Recession's blessing

Falling Western demand is keeping high-quality Chinese goods in China

BY economist:

ON THE shelves of Chinese shops is the usual assortment of toys, clothing, appliances and cookware. But over the past month the quality of many of the goods on offer has improved. In part this is because scandals over toxic paint and poisoned milk have brought closer scrutiny from inspectors and hence less corner-cutting. But it is also partly because of falling demand for Chinese goods from America, Europe and the Middle East, which has given China’s manufacturers and local government a big incentive to work around the country’s formidable export-promotion policies and to sell at home.

Chinese manufacturers are well aware that they operate in one of the few large markets that is still showing a pulse. Retail sales in October were up by 22% compared with the same month in 2007—a slight drop from 23.2% in September, but an impressive figure nonetheless. That certainly exaggerates the country’s economic vigour (growth in car sales, for example, is declining), but it would be a stretch to believe that China is in recession.

As domestic consumption booms, China’s export-oriented manufacturers are under siege. Figures announced on December 10th showed that exports fell by a startling 2.2% in November, compared with a year earlier. Analysts had expected an increase of around 15%; it was the first fall in exports for seven years. The news followed a government survey, released on December 1st, that showed a precipitous decline in the fortunes of export manufacturers, confirming lots of anecdotal evidence. Every week brings fresh reports of factory closings, particularly in the industrial belt around the Pearl River delta in southern China. Unpaid workers have been staging violent protests. Diverting goods intended for export to the domestic market makes sense for factory owners, who want their firms to survive, and for local officials, who wish to maintain order.

There is, however, a problem. This scheme conflicts with government policy, which is to promote exports. China encourages the import of industrial commodities, such as oil, base metals and even quality fabrics and industrial machinery—provided goods made with them are sent abroad. Accordingly, a tax is imposed on imports, and is then mostly reimbursed when finished goods are exported. (Products brought into special zones devoted to manufacturing for markets abroad avoid the tax altogether.)

As a result of pressure from China’s trading partners, these tax rebates on exports had been contracting. But in November a new stimulus plan was announced that increased the rebates on more than 3,000 items. Evidently China’s officials hope the country can once again export its way to higher growth, despite the financial troubles in its main markets.

Given that demand is more robust at home than abroad, the market is pushing in the opposite direction to the government. But circumventing official policy is difficult. Along with the loss of the rebate, say manufacturers, comes an increase in attention from public authorities that most companies prefer to avoid. Some manufacturers therefore avoid the domestic market in China entirely; others run separate factories for domestic and foreign goods.

One solution is to route goods to the domestic market via Hong Kong, so that they qualify as exports, but this takes time and money and strikes many operators as a huge waste of both. China and Hong Kong are filled with small trading companies noted for their ability to handle these problems using one murky method or another. The sudden appearance of higher-quality goods suggests that officials are being less zealous than usual in enforcing the export rules, for fear of causing job losses.

Chinese consumers, for their part, must surely be pleased that they can buy better products at keen prices. A year ago, the boom was expected to be the means of breaking down the divide between China’s domestic and export-led economies. But perhaps a bust is what was required.

Microsoft bets on high-growth pockets in India

by economic times
Microsoft India chairman Ravi Venkatesan tells ET in an interview that there is still a lot of vibrancy left.

The contraction in money supply may have dampened buying sentiment, but for the global software products giant, microsoft there are still very significant areas of growth in country such as India.


What is your assessment of the economic situation vis-a-vis IT purchases?

I think it is still an incredible event that the Indian economy is expected to grow at 6.5-7%. There is a current decline in the market, but the overall conditions are still strong. There is a massive under- utilisation of IT in India and we still see pockets of significant activity in areas such as healthcare and education which are recession-proof. As of now, government spending on IT is very strong, both in the states and at the Centre.

So fundamentally, it is positive; these are not great times, but there is enough vibrancy. Today, we are seeing that companies are trying out new business models with openness to new things.

Would Microsoft India look at a flexible pricing strategy in the current environment?

We are constantly introducing new products at different price points. We introduced our Home Office at Rs 3,000 and are constantly looking at launching value products. Economics is a fundamental barrier towards greater access to software products. Clearly, this is a difficult time for our customers and we are also becoming flexible in structuring the payment mechanisms.

