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The Wise Investor June 2010

VIEWS: 2,160 PAGES: 44

									   Vol 4 - Issue 3 | June 2010 | Rs.3.50

                                                          Behavioural shift story, still nascent
                                                                                   • Official unemployment is 10% and the more broad-based
                                                                                      indicators of unemployment are closer to 18%.
                                                                                   • At least half the job losses are of a permanent nature.
                                                                                   • There has been no net job creation in the decade preceding the
                                                                                      crisis in the U.S.
                                                                                   • There has been an unprecedented extension in unemployment
                                                                                   • Small businesses – the fulcrum of the U.S economy – do not
                                                                                      share the relative optimism of the larger companies or the U.S
                                                                                      stock market.
                                                                                   • There has also been a sharp reduction in job creation by the
                                                                                      small businesses in recent years.
                                                                                   • A second round of home-price declines has started in most
                                      Perspective                                     places.
                                                                                   • Applications for food stamps are in excess of 50 million or even
Our series on `Economic Crisis Effects’ completes a year this month.                  possibly closer to 60 million according to a recent Reuters story.
What we have had is many-a-tale of a heart rending nature. What                       Usage is at a record 40 million.
we have also had is evidence of a behavioural shift, which is still at a           • Wages are at best flat or declining.
nascent stage in the U.S, and probably has not even started in                     This is just a selection of factors at play. In this backdrop, what are
Europe, including U.K. The tales that have been featured are only                  the factors driving consumer spending?
select examples and the entire chronicle is several times the content
published in Economic Crisis Effects.                                              • Unemployment benefits are the first source. More is perhaps
                                                                                      used for consumption than spending. Is this sustainable? No.
As was the case with The Great Depression in the 1930s, the
ongoing Great Recession (if it is that) is likely to alter behaviour on            • People are defaulting on mortgages big time, banks are wary of
a permanent basis. This is likely to be the defining feature that will                foreclosure as it could affect their balance sheet and so people
determine how the developed countries emerge out of this financial                    are enjoying a free ride-staying in the home despite no mortgage
and economic crisis. This may not be captured by numbers (which                       payment and this means no rent, too. No mortgage payment and
are also amenable to manipulation); it will be important to focus on                  no rent also appears to be fuelling consumption. Is this
anecdotal evidence.                                                                   sustainable? No.
We also read stories of how the U S consumer has returned to                       • People are keeping credit cards current even as they default on
spending (or in fact has never stopped spending). Indeed, the share                   mortgages. This is also a source of spending though credit card
of the consumer in the U.S GDP pie is now larger than before the                      outstanding are on a downward trend. A part of population is
onset of the crisis. This largely reflects more the collapse in other                 using this approach to maintain spending. Is this sustainable? No.
parts of the economy and the economy as such.                                      • Low rates (or shall we say closer to zero) mean interest
What most of these stories do not emphasise is the sources of this                    payments are less strenuous. Is this sustainable? Yes is the answer
spend and how sustainable it is. Yes, the top1% of the population by                  for a few years but over the long term, No.
wealth – this group’s share has increased dramatically over the past               • Has there been a meaningful reduction in debt? No. And this
two decades – is in fairly good shape and spending. A few from this                   obviously means the current trend must eventually run out of
group exhibit restraint in the interest of taking note of reality                     steam.
elsewhere.                                                                         • Is there a possibility of more handouts by the U S government?
What is the status outside of the top 1% in the U.S context?
• Debt levers are still unacceptably high.                                                                                         ...continued on page 14
 Sundaram BNP Paribas Asset Management: Investment
 Sundaram BNP Paribas Asset Management Manager for Sundaram BNP Paribas Mutual Fund / Portfolio Management Services: Sundaram BNP Paribas Portfolio Managers
                                                                                                                                                             Chart of the Month

                                                                                                                                                           Risk isn’t volatility

Risk isn’t a number. It is a concept. Ben Graham argued that we should focus on the danger of permanent loss of capital as a sensible measure
of risk:What is the chance that I will see my capital permanently impaired by this investment? This strikes me as a much more sensible viewpoint
than the mathematically elegant but ultimately distracting practice of assuming that risk is equivalent to standard deviation.
For instance, let’s look at equity volatility.The chart shows a measure of the volatility of the S&P 500. Were equities more risky in late 2007 or
early 2009? If you follow the edicts of standard finance, then 2007 was a much less risky year than 2009. Now, tell me again that risk and volatility
are the same thing! – James Montier
James Montier is a member of the Asset Allocation Team at GMO. Source: Link to Montier’s White Paper I Want to Break Free,
or, Strategic Asset Allocation ≠ Static Asset Allocation

                                                                                                                                            Global Market Snapshot
                                 A comparison in 2007 (close to peak), 2008 (close to bottom), 2009 (recovery) & the present
                                                      Market Cap ( $ Billion)                                        Share in World Market Cap (%)                                             Returns (%)                          Distance
    Region/Country                                                                                                                                                                                                                 from Peak
                                      End Apr            2009                2008                 2007            End Apr             2009            2008            2007            2010            2009            2008
                                       2010                                                                                                                                           YTD                                             (%)
 World                                 42599             49722               31901               60880             100.0             100.0          100.0           100.0            -14.3             55.9           -47.6             -30.0
 United States                         13283             13748               10455               17660                31.2             27.7           32.8             29.0           -3.4            31.5            -40.8             -24.8
 Canada                                 1651              1609                 992                1749                 3.9              3.2            3.1              2.9            2.6            62.2            -43.3              -5.6
 Brazil                                 1141              1326                 565                1273                 2.7              2.7            1.8              2.1          -14.0           134.7            -55.6
 Mexico                                  371               363                 247                 398                 0.9              0.7            0.8              0.7            2.3            46.8            -37.9              -6.8
 Chile                                   239               229                 130                 208                 0.6              0.5            0.4              0.3            4.5            76.0            -37.5              14.9
 United Kingdom                          2648              2975                1981                 4051                6.2              6.0             6.2             6.7         -11.0             50.2           -51.1             -34.6
 France                                  1544              1900                1480                 2736                3.6              3.8             4.6             4.5         -18.7             28.4           -45.9             -43.6
 Germany                                 1169              1371                1075                 2208                2.7              2.8             3.4             3.6         -14.7             27.5           -51.3             -47.1
 Switzerland                              941              1076                 848                 1217                2.2              2.2             2.7             2.0         -12.5             26.8           -30.3             -22.7
 Japan                                   3467              3488                3268                 4545                8.1              7.0          10.2               7.5           -0.6             6.7           -28.1             -23.7
 Honk Kong                               2069              2268                1312                 2655                4.9              4.6           4.1               4.4           -8.8            72.9           -50.6             -22.1
 India                                   1307              1294                  640                1813                3.1              2.6             2.0             3.0             1.0         102.3            -64.7             -27.9
 Australia                              1089              1253                  652               1415                 2.6              2.5             2.0             2.3          -13.1            92.1            -53.9             -23.0
 China + Others                        11680             16823                 8256              18952                27.4             33.8            25.9            31.1          -30.6           103.8            -56.4             -38.4
Data Source: Bloomberg;The last available figures for each year have been taken;Analysis: Sundaram BNP Paribas Asset Management. End December 2007 figures have been reckoned as the peak as different countries reached the point on different dates.
  Sundaram BNP Paribas Asset Management                                                                                   2                                                                 The Wise Investor June 2010
                                                                                     India View                               Equity

                                                                  FII flows may stay volatile
                                                                                     indications that we are moving to a stricter and more rational
                                                                                     How does it impact economies? An uncertain environment
                                                                                     does not increase confidence in spending for both corporate
                                                                                     and consumers. Volatility is availability and cost of money is likely
                                                                                     to continue for some more time creating large pools of liquidity
                                                                                     and extreme fear in markets. This is likely to give us
                                                                                     opportunities from time to time to buy assets cheap.
                                                                                 2   If fiscal stimulus gets removed over the next two years in the
                                                                                     developed world, is growth likely? If yes, what could be the drivers?
                                                                                     If no, what are the implications for emerging markets?
                                                                                     The fiscal stimulus till date has been more of rescuing the
                      Satish Ramanathan
                                                                                     banking system, with marginal stimulus in consumption by way
                                                                                     of tax credits. Much of that stimulus, too, has not moved
              Sundaram BNP Paribas Asset Management
                                                                                     forward and there is an extreme reluctance to lend by the
                                                                                     banking system.
                                                                                     Some of the stimulus is aimed at the unemployed, which is more
1     What are the additional flashpoints, if any, in the global financial           for subsistence rather than jumpstarting the economy. Over the
      crisis and what would be the implications?                                     next few years, the main effort will be an attempt to repair the
      The global financial crisis has several issues that need to be                 balance sheets of the developed world banking system and their
                                                                                     government balance sheets.
      addressed chief being the high amount of debt in the banking
      system. In order to come to a more reasonable level of debt-                   The changing dynamics in the West has left Governments poor
      equity in the banking system, there has to be a slower credit                  and corporate/banks rich. It would be reasonable to assume
      growth and significant amount of equity that needs to be raised                that there will be higher taxes along the way and lower
      by the financial system. This could stress the markets as the                  government expenditure. Yet not all is lost, as there are nascent
      supply of equity through fresh issuances could strain the market.              signs of a recovery of consumption as well; this could sustain
                                                                                     and pick up momentum as the government subsidies reduce.
      The second aspect of the financial system that is extremely risky
                                                                                     We have to remember that we are in the fourth year after the
      is the large amount of short- term debt, which could result in
                                                                                     global financial crisis, and the slow process of repair is already
      extreme rollover risk and could therefore result in high interest
                                                                                     underway across companies and individuals.
      rate volatility. This is true not only for the financial system but
      for the Central Banks as well.                                             3   How is India placed in the wake of what may pan in the developed
                                                                                     world when the stimulus is gone?
      Rollover risk in my view could result in volatile markets for
      some time. The consequences of this would be that banks                        More than the impact of the developed stimulus being
      could try to increase borrowings over a longer time frame                      withdrawn, we have to focus on the domestic stimulus, which
      which could push up the yield curve. The key risk as we see it                 has resulted in the spectacular rebound and growth in
      is Asset-Liability Mismatch, which could stress the markets for                consumption. What are they?
      some time to come.                                                             1.   The Sixth Pay Commission which increased salaries
      One of the major risks that we face is the rejection by investors              2.   Inflation shocks being absorbed by Government.
      of sovereign debt. Sovereign debt was a very powerful tool in                  With the recent crises globally on government debt, it is
      the hands of policy makers and was always mis-priced, as                       increasing evident that the Indian government is now willing to
      investors perceived low levels of default. But a flood of                      take some harsher measure to rein in subsidies and reduce its
      sovereign debt is making investors realise that what they gain in              debt. Towards this there are some actions which merit mention
      definiteness of payment may be eroded due to the value of                      – increased fertiliser prices, and fuel prices.
      money coming down.                                                             The government has also extracted its pound of flesh from the
      The CDS rates expanding on sovereign debt is one of the                        telecom sector and is increasingly looking to raise revenues
    Sundaram BNP Paribas Asset Management                                    3                                      The Wise Investor June 2010
                                                                                India View                              Equity
      from other sources as well. It will be interesting to observe as          freezing up of the credit market still exists, but is becoming less
      to whether the economy slows down when the government                     as there has been an extraordinary amount of intervention into
      reduces the subsidies.                                                    the credit markets. Further, the slowdown could exacerbate the
4     What are your views on the government debt position in India?             weak debt markets and increase defaults and non performing
      How vulnerable are we in terms of debt in foreign currency?               loans further.
      The consolidated government debt is 80%, which is high when               Debt markets are not adequately pricing currency risks, credit
      compared to other Asian peers. However, the advantage India               risks and interest rate volatility for the developed markets. We
      has is a higher rate of inflation and earnings growth, which helps        still think that interest rates will have to move up to reduce the
      the government to tide over the debt comfortably. We think                speculative frenzy in commodities and other asset classes.
      that a reduction in fiscal deficit will help in several ways, chief       A weakening currency of the developed world could result in
      being access to low cost capital for industry.                            higher inflation as well, so we may see a situation of higher
      There are a lot of projects on the anvil and this could spur the          inflation, higher interest rates and slower growth than we are
      next level of growth. As regards foreign currency debt, India is          currently seeing. So the past high growth was on the basis on
      fairly comfortable on this issue as most of this is trade related,        low interest rates (mis-priced debt), and higher debt, the future
      and there are equivalent claims by Indian businesses as well. So,         may be a more rational pricing of debt (including sovereign
      on a structural basis India is an improving story rather than a           debt) and lower debt.
      deteriorating one.                                                        The base effect of favourable growth wears off during the
      From a market perspective, India will continue to remain                  course of first half of 2010 and markets will be edgy when
      volatile, as it is highly dependent on foreign flows into equity          growth plateaus out. We have seen the sharp correction in
      markets.                                                                  Chinese market on fears of lower growth, and could repeat in
                                                                                other geographies as well.
On a structural basis India is an improving story rather than a                 Fears of a double dip are also increasing on account of
deteriorating one. From a market perspective, India will continue               tightening in a higher growth countries and weaker growth in
to remain volatile, as it is highly dependent on foreign flows into
                                                                                the developed world. We believe growth would decline in the
equity markets.
                                                                                second half of 2010, especially in the developed world, but that
5     You had indicated infrastructure as high-conviction idea about six        need not be indicative of long-term potential.
      months ago.What is your stance now?                                       Yet another concern that we have about the equity markets is
      We remain positive on the infrastructure story, but are now               the supply of fresh equity which could dampen spirits for some
      underweight this sector primarily because of a deterioration in           time to come. This could prevent or delay Indian companies
      capital efficiency of this sector. We are seeing signs of                 access to capital markets and hence their project
      misallocation of capital and investment in to long-gestation              implementation.
      projects where returns are back ended. Consequently, we have              The Chinese banking system is expected to raise close to $ 70
      far more discriminating in the selection process of infrastructure        billion – a significant sum that could depress equity markets.
      companies.                                                                Similarly, Indian companies will also have to raise capital to
6     Are FII flows to India likely to stay robust?                             maintain the growth momentum, which may be difficult in a
                                                                                volatile environment.
      FII flows will remain volatile on account of the global
      uncertainties. Indian markets remain very dependent on FII                Corporate margins have been high on the back of a savage
      inflows as domestic savings in equities has declined significantly        compression in expenses, and we think that this should ease
      on account of new marketing procedures in mutual funds and                lowering margins on an incremental basis. Should growth
      insurance policies. While there is a growing consensus on the             moderate and margins decline, then it would be difficult to see
      longer-term prospects of Indian companies, the relatively higher          corporate earnings expand and keep pace with expectations.
      valuation is delaying inflows.                                            This is especially true in India, where margins are high at record
7     What is your take on valuation level of the broad market in India?
                                                                                Our concern is lower growth and margin compression eroding
      The Indian markets can be broken into two buckets – large-cap
                                                                                the earnings growth and hence resulting in a correction. We are
      stocks that are fairly valued relative to their current level of
                                                                                seeing this trend in the cement and telecom sector and are
      earnings and small-cap stocks that are cheap across several
                                                                                seeing this in some other sectors as well. Fresh capacities are
      parameters. We think there could be a fairly prolonged time
                                                                                also being added and while the industry is confident of
      correction for the large-cap stocks rather than absolute price
                                                                                maintaining pricing power it will be difficult in an era of lower
      correction. Hence short-term returns may prove to be elusive.
                                                                                capacity utilisation.
8     What are the main concerns in the global, local context (please
                                                                                Hence our central thesis for this year is one of cautious
      indicate implications)?
                                                                                opportunism-identify good companies with robust earnings
      The main issues from a global context that confront us today              growth and buy them at attractive prices. There can be no
      are the stability of the financial system. The risk of a sudden           substitute for this common sense.

