03
Jan/03
Jul/03 Dec/03

High 316.2
High 13.91
High 11.77
May/05
Jan/04 Jun/04
Nov/05 Dec/04
Jul/04
Jan/05 May/06 Jun/05
Jul/05 Nov/06 Dec/05

Sundaram BNP Paribas Asset Management


Jan/06 May/06
May/07
Jul/06
Nov/06

Low 34.7
Low 4.80
Low 4.99
Jan/07 Nov/07
May/07
10-Year G-Sec Yield (%)

Jul/07 May/08
Jan/08 Nov/07
Oct/08 May/08

India Forex Reserves ($ billion)


Jul/08
Jan/09 Apr/09 Nov/08

1-Year AAA Corporate Bond Yield (%)


Jul/09 Oct/09 May/09
Jan/10 Nov/09

Close 8.01
Close 8.05
Apr/10

Close 279.4

33
bp

0
2
4
%6
8

-2
10
12
14
Jan/00
5
45
85
125
165
bp 205
245
285
325
365

10.0
100.0
190.0
280.0
370.0
Jul/00 Dec/01 Jan/00
Jan/01 Jul/00

Open 210
Open 126

Open 3.55
Jun/02
Jul/01 Dec/00
Dec/02 Jun/01
Jan/02
May/03 Dec/01
Jul/02
Nov/03 Jun/02
Jan/03
May/04 Dec/02
Jul/03
Jun/03
Jan/04

High 423
High 341

Nov/04

High 12.82
Dec/03
Jul/04 May/05 Jun/04
Jan/05
Nov/05 Dec/04
Jul/05 Jun/05
May/06
Jan/06 Dec/05
Jul/06 Nov/06
May/06

WPI Inflation (%)


May/07
Low -16
Low -64

Jan/07 Nov/06

Low -1.01
Jul/07 Nov/07 May/07
Jan/08 May/08 Nov/07
Jul/08 Oct/08 May/08
Jan/09 Nov/08
Apr/09
May/09
G Sec 1-10 Year Spread (basis points)

Jul/09
Oct/09 Nov/09
Jan/10
Close 70
Close 290
Fixed-Income Chart Book

Close 9.90

The Wise Investor May 2010


Apr/10
5-Years G Sec AAA Bond Spread (basis points)

Source: Bloomberg
Commodities Chart Book
Crude Oil Gold

170 1200
150
1000
130
110 800
$/bbl

$/oz
90
70 600
50
400
30
10 200

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Open 23.9 High 145.7 Low 16.6 Close 86.9 Open 288.0 High 1215.7 Low 255.6 Close 1179.2

Baltic Freight Index LME Metals Index

21700 5000

18700 4500
4000
15700
3500
12700
3000
9700
2500
6700 2000
3700 1500
700 1000
Apr-00

Apr-01

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Open 1782 High 19687 Low 830 Close 3936 Open 1254.2 High 4556.6 Low 958.3 Close 3512.5

S & P Goldman Sachs Commodity Index S&P Goldman Sachs Agflation Index

1000 700
900
600
800
700 500
600
400
500
400 300
300
200
200
100 100
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10

Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10

Open 194.5 High 890.3 Low 162.0 Close 910.1 Open 162.8 High 499.2 Low 149.6 Close 310.1

Source: Bloomberg

Sundaram BNP Paribas Asset Management 34 The Wise Investor May 2010
Relative performance
MSCI World MSCI Emerging Markets
MSCI World MSCI Emerging Markets
140 MSCI Emerging Markets 300
MSCI World 247.1
120 250
100
200
80
150
60
40 100
40.5
20 50
0 0
May/00
Aug/00
Dec/00
May/01
Aug/01
Dec/01
May/02
Aug/02
Dec/02
May/03
Sep/03
Dec/03
Apr/04
Aug/04
Dec/04
May/05
Aug/05
Dec/05
May/06
Aug/06
Jan/07
May/07
Aug/07
Jan/08
May/08
Sep/08
Dec/08
May/09
Sep/09
Dec/09

May/00
Aug/00
Dec/00
May/01
Aug/01
Dec/01
May/02
Aug/02
Dec/02
May/03
Sep/03
Dec/03
Apr/04
Aug/04
Dec/04
May/05
Aug/05
Dec/05
May/06
Aug/06
Jan/07
May/07
Aug/07
Jan/08
May/08
Sep/08
Dec/08
May/09
Sep/09
Dec/09
Both indices re-based to 100 for January 2000 and expressed as MSCI Both indices re-based to 100 for January 2000 and expressed as MSCI
World relative to MSCI Emerging Markets to reflect relative performance Emerging Markets relative to MSCI World to reflect relative performance.

