'Sprucing corporate governance'
Poor corporate governance can kill the emerging equity culture as happened in Germany, writes Dr Bhaskar Dasgupta.india Updated: Nov 11, 2003 20:47 IST
The India Babble
Tuesday saw the Sensex tank 96 points following on from margin calls and rumours of FII's withdrawing from the market, which spooked the participants. Pharma stocks were hit by regulatory rumours, steel companies were hit on rumours of price cuts and the general worldwide rumour mongering from the US dollar didn't help either. The Sensex closed at 4755. Wednesday saw a lighter version of Tuesday, with the Sensex closing 15 points down. Thursday was even worse, with the Sensex closing 93 points down at 4648, mostly due to the worries arising from the global markets and specifically emerging from the Asian and the Japanese market dive. People are more worried about the FII's, and the worry that they might withdraw their funds. The week closed up, following on from the Hindu New Year good feelings and a push from tech stocks. The Sensex jumped 109 points to close at 4757, 2.3 per cent over the previous close.
The amount of Foreign Institutional Investor inflows is rapidly growing; it's about $5 billion till date, compared to $740 million in the whole of 2002. One shouldn't get too excited; this is easy come easy go money. Thefact that India is now a favoured destination for emerging market funds is something which is good. The regulators and powers that be should concentrate on making sure that the macroeconomic policies and regulatory framework is good and strong, which will keep the money in town. For starters, can someone please do something about the fiscal deficit?
The news that Glaxo SmithKline is going to tie up with Ranbaxy exploded like a bomb within the beleaguered environs of the world pharmaceutical industry. The tie-up essentially means that Ranbaxy gets to carry out research on promising drugs, while Glaxo gets access to low-cost research, as well as potentially creating the first large scale off-shoring in pharmaceuticals. One can see significant opportunities for cost reduction as well as increased work with generics. If you can't beat them, join them!
I was chuckling at reading about the US ships, which are currently being towed across the pond to the UK, to be broken up. These ships are said to have toxic waste and the campaigners don't like this fact and there is a major hoo haa about all this. So what about the massive ship breaking up industries in South Asia and East Asia? I haven't really seen any major issues around that, but then of course the cost of the health and safety of an Indian ship breaker is far lower than of a European one. It's all right to send them to India, but it's not all right to send them to the UK. Of course, if they were broken up in USA that would be fine as well, I presume.
The lobbying power of Indian corporates was in full view, with the government deciding to withdraw the Companies (Amendment) Act 2003. The act had several interesting corporate governance measures, such as requiring companies to have at least 50 per cent independent directors, addition of women to the board, retirement of directors at 75 etc.Broadly speaking, the legislative skill which was put into this bill was lacking, but I would advise that the corporate governance aspects be retained. Indian business's corporate governance status sucks and the Indian government would be well advised to recall what happened in Germany. Corporate governance and bad economic timing just simply killed off the emerging equity culture in that country. Given the importance of this issue, this act should be revisited as soon as possible. Mind you, the process of consultation for legislative bills is simply incoherent in India and the political managers should have handled this process better.
The Babble in the Ivory Towers
Tarun Chordia, Asani Sarkar, and Avanidhar Subrahmanyam of the Federal Reserve Bank of New York empirically study stock and bond market liquidity over a period of 1800 trading days. This is a considerably long period to study and they model liquidity, returns, volatility and order flow in the stock and bond markets. They find that shocks to spreads in one market have a direct impact on both market's spreads, and return volatility is an important driver of liquidity. They also find that innovations to stock and bond market liquidity and volatility prove to be significantly correlated, suggesting that common factors drive liquidity and volatility in both markets.
They also study macroeconomic factors such as monetary expansion and find that it increases equity market liquidity during periods of financial crises. They also find that unexpected increases (decreases) in the federal funds rate lead to decreases (increases) in liquidity and increases (decreases) in stock and bond volatility. Furthermore they discover that flows to the stock and government bond sectors play an important role in forecasting stock and bond liquidity.
The study is very interesting, as it allows both market participants as well as policy makers to direct their asset allocation decisions and management of macroeconomic factors, which is especially important when considering volatile markets. Bearing in mind that the research was conducted for a developed country such as the USA, the results are suitable for other countries as well. Managing liquidity is vital for macroeconomic managers and this research shows the impact of interest rate as well as monetary expansion on stocks and bonds. In most of the countries, this link is usually not used or seen, but should be, as the impact can be immediate and major.
