Why India’s central bank resisted pressure to ease

The Reserve Bank of India’s refusal to succumb to pressure to cut interest rates shouldn’t be seen as a snub at the government; rather, the move implies that containing inflation remains at front and center, the central bank’s deputy governor Subir Gokarn told CNBC on Wednesday.

On Tuesday, the central bank left rates steady at 8 percent, choosing instead to cut the cash reserve ratio for banks by 25 basis points. The move triggered immediate criticism from Finance Minister P Chidambaram, who had hoped for more aggressive easing measures from the RBI to support the government’s current campaign of boosting growth.

The finance minister on Monday unveiled a five-year plan to cut the country’s hefty fiscal deficit, a day ahead of the central bank decision, in hopes that the RBI would reciprocate with sufficient stimulus.

The government has been urging the central bank to lower rates for months now, especially since unveiling drastic reforms in September aimed at increasing investment in the country. A call the central bank has so far resisted.

Gokarn says while he recognizes that the government is an important “stakeholder” in its monetary policy, the central bank will not lose sight of its prime objective to keep inflation under control.

“The government is obviously an important stakeholder in the policy, and the RBI is quite sensitive to it, but we cannot ignore the fact that inflation is still high, and is likely to go up over the next three months,” Gokarn told CNBC on Wednesday.

Wholesale price inflation, India’s main inflation gauge, spiked to 7.8 percent in September – the highest level in 10 months – driven by the government’s recent diesel price hike. During its policy review, the RBI raised its inflation forecast based on the wholesale price index (WPI) to 7.7 percent from its earlier estimate of 7.3 percent.

Gokarn, who is one of the four deputy governors at the central bank, said aggravating the risk of further price pressures with premature easing is unjustified, adding that a rate cut is unlikely until the upward trend in inflation reverses.

“When we look at the trajectory of inflation beyond December – the baseline scenario suggests it will show a steady moderation, and that is the scenario that gives us a little more space to start thinking about easing,” he said.

The Reserve Bank last cut interest rates in April, when it lowered the repo rate by 50 basis points. It has cut the cash reserve requirement ratio for banks by 175 basis points since the start of the year, in an effort to ease liquidity in the banking system.

Deficit Target

While the government’s new target to nearly halve the budget deficit to 3 percent by 2017 is seen as ambitious by many economists, Gokarn said he believes it is achievable.

“Making this commitment places an enormous obligation on the government’s shoulders. If growth isn’t going to be that fast, it will be a challenge, but it’s not unachievable,” he said.

“It puts pressure on the government to take action consistent with this roadmap, like expenditure cuts, tax reforms, like a GST (goods and services tax),” he added.

Discussing movement in the rupee – which fell 2.5 percent against the US dollar in October, after rising 5 percent in September – Gokarn said this recent volatility is tied to the general risk-off sentiment by global investors.

“Even if we had continued to see domestic (reform) action, a strong global risk off will have taken it down,” he said.

By CNBC’s Ansuya Harjani

Copyright 2011 cnbc.com

Why are India’s retailers afraid of Wal-Mart?

Indian supermarket chain owner Ramesh Lahoti says he has every reason to fear encroachment by global retailers – since 2007 he has had to close five of his MK Retail stores in the southern city of Bangalore due to stiff competition from Germany’s METRO Cash and Carry.

If Wal-Mart, the world’s biggest retailer, sets up shop near his existing eight stores in India’s third most populous city, Lahoti says the future of the family-run business will be in jeopardy.

“There’s a question mark over the future of my establishment,” Lahoti, 50, told CNBC. “We cannot compete…What will happen when I keep on closing my shops? Ultimately after 10 years there will only be big retailers.”

Lahoti is one of millions of Indian shop owners who staunchly oppose a government ruling last month to allow foreign multi-brand retailers such as Wal-Mart to open stores in India.

The reforms to India’s USD 450 billion retail market are part of economic measures aimed at reviving growth in Asia’s third biggest economy and staving off the threat of a downgrade to India’s long-term credit rating.

But, foreign investment into retail has caused a major uproar with protests, mass rallies and the burning of effigies of the government.

The Confederation of All India Traders (CAIT), a trade group that represents 50 million local businesses, says global giants such as Wal-Mart are not welcome in India, because their “deep pockets and enormous resources” will squeeze local retailers.

