Read the Fine Print(part-2)

How to Invest

The different modes in which one can invest overseas in stocks, bonds, currencies, commodities, realty, et al include:

1. Direct Foreign Investment

2. Domestic Mutual Funds investing abroad: Sebi registered mutual funds have been cumulatively permitted to make overseas investments of up to $3 billion subject to Sebi guidelines. Further, such mutual funds which were hitherto permitted to invest in equity of listed overseas companies provided the overseas listed company held at least 10% in a company listed in India, have now been permitted to make such investments without the requirement of 10% reciprocal shareholding in a Company listed in India. Currently, only a handful of domestic mutual funds like Franklin Templeton and Principal PNB have launched funds which invest in overseas securities.

3. International Mutual Funds

4. Domestic companies with large foreign business/service exposure (indirect foreign investment)

5. Securities, Brokerage or Fund houses.

Recent Announcements in the Union Budget 2007-2008

The honourable Union finance minister, P Chidambaram, has announced in his Union Budget 2007 -2008 speech that he proposes to converge the different regulations that allow individuals and Indian mutual funds to invest in overseas securities by permitting individuals to invest through Indian mutual funds.

Hence, we may expect some changes/liberalisation in foreign investments norms soon.

Asset Allocation

One needs to carefully do the asset allocation between local and international investment. Although there is no ballpark figure, it all depends upon the risk-return profile of the investor and investment opportunity. However, for a conservative investor, an asset allocation of 5 to 20% towards international investments is fairly reasonable.

Conclusion

Although the Indian stock markets have seen strong growth over the last 3 years, the recent fall indicates that going forward, the growth could slow down. Thus, with the liberalisation of foreign investment norms, investing outside India is (shown become) comparatively easier than before, but before treading into foreign waters, one needs to consider the pros and cons thereof carefully.

Read the Fine Print(part-1)

"Learn about the process & restrictions before you plan to invest abroad"

We've heard the axiom "The world is your investment landscape". With the Reserve Bank gradually liberalizing the provisions relating to foreign investment, let's see how can one really go about investing abroad and what are the crucial factors one needs to consider while investing abroad. Moreover, the Union Budget 2007 -2008 has also made some announcements to enable foreign investments.

Why Invest Abroad?

As the renowned economist Adam Smith said "Never keep all your wealth in the country where you live because anything can happen - and usually does". As per Goldman Sachs, in the next 50 years, Brazil, Russia, India and China - the BRIC economies - could become a much larger force in the world economy. Moreover, some of the European countries have witnessed goods economic/financial progress over the last few years and so have certain USA companies investing in emerging markets. The pros and cons of investing abroad are:

Foreign Investment Restrictions

Investment outside India by residents of India has been restricted since ages due to the lack of foreign exchange reserves. However, with the gradual build-up of foreign exchange reserves, RBI has been constantly relaxing the law relating to foreign investments.
Till recently, RBI permitted resident individuals to:

1. Invest in the following instruments without any upper limit:

a. Equity of listed foreign companies, who in turn have shareholding of at least 10 per cent in companies listed on a recognized Stock Exchange in India as on January 1st of the year of investment, and

b. Rated bonds and fixed income securities provided however the rating should be at least A-I/ AAA by Standard & Poor or P-a/Aaa by Moody's or FI/ AAA by Fitch IBCA etc. for short -term obligations and corresponding ratings for long-term ones.

2. Remit up to $25,000 per calendar year (January to December) for any purpose without any distinction between the transactions being on the current or capital account.

3. Remit up to $5,000 per remitter/donor per annum towards gift and donation each aggregating up to $10,000.

Recently, RBI issued AP (DIR Series) Circular No 24dated December 20,2006, which has enhanced the limit from $25,000 per calendar year to $50,000 per financial year (April to March) for any current/capital account transactions. However, the above revised limit of $50,000 includes remittances towards investments in overseas companies (the requirement of 10% reciprocal shareholding in the listed Indian company by such overseas company has been dispensed with), gift and donation.

