Housing finance portfolios of Indian Banks and HFC’s have arguably been the best performing asset class in the last 15 years, with delinquency ratios across most lenders at less than 100bp and their credit costs at less than 30bp. However, the period was marked by a sustained increase in property prices, and not necessarily a fall in interest rates. Housing finance portfolios had extra cushion in form of cash down payment which was an integral part of majority of home purchases in India paid out of the pocket of buyer. Rising property prices, nominal GDP growth ( real growth plus inflation) rates of 13-15% for better part of this century created excellent employment opportunities and double digit salary growth all led to this Physical asset scoring over any other asset class. The turf is now becoming more competitive as more banks with attractive deposit franchise jostle for market share in absence of credit growth from their traditional corporate borrowers. India Ratings in this report talks about smaller room for growth for large ticket housing loans .
I see few more headwinds emerging for real estate over next few years based on my understanding of Macro.
1. Rise in Real estate prices in past were more a function of rising inflation which led to value of money falling dramatically hence rising property prices.With inflation targeting adopted by RBI, demonetisation, which will reduce the black money proportion in real estate transactions, RERA act (real estate regulation act), Implementation of Benami transaction act (Income tax crackdown begins: 87 notices issued, 42 assets worth crores attached under Benami Act ) it is highly unlikely that we will see real estate prices rising like before.
2. I see nominal GDP growth in next couple of years at around 10-12% driven more by government expenditure rather than private sector. This will certainly impact the profitability of corporate India and in turn will lead to muted wage growth for the employees. In fact,rightsizing (read downsizing) is the new word. Consider this,number of employees employed in IT sector is negative YOY for the first time since 2000. The country’s biggest bank by market cap HDFC Bank shed 4500 employees for the first-time bank has started operations. The insecurity in private sector employees has started to creep in and the companies catering to outsourcing are already feeling jittery after Trump election
3. HFC’s which cater to small value loans will not be effected as govt expenditure is set to rise for this section of society in run up to Lok Sabha election to be held in 2019. There are also signs that agricultural commodities have bottomed out with the classic theory of “Poverty amidst plenty” slowly reducing the crop planted in main agricultural regions of western world.I see rising soft commodities prices, which should positively affect the balance sheets of rural households.
The debt/ GDP for household in India is not at alarming levels as compared to other Emerging countries, but in absence of strong nominal GDP growth we will reach there in next 2-3 years and that is when music stops for lenders and delinquencies will start rising.
India Ratings report
HFCs – india ratings
VIX hit lowest level in 10 years
VIX (volatility index)index hit the lowest level since 2007 before recovering a bit on Friday . VIX is a trademarked ticker symbol for the CBOE Volatility Index, a popular measure of the implied volatility of S&P 500 index options; the VIX is calculated by the Chicago Board Options Exchange (CBOE). Often referred to as the fear index or the fear gauge, the VIX represents one measure of the market’s expectation of stock market volatility over the next 30-day period. Low level of VIX is often associated with high stock prices and high complacency and high VIX is often correlated to low and volatile stocks prices and great time to buy stocks
Indian VIX is also correlated to US VIX most of the time and although Indian equity markets have not touched a new high like US equity markets, Indian markets VIX at 16 is near lowest end.
The following chart of global policy and VIX has also diverged . As per Gavekl Based on the level of the economic policy uncertainty in the world, a regression model would have predicted that the VIX would be pushing 30 instead of hovering around 10
So where is the equity market getting this confidence?
These days, markets have grown convinced that Beijing will avert Chinese financial and economic crisis. The Bank of Japan will secure bond prices in Tokyo – no matter how much government debt is issued. The ECB will hold together Italy, Portugal, Spain and euro integration more generally. The Fed will not tolerate any meaningful tightening of financial conditions, ensuring the sustainability of bull markets in U.S. financial assets. The U.S. and king dollar provide a stable foundation for global finance that, along with ongoing Chinese growth, will hold EM debt crisis at bay. And, more generally, the Fed and international central bankers will continue backstopping global markets, guaranteeing ample liquidity and buoyant securities prices. Bear markets – let alone crisis – are simply intolerable. Even if calm prevails, markets have grown way too complacent regarding the global monetary backdrop. So many unknowns. So many things that could go wrong. Whenever it unfolds, the next de-risking/de-leveraging episode should be quite captivating.
Chinese demand for overseas property collapse
China’s escalating crackdown on capital outflows is sending shudders through property markets around the world.Less than a month after China announced fresh curbs on overseas payments, anecdotal reports from realtors, homeowners and developers suggest the restrictions are already weighing on the world’s biggest real estate buying spree.This sudden slowdown is outcome of statement from the State Administration of Foreign Exchange on Dec. 31, hours before the reset of Chinese citizens’ annual foreign currency quotas. Among other requirements, SAFE said all buyers of foreign exchange must now sign a pledge that they won’t use their $50,000 quotas for offshore property investment. Violators will be added to a government watch list, denied access to foreign currency for three years and subjected to money-laundering investigations, SAFE said.
The clampdown has also effected spending on luxury designer retail , as per BAC the sales at high end luxury retail outlet turned negative for the first time in last 6 years.
Have the law of economics stopped working and china has won the battle against capital outflows or as i fear china is preparing to float its currency in 2017 escalating the trade war and resulting protectionism.
what i read this week……Economic Times
When Donald Trump is trying to fence US borders, China has just broken new frontiers by opening a rail transportation link with Western Europe under its ‘One Belt, One Road’ initiative. That should be music to the ears of people who support globalisation.