Details of this paper and past columns are available on http://beady.blogspot.com
The World Babble
US stocks staged a good advance on Tuesday but losses at AT&T and SBC communications kept the DOW under water, closing 30 points down at 9747. NASDAQ closed 16 up at 1940. The markets are generally treading water with the earnings season for this quarter coming to close and all eyes on the forthcoming economic numbers. Japan closed well down on Wednesday after a bout of worry overtook the banking sector. The non-export sector took fright as well; fears of overheating and worries about the dollar overtook a reasonably good economic performance.
US Treasury Secretary John Snow's rather weird comments about the long term interest rates roiled the foreign exchange markets on Monday and tried to settle down on Tuesday. Snow's comments were really difficult to understand from many perspectives. First of all, why is he sprouting off about rising interest rates when the Fed is trying desperately to keep the momentum going behind the economy and giving all the good signals about low interest rates? Secondly, why is he talking about high interest rates when the soft dollar policy is so politically important, especially with an election year coming up? What is with the Bush Administration's economic policy which is so error prone? With the current account deficit reaching stratospheric levels, one would have thought that John Snow would be very circumspect about his utterings. Oil is still trading at above $30 per barrel and Gold is still pushing $382 an ounce.
Wednesday saw some more bad news coming from Amazon and US drug companies, such as Merck and Pfizer, which hit the markets reasonably hard. As a result the DOW dropped 149 points to close at 9598 and the NASDAQ down 42 at 1898. The European Markets were not that much better after murmurs about potential interest rate increases. The FTSE Eurotop 300 closed down 1.7 per cent, while the UK closed down 1.53 per cent. Yields on the gilts shot up after the Bank of England meeting minutes showed that the hawks are now coming into ascendancy. Nikkei 225 also dropped below 11000, a drop of 550 points, mainly because of the US fall and the continued strength of the yen. It was a severe shock to the system. Thursday witnessed a slight recovery of about 15 points in the DOW, closing at 9613 while the NASDAQ ended down 13 points to close at 1885. The Labour Department said initial jobless claims fell 4,000 in the latest week to 386,000, which was reasonably good news. Japan closed virtually flat on Friday at 10335, while the DOW struggled to keep its head above water and then finally succumbed to close 31 points down at 9582 whilst the NASDAQ closed 20 points down at 1866. This was mainly due to Microsoft's doing, its software licensing revenue figures did not make the analysts very happy.
The US Senate blocked the class action bill, which was making an excruciatingly slow movement through the US political pathway. The proposal was essentially to move class action suits from state courts to federal courts, with a view that this will reduce frivolous lawsuits. The cost of doing business in the USA is spiralling out of control, with a myriad of industries suffering, from the asbestos issue, to cigarettes, to medicine, you name it. US president George Bush has tried to make legal reform one of the corner stones of his campaign, but given the fact that it is an election year, the well heeled lawyers are very nicely placed to scotch this attempt to reform the American Legal System from its excesses.
The London Stock Exchange's decision to move all its back office activities to Eurex Clearing, part of Deutsche Bourse, has again given rise to frantic rumours about the rebirth of the joint Deutsche Bourse and London Stock Exchange merger idea. This step will lower the cost of trading, but more importantly, will take the merger process one step closer. Needless to say, this was because of the decision of LSE's current clearer, London Clearing House, to get into bed with Clearnet, the French led Euronext's clearing agent. The Financial Times reported that the Eurex clearing people have proposed prices which are 40 per cent lower than the LCH's prices. Good move, I would say, anything that helps in reducing fragmentation is better.
Talking about Germany and France, both countries are struggling over their deficits. France got a reprieve this week but it's still moaning about the temerity of the European Commission to complain about its deficit. The European deficit control mechanism and stability pact was a classic example of flawed legislation and the chickens are now coming home to roost. The big economies are suffering and can not raise the taxes or increase public deficits, the poor chaps are a bit stuffed, if you ask me. Italian workers are moaning about their pensions. Talk about stick in the muds.
On the trade front, there seems to be quite a lot of pushing and shoving going on, plus a heavy bout of sulking on the European side. The Americans have pushed hard at the APEC meeting to start off another round of trade talks based on the Cancun draft, but most of the big developing countries, starting from India, Malaysia and Brazil etc. have firmly rejected this step. No surprises there at all, the Cancun draft was a patently unfair document, which had no chance of getting through at all, especially with the agricultural issues and the Singapore issues still inside that document. Besides that, the WTO reports that the number of anti-dumping investigations have dropped as compared to last year. USA, India and China were the top three initiators of anti-dumping actions.
(Dr Bhaskar Dasgupta writes a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.)
First Published: Nov 11, 2003 20:47 IST