Will Microsoft have its focus both on enterprises and consumer market?

We will devote equal attention to both these segments. Our integrated consumer business is still small but provides us with biggest growth potential. Even Microsoft Vista is also doing pretty strongly with good adoption from enterprises.

We see strong growth in India and in times like these we want to increase our market share as well as the distance between the competition.

What challenges do you see in the Indian market?

There are some key challenges, such as the absence of broadband infrastructure. If we do not have it, then we cannot drive computing products.

Secondly, there is not enough focus on the India market, but things are beginning to change. And lastly, in a growth economy like ours, the government is a huge factor for IT adoption. Now that is happening and it is good times for Indian IT.

China and India Suddenly vulnerable

From The Economist print edition

Asia’s two big beasts are shivering. India’s economy is weaker, but China’s leaders have more to fear

THE speed with which clouds of economic gloom and even despair have gathered over the global economy has been startling everywhere. But the change has been especially sudden in the world’s two most populous countries: China and India. Until quite recently, the world’s fastest-growing big economies both felt themselves largely immune from the contagion afflicting the rich world. Optimists even hoped that these huge emerging markets might provide the engines that could pull the world out of recession. Now some fear the reverse: that the global downturn is going to drag China and India down with it, bringing massive unemployment to two countries that are, for all their success, still poor—India is home to some two-fifths of the world’s malnourished children.

The pessimism may be overdone. These are still the most dynamic parts of the world economy. But both countries face daunting economic and political difficulties. In India’s case, its newly positive self-image has suffered a double blow: from the economic buffeting, and from the bullets of the terrorists who attacked Mumbai last month. As our special report makes clear, India’s recent self-confidence had two roots. One was a sustained spurt in economic growth to a five-year annual average of 8.8%. The other was the concomitant rise in India’s global stature and influence. No longer, its politicians gloated, was India “hyphenated” with Pakistan as one half of a potential nuclear maelstrom. Rather it had become part of “Chindia”—a fast-growing success story.

The Mumbai attacks, blamed on terrorist groups based in Pakistan and bringing calls for punitive military action, have revived fears of regional conflict. A hyphen has reappeared over India’s western border, just as the scale of the economic setback hitting India is becoming apparent. Exports in October fell by 12% compared with the same month last year; hundreds of small textile firms have gone out of business; even some of the stars of Indian manufacturing of recent years, in the automotive industry, have suspended production. The central bank has revised its estimate of economic growth this year downwards, to 7.5-8%, which is still optimistic. Next year the rate may well fall to 5.5% or less, the lowest since 2002.

Still faster after all these years

If China’s growth rate were to fall to that level, it would be regarded as a disaster at home and abroad. The country is this month celebrating the 30th anniversary of the event seen as marking the launch of its policies of “reform and opening”, since when its economy has grown at an annual average of 9.8%. The event was a meeting of the Communist Party’s Central Committee at which Deng Xiaoping gained control. Tentatively at first but with greater radicalism in the 1990s, the party dismantled most of the monolithic Maoist edifice—parcelling out collective farmland, sucking in vast amounts of foreign investment and allowing private enterprise to thrive. The anniversary may be a bogus milestone, but it is easy to understand why the party should want to trumpet the achievements of the past 30 years (see article). They have witnessed the most astonishing economic transformation in human history. In a country that is home to one-fifth of humanity some 200m people have been lifted out of poverty.

Yet in China, too, the present downturn is jangling nerves. The country is a statistical haze, but the trade figures for last month—with exports 2% lower than in November 2007 and imports 18% down—were shocking. Power generation, generally a reliable number, fell by 7%. Even though the World Bank and other forecasters still expect China’s GDP to grow by 7.5% in 2009, that is below the 8% level regarded, almost superstitiously, as essential if huge social dislocation is to be avoided. Just this month a senior party researcher gave warning of what he called, in party-speak, “a reactive situation of mass-scale social turmoil”. Indeed, demonstrations and protests, always common in China, are proliferating, as laid-off factory-workers join dispossessed farmers, environmental campaigners and victims of police harassment in taking to the streets.

