Birla plans $10-b financial services

THE Aditya Birla group wants to build a $10 billion integrated financial service business, spanning everything from stock broking and consumer finance to life and non-life insurance.
“We want to build a business that’s at least worth $10 billion for the group in this vertical,” said Ajay Srinivasan, chief executive for financial services and director for corporate strategy and business development at Aditya Birla Management Corporation, the group’s management company.
“The vertical could perhaps be more valuable than… Hindalco or Idea Cellular in market value over the next five years,” he said.
The group is ready to re-enter stock broking, which it exited a few years ago, and strengthen the existing consumer finance business. It will also make a debut in private equity and general insurance. It has drafted a Rs 2,000 crore plan for both organic growth and acquisitions.

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End of NICE decade is rude shock for investors:James Saft

The demise of the NICE decade of low inflation and steady growth, mourned by Bank of England Governor Mervyn King, means tough times are ahead for most financial assets.

Calling it the "most difficult challenge yet" for Britain's 11-year-old Monetary Policy Committee, King last week declared the decade of non-inflationary consistent expansion (NICE) over and done, as tight credit and rising inflation force a rebalancing from consumption and borrowing to production and savings.

That is bad news for King and Britain, as the bank will have little freedom to ease the economy's transition by lowering interest rates.

But it will be bad news for financial markets as well, and not just in Britain. Inflation and economic growth will be choppier and less predictable, and so therefore will be company profits.

And if there is one thing investors hate, quite rightly, it is unpredictability. They will react, almost mechanically, to this new volatility by demanding an extra risk premium for holding stocks and bonds.

That extra premium implies, all other things being equal, lower prices for the same earnings power in a stock or a bond.

"We are at the start of the decade of great instability for both real economies and asset markets," said Lena Komileva, an economist and strategist at brokerage Tullett Prebon in London.

"At a time when the cost of finance is decided in asset markets, outside the control of central banks, increased macroeconomic instability and rising asset price volatility as a result will compound the effects of the credit crunch.

"With cheap leverage no longer available, an adverse macroeconomic environment will make the correction of asset valuations in line with real fundamentals that much more painful."

The NICE decade is a manifestation of the broader phenomenon that economists have dubbed the Great Moderation.

Since the 1980s the economies of the West, led by the United States, have enjoyed fewer and less severe downturns, a period characterized above all by less volatility in the economy both in terms of growth and inflation.

There has been a lot of debate about what caused such an extended period of predictability, but what is clear is that the benefits have been huge. It has made it easier for governments, companies and individuals to plan their investment and consumption.

It has also probably contributed to a fall in savings in the English speaking economies, as rainy days have been few and far between.

All that seems to be changing.

THE HIGH VALUE OF PREDICTABILITY

If the Great Moderation is on the way out, investors will simply have to get used to more volatility.

To get a sense of how important this is, look at the premium investors paid for General Electric shares during its period of steady earnings expansion. Or conversely, look at the very low multiple of earnings shareholders are willing to pay to hold investment banking shares, which historically experience huge volatility in earnings.

And though Britain has gone longer without a recession, there is no doubt that the United States has also benefited from low and stable inflation and is now seeing rising inflationary pressure.

More than 20 percent of Britons polled in a survey by the Bank of England and GFK expect inflation to rise by five percent or more in the next year.

In the United States, the Reuters/University of Michigan survey of consumer sentiment, released on Friday, showed that median year-ahead inflation expectations jumped to 5.2 percent in May from 4.8 percent in April, the highest since the dark days of February 1982, when inflation was raging and the Great Moderation just a gleam in Paul Volcker's eye.

The latest bout of inflation is being caused by skyrocketing prices for agricultural commodities and energy. And whereas emerging markets like China were only one or two years ago supplying disinflation to the west through competition and cheap manufactured goods, these countries are now themselves in the grip of rising wages as well as commodity prices, making them a source of inflation.

Russell Jones, a fixed income strategist at Royal Bank of Canada in London, thinks that rising volatility won't just hit asset prices across the board.

"Volatility also heightens risk aversion as well," he said. "People are frightened off by volatility and they will keep their money in less risky asset."

Jones thinks Britain faces a period he characterizes as "evil," for Exacting period of Volatile Inflation and Low growth.

Quite possibly it won't be that bad, but two things are reasonably sure: central banks will not have the same freedom to lower rates they have used in the past to dampen economic volatility, and investors will have to grapple with the costs.

At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.

Comment: Is the housing tsunami receding?

Contrary to popular belief, a tsunami is not a single gigantic wave, but is a series of massive waves that can pummel shorelines thousands of miles from its origin, leaving a trail of devastation in its wake.

The current U.S. housing slump - the worst in 70 years - has been likened to a tsunami because of the carnage it has caused in financial markets worldwide, many of which were quite distant from the epicenter. The estimated damage in terms of market capitalization that has been vaporized over the past six months already exceeds hundreds of billions of dollars.

There are signs the worst is over and investors are cautiously picking up the pieces. But before you get too comfortable, realize that hazards remain.

Last week, Linens 'n Things became the latest casualty of the slowdown, as it filed for bankruptcy in the largest leveraged buyout failure since July.

The second-largest U.S. houseware retailer was unable to cope with competition and tight liquidity conditions as consumers cut back spending on home furnishings. Smaller rival Home Interiors & Gifts, a direct-marketer of home decorative products, also filed for bankruptcy last week.

Revenues and earnings at lumber producers have also taken a hit. Weyerhaeuser reported a loss of $148 million in its first quarter, and Canada's Canfor reported a loss of close to $84 million.

The slump has also slashed the market value of homebuilders in the S&P 500 by two-thirds from their peak in January 2006. The five companies in the S&P 500 Homebuilding index currently have a total market capitalization of $16 billion, compared with over $49 billion in the heady days of early 2006.

Nevertheless, judging by the performance of homebuilding stocks such as Pulte Homes and DR Horton, it appears as though investors believe the worst is behind them. The S&P 500 Homebuilding index was up 11 percent for the year as of Friday, led by Pulte with a 34 percent gain and DR Horton with 19 percent.

But the most telling indicator of improving sentiment is that top-rated securities backed by subprime loans rose - albeit modestly - in April, after falling over 9 percent in the preceding six months. As the implosion in U.S. subprime mortgage-backed securities was one of the major shocks that triggered the housing tsunami, any improvement in that asset class would be a positive factor for markets across the board.

For the moment, investors are willing to look beyond U.S. housing data, which continues on its dismal trend. Last week, real estate data company Radar Logic reported that home prices fell in 22 U.S. metropolitan areas in February, as foreclosures reached record levels. Prices per square foot in areas such as Sacramento plunged almost 30 percent from year earlier levels. Prices in Las Vegas fell 26 percent.

Markets may have stabilized in recent weeks as the leading wave of the housing tsunami recedes, but don't take your eyes off the water: there may be more waves on the horizon.