Vitta Artha - Summer Edition'19

Vitta| Summer Artha edition Vitta Artha

Student Article

Cover Page

CONTENTS

Page 1

An Introduction to This Edition of Vitta Arta

Maha-Gathbandhan of Banks

Page 2-3

C.D. Sreedharan, Visiting Professor IIM Amritsar

Global Recession : Indicators to look out

Page 4-6

Joydeep Barman, Asst. Vice President, Accenture India

Collective Finance : A new language

Page 7-8

of Rural Development Utsav Ameta, IIM Ahemdabad

Sovereign Bond

Page 9-12

Varun Gajaria, SITM

AI transforming Financial

Page 13-15

Audits Himanshu Tiwari, SITM

The Investment

Page 16-17

Conundrum Shubham Goel, IIM Amritsar

Inverted

Page 18-19

Yield Curve Sebin Michel, IIM Amritsar

FEC

Page 20

Snapshot Credits

Page 21

Crossword

Page 22

Vitta Artha

Foreword

SUNDER RAM KORIVI Department of Economic Affairs and National Institute of Financial Management Research Programme

many, just to name a few - India’s increasing exposure to the global markets, current US-China trade war, the brunt of the environmental calamities recently experienced by various states in India, The US bond yield curves

are

at

the

cusp

of

inversion.

Analysis of the contemporary financial world and its implications is critical for budding managers to intro-

Dear all, It is with great pleasure I announce that the Finance

spect future calamities and plan accordingly. These

issues serve as a decision-making mechanism for a and Economic Club (FEC) is ready with its fourth future leader. edition of Vitta Artha. The FEC of IIM Amritsar is I hope a reader finds the content intriguing and intelevolving as it diligently strives to improve the cogni- ligently provoking. zance of financial and economic issues among the students. The finance world is no more just a play of transactions but spans an immense world of stock markets, equities and debt, commodity market, boom and

recession

periods

of

the

world.

The current theme of Vitta Artha is The Economic Slowdown. The industry article tries to explain the current phenomenon of economic slowdown primarily in the context of India, which recorded the lowest real GDP quarterly growth rate in six years.

The issue also covers the imperative decision to kick start the economy by the way of capital infusion

measures taken by the government of India such as Issuance of Sovereign Bonds, PSBs recapitalization, RBI’s Rs 1.76 Lakh Crore transfer and so forth; Overviewing these and their targeted effects on the Indian economy. Being a pupil of management, it is crucial to know

the

current

economic

scenario.

The staggering unemployment rate in India was at its peak of 9% during the week ended 25th August 19.

The factors contributing to such circumstances are

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Faculty Article

Prof. C.D. SREEDHARAN Visiting Professor, IIM Amritsar, AGM (Retired) RBI Mumbai

MAHAGATHBANDHAN OF BANKS As all of us know these are times when the Indian economy is passing through tough times on account of subdued economic activities in sectors like manufacturing, services, construction and agriculture. Various indicators such as sale of commercial and passenger vehicles, production of capital goods, steel and cement, consumer goods had shown poor growth.

Tax revenue growth rate has also slowed down

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State Bank of India’s merger with 5 associate banks In 2017, when SBI merged with 5 associate banks: State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad there was a belief that this step would revive the struggling banking sector.

One of the major reasons plaguing the banking system is the increasing amount of bad loans because the corporate borrowers were not repaying their loans back to the banks. And as a result, the bank lending was becoming fragile and in turn was hurting corporate sector investments .The need of the hour is to reduce the credit risks. So, this merger was seen as the blessing to cater to the issues of meeting the demand for fresh loans in the economy and also make SBI stronger and more sustainable. However, SBI’s bad loan problems only grew bigger after the merger of its five associate banks two years ago. Bad loans registered a sharp increase for the merged entity, with gross NPA’s increasing to 1.88 lakh crore rupees (9.97%) from 1.01 lakh crore rupees (6.94%). Significant write-offs and persisting slippages have been eating into SBI’s profit and capital, impeding credit growth.