And then I also read about two emerging technologies that are rapidly becoming mainstream in the auto world and about this Russian app that threatens to destroy privacy forever.
Ah, heavy stuff for a weekend? Do read nonetheless. It’s much softer that crunching macro-economic numbers. And do have a great weekend ahead!
CALEXIT…..California files petition to secede from USA
A proposal for California to secede from the United States was submitted to the Secretary of State’s Office this week. The proposed “CALEXIT” proposition plans to ask voters to repeal part of the state constitution that declares California an inseparable part of the USA. Californians overhelmingly voted for Hillary clinton and californians subsidise other states. if california was an independent country, based on GDP of $ 2.46 TRILLION it would rank as 6th biggest economy in world ahead of France which is the world’s seventh-largest economy with a growth domestic product of $2.42 trillion, and India which is the eighth-largest with $2.09 trillion, according to the latest International Monetary Fund data.
The $99 billion idea.How Uber and Airbnb won
This is the story of Airbnb and Uber, among the fastest-growing startups in history by sales, market value, and number of employees. They’ve attained these heights, and a combined worth of $99 billion, despite owning little in the way of physical assets. Airbnb can be considered one of the biggest hotel companies in the world—currently valued at $30 billion, about the same as Marriott International—yet it possesses no actual hotel rooms. Its founders are billionaires three times over, at least on paper. Uber is among the world’s largest car services, yet it doesn’t employ professional drivers or own any vehicles (save for a small, experimental fleet of self-driving cars). Uber is valued at $69 billion, more than any other privately held tech startup in the world. Kalanick, founder of Uber and Camp , founder of Airbnb have an estimated net worth of about $6 billion each.
The strange thing is these big startups is that it is a winner all take the market and there is no space for even the second guy
Futuristic technologies inside your new home…plug and play
This interactive infographic previews some of the upcoming technologies that futurists see inside your next home.
By the year 2030, a futuristic toilet will run diagnostics on your bathroom sessions, and your GP in the mirror will alert you of potential illnesses, deficiencies, or other material data.
Invisibility cloaks: By changing the way that light interacts with objects, invisibility cloaks could be used to “hide” ugly objects in your next home. See a video clip that explains the upcoming “Harry Potter” technology here.
By the year 2045, food will be 3D printed from scratch in kitchens. Perhaps more importantly, 3D food printing will allow us to make use of things that are currently less desirable for use in traditional cuisine, such as algae, beet leaves, or insects.
Dish Spa: Similar to a fish spa treatment, your future dishes will be cleaned by robotic fish in a tank by 2050. They’ll apparently take the remains of your food and convert it to a biofuel.
Plug and play
India is the largest importer of weapons in the world with a 14% share of the market.
Together, the United States, European Union, and Russia combine for over 80% of weapons exports, while the rest of the world fills out the “longtail” of the exporter distribution.Meanwhile, India is the largest importer of arms with 70% coming from Russia, 12% from U.S and Israel (7%) as other major partners.
This is one industry where make in India needs to succeed. The thinking in government is on right lines for joint parterships with overseas arms manufacturer getting invites for setting up manufacturing facilities in India to make for India and making India as an export hub to rest of the world. This will create more job opportunities for us.Although technology transfer is a contentious issue, still we will learn from these companies and, who knows, in few years with Make in India initiative our reliance on imports from these countries will go down thereby saving precious foreign exchange which can be used for more productive purpose
Move on Bitcoin…… this cryptocurrency grew 26 times last year
Bitcoin is synonymous with cryptocurrency but there are other like Ethereum whose price shot up 10 times last year. A little known once-obscure cryptocurrency called Monero outpaced all of them, multiplying its value around 27-fold. The source of that explosive growth seems to be Monero’s unique privacy properties that go well beyond the decentralization that makes Bitcoin so resistant to control by governments and banks. It’s instead designed to be far more private: fully anonymous, and virtually untraceable. Today each Monero is worth around $12, compared with just 50 cents at the beginning of last year, and the collective value of all Monero has grown to close to $165 million
Tsunami of disruption in financial services
Things are becoming more difficult with launch of UPI as UPI although helps the banks, the incumbents, but it helps the challengers even more. If I am using the UPI app, I don’t have to think much about the bank I am sending the money to or requesting money from—the same way I don’t think about my telecom service provider when I send a WhatsApp message to a friend. Almost everything about the bank—most importantly the bank account number, the primary identity—is hidden behind a simple virtual payment address (VPA), the new identity. The bigger your customer base, the more worried you will be. The way Ola and Uber understands taxi business better than taxi guys, technology guys know more about banking than the other way around. In this Panel discussion Ritesh Pai of Yes Bank, Viiay Shekhar Sharma of Paytm and Adhil Shetty of Bank Bazaar- which aggregates bank products- give some interesting insights. Adhil Shetty talks about how 7 million customers are coming to his site for product offerings from 30 banks. In a survey of net savvy banking customers held last year, 45% took financial decision by doing the research themselves. This percentage of people is now at 75% this year. Paytm is on the way to launch its payments bank. Currently this e-wallet company has a base of 100 million customers. If every paytm customer keeps a minimum of Rs.1,000/- in their Paytm wallet it amounts to approx. USD 2 billion of daily float at zero cost.
Must watch for everybody associated with financial services