“We don’t want any global retailers to come to India,” Praveen Khandelwal, National Secretary General at CAIT in Delhi said. “If they are allowed to operate their business activities in India, there will be an uneven playing field, where the existing retailers will not be able to compete.”

Independent retailers such as mom-and-pop shops, known locally as “kiranas,” dominate India’s retail market – holding a 93 percent market share over corporate retailers at 7 percent, according to consultancy firm Technopak.

Wal-Mart Effect Inflated?

Wal-Mart has said it hopes to open its first stores in India within 18 months. Under the Indian government’s latest proposals, global firms like Wal-Mart and Britain’s Tesco would be able to buy up to a 51 percent stake in Indian supermarkets.

The new rules will enable global retailers to sell directly to Indian consumers. Previously, multi-national retailers could only operate wholesale businesses.

Technopak Chairman Arvind Singhal said concerns that Wal-Mart will wipe out competition are overblown, with enough room in India’s retail space for both traditional shops and big-box stores to operate as consumption grows.

He expects corporate retail chains to grow their market share by 13 percent by 2021, while independent retailers will still hold to up to 80 percent of activity in the industry.

“We don’t see any reason why consumption for the next 20 to 30 years will not continue to grow strongly,” Singhal said.

India’s retail market will nearly double in value to USD 810 billion by 2021 amid increased consumption by a rapidly growing middle class, according to Technopak.

Evidence that mom-and-pop shops are holding on to their huge market share despite the emergence of local supermarket chains like Big Bazaar in the last five to six years shows they haven’t been significantly impacted by corporate chains, said Dheeraj Sinha, author of the book “Consumer India: Inside the Indian Mind and Wallet.”

“A lot of them [kiranas] have undergone a makeover and they’ve started stocking things that they wouldn’t otherwise stock,” Sinha said. “The neighborhood retailer has actually upgraded themselves to the challenge.”

Aninda Mitra, Head of Southeast Asia Economics at ANZ backs that view, adding that while there is likely to be some dislocation when Wal-Mart opens its India stores, entire segments of the Indian retail sector are unlikely to disappear as feared.

“How that can happen in such a large country remains to be answered. It’s not as if Wal-Mart’s taking over everything,” Mitra said. “It is a very local segment that has been able to capture a lot of political attention, but there’s not necessarily genuine economic fear of widespread destabilization of the retail market.”

Analysts say the entrance of Wal-Mart could actually improve India’s supply chain distribution issues, which have been plagued by infrastructure and inefficiency woes.

Neighborhood shop owner Vestupal Sandhvi, who has been running his family grocery business Mookambika Traders for about 25 years in a Bangalore suburb, however, said he doesn’t see any of the benefits that Wal-Mart could potentially bring.

“Already we are losing 40 percent business to METRO Cash and Carry; Wal-Mart will create a problem throughout India,” Sandhvi said.

The shop owner says that because Wal-Mart receives financing abroad at rates of 2 to 3 percent, it is difficult for India’s small retailers to upgrade their businesses in order to compete, since taking out a loan with local banks entail high interest rates at around 18 percent.

“I’ll be doing the same business, I can’t change the business,” he said.

Location, Location, Location

Ultimately, consumer spending habits could determine whether or not India’s local retailers are able to compete alongside the likes of Wal-Mart.

Mumbai resident Anuja Kothari, 32, said she doesn’t expect the shopping experience at Wal-Mart to be much different from what is already offered by India’s big supermarket chains, and location will be biggest factor in her decision to shop there.

“It all depends on which area it [Wal-Mart] comes up, because there are many supermarkets already in India and each is running because it is in a particular location,” Kothari said.

Miloni Shah, 27, who also lives in India’s financial center, said she looks forward to visiting Wal-Mart for items she needs on a monthly basis, and still plans to shop at the neighborhood store for daily goods.

“All the local grocery stores are really small, cramped and you don’t even have the option to walk around and see. You go there knowing what you want and you ask for it,” the private equity professional said. “But when you go to Wal-Mart or a big supermarket, you have the whole concept of taking the cart, walking around, seeing things you want.”

Software engineer Pavan Kumar, in Pune, a tier-two Indian city, backs that sentiment, saying that while he expects a better shopping experience at Wal-Mart, he does not expect a drastic change to the way he shops.

“Over the last 10 years, we moved from small shops to the bigger malls and retail chain stores,” Kumar said. “Wal-Mart will be another addition; it’s not going to produce something totally different.”