With ripples of global slowdown being felt in India, the need of the hour is to bring in the next era of economic reforms and to improve from the 1991 philosSo, the big question will be whether the current mega ophy of LPG (Liberalization, Privatization, Globalizamerger will stay true to the value proposition that tion) to the new economic reforms. honorable Finance Minister is suggesting? How the The new move from the government labeled as the Government will l fare in resolving the internal ecoMega Merger of the 10 Public Sector Banks is termed as the nomic issues. next big step in the direction of consolidating the Mega Mergers of Banks public sector banks. The government has planned to merge 10 public sector banks into 4, thus reducing the The government has proposed to merge 10 PSBs innumber of state-owned banks from 18 to 12 with the to four big banks with the aim of creating “next genaim of creating “next generation banks”. But before eration” banks. going into the details of the merger let us see through 1. Punjab National Bank , Oriental bank of Comthe microscopic lens the impact and success of the merce and United Bank of India some recent bank mergers and then make our views 2. Canara Bank will merge with Syndicate bank about the current Mega Merger.

3. Andhra Bank and Corporation Bank will merge with Union Bank of India

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Faculty Article

Vitta| Artha Vitta Artha Summer edition

4. Allahabad Bank will be merged with Indian Another gain is the operational efficiency gains that Bank. reduce the cost of lending. The growing trend toThis will create banks with stronger balance wards retail banking and payment banking asks for sheets and bigger risk appetite. The resulting amal- some serious changes in the public sector banking gamated entities will result in creating strong na- and this positive step will create a positive externality. tional and global presence. With greater segmentation of different kind of banks catering to different customer clusters like small finance banks and regional players, India can afford the amalgamation of the nationalized banks which can indeed lend to large companies. With support from banking sector India can achieve the dream of becoming the 5 trillion dollar economy by 2025.

Finally the market is upbeat about the measures taken by the government to revive the banking sector and the optimism around the idea of consolidation has found more likers than haters .The onus is on the government ,Reserve Bank and the Banks managements to monitor the allocation of resources so as to maximize the gains and put India back on track towards the accelerated growth.

There is definitely a sense of optimism in the air as Let us hope the current banking reform will revive the banks will have 10 lakh crores rupees in their the economy instead of burdening the economy with purse. And as a result it will increase their capacity to more bad loans. lend and will also revive the struggling sectors like automobile sector and manufacturing sector.

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Industry Insight

JOYDEEP BARMAN Assistant Vice President, Accenture India

Global Recession: Indicators to look out for!

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developing countries, a common practice is to consider recession when the world growth rate is below 2%.

The International Monetary Fund has predicted a world growth rate of 3.6% for 2020 and thus does not predict a recession soon, though still uncertain due to the recent trade tensions. This stated number is still below the actual growth reported in 2017 at 4% when U.S., Europe and China were all growing steadily at the same time.

We would therefore explore a few indicators which Since the 2008 financial crisis, its been a decade are frequently used for assessing a potential recession of financial policy interventions and economic re- event. forms, focused on the critical and leading indicators U.S. economy as the leading indicator of a potential recessionary event. But the prediction of a global recession is a tricky job. Most indicators rest U.S. is the largest economy in the world. If the U.S. on the U.S. economy for predicting a downturn in economy spirals downward, there is a good chance global economic health. However, U.S. data alone for others to follow. The U.S. bond rates are a good cannot stand suitable enough for the economic behav- indicator of a slowing economy. If the three-month iour of most countries, especially the developing ones. borrowing rates are below the long-term rates, this Moreover, recession occurrences are also infrequent. means that markets are wary. In the past 50 years, this Before 2008 – 2010 recession period, the previous behaviour has been a strong contender to predict for downturn for the global economy can only be at- recession. The below graphical representation suggests the inversion of the US yield curve during the tributed to the period between 1990 and 1991. past recession events.

Considering the growth in population and the high The fall of China rates of expansion for the poorer and

Figure 1: U.S. yield curve behaviour during the past 50 years (Source: Thomson Reuters Datastream)

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Industry Insight

Li Keqiang is the current Premier of the State Council for the People’s Republic of China, and he favours three primary parameters to monitor growth for China – consumption of power, freight volumes and bank loans. These three indicators combined forms the China Momentum Index.

This index started declining in 2007, picking up deceleration in 2008 just before the 2009 global crisis. It again hit record low in 2015-16 when it reported a value of 2 and is now hovering around 5 compared to 7 reported back in 2018. This benchmark is only available post year 2000, hence does not give us enough

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precedence to test against the 1990-91 recession period.