The gap between mouth and trouser

One worry is that China’s rulers will try to push the yuan down to help exporters. That would be a terrible idea, not least because the government has the resources to ease the pain in less dangerous ways: it is running a budget surplus and has little debt. Last month it announced a huge 4 trillion yuan (nearly $600 billion) fiscal-stimulus package. Some who have crunched the numbers argue that this was all mouth and no trousers—much of it made up by old budget commitments, double-counting and empty promises. It was thus mainly propaganda, to convince China’s own people and the outside world that the government was serious about stimulating demand at home. That may yet prove to be unfair: what matters is when infrastructure money is spent, not when it is announced. Yet there is little sign that the regime is ready to take radical steps in the two areas that would do most to persuade the rural majority to spend its money rather than hoard it: giving farmers better rights over their land; and providing a decent social safety-net, especially in health care.

Still, China does at least have trousers, with deep pockets. India, in contrast, is not seen as a big potential part of the answer to the world’s economic problems. Not only is its economy far smaller; its government’s finances are also a mess. Its budget deficit—some 8% of GDP—inhibits it from offering a bigger stimulus that might mitigate the downturn (see article). This is alarming. If China reckons it needs 8% annual growth to provide jobs for the 7m or so new members of its workforce each year, how is India to cope? A younger country, its workforce is increasing by about 14m a year—ie, about one-quarter of the world’s new workers. And, perversely, its great successes of recent years have been in industries that rely not on vast supplies of cheap labour but on smaller numbers of highly educated engineers—such as its computer-services businesses and capital-intensive manufacturing.

In two respects, however, India has a big advantage over China in coping with an economic slowdown. It has all-too extensive experience in it; and it has a political system that can cope with disgruntlement without suffering existential doubts. India pays an economic price for its democracy. Decision-making is cumbersome. And as in China, unrest and even insurgency are widespread. But the political system has a resilience and flexibility that China’s own leaders, it seems, believe they lack. They are worrying about how to cope with protests. India’s have their eyes on a looming election.

It used to be a platitude of Western—and Marxist—analysis of China that wrenching economic change would demand political reform. Yet China’s economy boomed with little sign of any serious political liberalisation to match the economic free-for-all. The cliché fell into disuse. Indeed, many, even in democratic bastions such as India, began to fall for the Chinese Communist Party’s argument that dictatorship was good for growth, whereas Indian democracy was a luxury paid for by the poor, in the indefinite extension of their poverty.

But as China enters a trying year of anniversaries—the 50th of the suppression of an uprising in Tibet; the 20th of the quashing of the Tiananmen Square protests; the 60th of the founding of the People’s Republic itself—it may be worth remembering that the winter of 1978-79 saw not only a party Central Committee plenum but also the “Democracy Wall” movement in Beijing. It was a brief flowering of the freedom of expression, quite remarkable after the xenophobic isolation of the Cultural Revolution. Deng, like Mao Zedong before him, tolerated the dissident movement as long as it served his ends, and then stamped it out. In so doing he thwarted what Wei Jingsheng, the most famous of the wall-writers, had dubbed “the fifth modernisation”: democracy. China still needs it.

An elephant, not a tiger

From The Economist print edition

For all its chaos, bureaucracy and occasional violence, India has had a remarkably successful past few years. James Astill (interviewed here) asks how it will cope with an economic downturn

EARLY next year, perhaps in April, India’s coalition government will face the judgment of 700m voters. Being mostly poor, they will not be happy. Recent months, moreover, have brought particular hardships: high inflation, a patchy monsoon, a slowing economy and vanishing jobs. In a worrying time, the terrorist attacks in Mumbai on November 26th-29th came as a particularly harsh blow. They gave the world images of India that jarred with the shining message of its recent progress. For three days India’s most cosmopolitan city and aspirant international financial centre echoed with gunfire. Amid the slaughter wrought by just ten well-organised assassins many individual Indians acted heroically. Yet the institutional response, as so often, was poor. Properly trained troops took over nine hours to arrive at the scene. Most of the 170-plus victims died during that time.

The Congress party, which leads India’s ruling coalition and runs Maharashtra, the state of which Mumbai is the capital, is likely to suffer for this. To make amends, Congress sacked the interior minister, and Maharashtra’s chief minister. The government, led by Manmohan Singh (pictured above), has also raised a cry—though not, thankfully, its fists—against Pakistan, whence the terrorists probably came.