    Sundaram BNP Paribas Asset Management                                   4                                 The Wise Investor June 2010
                                                                                                          Distilled Wisdom

                                                  20 Investment Lessons of 2008
Seth Klarman is the President of The Baupost Group, a Boston-                             its market price approximates its true value. This mirage is
based private investment partnership. The firm has achieved                               especially dangerous during periods of market exuberance.
investment returns of 20% compounded annually over 25-plus                         #8. A broad and flexible investment approach is essential during a
years. He is also the author of Margin of Safety-Risk Averse                              crisis.
Investing Strategies for the Thoughtful Investor.                                  #9. You must buy on the way down. It is almost always better to
In his latest annual letter, he describes 20 investment lessons of                        be too early than too late, but you must be prepared for price
2008, which, he says, “were either never learned or else were                             markdowns on what you buy.
immediately forgotten by most market participants.”                                #10. Financial innovation can be highly dangerous, though almost
#1. Things that have never happened before are bound to occur                             no one will tell you this.
      with some regularity. Whatever adverse scenario you can                      #11. Ratings agencies are highly conflicted, unimaginative dupes.
      contemplate, reality can be far worse.                                              Investors should never trust them.
#2. When excesses such as lax lending standards become                             #12. Be sure that you are well compensated for illiquidity –
      widespread and persist for some time, people are lulled into a                      especially illiquidity without control – because it can create
      false sense of security, creating an even more dangerous                            particularly high opportunity costs.
      situation.                                                                   #13. At equal returns, public investments are generally superior to
      Correlations between asset classes may be surprisingly high                         private investments as they are more liquid and amidst distress
      when leverage rapidly unwinds.                                                      more likely to offer attractive opportunities to average down.

#3. Nowhere does it say that investors should strive to make                       #14. Beware leverage in all its forms.
      every last dollar of potential profit; consideration of risk must            #15. Many leverage buy-outs are man-made disasters.
      never take a backseat to return. Conservative positioning                    #16. Financial stocks are particularly risky.
      entering a crisis is crucial: it enables one to maintain long-term
                                                                                   #17. Having clients with a long-term orientation is crucial. Nothing
      oriented, clear thinking, and to focus on new opportunities                         else is as important to the success of an investment firm.
      while others are distracted or even forced to sell.
                                                                                   #18. When a government official says a problem has been
#4. Risk is not inherent in an investment; it is always relative to the                   “contained,” pay no attention.
      price paid. Uncertainty is not the same as risk.
                                                                                   #19. The government – the ultimate short- term-oriented player –
#5. Do not trust financial market risk models. Reality is always too                      cannot withstand much pain in the economy or the financial
      complex to be accurately modeled. Attention to risk must be                         markets. Bailouts and rescues are likely to occur, though not
      a 24/7/365 obsession, with people – not computers –                                 with sufficient predictability for investors to comfortably take
      assessing and reassessing the risk environment in real time.                        advantage.
#6. Do not accept principal risk while investing short-term cash: the              #20. Almost no one will accept responsibility for his or her role in
      greedy effort inevitably leads to the incurrence of greater risk.                   precipitating a crisis.
#7. The latest trade of a security creates a dangerous illusion that                                       Source: (
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        5                                          The Wise Investor June 2010
                                                                                                 Eye on the Market

                                                                                 10 Must–Read Blogs
                                                                              media (including electronic) if there is genuinely a case. The
                                                                              blogsphere is vast and can be daunting, if you are just trying to make
                                                                              a start.
                                                                              To make life easy, here are a list of 10 blogs that provide an useful
                                                                              starting point.The best way to keep tab is to subscribe to them on
                                                                              an RSS feed, receive e-mail alerts and track them on Twitter, which
                                                                              enables you to get a gist of what they are focussing on as well as
                                                                              links to the stories, views and takes on news/views in mainstream
                                                                              The pick of 10 (blogs that are more technical have been kept apart)
                                                                              is featured in alphabetical order:
                       S.Vaidya Nathan                                        China Financial Markets ( blogger: Michael
                        The Products Team                                     Pettis):This is the best place to go for a view on China. Posts are not
              Sundaram BNP Paribas Asset Management                           frequent but they are detailed.
                                                                              Financial Armageddon (
                                                                              blogger: Michael Panzer): A sustainable turn in the economic cycle is
If the global financial and economic crisis has had an impact that you        more likely to be picked up here a bit ahead.
do not read about in the newspapers or magazines and do not hear              Mish            Global             Economic            Analysis
about on television news channels (without any exception), it is the          (    blogger :    Mike
fact that they failed to report reality and reality in time.                  Shedlock): Mish follows Austrian economics and has zero tolerance
These sources have become so much a part of the system – political,           for the Fed and unions.
economic and markets (and only stock markets) – that they peddle              Naked Capitalism ( blogger
news and views that are at most times bereft of value. Spin is                uses the name tag Yves Smith):This is a robust source for views on
imparted to facts and negatives placed before us as positives or not          the financial system, reforms and technical issues.
as bad as they are. There are a few exceptions that merit a check,            Of Two Minds ( blogger:
but even they are sanitised versions.                                         Charles Hugh Smith):The focus is on viewing economic trends, social
If you cared to follow, you had a much superior source of                     trends, life and markets as a package.
information and insights, a take on reality ahead of time and multiple        Prudent Bear &The Bear’s Lair (
sources that constantly check each other. The blogs have arrived              bloggers: Doug Noland and Martin Hutchinson). The focus is
(and this is not confined just to economics, finance and markets).            intensely on credit and central bank actions in fuelling it.
Throughout this crisis and dating to as early as 1999, a couple of            The Automatic Earth (
hundred and more blogs from different parts of the world have                 bloggers: Stoneleigh and Ilargi): Most dire, this blog melds economy,
done a spectacular job of alerting citizens to economic reality as it         politics, human behaviour, markets and money superbly.
is. The writers of most of these blogs had called the crisis well in          The Big Picture ( blogger: Barry
advance.                                                                      Ritholtz): In terms of quality, this blog has slipped over the past 18
If you had been following them closely, it is likely that you would not       months but is still a good enough place to keep track.
have lost a dime in the meltdown of 2008 & Q1 2009.                           The Market Ticker ( blogger:
If you had been tracking them from advanced countries, it is also             Karl Denninger): A relentless focus on wrong doings in the financial
very likely you would have made a pile by switching funds across              sector and Wall Street is a trademark of this blog.
asset classes in a timely manner.                                             Zero Hedge ( bloggers use names of
Issues such as vested interest are cut out quickly, as usually quality        characters in the movie The Fight Club – the lead is Tyler Durden as
blogs do not hesitate to take apart each other or writers on other            in the movie).This is an in-your-face, but useful blog.
 Sundaram BNP Paribas Asset Management                                    6                                      The Wise Investor June 2010
                                                                                                                      Focus Topic