Purchasing Managers’ Index The Purchasing Managers’ Index or PMI is regarded as a strong indicator of the services and manufacturing trends. J P Morgan produces a composite PMI to understand global economic scenario. The current JP Morgan PMI was at its lowest in 2016. Its currently holding its mark just above 50 which is regarded as the cut-off point to suggest global expansion. However, if the index gets to a score below 50, it could be a

Figure: China Momentum Indicator (Source: Fathom Consulting China Momentum Index)

Figure 2: China Momentum Indicator (Source: Fathom Consulting China Momentum Index)

clear indication of a coming recession.

Also, the 7 to 10-year yields on the Barclays/ Bloomberg multiverse which is regarded as a debt During the last global recession of 2009, the index clearly went below the 50-mark suggesting a good cor- benchmark globally are at the lowest level since 2016. relation between the index and global economic It should be considered that this list of indicators is health. only a representation of showing economic health and are not an exhaustive list of predictor variables for a probable recession. There are many dynamic variables The relation between bond yields and inflation is posithat have a strong correlation to economic growth, are tive with growth. Thus, when the growth is strong the interlinked and hence interplays in determining a posbond yields and inflation also rise and vice-versa. But sible recession. Looking out for all these indicators in the 5-year forward swaps which gauges the marketconjunction can give an economist a fair understandbased inflation, have taken a nose dive since 2016. ing of what the future may hold.

Bonds market and Inflation

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Industry Insight

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Figure 3: JP Morgan Global Composite PMI (Source: tradingeconomics.com)

Figure 4: Global bond yields and inflation expectations (Source: Thomson Reuters Datastream)

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Student Article

Collective Finance: A New Language of Rural Development Utsav Ameta PGP-FABM, IIM Ahmedabad The future of India lies in its villages - Mahatma Gandhi Surely M.K.Gandhi would have imagined rural economy driving the steering of Indian economy while putting forward the self-sufficiency model of the village.

Self-sufficient villages are still a dream for India given the state of economic and financial status of villages from past 70 years. The village remained on economybackseat post-independence because of asymmetric sectorial growth by shifting policy focus directly to develop the industrial sector. In recent years, villages and agribusiness enthusiast have found the same Gandhian model working in favor of rural scenario. Many initiatives have recently come into light pushing rural entities for collective finance model for all problem from credit, finance to agriculture, market, skill development sector. Aggregated finance paving ways for villages of India to become self-sufficient in most aspects. Initiatives like Zamindara, SHG Finance, WUA model, etc. are trying to bring the rural people together for collective growth by collective effort. Collective finance is the new language of development which means the group of rural people coming together and providing whatever they can provide (money, information, social capital, education, skill development), in turn getting personal and social benefits.

Defining Success By Choosing Appropriate Collaboration To strengthen the collective finance and rural development, upbringing under-developed categories becomes necessary which were left till now. These categories include women, village youth aspiring to migrate for livelihood, marginal farmers, laborers. Forming these discrete homogenous groups as they understand each other's pain and also peer-pressure for self and collective development and bringing them together for collective finance and aggregator agribusiness model including aggregated agri-marketing is solving problems of many villages like Kansa in Gujarat.

While private and public sector can provide other required instruments like digital technology, shadow banking to make the program successful, the main driving seat is to be occupied by these groups only. As most of the schemes for rural development fail at the implementation part, micro-financing & shadow banking are the best example of initiatives which brought to success by implementation through these groups.

Rural micro-financing impacted through forming such homogenous groups and linking the credit-worthiness of each member to the credit repayment discipline of the successive borrower in the group. This kind of setting reduce the default rates even without collaterals because social collaterals guarantee repayment through peer-pressuring and monitoring. Similarly, intra-village aggregated marketing model and aggregated skill-development enable rural people to develop competencies for collective growth. These models also develop social building and collective peace which are necessary with development.

Together Is Better With more and more initiative coming in this sector and targeting the development through collective finance, the self-sufficiency model of the village is articulating the true story of rural development. Symmetric development should be the prime target of public and

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Student Article

private policies, if in development planning some groups are left, later makes them vulnerable and bring the development cycle back to the ground. The primer institutes and resource-enabled enterprises work-

ing in this sector should also focus on collective finance as a driver of rural growth. The future with such kind of models prosper the prophecy done by Gandhi for rural sector.