– By CNBC’s Rajeshni Naidu-Ghelani.

Copyright 2011 cnbc.com

How Hurricane Sandy will affect investors

While Hurricane Sandy is on its way to causing untold billions of dollars in damage, its impact on the stock market is likely to be isolated but unpredictable.

Exchanges across the US closed Monday and will stay that way Tuesday as the potentially history-making storm stomps its way up the East Coast.

Futures traders made bets Monday that the stock market would open lower – about 48 points off on the Dow industrials – once trading resumes.

From there, though, the market action could be volatile.

“Investors have every reason to be on edge as they await the conclusion of natural, corporate, and political events,” said Sam Stovall, chief equity strategist at Standard & Poor’s. “Our belief is that November will be a month to remember.”

Interestingly, Stovall said stocks usually rise in the aftermath of major storms.

Of the 13 worst hurricanes in US history, only Ike in August 2008, which struck as the economy was entering freefall, and Hugo in 1989, saw stocks that were negative in the three-month and six-month intervals afterwards. The median six-month gains approached 6 percent.

“History says that hurricanes typically don’t trigger market declines,” Stovall said. “Individually, the market’s performance following major hurricanes has been uneven, as equities are more likely driven by wider-reaching global events than localized natural disasters.”

Still, Hurricane Sandy is likely to leave a mark.

The most obvious area would be on property and casualty insurers, which will have to wrestle with maybe $5 billion or more of claims.

Analysts at Bernstein Research expect some familiar names such as Travelers, Allstate and Chubb to take some early hits but ultimately rebound.

“As a longer-term investor, even with all the companies in our coverage likely to announce losses in coming days, we’re just not that concerned, for the storm seems less powerful than broad, and even dramatic headline economic losses typically end up being much more muted insurable events,” Bernstein’s Josh Stirling and Michael Kovac said in a research note.

Following Hurricane Irene in August 2011, the insurer stocks traded down as much as 8 percent then recovered as damages became known and investors realized the companies could handle the losses.

“We can expect the market will continue to sell the stocks, given headlines and uncertainty, and then begin to buy them back when the companies report manageable losses,” the Bernstein analysts said. “For many, this passing and predictable weakness presents an opportunity to build positions, now at more attractive levels, in the leading non-life writers to take advantage of a cyclical pricing recovery.”

Retail stocks, particularly home improvement outfits like Home Depot and Lowe’s, also will be in view. For those stocks, the reaction is often the opposite of the approach to insurers.

In the immediate aftermath of storms, “the market feasts on the enthusiasm but then any gains are given back once math is done that the actual impact to sales (less so earnings as storm precaution items are usually low-margin commodity-type goods) will be muted,” Brian Sozzi, chief equities analyst at NBG Productions in New York, said in a report.

Sozzi had a few quick observations about what to expect from Sandy:

Homebuilders such as Toll Brothers, D.R. Horton and Hovnanian could benefit from demand for rebuilding from the storm but are just as likely to get hit by damages to products, shell buildings and replacement costs.

Amazon, which reported disappointed earnings last week, “has a long way to go in killing brick and mortar retail,” evidenced when Sozzi did an online search for “hurricane preparation” and got no results for the online retailer. Outside of the online realm, Apple has 78 stores in Sandy’s path.

Much of the battle for post-storm business will come online. Sozzi found that Sears had a “surprisingly nice storm guide on its homepage,” while Home Depot also had a “storm central” guide but Lowe’s had none.

Commodities also will get plenty of attention.

Dennis Gartman, who runs a hedge fund and authors the widely followed Gartman Letter, said that space, too, will be a mixed bag.

“If Sandy becomes truly untoward in the next 48 hours, we can imagine crude oil prices coming under pressure while gasoline, and particularly heading oil, race higher,” he said. “We can imagine the heating oil backwardation (future month prices lower than current) to become even more extreme than it already is, and we can imagine gasoline going backwardated out into the spring of next year rather easily. Indeed, we’d be surprised if it did not do so.”

The good news is that, ultimately, the US economy will rebound from the storm and even provide some chances for a quick stimulus.

University of Maryland economist Peter Morici pegged Sandy’s total damages at least USD 35 billion, much of which will be offset by the economic benefits of rebuilding.

“Disasters can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact,” he said. “Ultimately, Americans, as they always seem to do, will emerge stronger in the wake of disaster and rebuild better — making a brighter future in the face of tragedy.”