                                                              The $ 100 Billion Question
                                                        an assessment of the benefits and costs
                                                                                                                  To sum up, the maximum efficient
                                                        of restrictions.                                          scale of banking could be relatively
                                                        The Benefits of Prohibition                               modest. Perhaps it lies below $100
                                                                                                                  billion. Experience suggests there is at
                                                        The potential benefits of restricting                     least a possibility of diseconomies of
                                                        activity in any complex adaptive system,                  scale lying in wait beyond that point.
                                                        whether financial or non-financial, can
                                                        roughly be grouped under three                            Al’Qaeda has chosen this organisational
                                                        headings: modularity, robustness and                      form.
                                                        incentives. Each has a potentially                        Al’Qaeda is a prime example of
                                                        important bearing on systemic resilience                  modularity and its effects in
                                                        and hence on the social benefits of                       strengthening systemic resilience. There
                                                        restrictions.                                             are many examples from other industries
         Andrew Haldane                                 Modularity: In 1973, Nobel-prizing                        where modularity in organisational
    Executive Director, Financial Stability             winning economist Robert Merton                           structure has been deployed to enhance
              Bank of England                                                                                     systemic resilience.
                                                        showed that the value of a portfolio of
                                                        options is at least as great as the value of              Computer manufacture is one. During
                                                        an option on the portfolio. On the face                   the late 1960s, computers were highly
                                                        of it, this seems to fly in the face of                   integrated systems. Gradually, they
What is the right size for banks? Do we                 modern portfolio theory, of which                         evolved into the quintessential modular
need the kind of monster-sized banks we                 Merton himself was of course one of the                   system of today, with distinct modules
have today in the developed world – the                 key architects.                                           (CPU, hard disk, keyboard) which were
ones that pushed the world to the brink,                Whatever happened to the benefits of                      replaceable if they failed without
from which for now, governments appear to               portfolio diversification? The answer                     endangering the functioning of the
have pulled us back by risking trillions of             can be found in an unlikely source –                      system as a whole.
dollars.                                                Al’Qaeda. Although the precise                            This improved resilience and reliability. In
Andrew Haldane has been one of the rare                 organisational form of Al’Qaeda is not                    the computing industry, modularity
persons in central banking systems of the               known with certainty, two structural                      appears to have had an influence on
developed world who has outlined the                    characteristics are clear.                                industry structure. Since the 1970s, the
problems as they are and the possible                   First, it operates not as a centralised,                  computer hardware industry has moved
solutions; however unpalatable they are to              integrated organisation but rather as a                   from a highly concentrated structure to a
                                                        highly decentralised and loose network                    much more fragmented one.
the banks and their peers in the central
banking system. In one such speech last                 of small terrorist cells.                                 In 1969, IBM had a market share of over
month, Haldane showcases the $ 100                      Second, as events have shown, Al’Qaeda                    70%. By this century, the market share of
billion problem.                                        has exhibited considerable systemic                       the largest hardware firm was around a
                                                        resilience in the face of repeated and on-                third of that. Modularity has meant the
We present the second and concluding                                                                              computer industry has become less
                                                        going attempts to bring about its
part of edited extracts from his                                                                                  prone to “too-big-to-fail” problems.
comprehensive speech on the topic in April                                                                        Other examples of modularity in
                                                        These two characteristics are closely
2010                                                                                                              organisational structures include:
                                                        connected. A series of decentralised cells,
In the light of the Great Recession, and                loosely bonded, make infiltration of the                  • The management of forest fires,
the large apparent costs of too-big-to-                 entire Al’Qaeda network extremely                             which typically involves the
fail, does Weitzman’s cost-benefit calculus             unlikely. If any one cell is incapacitated,                   introduction of firebreaks to control
suggest there is a case for winding back                the likelihood of this undermining the                        the spread of fire;
the clock to the reforms of the Great                   operations of other cells is severely                     • The management of utility services,
Depression? Determining that requires                   reduced.That, of course, is precisely why                     such as water, gas and electricity,
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        7                                          The Wise Investor June 2010
                                                                                                                      Focus Topic
    where the network often has built-in                gaps averted systemic disaster and a new                  risk due to higher volatility assets and
    latencies and restrictions to avoid                 world record of over 4 million dominos                    activities.
    overload and contagion;                             was still set.                                            This evidence is no more than illustrative.
• The management of infectious                          No-one died, except the poor sparrow                      But it suggests that, in the arm wrestle
    diseases which these days often                     which (poetically if controversially) was                 between diversification and diversity, the
    involves placing restrictions on travel,            shot by bow and arrow. So to banking -                    latter appears to have held the upper
    either within a country (as in the case             it has many of the same basic ingredients                 hand. Bigger and broader
    of foot-and-mouth disease in the UK)                as other network industries, in particular                Banking does not obviously appear to
    or outside of it (as in the case of                 the potential for viral spread and                        have been better, at least in a risk sense.
    H5N1);                                              periodic systemic collapse.                               In banking, as on many things, Merton
• The control of computer viruses                       For financial firms holding asset                         may have had it right.
    across the world wide web, which is                 portfolios, however, there is an additional               Robustness: There is a literature on
    typically achieved by constructing                  dimension. This can be seen in the                        how best to regulate systems in the face
    firewalls which restrict access to local            relationship between diversification on                   of such Knightian uncertainty that
    domains;                                            the one hand and diversity on the other.                  suggests some guideposts for regulation
                                                        The two have quite different implications                 of financial systems.
• Attempts on the world domino
                                                        for resilience.
    toppling record, which involve                                                                                First, keep it simple. Complex control of
    arranging the dominos in discrete                   In principle, size and scope increase the                 a complex system is a recipe for
    blocks to minimise the risk of                      diversification benefits. Larger portfolios               confusion at best, catastrophe at worst.
    premature cascades.                                 ought to make banks less prone to                         Complex control adds, not subtracts,
                                                        idiosyncratic risk to their asset portfolio.              from the Knightian uncertainty problem.
These are all examples where modular
                                                        In the limit, banks can completely                        The US constitution is four pages long.
structures have been introduced to
                                                        eradicate idiosyncratic risk by holding the               The recently-tabled Dodd Bill on US
strengthen system resilience. In all of
                                                        market portfolio. The “only” risk they                    financial sector reform is 1,336 pages
these cases, policy intervention was
                                                        would face is aggregate or systematic                     long.Which do you imagine will have the
required to affect this change in
                                                        risk.                                                     more lasting impact on behaviour.
structure. The case for doing so was
particularly strong when the risk of viral                                                                        Second, faced with uncertainty, the best
                                                         In 2008, 145 banks globally had assets
spread was acute. In some cases,                         above $100 billion, Together, these                      approach is often to choose a strategy
intervention followed specific instances                 institutions account for 85% of the                      which avoids the extreme tails of the
of systemic collapse.                                    assets of the world’s top 1000 banks                     distribution. Technically, economists call
                                                         and for over 90% of the support                          this a “minimax” strategy – minimising
The North American electricity outage                    offered by governments during the
in August 2003 affected 55 million                       course of the crisis.                                    the likelihood of the worst outcome.
people in the US and                                                                                              Paranoia can sometimes be an optimal
Canada. It had numerous adverse knock-                  But if all banks are fully diversified and
on effects, including to the sewage                     hold the market portfolio, that means                     This is a principle which engineers took
system, telephone                                       they are all, in effect, holding the same                 to heart a generation ago. It is especially
                                                        portfolio. All are subject to the same                    evident in the
and transport network and fuel supplies.
A number of people are believed to                      systematic risk factors. In other words,                  aeronautical industry where air and
have died as a consequence. This event                  the system as a whole lacks diversity.                    space disasters acted as beacons for
led to a rethinking of the configuration of             Other things equal, it is then prone to                   minimax redesign of aircraft and
the North American electricity grid, with               generalised, systemic collapse.                           spaceships.
built-in latencies and stricter controls on             Homogeneity breeds fragility. In Merton’s                 Third, simple, loss-minimising strategies
power circulation.                                      framework, the option to default                          are often best achieved through what
In the mid-1980s, an attempt on the                     selectively through modular holdings,                     economists call
world domino-toppling record – at that                  rather than comprehensively through the                   “mechanism design” and what non-
time, 8000 dominos had to be                            market portfolio, has value to investors.                 economists call “structural reform”. In
abandoned when the pen from one of                      The       precise    balance      between                 essence, this means
the TV film crew caused the majority of                 diversification and diversity depends on                  acting on the underlying organisational
the dominos to cascade prematurely.                     banks’ balance sheet configuration. This is               form of the system, rather than through
Twenty years later a sparrow disturbed                  consistent      with     evidence     from                the participants
an attempt on the world domino-                         econometric studies of banking                            operating within it. In the words of
toppling record. Although the sparrow                   conglomerates which has found that                        economist John Kay, it is about regulating
toppled 23,000 dominos, 750 built-in                    larger banks, if anything, exhibit greater                structure not behaviour.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        8                                          The Wise Investor June 2010
                                                                                                                      Focus Topic
Taken together, these three features                       legion. They included escalating leverage,             contracts – the financial equivalent of
define a “robust” regulatory regime –                      increased trading portfolios and the                   Facebook friends. Whatever the
robust to uncertainties from within and                    design of tail-heavy financial instruments.            technology budget, it is questionable
outside the system. Using these                            This dynamic means it is hazardous to                  whether any man’s mind or memory
robustness criteria, it is possible to assess              believe there is a magic number for                    could cope with such complexity.
whether restrictions might be preferable                   regulatory ratios sufficient to insure                 Optimal scales for banks is less
to taxation in tackling banking pollution.                 against tail risk in all states of the world.          than $ 100 billion: To sum up, the
To illustrate this, contrast the regulatory                Because tail risk is created not endowed,
                                                                                                                  maximum efficient scale of banking could
experience of Glass-Steagall (a                            calibrating a capital ratio for all seasons is
                                                                                                                  be relatively modest. Perhaps it lies
restrictions approach) and Basel II (a                     likely to be, quite literally, pointless.
                                                                                                                  below $100 billion. Experience suggests
taxation approach).                                        The Costs of Prohibition: Turning to                   there is at least a possibility of
Glass-Steagall was simple in its objectives                the other side of the equation, what
                                                                                                                  diseconomies of scale lying in wait
and execution.The Act itself was only 17                   does existing evidence tell us about the
                                                                                                                  beyond that point. Conglomerate
pages long. Its aims were shaped by an                     costs to banks of restrictions, whether on
                                                                                                                  banking, while good on paper, appears to
extreme tail event (the Great                              the scale or scope of their activities?
Depression) and were explicitly minimax                                                                           be more mixed in practice. If these are
                                                                Economies of Scale: They appear
(to avoid a repetition). It sought to                                                                             not inconvenient truths, they are at least
                                                                to operate among banks with assets
achieve this by acting directly on the                                                                            sobering conjectures.
                                                                less, perhaps much less, than $100
structure of the financial system,                              billion. But above that threshold there           They also sit awkwardly with the current
quarantining commercial bank and                                is evidence, if anything, of                      configuration of banking. In 2008, 145
brokering activities through red-line                           diseconomies of scale.                            banks globally had assets above $100
regulation. Glass-Steagall satisfied all                                                                          billion, most of them universal banks
                                                                Economies of Scope: Turning
three robustness criteria.                                                                                        combining multiple business activities.
                                                                from economies of scale to
And so it proved, lasting well over half a                      economies of scope, the picture                   Together, these institutions account for
century without a significant systemic                          painted is little different. Evidence             85% of the assets of the world’s top
event in the US. The contrast with Basel                        from US bank holding companies                    1000 banks ranked by Tier 1 capital.
II is striking.This was anything but simple,                    suggests that diversification gains               There are no examples during this crisis
comprising many thousands of pages and                          from multiple business lines may be
taking 15 years to deliver. Basel II was                                                                          of financial institutions beyond $100
                                                                more than counter-balanced by
underpinned by a complex menu of                                                                                  billion being resolved without serious
                                                                heightened exposures to volatile
capital risk weights.This was fine-line, not                                                                      systemic spillovers. Instead, those in
                                                                income-generating activities, such as
redline, regulation.                                                                                              trouble have been bailed-out. The same
In short, Basel II satisfied few of the                                                                           145 institutions account for over 90% of
                                                           This mirrors the evidence from the
robustness criteria and so it proved,                                                                             the support offered by governments
                                                           Great Depression. Internationally, a
overwhelmed by the recent crisis                                                                                  during the course of the crisis.
                                                           recent study of over 800 banks in 43
scarcely after it had been introduced.                     countries found a conglomerate                         $100 billion may not just be the question;
Incentives: Tail risk within some                          “discount” in their equity prices. In other            it may also be part of the answer.
systems is determined by God – in                          words, the market assigned a lower value               Today’s financial structure is dense and
economist-speak, it is exogenous.                          to the conglomerate than the sum of its                complex, like a tropical rainforest. Like
Natural disasters, like earthquakes and                    parts, echoing Merton’s 1973 insight.This              the rainforests, when it works well it is a
floods, are examples of such tail risk.                    is evidence of diseconomies of scope in                source of richness.Yet it is, as events have
Tail risk within financial systems is not                  banking.
                                                                                                                  shown, at the same time fragile. Simpler
determined by God but by man; it is not                    With hindsight, this crisis has provided               financial eco-systems offer the promise
exogenous but endogenous. This has                         many examples of failures rooted in an                 of greater robustness, at some cost in
important implications for regulatory                      exaggerated sense of knowledge and                     richness. In the light of a costly financial
control. Finance theory tells us that risk                 control. Risks and counterparty
                                                                                                                  crisis, both eco-systems should be
brings return.                                             relationships outstripped banks’ ability to
                                                                                                                  explored in seeking answers to the $100
So there are natural incentives within the                 manage them. Servers outpaced
                                                                                                                  billion question.
financial system to generate tail risk and                 synapses. Large banks grew to comprise
to avoid regulatory control. In the run-up                 several thousand distinct legal entities.              (Concluded-the first part was
to this crisis, examples of such risk-                     When Lehman Brothers failed, it had                    published in The Wise Investor May
hunting and regulatory arbitrage were                      almost one million open derivatives                    2010)

Source: Bank of England ( Speech link:
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                           9                                       The Wise Investor June 2010
                                                                                                                                                           By Invitation

                                Unreal economy trumps ‘real economy’
                                                                                                               driven by their own brand of anti-public “interest.”
                                                                                                               What constitutes value has migrated from actual value, based in
                                                                                                               something you earn and related to something you can actually
                                                                                                               concretely use, to “references to value,” some number merely
                                                                                                               assigned to some financial instrument attached to some good or
                                                                                                               service somewhere several degrees removed from its source. (Think
                                                                                                               “mortgage backed securities” where the actual deeds to properties
                                                                                                               are no longer even in the picture after extensive “packaging” and
                                                                                                               This is all a fancy way of playing the age old game, externalize
                                                                                                               liabilities, internalize gains, but on an unprecedented and potentially
                            Zeus Yiamouyiannis                                                                 cataclysmic scale. Just as with political coverage that largely deals
                                                                                                               with the “horse race,” personalities, gaffes, and likeability of
                                                                                                               candidates over actual policy, financial coverage has concerned itself
                                                                                                               with a relentless boosterism, tea leaf reading, and a host of other
                                                                                                               trivialities while the structural rot goes unreported.
Something profound has happened, obscured by all the concerns                                                  Abstractions like the “velocity of money,” along with whitewashing
about economic details and speculation about whether we are in a                                               indicators like trading volume are used to gauge the health of an
“deep recession” or a “depression,” a “nascent recovery” or a “W                                               economy without sorting out whether such indicators are attached
shaped” downturn. We no longer have a global economic system                                                   to some productive, underlying activity or asset. This all serves to
that is tethered to concrete reality. Parasitic, amoral, slight-of-hand                                        create a convenient smoke screen for moneyed interests, and
value-shuffling (what I would call the “unreal economy”) has                                                   progressively makes the “new normal” one that thrusts citizens
                                                                                                               deeper into debt servitude.
effectively trumped the “real economy,” the production and
exchange of meaningful goods and services.                                                                     Post Mortem and Review : A post mortem is in order.The elements
                                                                                                               of this worldwide con game are remarkably simple, not complex at
Worse, we’ve let it happen with our acquiescence, our hope that we
                                                                                                               all. Apparently you only need a few things to make a mockery of the
can just ride this one out, and our denial of what we sense intuitively
                                                                                                               entire global economic system, and big banks garnered these few
to be true—pervasive fraud in the conduct of global financial
                                                                                                               important things through “regulatory capture”:
business and massive counterfeiting in the establishment of value.
                                                                                                               • unregulated, unenforced rules (particularly for derivatives)
We’ve allowed big banks and affiliated institutions to simply concoct
                                                                                                               • license to “mark to model” (assign your own values to your
fake wealth out of thin air, and we have legitimized and rewarded
these concoctions with a massive transfer of real wealth to a very
small but powerful oligarchy through unregulated private bets                                                  • ability to peg present value to irrational expected future returns
                                                                                                                 (based on unlimited, exponential growth)
backed by public taxpayer money, stratospheric fees siphoned from
transactions, predatory lending, and private equity cannibalization of                                         • infinite leverage (no effective requirements for reserve capital in
once-productive firms.                                                                                           unregulated “shadow” markets)