Figure 1: Agri Services in India (Source: Sohan Lal)

Figure 2: Digital Rural Finance - Rise of Fintech (Source: BF Consulting)

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Student Article

Sovereign Bonds VARUN GAJARIA PGDM - Analytics Welingkar Institute of Management On 6th July, 2019, in her budget speech, the Finance Minister of India, Mrs. Nirmala Sitharaman announced a historic move by proposing a plan to raise funds from off-shore investments and borrowings by expressing an intention to raise up to $10 billion off the targeted $100 Billion (INR 7 trillion) in FY 201920 by issuing sovereign bonds with issue of a 30-year commercial paper from the Government of India.

The following move is historical in the sense that it is the first time that the Indian Government is floating its Sovereign bonds in external markets. "The government has met several foreign bankers over the last two weeks and sees an appetite for long-term sovereign bonds", as quoted in a report by Reuters. The bonds are likely to be issued for a term of more than 10 years in line with the effort.

However, the proposal has been criticized by ex-RBI Governor and being called as the one that may not have ‘real effect and is attached to enormous risk'.

Through this article, we analyze the future of the move and its effect on the economy.

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Sovereign Bond All you need to know about it.

A bond is a promise issued to the bondholder by an institution or by the Sovereign as a promise to pay back the borrowed amount upon purchase of bond by the holder along with the interest which is a function of market forces depending on the type of bond. (floating rate bond).

Figure 1: Types of bonds

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Student Article

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The Proposal The FM has proposed that the Government will float sovereign bonds in external markets to raise as much as $10 billion from the external markets. The move comes after the government expressed its willingness to raise $100 billion (INR 7 trillion) from domestic m a r k e t s .

The move is significant as raising debt from external sources will have the following impact on fiscal fin a n c i n g : Firstly, in the following scenario, the Government will be issuing the bonds in foreign currency which will enable the government to earn foreign currency.

This will have a significant impact on the treasury and usually, borrowings in foreign currency entail lower interest rates and hence the loans get cheaper.

Figure 2: 2: India's India's Total Total Debt DebttotoGDP GDP(%) (%)

Secondly, floating the bond in foreign bond indices will make the bond attractive to the investors and encourage foreign investments.

Thirdly, the bond will make the government more disciplined with their neck on the line as borrowers might pull out funds/deposits if they start seeming less attractive. However, the problem can be met with, by the government as it mandates PSU's to invest a part of their deposits in Government bonds.

Further, floating the sovereign bonds will help set credit risk premium for the nation which translates as additional yield a bond must offer to the investor for investing in a developing market like India and not a developed one like the United States.

Figure 3: India’s total external debt

India so far has a foreign debt to GDP ratio of 5% which is among the lowest in the world. Hence, the government can afford to raise debt in this manner.

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Student Article

India’s recent rise in domestic bond yield is an indication of fall in investments and drop in prices of domestic bonds. The following situation in domestic market is a reflection of how the economy is faring as far as trust from investors In the past 4 years, India has witnessed investments of scale followed by disinvestments of significant amounts. All these aspects along with falling bond yield of Govt. bonds in domestic market play an important role for an investor in foreign currency market while deciding to invest in govt. bonds.

The Indian Government with the move has made a modest start as far as the amount is concerned as raising $10 Billion in debt is merely 10% of the budgeted debt raising for the fiscal year 2019-20. However, the targeted exposure will certainly mark India's Government bond's entry into the debt market space and the bond having traded in foreign currency and indices which would, therefore, invite foreign currency and play a crucial role in stabilizing FOREX rate of INR against various currencies.

Hence the question that arises here after presenting the above analysis is that why hasn't any Indian Govt. done this before? What could be the possible downsides to the move? 

India Inc. today has in total $60 billion in FPI investments in debt which form about 3.3%of the outstanding debt across government and non-government papers while we have $428 billion of FPI investments in Equity and hence foreign disinvestment in recent times has led to an outcry by economists as India continues to depend on FPI through Equity as the amount forms 41% of the NSE free-float Market Cap.



Further India stays indebted to FPIs to an extent of $316 billion but invites $648 billion worth investments from FPI and FDI.



Floating sovereign bonds in foreign currency could well attract investment as it has before but India Inc. would still stay vulnerable to

movements in currency and global disinvestment cycles coupled with having to pay a premium for investing in an emerging economy like India and not in a developed economy like the U.S. 

This would invite greater risk hence. Besides, we need a stable growth, in the long run, to be able to service the debts in case the government continues this activity in future.



Economists in retrospect have pointed out that borrowing in foreign currency is 1% more expensive than in domestic currency.