MSCI Brazil MSCI Russia


250 400
MSCI Brazil 191.9 MSCI Russia
350 MSCI Emerging Markets
200 MSCI Emerging Markets
300
150 250 181.2
200
100 150
100
50
50
0 0
Apr/00
Aug/00
Dec/00
Apr/01
Aug/01
Dec/01
Apr/02
Aug/02
Dec/02
Apr/03
Aug/03
Dec/03
Apr/04
Aug/04
Dec/04
Apr/05
Aug/05
Dec/05
Apr/06
Aug/06
Dec/06
Apr/07
Aug/07
Dec/07
Apr/08
Aug/08
Dec/08
Mar/09
Jul/09
Nov/09
Mar/10
May/00
Aug/00
Dec/00
May/01
Aug/01
Dec/01
May/02
Aug/02
Dec/02
May/03
Sep/03
Jan/04
May/04
Sep/04
Jan/05
May/05
Sep/05
Jan/06
May/06
Sep/06
Jan/07
May/07
Sep/07
Jan/08
May/08
Sep/08
Jan/09
May/09
Sep/09
Jan/10

Both indices re-based to 100 for January 2000 and expressed as MSCI Both indices re-based to 100 for January 2000 and expressed as MSCI
Brazil relative to MSCI Emerging Markets to reflect relative performance Russia relative to MSCI Emerging Markets to reflect relative performance

MSCI India MSCI China

190 MSCI India 130


MSCI China
170 MSCI Emerging Markets 120
MSCI Emerging Markets
110
150
100
130 144.7
90
110 91.2
80
90 70
70 60
50 50
Apr/00
Aug/00
Dec/00
Apr/01
Aug/01
Dec/01
Apr/02
Aug/02
Dec/02
Apr/03
Aug/03
Dec/03
Apr/04
Aug/04
Dec/04
Apr/05
Aug/05
Dec/05
Apr/06
Aug/06
Dec/06
Apr/07
Aug/07
Dec/07
Apr/08
Aug/08
Dec/08
Mar/09
Jul/09
Nov/09
Mar/10

Apr/00

Apr/01

Apr/02

Apr/03

Apr/04

Apr/05

Apr/06

Apr/07

Apr/08

Nov/09
Dec/00

Dec/01

Dec/02

Dec/03

Dec/04

Dec/05

Dec/06

Dec/07

Dec/08
Mar/09

Mar/10
Aug/00

Aug/01

Aug/02

Aug/03

Aug/04

Aug/05

Aug/06

Aug/07

Aug/08

Jul/09

Both indices re-based to 100 for January 2000 and expressed as MSCI India Both indices re-based to 100 for January 2000 and expressed as MSCI
relative to MSCI Emerging Markets to reflect relative performance China relative to MSCI Emerging Markets to reflect relative performance
Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management
Sundaram BNP Paribas Asset Management 35 The Wise Investor May 2010
In a lighter vein
• Depression-proof dept: The Institute for Mortuary Research reports there were 417,611 US deaths in Q1, up 8%, over YoY; populous industrial regions are
also spending more on funerals than last year. Recently, one car maker reported that its only profitable division last year was hearses and ambulances.

• A well known restaurant chain is experimenting to see whether people order according to taste or price, particularly during depressions. After breakfast,
every meal is 60 cents regardless of choice (meals include appetizer, main dish, and dessert). Statistics will be compiled to determine what people will order
when price isn't a consideration. Incidentally, business at that restaurant increased 60% on the first day of the experiment.