A global economy mediated by an acceptance of a standardized,                                                  • massive size, so that the bank is "too big to fail"
reality-based rule of law and value between nations has given way                                              non-transparency and non-accountability.
to the shrouded anarchy of transnational banks as overriding powers                                            This combined with the moral, social, personal, and cultural approval
Source: Copyright 2010 ZeusYiamouyianni. For author background, visit his profile on the web. For a more detailed versions of this article, please visit Note: By Invitation
features articles solicited by The Wise Investor from experts. It may, on occasions, showcase excerpts of exceptional papers/speeches, which are available in the public domain or published with permission.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                                                  10                                                       The Wise Investor June 2010
                                By Invitation                                                            The Outside View
of maximizing profit at any cost, incentivizes massive fraud and                                                Spanish Flu
This is less sin or malfeasance than just plain lunacy.Yet, this is what            The issue today is that, if the European crisis is going to get worse
we have and what we have allowed to gain the upper hand.                            before it gets better, the obvious question is what will be the next
Literally, following the same formula with a little “solid reputation”              catalyst for angst. In GREED & fear’s view the most likely answer is
sprinkled on, I can value my cat’s litter box at a million dollars, trade
on its ostensible increased future value to skim myself a tidy sum in
profit and transaction fees, leverage my “marked to model” value of                 GREED & fear does not pretend to be an expert on Spain with
that litter box, a million fold to buy up Chrysler. I can then loot
                                                                                    recent visits there primarily confined to the Nou Camp (though in
Chrysler, stripping it of its real wealth and infrastructure, gut jobs, etc.
for short term boosts to profits, and then walk away a billionaire.                 the interests of full disclosure it should be revealed that 12 years
I can give any reason or no reason at all for what I’m doing. I don’t               ago GREED & fear worked briefly for a Spanish bank).
have to tell anyone a thing, and no one is going to come after me. If
they do “come after me” it will be to lard me with hundreds of                      But a brief survey of the situation makes it clear that the most
billions of dollars of taxpayer money to keep the national or global                remarkable thing about Spain is how long it has taken markets to
economy from collapsing.                                                            wake up to the problems there. In this there would seem to be a
Talk about throwing good money after bad. The most I can lose is
                                                                                    clear parallel with US sub-prime.
my litter box and now that everyone has a stake in the con, they
have every incentive to cover it up and make me whole, both to                      Thus, Spanish banks outperformed European banks until
protect against their anxiety and their feelings they’ve been conned,
                                                                                    December 2009. Indeed Spain has been the country with the
and to maintain a functioning dysfunctional system.
                                                                                    second largest current account deficit after the US since 2003.
We have currently already established and incentivized as “rational”
an irrational framework where outright, willful lying, theft, fraud, and            Similarly loan growth ran way above the rest of the Euro area
counterfeiting are rewarded.The more parasitic and more inefficient                 during the credit boom. Clearly, the only way these macro
I am in this framework, the more I make.The more I trade an asset
                                                                                    excesses were allowed to grow to this extent was the false
back and forth, the more fees I get.
                                                                                    comfort provided by Euroland monetary union.
Even if those fees eclipse the entire value of the asset in question, I
am “rationally” compelled to continue trading as long as someone                    Equally clearly the debt dynamics in Spain will quickly become
else is paying. If I can inflate the value of my asset at will and pay
                                                                                    impossible to finance once markets start to price in the credit risk.
Moody’s or Standard and Poor’s to give me a AAA rating who’s
going to know?                                                                      This is why Spain, not Greece, is probably the key stress test of
It is sobering to contemplate that the market for unregulated                       whether Euroland can manage its coming deflationary adjustment
derivatives alone, has exceeded the global GDP at a total volume                    and keep the common currency in place.
exceeding 600 trillion dollars and possibly more than a quadrillion
dollars (1,000,000,000,000,000 or a million billion dollars).                       This is because of Spain’s sheer size.Thus, BIS-reporting European
The way out: How can a world-wide economy unhinged from                             banks held US$832 billion in Spanish debt at the end of 2009,
concrete reality perhaps result in positive changes (after, no doubt, a
                                                                                    compared with “only” US$193 billion in Greek debt and US$240
lot of pain)? The answer is fairly brief.
                                                                                    billion in Portuguese debt
We can exercise civil disobedience, refuse to be stooges, create our
own spaces, and recommit to spend time and energy where our                                  Christopher Wood, Managing Director & Strategist of
true heart lies, free from the delusional temptations of a corporate-
                                                                                             CLSA Asia-Pacific, an independent research outfit and
driven reason for life that has shown itself to be both conclusively
abusive and unfulfilling.                                                                    author of the weekly report GREED & Fear.
In the end, they need us, and we don’t need them. This is the only
“this life” we are going to have. It’s a lot more adventurous and
enhancing to be a cultural creative then a debt slave.                                                                                          Source: CLSA

The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                         11                                        The Wise Investor June 2010
                                                                                        Investing Environment

                                                                                                 Asset Allocation
                                                                                                                                             •   2   •

                                                                                                                    The important aspect is to
  Lifetime goals         Income          Net worth             Age          Personality         Time frame
                                                                                                                    ensure a healthy balance

             Return Expectation            Liquidity Preferences               Risk Tolerance

                                                                                                                    • Owning the right mix of
                                           Investor Profile
                                                                                                                       financial assets

            Conservative                        Moderate                               Aggressive                   • Realistic returns

                                                                                                                    • Ability to take risk (absorb
   Capital               Secure          Income/Growth                                                                 likely losses)
                                                                       Growth               Growth Plus
 Preservation            Growth             (Balanced)
                                                                                                                    • Liquidity
  Low                                           Risk/Return                                               High
                                                                                                                    • Flow of income at desired
EPF / PPF   Money Fund     FD     Gold    MIP    Balanced    Equity   Global Markets   Commodities    Real Estate
                                                                                                                       level at each desired time
 Balance risk and reward                     Asset allocation                   Diversify your portfolio               point

                                Check if the following are in place and constantly reviewed:
 Defined goals & a well-thought out time frame for attaining the                Know clearly the tax effects in your investment plan
                                                                                 Use of a credible, professional financial advisor
 Understand risks and ability to absorb losses (short-term and
  long-term)                                                                     Periodic review with long-term performance, risk measures and

 Matching of time frame, objective and risk-return preference                     objectives

 Planned cash flows and a plan for exigency                                     A portfolio view and not by security

 Focus on long-term investment strategy and requirement of                      Ignore short-term volatility effects and avoid panic decisions
                                                                                 Reallocate, reinvest and rebalance
 Clear idea of income, surplus available for investment and likely
  future income                                                                  Alter asset allocation if there is a permanent change in any
 An investment plan that fits in with all the key aspects                         preference

 High degree of discipline in sticking to basic investment plan at all          Take cash calls when markets are overvalued or a major crisis
                                                                                   appears possible
 Enhancement of investment level over time based on comfort
  level                                                                          In taking risk off the table, Being Early is better than Being Wrong

 Understand effect of exit loads, expenses and fees                             Be patient to achieve long-term goals
 Sundaram BNP Paribas Asset Management                                    12                                        The Wise Investor June 2010
                                                                                             The Book of Choice

                                                                           The Great Crash 1929
                                                                               started in 2007 and is still in place with more sources of pain, this
                                                                               book has been a useful re-read to check how 1929 panned out.

                                                                               While we are on this topic, you could get a great snapshot of the
                                                                               1930s      from       the      News        From       1930s       blog
                                                                               ( – a meticulously compiled
                                                                               summary from The Wall Street Journal of the corresponding date in
                                                                               that decade. This blog has no links to the book and has been
                                                                               referred for sheer contextual relevance.

                                                                               The book now has a foreword by James Kenneth Galbraith that
                                                                               provides a background to the ongoing financial crisis. One sentence
                                                                               in the foreword inks the two periods nicely: `As in 1929, the
                                                                               architects of disaster will form a rich rogue’s gallery to go shooting
                                                                               in’. This book is a useful read now as the advanced world appears
                                                                               headed toward one more lost decade, if not worse.
At less than 200 pages, this book has remained perhaps the best
snapshot on events of 1929 – the crash in markets and the year that            We present select extracts to provide a flavour of what is in
to which is dated the birth of the Great Depression.This book was              prospect for a reader.

interestingly, first published, when the Dow Jones Industrial Average          • On December 4, 1928, President Collidge sent his last message
just about managed to recover the massive losses suffered in 1929                 on the state of the Union to the reconvening Congress. Event
and through the 1930s – a period interspersed with a few sharp                    the most melancholy Congressman must have found
rallies of the kind we have witnessed since March 2009.                           reassurance in his words. No Congress of the United States ever
                                                                                  assembled, on surveying the state of the Union, has met with a
You may have problems with ideological stance and its impact on
                                                                                  more pleasing prospect than that which appears at the present
dealing with the economic/financial/market issues of the period.You
                                                                                  time. In the domestic field there is tranquillity and
could vehemently contest comments on persons and policies at
                                                                                  contentment…. And the highest record of years of prosperity. In
multiple places through the book. That is exactly how it should be.
                                                                                  the foreign field there is peace, the goodwill which comes from
Even for those who are at the other end of the spectrum, this book
                                                                                  mutual understanding. The main sources of these unexampled
has utility as a definitive chronicle of the times.
                                                                                  blessings lie in the integrity and character of the American
What also sets the book apart is also the simple manner in which                  people’.
complex issued have been dealt with. Littered with anecdotes, it
                                                                               • One thing in the twenties should have been visible even to
provides a broad sweep and captures ground reality in a manner
                                                                                  Coolidge. It concerned the American people of whose character
that numbers do not and cannot. As a phase in the U.S economy
                                                                                  he had spoken so well. Along with the sterling qualities he
that altered behaviour of people in a profound way, the anecdotal
                                                                                  praised, they were also displaying an inordinate desire to get rich
approach proves the appropriate way.
                                                                                  quickly with a minimum of physical effort. The first striking
The author of the book – John Kenneth Galbraith – needs no                        manifestation of this personality trait was in Florida.There, in the
introduction. If you are interested in a detailed background, just do a           mid-twenties, Miami. Miami Beach, Coral Gables,The East Coast
web search to multiple sources. The financial crisis that officially              as far north as Palm Beach, and the cities over on the gulf had
 Sundaram BNP Paribas Asset Management                                    13                                     The Wise Investor June 2010
               The Book of Choice                                                                                    Perspective
    been struck by the great Florida real estate boom. The Florida                                                               ...continued from page 1
    boom contained all of the elements of the classic speculative                     This is possible but the political contours of the U.S Congress has
                                                                                      changed over the past year and will do so in a more pronounced
    bubble. There was the indispensable element of substance. On
                                                                                      way, come elections in November. Even if more handouts are
    that indispensable element of fact, men and women had
                                                                                      initiated, is this a sustainable avenue? No.
    proceeded to build a world of speculative make-believe.
                                                                                   It is an interplay of similar factors that is forcing Japanese consumers
• Andrew W Mellon said `There is no cause for worry. The high                      to become more prudent despite the passage of 20 years since the
    tide of prosperity will continue’. Mr. Mellon did not know. Neither            deflation was triggered. In an editorial in February 2010 on The
    did any of the other public figures who then, as since, made                   Economics of Eating In,The Japan Times noted with concern:

    similar statements. These are not forecasts; it is not to be                   Japanese culture has long respected practicalities and shunned
                                                                                   wastefulness. However, the current trend of not eating out signals
    supposed that the men who make them are privileged to look
                                                                                   much deeper concerns about personal spending. The drop in the
    farther into the future than the rest. Mr.Mellon was participating
                                                                                   number of people dining out may not seem large compared with
    in a ritual which, in our society, is thought to be of great value for         downturns in other sectors of the economy, but restaurants
    influencing the course of the business cycle. By affirming solemnly            comprise a vital part of consumer spending. Eating out often
    that prosperity will continue, it is believed one can help insure              combines with other consumer activities, like shopping and
    that prosperity will, in fact, continue. Especially among                      entertainment.
    businessmen the faith in the efficiency of such incantation is very            When one drops, they all may drop. It would be a pity, too, if the fast-
    great.                                                                         food chains' low-price menus wiped out the cuisine and dining
                                                                                   experience of the traditional Japanese izakaya and kissaten.The shift
• Some of those in positions of authority wanted the boom to                       to fast food may only be temporary, but let's hope that economic
    continue.They were making money out of it, and they may have                   forces will not just benefit those places that offer the cheapest
    had an intimation of the personal disaster which awaited them                  choices for the longest time. The tradition of dining out is deeply
    when the boom came to an end. But there were also some who                     rooted in Japanese socializing customs and hopefully the decline will
    saw, however dimly, that a wild speculation was in progress and                not be permanent.
    that something should be done. For these people, however,                      This is all about behaviour – many are clearly hoping the cloud will
    every proposal to act raised the same intractable problem. The                 pass, but is now officially four years and barring the rescue of big
                                                                                   banks, little else of a sustainable nature has been achieved. What we
    consequences of successful action seemed almost as terrible as
                                                                                   may be looking at is a long-drawn period of lack of growth in the
    the consequences of inaction and they could be more horrible
                                                                                   U.S and other parts of the developed world. As the Japanese
    for those who took the action.                                                 example shows, policy makers can do little about behavioural
• Stocks, it was agreed, were again cheap and accordingly there                    change.