Yet for most poor Indians terrorism remains a small part of their troubles. To deal with those, Sonia Gandhi, Congress’s leader, will reissue a lot of unkept promises when the election campaign begins: to bring everyone electricity, piped water, schools and jobs. She will say little about what this government has actually done: there hasn’t been much.

At the same time Mrs Gandhi and her prime minister, Mr Singh, have presided over the biggest investment-led boom in India’s history. In the past five years the economy has grown at an average annual rate of 8.8% (see chart 1). Services, which contribute more than half of GDP, have grown fastest, above all India’s computer-services companies. Infosys, TCS and Wipro are now world-famous names. But Indian manufacturing has also done well. Its impressive run culminated in January with the launch by Tata Motors of an ultra-cheap family car, the Nano.

A world of fewer opportunities

India is now facing harder times. Its stockmarket has been sliding all year. As global credit has dried up, even Tata Motors, one of India’s best companies, has been struggling to lay its hand on capital. India’s economy is slowing rapidly and confidence is fragile. Previously soaring foreign investment in the country is expected to dip. Nobody yet knows how serious the slowdown will be, but in theory a recession in the rich world should hurt India less than other emerging markets: exports amount to only about 22% of India’s GDP, against 37% of China’s.

Diplomatically, India has also started to matter more. The US-India nuclear co-operation agreement, which was approved by America’s Congress in October, was the clearest sign of this: to let India in from the nuclear cold, the developed world has made an exception to the counter-proliferation regime. Mr Singh can take much credit for this. A courteous and scholarly former finance minister who launched reforms in 1991 that unshackled India’s mixed economy, he has been an effective envoy for India.

At home, often stymied by his coalition’s leftist allies, he has done much less well. But, among his few successes, he can claim that India, the world’s fourth-biggest emitter of greenhouse gases, has started to get serious about climate change. It refuses to consider cutting its carbon emissions, arguing that they are still very low per Indian. But guided by Mr Singh, India’s bureaucracy has at least accepted that, being hot, poor and agrarian, India will be badly hit by climate change.

That makes India’s main priority, reducing poverty through rapid economic growth, even more urgent. According to the World Bank, in 2005 some 456m Indians, or 42% of the population, lived below the poverty line. In 1981, by the same measure, the numbers were 420m and 60% respectively. The government’s own estimates are lower. But everyone agrees that poverty in India is falling much too slowly.

Pick another wretched statistic: there are plenty of them. India has 60m chronically malnourished children, 40% of the world’s total. In 2006 some 2.1m children died in India, more than five times the number in China.

To make a serious dent in poverty, India needs to keep up economic growth of around 8% a year. In the medium term that should not be too difficult. More impressive even than the success of India’s best companies is the zest for business shown by millions of Indians in dusty bazaars and slum-shack factories. They are truly entrepreneurs. It is no coincidence, as is often noted, that Indians have prospered everywhere outside India.

But India’s task remains daunting. Some 65% of Indians live on agriculture, which accounts for less than 18% of GDP. Shifting them to more productive livelihoods—and so reducing poverty—would be hard even if the number of people of working age was not growing so fast. Roughly 14m Indians are now being added to the labour market each year, and that number is rising. Half of India’s people are under 25 and 40% under 18 (see chart 2). They cannot all work for Infosys. Indeed, because of India’s historic underinvestment in education, many are not obviously skilled at anything. By one estimate, which may be optimistic, only 20% of job-seekers have had any sort of vocational training. If India cannot find employment for this lot, poverty will not be reduced and India may face serious instability.

Its democracy will be no defence. India is already worryingly violent. A Maoist insurgency in eastern India, which Mr Singh has called “the greatest internal security challenge we have ever faced”, is an obvious ill omen. Where it is spreading, in poor, agrarian and broken places, the “invisible threads” that bind India, in the phrase of Nehru, its first prime minister, are almost non-existent.

In recent years India has been creating more jobs than the gloomier scenarios suggested. Between 2000 and 2005 its rate of employment growth doubled, to 2.6% a year. But that is still insufficient, and there are also fears about the quality of jobs being created. To escape throttling labour laws, Indian entrepreneurs tend to keep their operations small: 87% of manufacturing jobs are with companies that employ fewer than ten people. These tend to be both less productive than jobs in bigger companies and less protected by the law.

