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BIG NEWS – July - 07th_2017


Posted on 11-Jul-2017 Comments  0

Analyst calls


Are we missing the bigger picture and this is happening globally?



Over the last few quarters, we are increasingly seeing analysts being off the mark on quarterly earnings estimates. This is not only happening in India but also across most other major geographies. Recently, we have also seen analysts going awfully wrong on estimating the trajectory of oil and copper prices. What is the bigger picture that is emerging?


The Goldman Sachs story…


Recently,Goldman Sachs decided to do a detailed analysis of how it got two recent trades awfully wrong. The first pertained to its call on crude oil prices and the second pertained to its call on copper prices.What was surprising was not that Goldman got the call wrong. Such bad estimates are quite common in markets. The reason Goldman is getting to the bottom of the matter is that analysts had missed out certain very obvious possibilities.


When the OPEC had decided to cut its oil supply by 1.8 million bpd,Goldman was betting on a rise in crude prices. While it did happen initially, crude oil prices retreated sharply afterwards as stock piles and higher US output bridged the supply gap. Even in case of copper, while Goldman was bullish, the sharp correction was caused by aggressive de-stocking of copper by dealers at higher levels. This sharp crash in copper prices was something that Goldman Sachs had really not bargained for!


Is this becoming a trend?


While it may be unfair to arrive at broad conclusions, there is definitely a shift as more brokers are getting their asset class views wrong.There are possibly two reasons for the same. Firstly, the global market has become more integrated and therefore it has become more complex. Estimating commodity price is not as straight forward as taking a view on Chinese demand growth. Second is the role of technology. Global business is currently on the cusp of some radical shifts in the use of tech with the emergence of analytics, cloud and Internet of Things (IOT). All these are likely to create shifts in business that are, perhaps, hard to comprehend for the human mind.


So,what is Goldman doing?


Goldman has taken the lead in relying more on robotic solutions. The need of the hour is to evaluate more data points and more permutations in relationships to arrive at a more credible situation. For example,Goldman has reduced the number of dealers from 600 to just 2 on its global trading desk. These jobs will be increasingly given to robots and altos. We could see a similar trend for analysts too. It is, perhaps, too manpower-intensive and the emerging challenges call for more of data handling and lateral analysis. It is just that the world of financial markets is changing. Welcome to High-Tech Markets! ©



Rating Agencies


How SEBI plans to make them more effective…



Over the last few years, the role of rating agencies has come in for a lot of criticism. The debate first started in the aftermath of the Global Financial Crisis in 2008 wherein rating agencies had entirely missed out the risk that institutions like Fannie Mae, Freddie Mac, AIG and Lehman were carrying in their books. Not surprisingly, SEBI is now aggressively moving to make credit rating agencies more accountable for their ratings and their actions…


More access to information…


One of the major concerns expressed by SEBI is that credit rating has become too much of a routine activity in India. In a market scenario that is becoming more complicated and disruptive, traditional models are becoming too simplistic. In fact, SEBI has now asked the rating agencies to focus more on the public and non-public information pertaining to companies so that ratings can be more meaningful to investors.


Quicker access to intelligence…


SEBI has underscored the need to combine information with intelligence to make ratings more substantive. Rating agencies need to tap banks,dealer networks, tax data and the ROC to access quality and proactive feedback. Now, rating agencies will be required to obtain monthly declarations from the rated companies that there have been no defaults in any debt payments.


Processes need to be smarter…


Currently,rating agencies wait for the company to disclose their default on interest or principal repayments before taking a call on ratings.That tends to have a time lag of nearly 2 months and normally defeats the very purpose of a rating downgrade. For example, the rating agencies will now be required to proactively seek information from banks and lenders on any delays in repayment and not wait for the rated company to disclose the same. It is also about making the downgrades more gradual. For example, in case of Amtek Auto the ratings were downgraded by 12 notches in one go, creating an absolute chaos and panic in the markets and almost driving one mutual fund to the point of default. This needs to be avoided.


How about more transparency?


Outside of the alphabetical output, little is known about the methodology and thinking that goes behind the ratings. SEBI now wants to make all rating discussions and minutes documented for detailed review.Additionally, there will be greater onces on the rating officers and the heads of the rating agency to be able to justify their decision to do or not to do a certain action. Currently, there is no regulatory review of rating actions and now it looks like SEBI will have that too. At the end of the day, sharper rating intelligence is likely to benefit the investors at large! ©


Trading Timings


Do equity markets really need longer trading hours?



Over the last one week, the recently launched Metropolitan Stock Exchange of India (MSEI) managed to create quite a flutter. Its decision to extend trading timings for equities till 5 pm did manage to stir the market out of its slumber. Eventually, the NSE and the BSE refused to react and that meant that the MSEI was also forced to withdraw its announcement quietly. Of course, with zero volumes on most days, the MSEI has only symbolic value in the markets. But the bigger question is whether India really needs longer equity timings?


Experience of 2010…


Back in early 2010, the BSE decided to extend timings at the opening which was followed by NSE extending trade timings starting 9.00 am in the morning. That has remained the format of equity trading sense.However, the trade closing has continued at be at 3.30 pm only. If one looks back at the experience since 2010, there has been no perceptible increase in trading volumes as a result of that increase in trade timings. In the Indian markets, volumes have been concentrated principally in the first hour and the last hour of trade. That trend has remained the same after 2010. The volumes concentration in the two time zones still continues. Therefore expecting the market volumes to go up as a result of an increase in market timings is quite ambitious. At best it will put more strain on the infrastructure of brokers and traders.


Following the commodity story…


One of the arguments offered in favor of longer trading hours is that this facility is available on commodities and forex. However, that is a different ball game altogether. Both commodities and forex are global assets and therefore require longer trading hours. Also they are impacted in the short term by more lateral factors. The same cannot be said about equities. The second argument is that due to shorter trading timings, India may be losing its competitive edge to Dubai and Singapore. But, to take on those markets, you have the IFC at the GIFT in Gujarat. There is no point in mixing that up with the onshore equity markets in India.


Trade processing a challenge…


Most of the FII trading in Indian equities and derivatives happens out of the trading desks in Singapore and Hong Kong respectively. Both are in a time zone that is 2½ hours ahead of India. A 5 pm closure will mean that institutional trade confirmations will reach global traders by 6 pm which will be 8.30 pm in Singapore and HK. Obviously, that is not entirely practical. Even in the case of domestic mutual funds,the declaration of scheme NAVs could get inordinately delayed. In a nutshell, the benefits of extended trade timings in equities are very few. The current equity market timings have stood the test of time and are best left that way! ©


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