Sustaining the Unsustainable(part-2)

Since then, economists have vied with each other to overturn this orthodoxy. Indeed, rejecting the conventional wisdom is now conventional, as Jeffrey Frankel, an economist at Harvard University, has pointed out. Three years ago, Michael Dooley, David Folkerts- Landau and Peter Garber, all Japan, Saudi Arabia, America and the EU economists at Deutsche Bank, argued the world economy was enjoying a reprise, the Bretton Woods era. America's large external deficit could be sustained for years as Asian central banks kept their currencies cheap in order to foster export led growth. In '05, Ben Bernanke said global interest rates were oddly low, suggesting a glut of saving abroad, not a shortfall of saving at home, was responsible for the flow of capital to America. Recent papers have picked up similar threads, arguing that imbalances may prove to be more persistent and less perverse than once thought. A study by IMF economists showed poor countries which export capital grew faster than those which rely on importing it from abroad.

One reason may be the feebleness of their financial markets. Ricardo Caballero and Emmanuel Farhi of the Massachusetts Institute of Technology, and Pierre-Olivier Gourinchas of the University of California, Berkeley say emerging economies have been accumulating real assets, but their generation of financial assets has not kept pace. Thanks to weak property rights, fear of expropriation and poor bankruptcy procedures, newly rich countries are unable to create enough trustworthy claims on their future incomes. Lacking vehicles for saving at home, the thrifty buy assets abroad instead, because emerging economies' supply of financial instruments is so unreliable, people may hoard more of them as a precautionary measure.

If global imbalances are the result of such frictions, they are unlikely to unwind quickly. Financial systems do not mature overnight. If Mr. Caballero is right, America is also less vulnerable to a sudden run on its securities. Where will the excess demand for global assets go? So far, the behaviour of financial markets seems to vindicate his point. But it's a mistake to place too much faith in these new studies. If the dollar tumbles, there will be plenty of academics ready to take the old theories off the shelf and eager to say: "We told you so."

Sustaining the Unsustainable(part-1)

“Global investors are worried about many things. Why is America's current-account deficit not one of them?”

Sour subprime mortgages, sluggish retail sales, the spectre of a broader retreat in credit and consumer spending. These are the American shadows that spooked investors across the globe this week, sending share prices tumbling from Manhattan to Mumbai. For years, the longest shadow of all was cast by America's imposing current-account deficit. But in these fretful times, no one seems to be fretting much about the country's reliance on foreign funding. Latest figures show Americans spent some $857 billion more than they produced in '06, the equivalent of 6.5% of GDP, and a new record. China's trade surplus in February was the second highest on record. It has reached almost $40 billion in the first two months of this year.

China's government, one of America's best creditors, has announced it is seeking a better return on a chunk of its forex reserves. It will create a new investment agency, which looks sure to diversify some of the central bank's assets out of the American Treasury bonds that now dominate its portfolio. None of this had much effect on the dollar. Measured on a trade-weighted basis, it has fallen by a mere 0.04% since the recent financial turbulence began on February 27. And as investors yawn at America's deficit, so too do policymakers. A year ago, finance ministers and central bankers from the G7 group of countries promised to take "vigorous action" to resolve the imbalances between the world's savers (particularly China, Japan and oil exporters) and borrowers (especially America). The IMF was hoping to reinvent itself as the overseer of this grand macro economic bargain. A year later the venture has fizzled. The IMF sponsored discussions between China, Japan, Saudi Arabia, America and the EU have yielded little. What explains this non-chalance? By some measures, the world is already rebalancing. The dollar has fallen by 16% from its’02 peak in real terms. Compared with the previous quarter, America’s current account deficit shrank in the last three months of ’06 and was below $200 billion for the first time in more than a year. That decline was a lot to lower oil prices. But even excluding oil, America’s trade balance seems to be stabilizing as exports boom and imports slow. Even so, it is hard to escape the conclusion that both investors and officials have become less worried about global imbalances. A few years ago, most economists argued the spectacle of poor countries bank rolling America's deficits was the perverse and unsustainable consequence of American profligacy. Economic theory suggested capital should flow from rich countries to poor ones; and that America could not increase its foreign borrowing for ever. Empirical studies showed that deficits of more than 5 % of GDP caused trouble.

Asian Stocks Fall For the Third Straight Week

ASIAN stocks fell posting their third weekly loss.

Mitsubishi UFJ Financial Group and Toyota Motor led Japanese stocks lower on concern the level of pay rises will damp growth in the region's largest economy. "With wage increases so weak, there's not much hope for a recovery in spending," said Tomokatsu Mori, of Fukoku Capital Management in Tokyo.