© 2012 CNBC.com

Scenes From Hurricane Sandy

As Hurricane Sandy bore down on the mid-Atlantic region, the affected areas prepared for high wind and flooding.

At least half a dozen states – Massachusetts, Connecticut, Rhode Island, New York, New Jersey, and Pennsylvania – declared a state of emergency and requested federal assistance.

Although the social and economic impact of the storm may not be fully realized until long after it has passed, images are coming in from the affected areas that show damage and flooding. The storm is estimated to affect as many as 50 million people in highly populated areas. CNBC.com will be updating these photos as the storm progresses.

Click ahead for scenes from Hurricane Sandy as it happens. 

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Montauk, New York

Waves crash against the shore while a person stands on a porch as Hurricane Sandy moves up the coast in Montauk, New York. Sandy, which has already claimed over 50 lives in the Caribbean, is predicted to bring heavy winds and floodwaters to the mid-Atlantic region.

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Boston, Massachusetts

A tree fell as Hurricane Sandy approached East Boston, hitting a home on Waldemar Avenue. No one was injured, but a kitchen window was broken, according to residents.

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Atlantic City

Waves crash against a previously damaged pier before landfall of Hurricane Sandy in Atlantic City, New Jersey.

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New York City

A woman walks down the promenade along the East River in New York as Hurricane Sandy prepares to make landfall.

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Brooklyn, New York

People walk by downed branches as Hurricane Sandy begins to affect the Brooklyn borough of New York City.

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New York City

Water rushes into the Carey Tunnel (previously the Brooklyn Battery Tunnel), caused by Hurricane Sandy in the Financial District of New York.

Click here to see the rest of the scenes from Hurricane Sandy

Realistic to expect Nissan to miss earnings targets: CEO

Japan’s second largest automaker says it is “realistic” to expect the company to cut its forecasts for the full year when it reports earnings next week, its chief executive Carlos Ghosn told CNBC.

“It’s true, we have seen already some announcements made by competitors, revising their forecast down, which would be very realistic,” Ghosn said, a day after rival Honda cut its full-year net profit by a fifth as an islands dispute between Japan and China hit sales in China. Nissan is scheduled to announce its results for the fiscal first half on November 6.

Anti-Japan protests after Japan nationalized the Senkaku Islands pushed Nissan’s sales down 35 percent in September, while it had to trim production by 20 percent as showroom traffic came to a halt. While Ghosn said that customers were gradually starting to return to Nissan’s stores, he said demand will not normalize before the end of the year.

“This recovery is going to take many months before we come back to some normal level,” Ghosn said. “I think it’s going to take way into next year before we come back to normal production.”

Nissan makes up a quarter of global profits in China, which means the downturn undermines its performance more heavily than its Japanese rivals. Nissan currently forecasts sales to increase 9.5 percent in fiscal 2012 to 10.3 trillion yen. Meanwhile, analysts also expect industry leader Toyota to lower forecasts when it reports next Monday.

As CEO of Renault, Ghosn is also faced with a three-year debt crisis in the euro zone that threatens to push France into recession for the first time in three years. With unemployment in France hitting 10 percent, the government of President Francois Hollande has been pressuring companies to maintain jobs; Ford Motor broke from the ranks last week when it announced it would close three factories in Europe and cut 5,700 jobs.

“We think we can avoid the situation, on the condition that we have established competitiveness in the main market and in the main base, which is France,” Ghosn said.

Copyright 2011 cnbc.com

Oil markets brace for ‘demand destruction’ after Sandy

Hurricane Sandy may inflict a negative hit to demand for crude oil and fuel products as production at US East Coast refineries comes to a standstill, reducing demand for the primary input.

Meanwhile, diesel and gasoline consumption by businesses and households could also be cut sharply after New York and other large cities are shut down by the storm, reducing economic activity. Power outages lasting as long as ten days may reduce demand further.

The supply of gasoline, diesel and jet fuel into the US East Coast ground almost to a halt on Monday as Hurricane Sandy forced the closure of two-thirds of the region’s refineries, its biggest pipeline, and most major ports, Reuters reported.

“If you think of it from the end-users’ standpoint, if they can’t process it then they’re going say, I’m going to store it and use it later,” CME floor trader Tres Knippa of Kenai Capital Management told CNBC’s ‘Closing Bell on Monday. “So if you don’t have the end-users using it, that means there’s more supply and, ergo, crude going down. However, as we move into the election I am not interested being short crude at these levels.”