    would be a heavy rush to buy. Numerous stories from the                        In this context, the ongoing divergence between growth in advanced
                                                                                   nations and emerging markets is here to stay, even if China were to
    brokerage houses, some of them possibly inspired, told of a
                                                                                   have a bumpy ride. Bouts of liquidity could chase stocks in emerging
    fabulous volume of buying orders which was piling up in
                                                                                   markets, every now and then.
    anticipation of the opening of the market. In a concerted
                                                                                   What this developing economic story means for investment is the
    advertising campaign in Monday’s papers, stock market firms
                                                                                   need to adhere to asset allocation across security types, be dynamic
    urged the wisdom of picking up these bargains promptly “We                     about the parts of money that is allocated to risky assets and not to
    believe” said one house, “that the investor who purchases                      necessarily expect returns of the magnitude obtained in the past
   securities at this time with the discrimination that is always a                decade (if there is a repeat, it will be as part of liquidity-driven
   condition of prudent investing, may do so with utmost                           bubble and you must know when to get off). The reality is the
   confidence”. On Monday, the real disaster began.                                economies of the developed world are still to experience the full
                                                                                   brunt of change in behaviour. Japan is the way forward, if you need
Book: The Great Crash 1929. Author: John Kenneth Galbraith Paperback: 194          a reference point on what is in store.
pages Publisher: Houghton Mifflin Hardcourt ISBN-13: 9780395478059; ISBN
10 - 978-0395478059 Price: Rs 547 at (the price is after a        T P Raman
discount of 15% and there is free delivery in India). Comment and pick of          Managing Director
extracts by S.Vaidya Nathan
                                                                                   Sundaram BNP Paribas Asset Management
 Sundaram BNP Paribas Asset Management                                        14                                      The Wise Investor June 2010
                                                                                    India                            RBI-Speak

                                                            Volatility in Capital Flows
                                                                                 On the flip side, however, capital flows are known to be pro-cyclical
                                                                                 and they complicate macroeconomic management. An open capital
                                                                                 account interferes with the simultaneous management of a
                                                                                 fixed/managed exchange rate peg and an independent monetary
                                                                                 policy – a phenomenon familiarly known as the ‘Impossible Trinity’.
                                                                                              Potential threat to financial stability
                                                                                 Large and persistent capital flows can potentially jeopardize financial
                                                                                 stability. Large speculative flows in ‘search for yield’ typically go into
                                                                                 investment in assets leading to rapid and destabilizing build up of
                                                                                 asset prices. Since such speculative flows are volatile by nature, they
                                                                                 can impair the orderly functioning of the financial markets.
                                                                                 When investors exit from securities markets abruptly in a herd,
                      Duvvuri Subbarao
                                                                                 stock and bond prices get affected, and when investors take the
                             Governor                                            redemption proceeds out of the country, the exchange rate gets
                        Reserve Bank of India                                    affected.
                                                                                 Should the central bank intervene to stabilize the forex market, the
                                                                                 resultant tightened liquidity can affect the money markets. Thus,
        Recovery in capital flows & related concerns                             speculative flows affect all financial markets - the securities markets,
                                                                                 the forex market, the money market and the credit market, with
As the crisis is ebbing, capital inflows into emerging market                    contagion spreading from one market to another rapidly.
economies (EMEs) have resumed - a consequence of a global
                                                                                 If not contained, these swift developments can threaten financial
system awash with liquidity, the assurance of low interest rates ruling
                                                                                 stability and lead to output and employment losses.
in advanced economies over ‘an extended period’ and the prospects
of robust growth in EMEs. According to the IMF, net private financial                                 Managing Capital Flows
flows to emerging and developing economies increased from US$                    Surely, capital flows are important to meet the investment needs of
254 billion in 2006 to US$ 689 billion in 2007 and then declined, at             EMEs. Problems arise when the flows are largely in excess of the
the height of the global financial crisis, to US$ 179 billion in 2008 and        economy’s absorptive capacity and also when they are highly
US$ 180 billion in 2009.                                                         speculative in nature. EMEs have responded to managing the
The resumption of capital flows has triggered familiar concerns in               adverse macro impact of volatile capital flows through a variety of
EMEs about macroeconomic and financial stability. This has also                  policy actions. Stylistically, these can be categorized into three
sparked off a vigorous debate internationally on the policy approach             options.
to capital flows at the country level and at the international level. My         • The first option is to do nothing (exchange rate option) in which
comments as chairman of this session will cover the theoretical                    case the exchange rate will appreciate.
arguments for and against capital flows, the collective experience to
                                                                                 • The second is to allow the flows to come in but intervene in the
date in managing capital flows and issues on the way forward. I will
                                                                                   forex market (reserve accumulation option).
also allude to India’s approach to capital account management.
                                                                                 • The third option is to deploy capital controls.Typically, EMEs have
         Arguments For and Against Capital Flows                                   adopted a mix of all the options. Let me briefly discuss the
The theoretical arguments in support of capital flows are quite                    implication of these options.
persuasive. Capital flows aid growth by providing external capital to                             The Option of Doing Nothing
sustain an excess of investment over domestic savings.
                                                                                 The most straight forward option for the central bank is to allow
By affording the opportunity of using the world market, an open                  flows to come in without any intervention. However, when capital
capital account permits both savers and investors to diversify their             inflows are large, this can lead to currency appreciation unrelated to
portfolios to maximize returns and minimize risks. Capital flows                 fundamentals and trigger a 'Dutch Disease' syndrome. Experience
could also potentially develop nascent financial markets, promote                has shown that a flexible exchange rate system is prone to
financial discipline and reduce the borrowing costs both for the                 overshooting, and this has engendered the 'fear of floating' among
government and the corporates.                                                   many countries.
 Sundaram BNP Paribas Asset Management                                      15                                       The Wise Investor June 2010
                                                                                     India                            RBI-Speak
            The Option of Reserve Accumulation                                                    The Option of Capital Controls
The second option for a central bank, confronted with a surge of                  The third standard option for EMEs is to impose controls on capital
capital flows, is to intervene in the foreign exchange market to                  flows. Experience in this regard has been mixed. Protagonists of
dampen disorderly movements of the exchange rate.This will result                 controls have argued that capital controls are distortionary, difficult
in accumulation of foreign exchange reserves and release of                       to implement, easy to evade, and that they become ineffective fairly
additional liquidity into the system. If left unsterilized, the additional        quickly and entail negative externalities.
liquidity so generated in the system will have potential inflationary
implications.                                                                     On the other hand, proponents of capital controls contend that
                                                                                  controls are desirable because they preserve monetary policy
Typically central banks have sterilized the flows, either partly or fully,
using a variety of tools including open market operations, tightening             autonomy, save sterilization costs, tilt the composition of foreign
the access of banks to the discount window, adjusting reserve                     liabilities toward long-term maturities, and ensure macroeconomic
requirements, using a foreign exchange swap facility, easing                      and financial stability.
restrictions on capital outflows and pre-payment of external debt.                The challenge for policy makers is to design and implement controls
In theory, each of these tools holds out the prospect of achieving the            where the cost of compliance is lower than the cost of evasion.
same effect as open market operations. However, one should be
                                                                                                      A hurt rather than a help
mindful of the law of unintentional consequences. Such intervention
would prevent the domestic money market interest rates from                       Capital controls were a central issue during the Asian crisis, but the
falling which would attract more inflows and thus actually accentuate             orthodox view that ‘controls are not desirable’ largely survived the
appreciation pressure, the problem that was sought to be contained                crisis. Capital controls are now once again a central issue, as the
in the first place.                                                               recent crisis witnessed, across emerging economies, a rough
In the case of EMEs, intervention may also entail large quasi-fiscal              correlation between the extent of openness of the capital account
costs if the domestic assets yield higher returns than the foreign                and the extent of adverse impact of the crisis.
exchange reserves.
                                                                                  Surely, this should not be read as the denouncement of open capital
Despite the costs of accumulating and holding reserves, reserves so               account, but a powerful demonstration of the tenet that premature
built up come handy in preserving financial stability in the face of              capital account opening hurts more than it helps.
outflows. In fact, besides being an intrinsic good, foreign exchange
reserves confer several other important advantages such as                                         The Tobin Tax on Transactions
automaticity, fungibility and usage in both crisis prevention and crisis          The advisability of a Tobin tax has figured prominently in the
resolution.                                                                       discussion on capital controls in the post crisis period. Several
In its January 28, 2010 issue, The Economist said, “Capital, like                 countries have used variants of Tobin tax to discourage heavy, short-
water, tends to flow around such obstacles (taxes). Try to dam its                term capital inflows. It has been argued that the tax helps reduce
movements at one point, and slowly but remorselessly, it will find                exchange rate volatility and consequently curtails the intensity of
its way around.”                                                                  “boom-bust” cycles engendered by international capital flows.
                                                                                  However,Tobin tax has been criticized on many counts: the tax can
Because of the potential for rapid outflows and the associated
                                                                                  be evaded easily through modern financial instruments like
liquidity risks, EMEs have tended to build up reserves as a means of
                                                                                  derivatives; it reduces liquidity in the markets; and to be effective, the
self-insurance. During the recent crisis, EMEs which had built up
                                                                                  scope of the tax needs to be continuously widened which may lead
reserves as self-insurance found that they could weather the crisis
                                                                                  to inefficiencies.The efficacy of a Tobin type tax remains a debatable
more effectively.
The very possession of an ample level of reserves helped to
                                                                                                     IMF Changes Tack, At Last
maintain market confidence as measured by lower spreads on credit
default swaps and also blunted the penetration of the crisis in these             Refreshingly, the IMF has shed its long held orthodoxy against capital
economies.                                                                        controls.The policy note of the IMF published in February 2010 has
                                                                                  referred to certain ‘circumstances in which capital controls can be a
Such self insurance has, however, faced intellectual inclement. It has
                                                                                  legitimate component of the policy response to surges in capital
been criticized as being costly and inefficient and also as contributing
to global imbalances. To wean EMEs away from self insurance,
international financial institutions like the IMF have recently come up           The IMF’s Global Financial Stability Report (April 2010) has gone
with revised instruments such as a flexible credit line and high access           further into this issue and observes that capital controls are
precautionary arrangements.                                                       reasonable instruments in the 'toolkit' of developing/EME
                                                                                  economies facing volatile capital flows.
There were also cases of regional swap arrangements during the
recent crisis. It is not yet clear if such external safety-nets can fully         The World Bank and the Asian Development Bank too have echoed
substitute for national level self-insurance in terms of speed,                   the view that capital controls may be advisable, indeed inevitable, in
effectiveness and autonomy.                                                       certain circumstances.
 Sundaram BNP Paribas Asset Management                                       16                                       The Wise Investor June 2010
                                                                                       India                             RBI-Speak
               India’s Approach To Capital Flows                                                          Exchange Rate & Flows
India has experienced both ‘floods’ and ‘sudden stops’ of capital flows.           Our exchange rate policy is not guided by a fixed or pre-announced
Net capital flows to India increased from as low as US$ 7 billion in               target or band. Our policy has been to intervene in the market to
1990-91 to US$ 45 billion in 2006-07, and further to US$ 107 billion               manage excessive volatility and disruptions to the macroeconomic
during 2007-08, the year just before the crisis. They dropped to as                situation.This ‘volatility centric approach’ to exchange rate also stems
low as US$ 7 billion in 2008-09 at the height of the crisis. Capital               from the source of volatility which is capital flows.
flows are estimated to have recovered to around US$ 50 billion in
2009-10.                                                                           Despite not having a fully open capital account, we have
                                                                                   experienced large volatility in capital flows.The exchange rate of the
India has followed a consistent policy on allowing capital inflows in              Indian rupee vis-à-vis US dollar appreciated when there were large
general and on capital account management in particular. Our                       capital inflows; and it depreciated when the capital inflows thinned
position is that capital account convertibility is not a stand alone               out. The two way movement is a clear demarcation of our flexible
objective but a means for higher and stable growth.                                exchange rate policy.
             Gradual path to capital convertibily                                  India’s exchange rate policy is said to have imposed some costs. Last
We believe our economy should traverse towards capital                             fiscal (2009/10), the rupee appreciated by 13 per cent in nominal
convertibility along a gradual path - the path itself being recalibrated           terms but by as much as 19 per cent in real terms because of the
on a dynamic basis in response to domestic and global                              inflation differential between us and our trading partners. This has
developments.                                                                      implications for our external competitiveness at a time when world
                                                                                   trade is recovering and concerns about protectionism are
To learn to ‘dam’ the flows so that the benefits of capital flows                  resurfacing.
exceed their costs remains an intellectual and policy challenge for                Also, if we have a flexible exchange rate, and if other countries which
EMEs. We believe our economy should traverse towards capital                       are our trading partners or competitors for the same export
convertibility along a gradual path - the path itself being                        markets have a fixed exchange rate, we get disadvantaged.
recalibrated on a dynamic basis.
                                                                                   Although India does not have a deliberate strategy of building up
We will continue to move towards liberalizing our capital account,                 reserves for self insurance, our reserves got built up as a result of
but we will revisit the road map to reflect the lessons of the crisis.             our relatively flexible exchange rate policy. The reserves so built up
As regards a Tobin type tax, we have not so far imposed nor are we                 have been used to contain volatility in the event of capital flow
contemplating one. However, it needs reiterating that no policy                    reversals. Our reserves comprise essentially borrowed resources,
instrument is clearly off the table and our choice of instruments will             and we are therefore more vulnerable to sudden stops and reversals
be determined by the context.                                                      as compared with countries with current account surpluses.
                   Approach to types of flows                                                   More flexible, open-minded approach
Among the components of capital flows, we prefer long term flows                   For several decades now, EMEs have struggled with capital flows in
to short-term flows and non-debt flows to debt flows.The logic for                 their own ways. The orthodox view that capital controls are
that is self-evident. Our policy on equity flows has been quite liberal,           inherently inefficient and should not be resorted to has inhibited
and in sharp contrast to other EMEs which liberalized and then                     mainstream research on the topic. But that orthodoxy has now
reversed the liberalization when flows became volatile, our policy                 changed, and a more flexible and open-minded approach is gaining
has been quite stable.                                                             ground.
Historically, we have used policy levers on the debt side of the flows             For example, the April 2010 Global Financial Stability Report of the
to manage volatility. Contrary to popular perception, we have used                 IMF says, “there are a number of different types of controls that can
both quantity and price based variables to moderate debt flows.                    be imposed with varying degrees of success under different country
There is a ceiling on the extent of FII investment in sovereign and                circumstances. Overall, the message is that one size does not fit all.
corporate debt (quantity variable) and there is also a withholding                 Since the use of capital controls is advisable only to deal with
tax (price variable).                                                              temporary inflows, in particular those generated by external factors,
                                                                                   they can be useful even if their effectiveness diminishes over time.”
External commercial borrowings (ECB) by corporates come in
through both an automatic route and an approval route. ECB flows                   There is a need to follow up this revised world view with research.
under both the automatic and approval routes are moderated by                      The IMF and other multilateral bodies and research institutions must
interest rate ceilings (a price variable) and those under the                      embark on researching the negative externalities arising from large
automatic route through an additional ceiling on total quantity (a                 and volatile capital flows, the ways to address the negative
quantity variable). Non-Resident Indians (NRI) deposits are                        externalities, explore when it is appropriate to use controls, what
monitored through an interest rate ceiling, a price variable.                      kind of controls work best and under what circumstances.
Comments of Dr. Duvvuri Subbarao, Governor, Reserve Bank of India at the High-level Conference on ‘The International Monetary System’ jointly organised by
the Swiss National Bank and the IMF in Zurich on May 11, 2010. Source:
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        17                                         The Wise Investor June 2010
                                                                                        Thoughts From The Frontline