If India is to sustain a growth rate of 8% or higher, as it aims to do, it will need to manage four potential constraints. The most pressing, its rotten infrastructure and the dreadful quality of its education, are, alas, not new. But the government’s response has long been inadequate, and with India’s burst of high growth these two problems have become more urgent than ever. India’s current rulers, the mahouts to an elephantine state, seem at least to understand this. But their efforts to end these troubles remain unconvincing. India’s other big constraints, its cumbersome labour and land laws, should be easier to fix. But there is depressingly little sign that this will happen soon.

India is getting stronger, but its problems are also growing. In the end, the pattern of its progress suggests, it will succeed. But it may be a long and painful grind.

Sittin' on the dock of a bay

From The Economist print edition

Trade slows and gloom mounts. But Asia’s economic downturn will be milder than the one it endured a decade ago

EARLIER this year most businessmen and investors hoped that Asia’s emerging economies could withstand the economic and financial turmoil in the developed world. Now, however, stockmarkets seem to be betting on a rerun of Asia’s deep recession after its own crisis in 1997-98. Share prices in the region have plunged by an average of two-thirds (in dollar terms) from their peak in 2007—almost as much as they fell during the Asian financial crisis. Is Asia really heading for such a painful economic slump?

The latest figures are certainly worrying. Japan is now in recession. China’s economy is slowing much more sharply than expected, with the 12-month growth in its industrial production falling from 18% to 8% over the past year. Indian spending is being squeezed by the credit crunch: commercial-vehicle sales fell by 36% in the year to October. Hong Kong and Singapore are already in recession, with GDP having fallen for two consecutive quarters.

Asia is more reliant on exports than is any other region, so it is bound to be hurt by the rich world’s worst recession since the 1930s. China’s exports have so far held up surprisingly well, growing by 19% in the 12 months to October. South Korea’s have increased by 10%. But in Singapore and Taiwan exports have plunged this year. An Indian official has said that exports in October were 15% lower than a year ago.

Asia’s foreign sales are being choked by the global credit squeeze as well as weak demand. Cargoes pile up on the dockside and ships wait empty because exporters cannot get letters of credit to secure payment on delivery. Robert Subbaraman, an economist at Nomura in Hong Kong, reckons that over the next year exports from Asia (excluding Japan) could fall by 20%—roughly the same drop as during the 2001 dotcom crash. Weaker exports will dent investment and consumer spending. Yet Mr Subbaraman reckons emerging Asia as a whole will see GDP growth of 5.6% in 2009. That would be well down on the 9% seen in 2007 and perhaps 7% this year, but it would be slightly faster than during the 2001 downturn and much stronger than the 2% average growth in 1998.

In 1998 Hong Kong, Indonesia, Malaysia, South Korea and Thailand all suffered slumps in GDP of more than 6%. Even the gloomiest forecasters do not expect anything so dire this time. A few, such as JPMorgan, expect GDP to decline next year in Hong Kong, and Hong Kong’s chief executive, Donald Tsang, expects growth to be flat or negative in all the region’s “mature” economies, including his own and Singapore. But everywhere else should see positive growth (see chart), and generally remain stronger than during the 2001 dotcom crash. Only Taiwan is likely to have a worse year in 2009 than in 1998.

Mr Subbaraman also believes that Asia will recover sooner than other parts of the world, because most governments have ample room to ease policy and their economies are in better shape than those elsewhere. China, India, South Korea, Singapore, Taiwan and Hong Kong have all cut interest rates in the past two months. Falling energy and food prices will push inflation lower, and so allow further rate cuts.

All the main Asian emerging economies, apart from India’s, have public debt-to-GDP ratios well below the average in rich economies, giving them room to boost public spending or cut taxes in order to spur domestic demand. China, Malaysia, South Korea, Taiwan and Thailand have already announced fiscal stimuli. Singapore is expected to fire its hefty fiscal ammunition soon. Hong Kong’s Mr Tsang is “up to his eyeballs in contingency plans”.