Brent December crude dipped 11 cents to settle at $109.44 a barrel, having reached $110.26. Brent was on pace to post a more than 2 percent loss for the month, a second straight monthly loss.

US December crude fell 74 cents to settle at $85.54 a barrel. Monday’s $84.66 intraday low was the lowest price since July. US crude futures were on track to end October down more than 7 percent, after sliding more than 4 percent in September.

Still, at this juncture traders appear divided over the direction crude and product markets will take in the wake of the worst weather event to hit New York City since at least 1938.

Fuel product futures initially jumped reflecting fears that power outages and flooding could leave refiners struggling to restore operations while reports of pipeline, port and terminal operations either shuttered or reduced raised concerns of supply bottlenecks.

Colonial Pipeline said on Monday it is proceeding with its plans to shut Line 3, which runs from North Carolina to New Jersey, at 7 p.m. Monday night ahead of the arrival of Hurricane Sandy.

November gasoline futures which expire on Wednesday, rose 5.77 cents to settle at $2.7568 a gallon on the New York Mercantile Exchange on Monday. The $2.8115 session high was the highest price since Oct. 17. US November heating oil gained 1.74 cents to settle at $3.1152 a gallon, reaching its highest level relative to US crude oil on record.

“With all these big closures of all these refiners on the East Coast, it’s not a surprise that you’re going to see crude a little bit lower and unleaded gasoline higher,” Kenai Capital’s Knippa said.

But longer-dated gasoline prices dipped on Monday as traders start pricing in reduced demand for fuel after the almost total shut-down of eastern seaboard roads and airports, Reuters reported.

“While the storm will shut down 6.5% of US refining capacity and motorists will top off their tank the shutdown of major cities and the expected power outages may take a toll on demand unlike anything we have seen before,” said Phil Flynn, Senior Market Analyst at The PRICE Futures Group.

“The impact on demand may not last for hours but more than likely for days. This could be the biggest demand destruction event in history. The East Coast is by far the largest consumer of gasoline as they consumed 3,202 barrels per-day,” Flynn added.

Will the RBI cave in to growing clamor for a rate cut?

Recent policy reforms by the Indian government to boost investment and rein in fiscal spending have raised speculation that the country’s central bank will do its part to revive economic growth by easing monetary conditions at its rate-setting meeting on Tuesday.

However, economists say the Reserve Bank of India is unlikely to bow to pressure so soon, as a rate cut would trigger further inflationary pressures and risk bringing the rupee under renewed pressure.

“The Reserve Bank will wait for inflation to resume a downward path, which is unlikely before 2013. Even then we see room for rates to be cut only modestly, from 8 percent to 7.5 percent, during the course of next year,” Andrew Kenningham, senior global economist at Capital Economics, wrote in a report.

Despite a sharp slowdown in economic growth, the RBI – which last reduced interest rates in April – has resisted aggressive policy easing in the recent months as inflation worries remain at the forefront.

Wholesale price inflation, India’s main inflation gauge, spiked to 7.8 percent in September – the highest level in 10 months – driven by the government’s recent diesel price hike, and is expected to touch 8 percent in the coming months.

Sonal Verma, an India economist at Nomura, agrees that the central bank has no room to cut policy rates this time around, even as the latest government reforms put the ball in the central bank’s court to enact growth-friendly policies.

Since September, the government has announced a slew of measures aimed at increasing investment in the country – including raising the foreign direct investment (FDI) limit in sectors ranging from broadcast to insurance.

Separately, over the weekend, Prime Minister Manmohan Singh engaged in a major reshuffling of the Congress-led United Progressive Alliance Cabinet, inducting 22 ministers – 17 of whom were new faces – a sign, some say, underscores the government’s resolve to push through deeply-unpopular reforms.

“The current set of reforms opens a window for the RBI to act on monetary policy. However, RBI action will be calibrated and a loosening of monetary policy will only be gradual,” Verma said.

A rate cut could also send the rupee hurtling back downwards, some analysts warn. The currency, which depreciated 9.5 percent after the central bank last lowered rates in April, has rebounded 3 percent since the reforms were announced in September.

Weakness in the rupee is negative for the India’s fiscal deficit, as the country imports 70 percent of its crude oil needs.