Also borrowing in small amounts in terms of foreign currency bonds will not have a significant impact on the yield curve in the long run and hence the whole purpose of borrowing might get defended.

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VittaArtha Artha Vitta

Student Article

Figure 5: Illustration by Chad Crowe

Figure 6: Source: The Hindu

Conclusion “the

In conclusion, the Indian Government will have to tread cautiously as they float the bonds in the coming fiscal year while managing the economy in line with the market expectations and investor sentiments to allow a steady flow of foreign currency into the system while managing the hedge against FOREX in Mr. Marti G Subhramanyam, TOI background.

aim of internationalization of the rupee would be more of a hope and prayer for some time to come, especially when even much more important currencies such as the Chinese yuan have had their own challenges in doing so.�

The above illustration is a testimony of how related economies that have been in the foreign debt currency market for longer than India will impact our borrowings.

The chart explains how volatility of Government securities has stayed lower than that of FOREX and hence it must be noted that floating Govt. bond in FOREX would invite high volatility in line with global indices. Hence, depreciation in Rupee could lead make it an expensive affair rather than a cheaper hence making hedging a costly affair.

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Student Article

AI transforming Financial Audits & the impact of Technology on Economy

they do. AI is helping them in increasing their potential to analyse more data in a single set.

With more and more broad size of organizations and complex data coming into picture, it is essential today for an auditor to use AI for fulfilling the key requirements of the customers that includes increased speed and efficiency in auditing processes.

One of the key benefits of enabling a computer sysHIMANSHU RANJAN TIWARI tem with AI to conduct audit process is the reduction of errors in auditing processes and handle very huge Symbiosis Institute of amount of data at a single time, which is tough for a Telecom Management, Pune human being to execute upon. Auditing can be further transformed by adding other technologies like maThe term Artificial Intelligence specifically refers to chine learning based models to automatically code those computing systems that involve human intelliaccounting entries. gence. Figures of a recent study found that a total of 88 percent of over 230 businesses are using AI be- AI is helping the auditors in providing better quality cause of its advantages and efficiency and among the audits by continuously monitoring areas like perforother business who have yet not deployed AI in their mance of internal control systems, designing and systems , around 56% are planning to do so in the monitoring audit committee’s effectiveness, providing course of next two years to gain competitive ad- audit education and supporting auditors by giving vantage. This is mainly due to rise in the volumes of them on site auditing performance reports. data generated and used by organizations with ad- The Big 4’s are investing heavily in AI powered auditvancements in technology. ing tools to assure its processes, which includes: AI has already moved beyond its first and basic appli- • cations of self – driven cars and is now diving into a new and potential sector that is auditing. AI is making it possible for both internal and external auditors to work in better ways by upgrading the level of work • •

Fig. 1: Depicting how AI makes Audit processes better

KPMG CLARA has been built by KPMG in collaboration with IBM Cognitive Computer Watson to develop accountancy tools and develop smart auditing platforms.

GL. Ai is a bot developed by PwC to spot errors in a business ledger.

Grant Thornton has its own AI framework in place for conducting smooth auditing process.

With the successful implementation of AI, auditors will be able to upgrade to another level where the basic work of auditing would be handled by the system with almost zero error rate and the auditor will be able to concentrate more on delivering strategic insights which is more important from an organizations view and pay attention to more complex problems.

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This will eventually create new challenges for the auditors because they will be requiring exceptional interpersonal skills to perform as business advisors and the

Fig. 2 (Grant Thornton’s AI Framework)

Fig. 3: Chart showing future spending plan on AI by various Continents

ability to provide strategic insights by effectively utilizing the tools to their advantage. This will in turn create opportunities for the auditors to take a step into new tasks such as developing new auditing systems for latest technological and emerging trends like blockchain.

For some auditors who are yet not too much into implementation of AI and believe that traditional systems would work and fulfil the demands are surely going to see a burdensome future and will be surpassed by their colleagues who use AI for better delivery.

How companies benefitted from Artificial Intelli- As suggested by Mr. John Bednarek, Director (Sales gence in conducting efficient Audit Processes Growth at Mindbridge AI) - “AI will not replace audiAlmost all the major giants in audit are turning to- tors, but auditors using AI will definitely replace those wards AI, among which the early adopters are the big not using AI.” 4’s already using AI for conducting smooth processes and disruptive business models. Deloitte which used to take 4-5 months for conducting a process now takes a week to do so. Technologies such as NLP (Natural Language Processing) and RPA (Robotic Process Automation) now gets completed in a few hours which took days for auditors to complete.