                                                                               Europe’s Hail Mary Pass
                                                        what Europe did last month.They threw                         unless German Chancellor Angela
                                                        a Hail Mary pass in an attempt to avoid                       Merkel agreed to back the European
                                                        the loss of the eurozone. Jean-Claude                         Union bailout plan at a summit last
                                                        Trichet blinked. Merkel capitulated.Today                     week in Brussels, El Pais newspaper
                                                        we consider what the consequences of                          said.
                                                        this new European-styled TARP will be                     • "According to El Pais, which didn't say
                                                        for Europe and the world. We do live in                     how it obtained the information,
                                                        interesting times.                                          Spanish Prime Minister Jose Luis
                                                        On Thursday of last week (May 13) Jean-                     Rodriguez Zapatero said (in a private
                                                        Claude Trichet, president of the                            meeting of his Socialist politicians)
                                                        European Central Bank, said three times                     that Sarkozy demanded 'the
             John Mauldin
Best-Selling Author, Recognized Financial Expert        "Non! Non! Non!" when asked in a press                      commitment of everyone, that
  and Editor of Thoughts From The Frontline             conference if the ECB would consider                        everyone should help Greece,
                                                        buying Greek bonds.                                         everyone according to their means,
                                                                                                                    or France would reconsider the
                                                        His exclamation was accompanied by a
                                                                                                                    situation of the euro.'
What is a Hail Mary Pass?: In a 1975                    forceful lecture on the need for
                                                        eurozone countries to get their fiscal                    • "Sarkozy banged his fist on the table
playoff game, the Dallas Cowboys were
                                                                                                                    and threatened to quit the euro,
nearly out of time and facing elimination               houses in order, some of which I quoted
                                                                                                                    which forced Merkel to cave in,
from the playoffs, down 14-10 against a                 in last week's letter. Trichet was
                                                                                                                    Zapatero told the Spanish politicians,
very good Minnesota Vikings team. The                   remonstrating about the need for the
                                                                                                                    according to the El Pais account.
Cowboys future Hall of Fame                             ECB to remain independent, and was
                                                        rather definite about it.                                 • " 'If at this point, given how it's falling,
quarterback Roger Staubach had no
                                                                                                                    Europe isn't capable of making a
very good options. He later said he                     Then on Sunday he said, in effect, "Mais
                                                                                                                    united response, then there is no
dropped back to pass, closed his eyes                   oui! Bring me your Greek bonds and we
                                                                                                                    point to the euro,' the newspaper
and, as a good Catholic, said a Hail Mary               will buy them." What happened in just
                                                                                                                    quoted the French President as
and threw the ball as far as he could.                  three days?
Wide receiver Drew Pearson had to                       Basically, the leaders of Europe marched
                                                                                                                  • "It wouldn't be the first time Sarkozy
come back for the ball and, in a very                   to the edge of the abyss, looked over,
                                                                                                                    linked the fate of the euro to a
controversial play, managed to catch the                decided it was a long way down, and did
                                                                                                                    willingness to support Greece. On
ball on his hip and stumble into the end                an about-face. It was no small move, as
                                                                                                                    March 7, before meeting Greek
zone. Angry Vikings fans threw trash onto               they shoved almost $1 trillion onto the                     Prime Minister George Papandreou
the field, and one threw a whiskey bottle               table in an "all-in" bet.                                   in Paris, Sarkozy said: 'If we created
that knocked a referee out. After that                  Bailing out Greece is very unpopular in                     the euro, we cannot let a country in
play, all last-minute desperation passes                Germany. So why did Chancellor Merkel                       the eurozone fall. Otherwise there
became known as Hail Mary passes.                       agree to do so? This is the story that has                  was no point in creating the euro.We
(That was a very thrilling game to                      come out in the last few days.                              must support Greece because they
watch!)                                                 • "French President Nicolas Sarkozy                         are making an effort." (Bloomberg)
The European TARP: And that is                            threatened to pull out of the euro                      The German Perspective: I find this
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        18                                         The Wise Investor June 2010
                                                                                        Thoughts From The Frontline
interesting when I compare it to the                    governments, and their announcements                      them. It almost certainly will. Credible
analysis from my friends at Stratfor:                   were not popular with their followers or                  estimates I have seen suggest that the
"Germany now senses the opportunity                     the unions. But they are enacting these                   Club Med countries will see their GDP
to reform the eurozone so that similar                  cuts before a durable recovery has come                   drop at least 4% this year.
crises do not happen again. For starters,               about. They are committing themselves                     It is not just the PIIGS. All of Europe will
this will likely mean entrenching the                   to a very rough road.                                     be making cuts. And in the short term
European Central Bank's ability to                      Austerity is coming all over                              that is going to be a drag on growth and
intervene in government debt as a long-                 Europe: But it is not just the PIIGS                      a headwind for the euro.
term solution to Europe's mounting fiscal               countries that are out of compliance in                   It's More Than Just Government
problems. It will also mean establishing                Europe. France has a budget deficit of                    Debt: A recent study by Portuguese
German-designed European institutions                   over 8%. There are going to have to be                    economist Ricardo Cabral shows that
capable of monitoring national budgets                  austerity measures enacted all over                       the PIIGS have even deeper problems.
and punishing profligate spenders in the                Europe.                                                   With the exception of Italy, they have a
future. Whether these institutions will                 Notice that Ireland has the largest deficit,              large percentage of their debt owned by
work in the long term - or fail as                      at 14.7%.This is in spite of (or more aptly               foreigners.(
attempts to enforce Europe's rules on                   because of) the enactment of severe                       =node/5008)
deficit levels and government debt have                 austerity measures, far beyond what
                                                                                                                  "Greece, for example, has approximately
in the past - remains to be seen. But from              Greece, Portugal, and Spain have
                                                                                                                  79% of government gross debt held by
Germany's perspective, they must."                      contemplated. And what has that gotten
                                                                                                                  non-residents and has a net international
Well, at least France and Germany are                   them? An economy that has shrunk by
                                                                                                                  investment position of -82.2% of GDP.
not looking at each other over the                      almost 17% in the last two years, 14%
                                                                                                                  Interest payments on public debt
Maginot Line. But it is the age old-                    unemployment, and a country in the grip
                                                                                                                  represented nearly 40% of Greece's
struggle: who will lead?                                                                                          already large 2009 budget deficit - and
There are so many implications of this                   The world is better off with a united                    this is set to increase."
                                                         Europe. That being said, I have my doubts
latest action, it is hard to know where to                                                                        These interest payments leave the
                                                         that the European Union in its current form
begin.                                                   will exist in 5-7 years. I hope I am wrong.              country, making their already bad trade
Buying Time: Above all, this is a move                                                                            imbalances even worse. And the taxes
to buy time.There is enough in this fund                of outright deflation. Property prices                    that might be paid on the interest go to
to purchase all the expected debt of                    have fallen by 34% and are still falling.                 other countries, too.
Greece, Portugal, and Spain for three                   Their banks are in shambles.                              Cabral looks at the average external
years.The money could actually last a lot                                                                         debt during 16 debt crises over the past
                                                        And their debt-to-GDP is rising, because
longer, as Spain might not need to tap                                                                            30 years. On average, Greece, Spain, and
                                                        even as they borrow their GDP is falling.
the fund for some time.                                                                                           Portugal are now 30% worse off than
                                                        It is hard to cut that ratio when GDP is
There were clearly some other quid pro                  falling. If GDP falls 20%, then the debt-to-              these other countries when they went
quos that came out of this weekend.                     GDP ratio rises by 25%. And that means                    into crisis and restructured debt.
Both Spain and Portugal announced new                   your interest-rate costs are an ever                      Cabral notes (as I have done in past
austerity moves, which will help them get               bigger chunk of your tax revenues.                        letters) that there are no good choices.
back below the 3% deficit limit mandated                                                                          Continuing to increase debt owed to
                                                        These are not growth plans: Let's
by the Maastricht Treaty within (they                                                                             foreign creditors just digs a deeper hole
                                                        be clear. These austerity measures are
hope) a few years.                                      not growth plans. They are not designed                   that they must dig out of. His conclusion
It was the usual combination of tax                     to help countries grow their way out of                   is that some sort of debt restructuring
increases, some budget cuts, and across-                the problem.There is no reason to think                   will ultimately be required.
the-board pay cuts for government                       that if Greece enacts the measures that                   Their unemployment is already high and
workers.                                                have been proposed, that what                             is going to get worse. They are not
These are very left-wing socialist                      happened to Ireland will not happen to                    enacting pro-growth policies. Spain, for
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        19                                         The Wise Investor June 2010
                                                                                                                                Thoughts From The Frontline
instance, has a rule that a company must                                          birth rates are low. And you increase                                               pension promises made all over Europe
pay a one-month severance fee for each                                            productivity by investing private capital                                           must be dealt with. The US has the
year an employee has worked. Thus, if                                             into businesses, the way the Germans                                                option of raising taxes, reducing benefits,
you have worked for ten years, you get a                                          have done, which is why their labor unit                                            and means testing, should we so choose
ten-month severance allowance if you                                              costs are so low compared to their                                                  to do so to meet the demands of
are laid off.                                                                     competition.                                                                        entitlement problems. Europe already
What that does is discourage new                                                  Euro-TARP almost mandates that capital                                              has tax rates that are high and growth-
employment, and it means that newer                                               be misallocated into non-productivity-                                              inhibiting. The entitlement problems in
workers are laid off first. That is one of                                        enhancing government programs and                                                   many countries are more onerous, and
the reason Spain has such a high                                                  debt.                                                                               their working populations are not
unemployment rate among young                                                     Europe is run by Keynesians (as is                                                  growing.
people.                                                                           the US): They see everything as a                                                   This is just the beginning of their woes.
The woe for Germany: The PIIGS                                                    liquidity problem. And sometimes it is.                                             They have a long way to go and a short
have much higher labor costs per unit of                                          But the PIIGS have a debt problem. And                                              time to get there. Can it be done? Yes, of
production than Germany, as much as                                               you don't cure a debt problem with                                                  course. But it is going to require a great
50% higher! Germany runs large trade                                                                                                                                  deal of change. I hope they pull it off, I
surpluses while the Club Med countries                                              Europe is run by Keynesians (as is the                                            really do. I have been to most of Europe
have large trade deficits.                                                          US). They see everything as a liquidity                                           and love every bit I have seen.The world
                                                                                    problem. But the PIIGS have a debt                                                is better off with a united Europe.
A country may want to reduce its
                                                                                    problem. And you don't cure a debt
government debt, its businesses and                                                 problem with more debt.                                                           That being said, I have my doubts that
individuals may want to reduce their                                                                                                                                  the European Union in its current form
debt, and they might like to run a trade                                                                                                                              will exist in 5-7 years. I hope I am wrong.
deficit. However, the rules of accounting                                         more debt unless you have a clear path
                                                                                                                                                                      One implication is parity: The euro
are such that you can only do two of the                                          to grow your way out of the debt. But as
                                                                                                                                                                      is on its way to parity with the dollar. So
three.                                                                            I have demonstrated, there is no clear
                                                                                                                                                                      is the pound. That is going to help their
                                                                                  path to growth with the current policies.
The reality is that the coming austerity                                                                                                                              exports vis-à-vis the US. Watch the yen
measures are going to reduce the ability                                          They will produce deflationary                                                      fall rather sharply over the next few
of the PIIGS to buy products from                                                 recessions, lower government tax                                                    years. Senators Schumer and Graham
outside their countries. Germany's                                                receipts from reduced GDP, and higher                                               gripe about China.
surplus will thereby suffer.                                                      unemployment.
                                                                                                                                                                      What are they going to say about
The Grand Misallocation: What this                                                At the end of the day, Greece will just                                             Europe, Britain, and Japan, all of which are
Euro-TARP does is take money from                                                 have more debt. Perhaps Spain and                                                   on course to premeditated devaluation?
mostly good credit and give it to weak                                            Portugal can work through their                                                     This is going to be just one more
credit. It will crowd out private savings                                         problems, but that will be very difficult                                           challenge for businesses in countries with
that go into private enterprise (which is                                         and will involve considerable economic                                              the world's stronger currencies.
where jobs come from) and put it to                                               pain. Italy can succeed if it decides to.
                                                                                                                                                                      Another side bet?: The ECB says it
unproductive uses in the government                                               This new program simply buys time to                                                will sterilize those government bonds it
debt of weak countries.                                                           try and figure things out. It is Germany                                            buys (meaning, it will make sure it does
There are only two ways to grow an                                                saying, "Ok, I give you 3-4 years. But don't                                        not add to the money supply). My bet is
economy: you can grow your population                                             come back asking for more."                                                         that when deflation starts to run
or you can increase productivity.That's it.                                       Bridge to nowhere: All this does is                                                 throughout Europe, the ECB will decide
The Club Med countries are not growing                                            bridge to the middle of the decade,                                                 that maybe not so much sterilization is
their populations appreciably, as their                                           when the truly massive health and                                                   required after all. Copyright 2009 John Mauldin.All Rights Reserved John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers
each week. For more information on John or his FREE weekly economic letter go to: To subscribe to John Mauldin's E-Letter please click here:
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                                                            20                                                            The Wise Investor June 2010
                                                                                          Economic Crisis Effects