TDK gained after saying it's in talks to buy a unit of Alps Electric, boosting speculation there will be further consolidation in the electronics industry.

Japan's Nikkei 225 Stock Average declined 0.7% while the broader Topix index slid 1 %. China's Shanghai and Shenzhen 300 Index lost 1.6%. Gauges fell in Australia, Hong Kong, New Zealand, Singapore, Thailand and India. Mitsubishi UFJ, Japan's biggest bank slipped 3%, its biggest loss since October 12. Toyota, the nation's biggest automaker, lost 0.7%. Suimitomo Mitsui Financial Group, Japan's No. 3 lender, declined 2.8%.

The world's second-largest economy grew 5.5 percent in the three months ended Dee. 31, the fastest pace in three years, the government said this week. Business investment rose 3.1 percent in the quarter, up from the 2.2 percent preliminary estimate. In contrast consumer spending rose 1 percent in the quarter, down from the preliminary 1.1 percent expansion. Stagnant wages may keep consumers from spending more on goods and services, denting economic growth and making bank stocks, which derive most of their earnings from the domestic economy, less attractive.

Global Markets Sneeze(part-2)

Adding to the housing worries, tile US Mortgage Bankers Association said delinquencies for all home loans rose to a three-year high of 4.95% in the fourth quarter, and to 13.33% in the risky 'subprime' market.

The Dow Jones Industrial Average fell more than 240 points overnight for its second-biggest drop in almost four years on Tuesday, with a tepid 0.1 % rise in the US retail sales in February providing little cheer for investors.

But barring a really severe economic downturn in the US, the Asian economies should continue to enjoy solid growth, said Tim Rocks, Asian equities strategist at Macquarie Securities in Hong Kong.

"We see the outlook as fundamentally very, very strong. Domestic conditions in Asia are very, very healthy. We don't see the Asian markets as particularly expensive overall," he said.

"We think it's a danger to become too defensive in this environment. Obviously we're .not going to know the full extent of this slowdown in the US for some time now so there's some reason for caution, "he added.

Across the region, stock price screens were awash with red.

Sydney lost 2.1 %, Shanghai slid 1.97%, Manila fell 3.38%, Seoul declined 2.0%, Kuala Lumpur was down 2.7% in late deals and Singapore shed 3.06%. Indian share prices were not spared from the rout, with Mumbai down over 3% in early deals. Dealers said the disquiet about the US economy had unnerved investors who are still jittery after last month's big sell-off sparked by heavy losses in Shanghai.

"The latest bout of share market turmoil has its origins in the US even though a 9% one-day fall in Chinese shares (on February 27) may have provided an initial psychological trigger," AMP Capital Investors head of investment strategy Shane Oliver said in Sydney.

"We remain of the view that while recent weakness and volatility in share markets may have further to run, it is just another correction in a still rising trend, " he said.

Global Markets Sneeze(part-1)

“Jitters over Chinese markets resurfaced after data on inflation, loans and trade boosted speculation.
US Mortgage Bankers Association said delinquencies for all home loans rose to a 3-year high of 4.95010 in Q4”

Global stock markets sell off spread to Asia on Wednesday following steep losses in the US and Europe as signs of trouble in the US housing sector spooked investors.

The falls reversed much of the markets' recent recovery from the worldwide rout that began late last month with a 'slump in Shanghai.

Jitters over the Chinese markets resurfaced after recent data on inflation, loans and trade boosted speculation that the authorities there may be forced to take further steps to cool the booming economy, dealers said.

At the same time, the US housing worries drove the dollar down towards new three month lows against the yen in a setback to Japanese exporters, contributing to a 2.92% slump in Tokyo.

The falls mirrored heavy losses across Asia after the Dow Jones Industrial average dropped 1.97% on Tuesday when data showing rising mortgage delinquencies stoked unease about the slowing Housing sector.

The main European markets opened sharply lower on Wednesday, extending Tuesday's losses.
Dealers said the US housing figures had fanned concerns about a possible credit crunch that could put the brakes on consumer spending in the world's largest economy.

"The sell-off in the local market was due to the correction in overseas markets amid the mortgage loan concerns," said Celestial Asia Securities director Kitty Chan in Hong Kong where shares closed 2.57% lower.

"Bad debts and all these issues could take the market lower still if more (bad) news is uncovered in the near term," she said.