Other analysts argue that a rate cut, unlike the fundamental structural reforms, will do little to boost the economy.

“Policy reforms that bolster the regulatory environment, increase legal certainty, accelerate various project approvals, and create the right incentives to invest are more important,” said Chetan Ahya, Asia-Pacific Economist at Morgan Stanley.

Still, as a compromise, Verma of Nomura says the central bank could announce a 25 basis point cut to the cash reserve ratio (CRR) – the amount of deposits lenders must set aside as reserves. The RBI last cut the CRR in September in an effort to boost liquidity.

But India watcher Robert Prior Wandesforde, director of Asian economics at Credit Suisse, believes the RBI will go further to and reciprocate government efforts with a rate cut.

“Our rationale is that the central bank will want to give the government a pat on the back for its recent reform measures and its apparent willingness to stick with them in the face of significant public and popular discontent,” he said.

“For this particular meeting, and probably for this meeting only, we believe the focus will not be on the very latest inflation trends,” he added.

The government has stepped up calls for the central bank to ease policy in the recent weeks, with Finance Minister Palaniappan Chidambaram on October 13 calling on the RBI to take “calibrated risks” to support growth.

By CNBC’s Ansuya Harjani

Copyright 2011 cnbc.com

Merkel urges more far-reaching financial regulation

German Chancellor Angela Merkel urged the world’s top economies to push ahead with further financial regulation, saying that not enough had been achieved so far.

The global financial crisis has prompted an overhaul of regulation in almost every part of the financial system from over-the-counter derivatives to bank capital requirements.

But Merkel said in her weekly podcast that more was needed.

“In my view, we are not where we ought to be yet,” she said.

“We had planned to regulate every financial centre, every financial actor and every financial market product. Significant progress has been made but the rules have not yet been implemented everywhere and we are still missing further areas.”

The chancellor pointed to “shadow banks”, or non-bank financial institutions that are less regulated than banks, as an area where progress needed to be made.

“For instance the regulation of shadow banks will hopefully be concluded at the next G20 meeting,” Merkel said.

Leaders of the world’s top economies (G20) made recommendations for regulation a year ago that also include hedge funds, special investment vehicles and repurchase agreements.

Regulators worry that as traditional banks get more heavily regulated, risky credit activities will shift to shadow banks.

Merkel meets with the heads of the International Monetary Fund, World Bank, International Labour Organisation, the World Trade Organisation and the Organisation for Economic Cooperation and Development in Berlin on Tuesday.

One of the topics of discussion will be the euro zone debt crisis. Merkel said tough steps were starting to show results.

“The structural reforms – despite being painful – are beginning to show effects in the individual countries, such as in Ireland and Portugal but also in Greece and Spain.”

Finance Minister Wolfgang Schaeuble said on Friday that, while he wanted Greece to stay in the euro zone, that was not yet a done deal.

“We want Greece to stay in the euro zone but Greece has a lot to do. That’s not yet decided,” Schaeuble told ZDF television.

Greece is due to receive almost 31 billion euros in the next tranche of emergency loans from the euro zone bailout fund, if international inspectors agree that it has implemented reforms set as a condition for aid.

Also read: Despite Gloom, Global Equity Performance at 5-Year High


Despite gloom, global equity performance at 5-year high

Investors have been bombarded with reasons to be pessimistic this year. The euro zone crisis, the U.S. fiscal cliff, fears of a China slowdown: all seem designed to hamper stock market performance.

Yet performance of stock markets around the world is now at its highest level for five years, led by fast-growing emerging markets, according to research from Lloyds.

In September 2012, 82 percent of 39 countries tracked by the research saw a year-over-year rise in equity prices, the highest proportion for five years and more than 10 times the proportion a year ago.

This is only based on returns between September 2012 over the previous year, so one-off factors could affect performance.

Thailand led the gainers, after a bad year in 2011, when floods ravaged Bangkok. It was followed by Denmark, up by 35 percent over the period, and the Philippines, which rose by 34 percent.

Slovakia’s equity market recorded the biggest fall, of 15 percent, after fiscal tightening by the government. It was followed by China, down 12 percent from September 2011, and Spain, down 10 percent from the year before amid talk that it will become the next major euro zone economy to seek a bailout from international lenders.

“Much of this increase was from a relatively low base following the sharp falls recorded in 2011,” Suren Thiru, economist at Lloyds TSB International, pointed out.