                             Life in the time of the Great Recession
This is the twelfth part of how the Great Recession is touching lives in many-a-different way.

Summer Schools Cancelled: Amber                         Potomac Partners.                                         observed the same trend and is worried
Bramble had to scramble to arrange                      “This is a market purely on life support,                 about this renaissance of left-wing
summer plans for her 5- and 7-year-old                  sustained by the federal government,” he                  violence in the country. German Interior
daughters after their suburban Kansas                   said at the Mortgage Bankers Association                  Ministry crime statistics for 2009 show a
City school district gutted its summer                  conference. “Having FHA do this much                      53 percent jump in the number of left-
school program this spring. Her                         volume is a sign of a very sick system.”                  wing attacks, the largest increase seen in
daughters were among about 2,500 of                                                                               many years.
                                                        The FHA backs loans with down
the Raymore-Peculiar district's 6,000                                                                             Police recorded a total of 1,822 left-wing
                                                        payments as low as 3.5 percent.The FHA
students who enrolled for free last                                                                               acts of violence in all of Germany,
                                                        and Fannie Mae and Freddie Mac, which
summer in a program that combined                                                                                 considerably     more      than      those
                                                        regulators seized in 2008, have been
traditional subjects with enrichment                                                                              committed by right-wing extremists. The
                                                        financing more than 90 percent of U.S.
classes like music.                                                                                               number of potential militant activists
                                                        home lending after a retreat by banks
But with state funding uncertain, the                                                                             rose from 5,500 to 6,600 from 2005 to
                                                        and the collapse of the market for
district decided to focus this year on                                                                            2009.
                                                        mortgage bonds without government-
about 800 students who either need to
                                                        backed guarantees.                                        2010 Class enters as 2009 Class
make up credits to graduate or are
                                                        Cosmetic Plastic Surgery Down in                          awaits jobs: Ten months after
struggling to keep up with classmates.
                                                        2009: Although it's been a sluggish year                  graduating from Ohio State University
Across the country, districts are cutting
                                                        for plastic surgery due to the economy,                   with a civil-engineering degree and three
summer school because it's just too
                                                        the long-term outlook is more                             internships, Matt Grant finally has a job -
expensive to keep. The cuts started
                                                        encouraging. According to statistics                      - as a banquet waiter at a Clarion Inn
when the recession began and have
                                                        released today by the American Society                    near Akron, Ohio.
worsened, affecting more children and
more essential programs that help                       of Plastic Surgeons (ASPS), 12.5 million                  “It’s discouraging right now,” said the 24-
struggling students.                                    cosmetic plastic surgery procedures                       year-old, who sent out more than 100
Sign of a very sick system: Loans                       were performed in the United States in                    applications for engineering positions.“It’s
guaranteed by the Federal Housing                       2009, down 1 percent from 2008; up 69                     getting closer to the Class of 2010, their
Administration,      the     U.S.-owned                 percent since 2000.                                       graduation date. I’m starting to worry
mortgage insurer, may be involved in                    Crisis Fuels Rise in Left-Wing                            more.”
more home-purchase transactions than                    Extremist Violence: Following the                         Schools from Grant’s alma mater to
borrowing financed by Fannie Mae and                    2007 protests at the G-8 meeting in                       Harvard University will soon begin
Freddie Mac.                                            Heiligendamm, the number of attacks by                    sending a wave of more than 1.6 million
FHA lending last quarter may have                       leftist extremists has risen dramatically in              men and women with bachelor’s degrees
topped the combined volume of                           Germany. The government is increasing                     into a labour market with a 9.9 percent
government-supported Fannie Mae and                     its focus on the autonomists, but                         jobless rate, according to the Education
Freddie Mac in a home-lending market                    authorities know little about a new                       and Labour departments.
that’s still a “government-financed                     generation that is torching cars, and                     Depressed earnings in prospect
market,” David Stevens, the agency’s                    worse, in its fight.                                      for years: The scramble for jobs may
head, said today at a conference in New                 The opposition in this struggle --                        depress earnings of new and recent
York, citing research by consultant                     Germany's federal government -- has                       college graduates for years to come and
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        21                                         The Wise Investor June 2010
                                                                                          Economic Crisis Effects
handicap       their    future    career                Supposedly everyone wants a new                           fewer retail workers, among others, will
opportunities, according to Lisa Kahn, an               home. Well, today's new home is                           likely be needed.
assistant professor of economics at Yale                tomorrow's resale. In a sea of empty                      At 40 million, food-stamp tally at
University’s School of Management.                      houses, one year from now, who would                      record: Nearly 40 million Americans
Students who graduated in the early                     be able to sell them and at what price if                 received food stamps -- the latest in an
1980s -- when two recessions drove                      they needed to move?                                      ever-higher string of record enrollment
unemployment to a peak of 10.8 percent                  Home Seizures Reach Record: U.S.                          that dates from December 2008 and the
-- suffered wage losses of more than                    home foreclosures climbed to a record                     U.S. recession, according to a
$100,000 in the next 15 years compared                  in April, a sign that government                          government update.
with those who came into the job                        mortgage relief efforts have yet to turn                  The Agriculture Department said 39.68
market during the decade’s boom years.                  the tide of property seizures, according                  million people, or 1 in 8 Americans, were
A new listserv of “Hot Opportunities”                   to a report by RealtyTrac Inc.                            enrolled for food stamps during
Harvard’s career-services office began                  Bank repossessions rose to 92,432 in                      February, an increase of 260,000 from
compiling in March garnered 1,000                       April, up 45 percent from a year earlier,                 January.
student subscribers in its first two days.              Irvine, California-based RealtyTrac said                  Enrollment has set a record each month
“This is the first year we have seen such               today in a statement. Foreclosure filings,                since reaching 31.78 million in
a demand for our services this close to                 including default and auction notices, fell               December 2008. USDA estimates
graduation,” said Robin Mount, director                 2 percent to 333,837. One out of every                    enrollment will average 40.5 million
of    the      office    in    Cambridge,               387 households received a filing.                         people this fiscal year, which ends Sept
Massachusetts. Thirty-three percent of                  About 5 million delinquent loans will                     30, at a cost of up to $59 billion. For fiscal
Harvard’s graduating seniors had                        probably end up in the foreclosure                        2011, average enrollment is forecast for
accepted a job as of commencement last                  process in addition to the 1.2 million                    43.3 million people.
year, down from 51 percent the year                     homes already taken back by lenders.                      "This is the highest share of the U.S.
before.                                                 Defaults may not peak until 2011                          population on SNAP/food stamps," said
Building Is Booming in a City of                        depending on how lenders process them                     the anti-hunger group Food Research
Empty Houses: In a plastic tent under                   Jobs gone for good: Fewer                                 and Action Center, using the new name
a glorious desert sky, Richard Lee                      construction workers will be needed.                      for food stamps, Supplemental Nutrition
preached the gospel of the second                       Don't expect as many interior designers                   Assistance Program (SNAP). "Research
chance.                                                 or advertising copywriters, either.                       suggests that one in three eligible people
The chance to make money on the next                    Retailers will get by with leaner staffs.The              are not receiving ... benefits."
housing boom “is like it’s never been,” Mr.             economy is strengthening. But millions of                 Degrees of Debt: As private college
Lee, a real estate promoter, assured a                  jobs lost in the recession could be gone                  costs climb, families are borrowing a
crowd of agents, investors and bankers.                 for good.                                                 record amount of federal money to pay
“We’re going to come back like you’ve                   And unlike in past recessions, jobs in the                for education. Al Eng, like a growing
never seen us before.”                                  beleaguered manufacturing sector aren't                   number of parents, soon may take on
Home prices in Las Vegas are down by                    the only ones likely lost forever.                        debt to cover the soaring costs of his
60 percent from 2006 in one of the                                                                                child’s private college education.
                                                        What sets the Great Recession apart is
steepest descents in modern times.                      the variety of jobs that may not return.                   “I’m going to do whatever it takes to pay
There are 9,517 spanking new houses                     Already, the percentage of the labour                     for school,” Eng says.
sitting empty. An additional 5,600 homes                force unemployed for six months or                        After losses in the stock and housing
were repossessed by lenders in the first                longer is 4.3 percent. That's the highest                 markets, families took out a record
three months of this year and could soon                rate on records dating to 1948.                           amount of U.S. government-backed loans
be for sale. Yet builders here are putting              Diminished home equity and investment                     in 2009, according to Palo Alto,
up 1,100 homes                                          accounts have made shoppers more                          California-based research group Student
They are frantically buying lots for even               cautious, too. And their frugality could                  Lending Analytics LLC.
more.                                                   endure well into the recovery.That's why                  “Many of the other options have dried
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        22                                         The Wise Investor June 2010
                                                                                                                                         Economic Crisis Effects
up,” says Tim Ranzetta, president of SLA.                                             1980, there were 28 million, or 12%.                                                   battered by the economic downturn.
“The federal loan dollars are still                                                   According to a recent Pew Research                                                     Donations have dipped, investment
available.That’s why you’re seeing such a                                             Center report, the growth is due to                                                    returns have plunged and bank credit is
dramatic increase.”                                                                   demographics, cultural shifts and high                                                 still hard to come by.
One way or another, families will pile up                                             unemployment.                                                                          Pentagon asks for hold on pay rise,
more debt as the cost of college climbs.                                              Carbon emissions drop most since                                                       sees fiscal calamity: The Pentagon,
In the 2009-10 school year, tuition and                                               1949: President Obama can now count                                                    not usually known for its frugality, is
fees rose by an average of 4.4 percent to                                             among the political pearls of his first year                                           pleading with Congress to stop spending
$26,273 at private four- year colleges--                                              in office a record drop in U.S. carbon                                                 so much money on the troops.
the highest increase in 21 years when                                                 emissions.
                                                                                                                                                                             In the midst of two long-running wars in
adjusted for inflation, according to the                                              The sand in the oyster, however, is that                                               Iraq and Afghanistan, defense officials are
New York-based College Board.                                                         this was mainly the result of the                                                      increasingly     worried     that       the
“I expect debt at graduation to continue                                              recession.                                                                             government's generosity is unsustainable
to grow by leaps and bounds,” says Mark                                               The federal Energy Information                                                         and that it will leave them with less
Kantrowitz, publisher of, a                                                Administration reported last week that                                                 money to buy weapons and take care of
Cranberry Township, Pennsylvania-based                                                greenhouse gas emissions fell 7% last                                                  equipment.
Web site about educational lending.                                                   year—the largest-ever percentage and                                                   Now, Pentagon officials see fiscal calamity.
A first in 100 years, household size                                                  absolute decline since the EIA started
rises: The number of people living                                                                                                                                           Overall, personnel expenses constitute
                                                                                      tracking the relevant data in 1949.
under one roof is growing for the first                                                                                                                                      about one-quarter of defense spending.
                                                                                      Holy bubble! Churches struck
time in more than a century, a fallout of                                                                                                                                    Since 2002, wages have risen 42 percent,
                                                                                      down by foreclosures: Thanks to its
the recession that could reduce demand                                                10,000-member congregation and                                                         compared with about 32 percent for the
for housing and slow the recovery.                                                    connections with business and civic                                                    private sector. Housing and subsistence
The Census Bureau had projected the                                                   leaders, Ebenezer AME Church expects                                                   allowances, which troops receive tax-free,
average household size would continue                                                 to avoid the fate of a growing number of                                               have gone up even more....
to fall to 2.53 this year. Instead, the                                               U.S. churches, which are defaulting on                                                 Income-tax collections slump in
average is likely to hit 2.63, a small but                                            loans, facing foreclosure and even                                                     usually most lucrative period: A
significant increase because it is a                                                  declaring      bankruptcy       at   an                                                decline in personal income tax revenues
turnabout.                                                                            unprecedented pace.                                                                    collected by the federal government
"A funny thing happened on the way to                                                 "It's happening to virtually every church,"                                            through the end of April 2010 suggests
the future" says Arthur C. Nelson,                                                    said the Rev. Grainger Browning, senior                                                that state governments may suffer
director of the Metropolitan Research                                                 pastor of Ebenezer. "At a recent meeting                                               significant declines in such tax collections
Center at the University of Utah.                                                     with the 100 top pastors in the country,                                               compared to 2009, a period which itself
"Household size increased."                                                           it was amazing how all of us were facing                                               was down dramatically from the year
The USA could end this decade with up                                                 some sort of challenge with the banks."                                                before, according to Rockefeller Institute
to 4 million excess housing units because                                             Super-cheap, few-questions-asked loans                                                 fiscal experts.
of the reversal in household size, he says.                                           were a temptation even churches could                                                  The weeks just after the April 15 filing
A key factor: "The Great Recession                                                    not resist, but now they are paying for                                                deadline for income-tax returns is the
has forced doubling up among both                                                     their sins as the debt crisis enters the                                               most important tax-collection period of
family and non-family members," Nelson                                                house of God.                                                                          the year for most states, and particularly
says.                                                                                 Long considered among the safest of                                                    those that rely heavily on income taxes.
Multi-generational households are                                                     borrowers, churches gambled on real                                                    Through April 30, the federal
on the rise: 49 million, or 16% of the                                                estate at a time when credit copiously                                                 government’s non-withheld income taxes
population, live in a home that had at                                                flowed and lenders were startlingly lax.                                               are down 17.6 percent from a year
least two adult generations in 2008. In                                               But places of worship have since been                                                  earlier.
Sources: Huffington Post, Bloomberg, Risk.Net,American Society of Plastic Surgeons, Der Spiegel, NewYork Times, Mish Global Economic Analysis, Reuters, Bloomberg Markets,Associated Press, Financial Armageddon, USA Today, Rockefeller Institute
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