PwC has enabled the whole process of concept to first implementation in a month – Anand Rao (Global AI Lead, PwC) In the ever changing world of transformation and technological advancements, the roles and processes of auditing will be the same but the way we approach to audits and conduct them would change with new challenges coming in the industry.

In the modern era, the key driver for a successful economy is technology. Economists all over the world are laying more focus to the impact on technology on a nation’s economy. It helps in digital transformation of government services, betterment of living standards among the residents of the country and more controllable international trade. Logically thinking, if technology is helping all the sectors in the nation to grow and develop, it is indirectly helping the economy to become a juggernaut for other nations. Technology today leads the GDP growth, productivity of crops in nations like India and betterment of corporate profits that indirectly leads to more tax, again helping the Central Government of any nation generate more profits.

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Fig 4: Image depicting Innovation and technology as the first parameter for future growth in India

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skilled workforce, on the other hand technology would help in automation of all the industries which would reduce cost and help India achieve greater recognition and profits globally. Also, according to experts from Mc Kinsey and Bain Co. Emerging technologies like IOT, AI and ML may help the developing nations develop a new workforce of millennial who would in turn generate 1.3x times the normal amount of money generated in the economy by 2025.

Labour cost reduction would be the prime focus of automation and would lead to more profit making industries thus extracting money from other nations.

When it comes to a developing economy like India, it As mentioned by Neil deGrasse Tyson had always been in the mind of individuals on how You innovate in ways that stoke your economy. Because innovawould technology impact the country in long term tions in technology are the drivers of future. economic terms. Globalization helped in creating

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Student Article

SHUBHAM GOEL PGP04, IIM Amritsar

The Investment Conundrum India’s deepening slowdown has left the economy on the verge of stalling. The index has fallen sharply by approximately 10% since the July high of 12088.55.

The exodus of FII’s is worsened by the lack of trust exuded by equity market with 100’s of stocks nosediving toward nadir. The brave question to be asked is, Is it the right time to invest?

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say there are 2 companies A & B in the same line of business. A is a well-established firm with stock trading at INR 100 and INR 10 per year in profits, B is a start-up with stock trading at INR 30 and INR 4 per year in profits. Benjamin Graham would simply invest in company B as he sees it to be undervalued. The other part of value investing was fundamental analysis. He strictly believed that investing was a long-term task and that a company with strong fundamentals could only sustain long term growth.

Philip Fisher had a strong faith in the common stocks.

He believed in thorough analysis and investigation of a company before investing in its stock. He would prepare a list of say 200 companies and then analyse them on a fifteen point basis which included Products and services with sales growth potential, Management’s ability to develop new product/services, Efficiency of R&D team, Worthwhile profit margin, Steps to maintain profit margin, outstanding personnel and executive relations, Depth in management, cost analysis, Long range outlook, Management of unquestionable integrity, Equity Dilution, unique advantages and management’s information exchange with investors.

For obtaining this information one needs to personally meet the management, the customers, other stakeholders. This way an investor would get 10-15 pennyworth companies. Though the process was monotonous and long, it assured supernormal gains.

As Warren Buffett said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. The 4 gurus of investing believe in buying cheaper and selling dearer. Economic recession is one such opportunity for the investors who are brave enough to earn supernormal returns.

But there is a huge difference between investing and speculating. People who invest make money for themselves, whereas people who speculate make money for their brokers. So, let us learn from the big 4 of invest- Initially, Warren Buffett blindly followed Benjamin ing.

Graham and invested only in the value stocks. Putting Benjamin Graham was the first to provide insights money on value stocks would have been hunky dory if into investing. During the 1929 recession in the US, it were not for the opportunity cost foregone with the when the investors were leaving the market, Benjamin growth stocks. This light bulb moment followed with Graham saw it as an opportunity to swoop in and investment in companies like Gillette, Wells Fargo, purchase the undervalued stocks. He was a firm be- McDonald’s etc. Warren Buffett also believes in qualiliever of value investing. Long term value investing ty investing, he would rather pay a fair price for a strategy involved purchasing stocks trading below great company than a low price for a mediocre comtheir intrinsic value, and then holding them until their pany. This rationale comes from the tenet of power of price reflected the real value of the company. Let us compounding. The term economic moat was popularunderstand value investing with an example. Let us ised by him. It refers to a business' ability to maintain competitive edge in order to protect its long-term 16

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profits and market share from the competing firms.