• Letter from an Oklahoman to his banker: "It is impossible for me to send you a check in response to your request. My present financial condition is due to the
effects of federal laws, state laws, county laws, corporation laws, by-laws, brother-in-laws, mother-in-laws, and outlaws ... These laws compel me to pay a
merchant's tax, capital stock tax, income tax, real estate tax, property tax, auto tax, gas tax, water tax, light tax, cigar tax, street tax, school tax, syntax, and carpet
tax. The government has so governed my business that I do not know who owns it. I am suspected, expected, inspected, disrespected, examined, reexamined
... boycotted, ... held up, held down, and robbed until I am nearly ruined; so the only reason I am clinging to life is to see what the hell is coming next."
Source: http://newsfrom1930.blogspot.com/ - A daily summary based on reading of The Wall Street Journal from the corresponding day in 1930.

BackPage Investment Quiz


1 Drachma used to be the currency of which country?

Compiled by S. Vaidya Nathan


2 What is the maximum exposure a fund / fund house can have in the equity of a company?

3 Who is author of ECONned?

4 The secret recipe of Coca Cola has remained stashed for several decades in the safe vault of a bank. Name the bank?

5 Which has been the longest closed-end fund in India?


P
R Answers must be mailed to iq@sundarambnpparibas.in
I The first 25 responses with correct answers to all questions will receive a prize. Please mention your mailing address in your e-mail. Employees of Sundaram BNP Paribas
Z Asset Management, its Sponsors and Associates & Group Companies of the Sponsors shall not be entitled to prizes even if they participate and mail correct answers.
E

Answers for April 2010 Quiz


1 Name the mutual fund scheme with the longest track record in India? The Gloom, Boom & Doom Report
Mastershare 4 Name the first Sharia-compliant fund launched in India?
2 In which year was the SEBI regulations for mutual funds put in place? Tata Select Equity
1996 5 In which country would you be traveling if you were spending cash in real?
3 Marc Faber publishes a renowned monthly report. What is it called? Brazil

Disclaimer
Mutual fund investments are subject to market risks. Please read the Statement of Additional Information of Sundaram BNP Paribas Mutual Fund and
Scheme Information Document of Sundaram BNP Paribas Mutual Fund carefully before taking an investment decision. Risk Factors: All mutual funds and
securities investments are subject to market risks. There can be no assurance or guarantee that a scheme's objective will be achieved. NAV
may rise or decline, depending on factors and forces affecting the securities market. There is risk of capital loss and uncertainty of dividend distribution.
General Disclaimer: The Wise Investor, a monthly publication of Sundaram BNP Paribas Asset Management, is for information purposes only. The Wise Investor is
not and should not be construed as a prospectus, scheme information document, offer document, offer solicitation for an investment and investment advice, to name a
few. Information in this document has been obtained from sources that are reliable in the opinion of Sundaram BNP Paribas Asset Management. Opinions expressed
Design and layout by Spark Creations: +91 044 45510041

by authors do not necessarily represent that of Sundaram BNP Paribas Mutual Fund or Sundaram BNP Paribas Asset Management or Sundaram BNP Paribas Trustee
Company or the sponsors. Statutory: Mutual Fund Sundaram BNP Paribas Mutual Fund is a trust under the Indian Trusts Act, 1882 Sponsors (Collective liability is
limited to Rs 1 lakh): Sundaram Finance Limited & BNP Paribas Asset Management. Investment Manager: Sundaram BNP Paribas Asset Management Company
Limited. Trustee: Sundaram BNP Paribas Trustee Company Limited. Past performance of Sponsors/Asset Management Company/Fund does not indicate or guarantee
future performance.
Published by Sunil Subramaniam on behalf of Sundaram BNP Paribas Asset Management Company Limited, from its office at Sundaram Towers, II Floor, 46, Whites Road, Chennai 600 014.
Printed by R. Velayudhan at Paper Craft, No.25, C.P.Mudali Street, Pudupet, Chennai 600 002.
Editor: Sunil Subramaniam.
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Sundaram BNP Paribas Asset Management 36 The Wise Investor May 2010

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