In contrast to the late 1990s, most Asian economies are in relatively good shape, if not Pakistan’s (see article). Elsewhere, foreign-exchange reserves exceed short-term foreign debts. Almost all the region’s countries have current-account surpluses, though India and South Korea have deficits, which explains why they have seen large currency depreciations this year.

Most Asian households and companies are also modest borrowers. The black sheep is South Korea, where households and firms are even more indebted than in America. But total domestic debt (private and public) fell to 143% of GDP in emerging Asia in 2007, compared with 251% of GDP in America. As its exports stumble, Asia faces a nasty cyclical downturn. But it is spared the deep structural problems, such as excessive debt, which could depress growth elsewhere for several years.

Tortoise or tiger?

All the Asian economies will slow sharply next year, but some more than others. As the most open economies that are also big financial centres, Singapore and Hong Kong have been hit hardest. India is the least dependent on exports, at only 22% of its GDP, compared with a regional average of over half. So, in theory, it should be the least affected by the global slump. But India has two disadvantages. First, it is more exposed to the global credit crunch as a result of its previous reliance on large capital inflows. The sudden reversal of capital has sharply increased the cost of borrowing, forcing firms to cut investment—an important driver of growth in recent years. The Reserve Bank of India has cut interest rates and pumped liquidity into the banking system, but borrowing rates remain high.

A second problem is that, unlike China, the Indian government has little room for a fiscal stimulus. Its budget deficit is running at an estimated 8% of GDP (including off-budget items). Whereas China is boosting infrastructure spending to prop up demand, India’s plans to build roads and power plants with the help of private money may be delayed by the credit squeeze. The finance minister, Palaniappan Chidambaram, declared this week that growth will “bounce back” to 9% next year. Many economists reckon it is likely to be closer to 6%, while China’s slows to 8%.

Among the South-East Asian economies, Indonesia seems to be holding up best, with GDP up by 6.1% in the year to the third quarter. As a big exporter of commodities it will be squeezed by falling prices. But Malaysia, which is much more dependent on foreign demand, will be hit harder. Its exports are equivalent to over 100% of its GDP—proportionally, more than three times bigger than Indonesia’s. Thailand, where Asia’s financial crisis began in 1997, has learnt its lesson the hard way. Its foreign-exchange reserves are now four times as large as its short-term foreign debt, and it has a current-account surplus. It is not about to suffer another crisis. But as exports fall, business and consumer confidence remain depressed by political uncertainty. Thailand will remain one of Asia’s slowcoaches.

On the surface, the massive debts of South Korea’s households and firms might suggest serious trouble ahead. However, the government has been quick to bail out its banking system, and most economists reckon that a large fiscal boost and the cheaper won (down by 29% this year) will help to cushion the economy, resulting in modest growth, of around 3% next year.

In contrast, Taiwan is already in recession. Its GDP fell by 1% in the year to the third quarter, dragged down both by a collapse in exports and by weak domestic demand. Some economists forecast growth of only 1% next year. To lift consumer demand, the government this week said that it would give everybody NT$3,600 ($108) in shopping vouchers to spend in shops and restaurants.

Such measures are a far cry from 1997, when rather than urging households to spend, governments in Asia begged them to hand over their gold jewellery to be melted down to bolster official reserves. Times have changed. Asia is certainly not immune to the rich world’s recession, nor will its economies quickly regain their previous rapid growth trajectory. But the current gloom and doom among investors in the region might yet prove overdone.

What is a World Economy? How about Investing in World Economy?

A World Economy is the sum total of all the economies of all the countries of world, including the manner they interact among themselves. In short, it is a family of members with each having different capabilities and risks. The exotic concept of World economy has arisen because of high reliance on Globalization. This globalization has created links between different individual elements (an element is a economy of a particular nation) of the world and because of this link, our activities are reflected to the outside world in few minutes or seconds after the act.


Why do people Invest?