This can be in the form of cost advantage, size advantage, high switching costs, intangibles etc. According to Warren Buffett one should invest in a stock that has a moat over its competitors, which is sustainable.

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something attracts you as a consumer, it must pique your interest as an investment. For example, CocaCola was one of the most used products in US at that time and also one the biggest investment opportunities. He expected that along with the idea, several fundamental values should be met for any stock to be worth buying. Percentage of sales for that product should form a major part of the total sales for that company. PEG ratio should be looked at, as it shows the ratio of valuation to earnings growth rate. Also, companies with strong cash positions and below average Debt to Equity should be preferred.

Peter Lynch came into picture during the early 1980’s when he took over Fidelity Magellan mutual fund in May’ 1977. Peter Lynch followed three basic investing principles: Only buy what you understand; performing simple fundamental analysis; investing for the long run. He reckoned that the greatest stock research tools are our eyes, ears and common sense. Lynch So, the impending recession can be harbinger of forsaid that most of his stock ideas came from grocery tune or devastation, it depends on what learning you stores and casual chatting with friends and family. If take from the past.

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SEBIN MICHAEL PGP 05, IIM Amritsar

Inverted Yield Curve: A Crisis Indicator?

Dropping GDP levels, rising un-employment, US – China Trade war, Brexit, rising tensions in North Korea; the nation along with the world seems spiralling into the crux of another financial downturn. But are these concerns for real? Are we really losing it again or is it just another point on the economic cycle? The inversion of the US treasury bond yields points to the opposite.

Treasury bonds are simply an interest – bearing bond issued by the government. The funds raised are used for government initiatives. They can be short term or long term investment. Treasury bonds are analogous to bank accounts. Banks pay you less in terms of interest for short term deposits and more on long term deposits. The bond market is also similar: the longer you lend, the higher the risk and higher the return. In an inverted scenario, interest on short-term bonds are higher than long- term bonds. Now for the first time in past 12 years’ short term US treasury bonds yields have topped long term yields.

On August 14, US Treasury bond yields began to suggest an impending financial crisis. The inverted yield curve is considered as a mostly accurate indicator of recessions. The curve has inverted before every US recession since 1955. It has managed to forecast a recession 9 times and was only once followed by a slowdown instead of a recession.

This Inversion seems to clearly have an effect on the US president. Donald Trump was quick to blame the Federal Reserve Chairman Jerome Powell and stated that the Fed did not lower interest rates quickly enough. Others were also quick to take sides on the matter. Eric Rosengren ( Boston Fed) claimed that the inversion was due to turmoil abroad. He attributed the volatile nature of current world market as the lead reason for this inversion. Global investors are buying anything with a dollar sign, both for security and better returns. This greater influx of money into the US bond market has pushed the prices up and brought down the yields. Additionally, the labour market and consumer expenditure are all still strong.

The Dallas Fed president Robert Kaplan sees things differently. He finds the lagging domestic growth as the main culprit behind the inverted yields and fears a recession. He finds a immediate requirement to cut the Fed rates. Brian Rehling (Wells Fargo) also shares the same sentiment. He said: “Essentially, investors are saying, ’We’re worried about economic weakness.”

Investors are now expecting Fed to cut rates by 0.25 percentage points by September. At least 12 other indicators are also ringing the alarm bells. From the more mainstream ones like the BEER indicator to

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Student Article

Vitta Artha edition Vitta Artha | Summer

more un orthodox recession centric indicators like the be attributed to government regulations and the curR – word Index, Underwear index, Diaper indicator rent political scenario, the possibility of an impending are all suggesting a tip over. recession cannot be eliminated.

The situation is also critical government in the wake of its failing auto industry, border troubles and lagging GDP growth. Indian bond market on the other seems to stable with long term and short term yields running in tandem. However, another US economic fall might be devastating for the country. India through last July has seen massive drop in FDI. Even though these can

In conclusion, the next 2 years can prove vital in determining our nation’s growth rate. The current scenario is so marred with various issues that no singular bubble cannot be attributed to the situation. A cohesive approach to smoothen the wrinkles on the face of world market may help us to reduce the accelerated ageing of the current economic cycle.

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