He warned that the euro zone debt crisis and the progress of the global economic recovery would affect the outlook for global equity prices in coming months.

Also read: Bad Time for Bears Despite Fiscal Cliff: Money Manager


Asia caught off guard by its aging population

This is a guest commentary for CNBC.com.

There are significant changes under way in the global economy. The continuing rise of emerging markets is one. Aging populations is another. The latter is gripping not just developed markets, such as Japan and Europe, with possibly dire consequences for financial stability and growth.

In parts of emerging Asia, populations are graying rapidly as well. These countries are equally ill-prepared to face the challenge.

China is probably the most worrying. Partly as a result of the country’s one-child policy – initiated in 1977 and rolled out nationwide two years later – its demographic turn will be abrupt. By some estimates, the labor force will start to contract in 2015. After years of expanding rapidly, which goes a long way toward explaining the economy’s breath-taking growth over the last three decades, this will amount to an outright jolt.

The numbers speak for themselves. Currently, China has approximately 137 million people aged 65 or above. In 12 short years, this will balloon by another 100 million. The ratio of retirees to income earners will jump from 49 percent currently to 69 percent in 2030, assuming that the retirement age remains the same. By 2035, the median age in China will have increased from 35 to 45 years – equal to Japan’s median age currently.

But China is not alone. South Korea’s working-age population will also begin to shrink in 2015. Taiwan has already seen a sharp rise in the ratio of retirees to income earners, while the country’s median age is projected to climb from 37 currently to 56 in 2050, which will make it the oldest population in Asia. Hong Kong and Singapore face similarly daunting demographics – although, in both cases, immigration could yet help mitigate the problem. Even Thailand is past its demographic prime, with the labor force expected to start contracting within the next 10 years.

Diminishing Demographic Returns

There are a number of ways in which aging affects growth. First, a declining labor force throttles economic dynamism. This is particularly true in Asia, where the demographic dividend has for years been a potent driver of economic expansion. For these economies to maintain their accustomed speed, every remaining worker would have to become a lot more productive.

Second, consumption patterns tend to change. People consume the most between ages 20 and 40. As populations age, therefore, household spending tends to cool as well, a situation that poses a challenge to countries trying to rebalance their economies away from exports and investment. Sharply rising incomes can go a long way toward delaying the slowdown in consumption that aging inevitably entails. But that brings its own set of problems, including rising inflation pressures, especially if productivity fails to accelerate.

Third, demographics can have a powerful impact on savings. People tend to accumulate a nest egg over their working lives. Particularly between the ages of 40 and 65, saving rates peak in anticipation of retirement. But, thereafter, it swiftly begins to drop, with savings being drawn down. Japan is already well into this process: its household saving rate has fallen from solid double digits in the 1990s to a rate below that of the United States. In South Korea, too, the saving rate has already started to plummet. With fewer savings available, investment ultimately becomes more costly, making it harder still to maintain economic growth.

Fourth, rapidly aging populations put significant strain on the public finances. Healthcare costs soar and, if not sufficiently accrued in prior years, so does spending on pensions. This can mean an ever higher tax burden on the working population, dampening growth. The IMF, for example, estimates that aging-related public sector costs will climb on average by 4.1 percent of GDP in China and by 7.8 percent in South Korea over the next 10 years, some of the highest such adjustments required in the world.

Act Now or…

Policymakers will need to act, fast, to prepare for Asia’s demographic turn. Provisions will have to rise, financed through taxes and direct contributions. Every effort, too, must be made to spur productivity growth to wean the economies off labor force growth as a driver of economic expansion. Debt should be held in check as well, if only because the cost of capital will inevitably begin to rise. Higher interest rates will make even existing, let alone new, borrowing far harder to finance.

Investors, too, should be mindful. It is easy to be gripped by the vagaries of economic numbers released from one month to the next. But something far larger is going on. Parts of Asia face similar aging problems as Europe and Japan. So far, no economy has succeeded in maintaining rapid growth when populations grow old. If this process is managed well, it need not spell doom. But the right tracks will need to be laid at once. Fortunately, there are other countries still waiting in the wings with young and hungry populations. India and the Philippines, for instance, will not have to grapple with such challenges for decades to come.

Frederic Neumann is co-head of Asian Economics at HSBC’s Global Research and has been covering regional economies for the past 7 years. He is a regular guest on CNBC TV.

Copyright 2011 cnbc.com