They do because:

Investments has brought extreme fortune for many rich individuals including Warren Buffet and George Soros across the world economies. And because of the possibility of making money in short term and long term, investors are mesmerized by the concept of investing. But we shouldn't forget that although every investor has two common objectives of managing returns and managing risks, however, Investing for individuals is as different as they themselves are. Investors have different needs for liquidity (governed by High priority short term & long term goals, the presence of credit facility in a country, bid - ask spreads in that particular issue, internal efficiency of Stocks, Bonds, Futures and options Exchanges in executing transactions, age and level of emotion stability, current and expected future incomes including risk measures of Inflation & Interest rates etc.), Risk Tolerance (Age, financial stability etc.) and most importantly, Return expectations.

Is Globalization an Advantage or Disadvantage to Investing ?

As mentioned previously, Investing is not just managing returns, it is more than that. It's managing risk attached with earning those risks. With the developments of new Financial Products, Global investing has become much more easier than it was 15 - 20 years back. The power of computing has reduced the transactions costs and reduced costs have caused people to spread their wings in world economy for investing. For example: With global Exchange Traded Funds (ETF's), an investor can establish both long or short position (long = Buy, Short = Sell) covering the entire global markets by purchasing just a single instrument. Thus full diversification is available.

However, how much of a good thing can you have? Previously portfolio managers have included the foreign stocks, bonds etc in their portfolios on account of lower correlation among the assets in US and other foreign nations. But, because of this excessive globalization, the world economies are becoming more integrated and business cycles of individual economies are getting synchronized and thereby the correlation among foreign and US assets are rising. How do we define risks, after all? Can we quantify risks? Yes, we can. The quantification of risks was first propounded by Harry Markowitz in Modern Portfolio theory. MPT describes how risk averse investors will diversify to attain optimal portfolio. Mr. Markowitz suggested that investors view variability of expected returns as risks and from thereon, the Variance and Standard deviation has been used to quantify risks. He also developed a formula for calculating variance, where in he charted out the importance of Covariance and Correlation between two assets. He proved that as we go on increasing the number of securities in the portfolio, it is the average covariance between the assets that matters the most and not the individual standard deviation of the assets.
Based on the work of Mr. Markowitz and the globalization of the world economies, it can be said that correlation between domestic and foreign securities is rising and thus the benefit of diversification by including foreign assets in your domestic securities portfolio, the benefit of diversification is going down.

But on other hand, we can argue that due to intense globalization and intense computing power, the transaction costs have fallen tremendously. So to some extent, the lost benefits from international diversification has been offset by a fall in costs of ordering and executing trades.

foreign exchange market structure in comparison with INDIA

the structure of the foreign exchange market and comparison with the foreign exchange of India

The major participants in the foreign exchange markets are commercial banks; foreign exchange brokers and other authorized dealers, and the monetary authorities. It is necessary to understand that the commercial banks operate at retail level for individual exporters and corporations as well as at wholesale levels in the inter – bank market. The foreign exchange brokers involve either individual brokers or corporations. Bank dealers often use brokers to stay anonymous since the identity of banks can influence short – term quotes. The monetary authorities mainly involve the central banks of various countries, which intervene in order to maintain or influence the exchange rate of their currencies within a certain range and also to execute the orders of the government.

It is important to recognize that, although the participants themselves may be based within the individual countries, and countries may have their own trading centers, the market itself is world – wide. The trading centers are in close and continuous contact with one another, and participants will deal in more than one market.

Primarily, exchange markets function through telephone and telex. Also, it is important to note that currencies with limited convertibility play a minor role in the exchange market. Besides this, only a small number of countries have established their full convertibility of their currencies for full transactions.

The foreign exchange market in India consists of 3 segments or tires. The first consists of transactions between the RBI and the authorized dealers. The latter are mostly commercial banks. The second segment is the interbank market in which the AD’s deal with each other. And the third segment consists of transactions between AD’s and their corporate customers.

The retail market in currency notes and travelers cheques caters to tourists. In the retail segment in addition to the AD’s there are moneychangers, who are allowed to deal in foreign currencies. The Indian market started acquiring some depth and features of well functioning market e.g. active market makers prepared to quote two-way rates only around 1985. Even then 2 - way forward quotes were generally not available. In the interbank market, forward quotes were even in the form of near – term swaps mainly for AD’s to adjust their positions in various currencies.

Apart from the AD’s currency brokers engage in the business of matching sellers with buyers. In the interbank market collecting a commission from both. FEDAI rules required that deals between AD’s in the same market centers must be effected through accredited brokers.