  Sundaram BNP Paribas Asset Management                                                                                23                                                                The Wise Investor June 2010
                                                                                       Perspective                                Global

                                                                                The Death of Capital
                                                                                       retrospect it is clear that they were not aggressive enough.While
                                                                                       many of these suggestions have been adopted or are in the
                                                                                       process of being adopted, much more needs to be done to
                                                                                       stabilize the financial system.
                                                                                   Since the publication of that essay, I have written a new book that is
                                                                                       being published by John Wiley & Sons this month. Entitled The
                                                                                       Death of Capital: How Creative Policy Can Restore Stability, the
                                                                                       book explores the origins of the 2008 financial crisis and
                                                                                       expands the call for reform. In addition to the recommendations
                                                                                       listed above, the book calls for additional regulatory changes
                       Michael E. Lewitt                                               including:
                                                                                   • Derivatives reform, with a preference for an outright ban on
                         The Death of Capital
                                                                                       naked credit default swaps or, recognizing that such a ban is
                                                                                       politically unrealistic, calling for such contracts to be listed on
                                                                                       exchanges and requiring substantial capital commitments by
Two years ago, John Mauldin was kind enough to publish my initial
                                                                                       their participants.
proposals for reforming the financial system. Entitled "How to Fix It,"
the April 2008 issue of The HCM Market Letter raised a lot of                      • A Tax on Speculation that would apply to the types of
eyebrows and upset many established interests on Wall Street with                      speculative activities that have so badly damaged the American
its outspoken call for financial reform. Among the changes I called for                economy, including naked credit default swaps, leveraged buyout,
were the following:                                                                    quantitative stock trading strategies and other stock and bond
• Compensation reform to better align the interests of Wall Street
   executives with those of society at large.                                      The book also takes an unvarnished look at the private equity
                                                                                   industry, which has been a prime abuser of capital as it has diverted
• Requiring private equity firms and hedge funds to be registered
                                                                                   an inordinate amount of capital into unproductive uses while
   with regulators.
                                                                                   producing (at best) mediocre returns and charging unjustifiably
• Taxing private equity partners' carried interests at ordinary tax
                                                                                   exorbitant fees.
   rates instead of capital gains tax rates, and prohibiting private
                                                                                   The recent problems experienced by Goldman Sachs highlight just
   equity firms from going public.
                                                                                   how far the financial system has lapsed from the days of gentlemanly
• Sharply reducing the leverage of financial institutions (including
   hedge funds).
                                                                                   Change in itself is neither good nor bad – it is an inevitable feature
• Banning off-balance sheet vehicles such as Structured Investment
                                                                                   of human life and it must be managed. Change on Wall Street has by
                                                                                   and large been managed poorly by being left to the most self-
• Reining in quantitative trading strategies.                                      interested forces.
• Reinstituting the downtick rule with respect to short selling                    My April 2008 essay began with a quote from Adam Smith that
   stocks.                                                                         should be etched into the brains of every Wall Street CEO and
At the time these proposals were considered controversial; in                      included in the oath of office of every new member of Congress.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        24                                         The Wise Investor June 2010
                                                                                       Perspective                                Global
The quote is from Adam Smith, who is best known as the author of                   in a manner that made whole foreign counterparties and Goldman
the bible of capitalism, The Wealth of Nations, but who wrote an                   Sachs; alternatives including offering a blanket credit guarantee to the
equally important book two decades earlier entitled The Theory of                  insurance company that would have calmed markets and obviated
Moral Sentiments. Smith wrote the following:                                       the necessity of the company paying out one hundred cents on the
"This disposition to admire, and almost to worship, the rich and the               dollar for its reckless insurance bets on synthetic mortgage
powerful, and to despise, or, at least, to neglect, persons of poor and            obligations.
mean condition, though necessary both to establish and to maintain                 While the result – avoidance of the extinction-level-event that an
the distinction of ranks and the order of society, is, at the same time,           AIG failure would have been for the financial system – was the
the great and most universal cause of the corruption of our moral                  correct one, the means by which it was achieved furthered the
sentiments."                                                                       agenda of socializing losses and privatizing gains and bred deep
What Adam Smith pointed out more than two hundred years ago                        distrust in the government and the system.
is equally true today – our society, fed by the media, worships wealth             Much of the crisis could have been avoided had policymakers and
at the expense of other values that are far more important to a                    investors operated under realistic assumptions about how markets
cohesive and healthy society.                                                      and economies work. Several years ago, former Federal Reserve
The entire mission of The Wealth of Nations was to try to recognize                Chairman Alan Greenspan described the failure of interest rates to
man for what he is – a social animal who is reliant on the good                    react in the manner he expected as a "conundrum."
opinions of his neighbors – and to develop the optimal economic                    We now know that Mr. Greenspan was operating under a false set
system to harness that human essence for the good of all mankind.                  of assumptions about human nature, as well as a misguided
Smith believed that system was a free market, and history has by and               understanding about how market participants behave.
large proven him correct. But the United States has strayed from a                 As noted in my book, had Mr. Greenspan been an acolyte of Hyman
free market model to a system that privatizes gains and socializes                 Minsky instead of Ayn Rand, he would have been less susceptible to
losses.                                                                            such a fatal conceit. But beyond that, the real conundrum in modern
During the last two decades, the American economy has suffered                     markets is the continued reliance of investors and policymakers on
from a series of legal, fiscal and monetary policies that have favored             two false mantras.
speculation over production.The result has been the financialization               The first is that markets are efficient; and the second is that investors
of the economy, which has been characterized in economic terms by                  are rational.
an unhealthy growth in debt at all levels of the economy and in                    Both assertions are so decidedly specious that one has to question
cultural terms by the monetization of all values.                                  both the sanity or the intelligence of those who cling to them. Yet
Entities such as Fannie Mae and Freddie Mac were perfect examples                  these two bugaboos are supported by reams of academic research
of how the free market had been corrupted before the 2008                          and much of the investment establishment! It is my contention that
financial crisis. The crisis itself demonstrated, however, that the logic          these delusions are why capital continues to be terminally
of the system required all large institutions to suffer from a similar             mismanaged by the professional investment class.
flaw. Yet these flaws were not inevitable, even at the height of the               With few exceptions, professional investors in all asset classes have
crisis; they were deliberate political choices.                                    produced at best mediocre returns for their investors. There are
While stakeholders of some institutions, such as Lehman Brothers,                  exceptions, of course, but they are essentially of statistical
were wiped out, those of other firms were not and some were even                   insignificance.
made whole. The most egregious example of this was the handling                    Private equity is one asset class that I pay particular attention to in
of American International Group (AIG), the insurance giant that                    my book, but the same criticism can be applied to virtually all asset
morphed itself into a giant hedge fund while enriching the officials               managers.The reality is that most managers do a very poor job for
responsible for some of the most ill-informed judgments in financial               their investors.This is not only because they cling to the false Gods
history.                                                                           of market efficiency and investor rationality; it is because they
There was no reason for the government to handle the AIG failure                   misunderstand the true nature of capital.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        25                                         The Wise Investor June 2010
    Perspective                                             Global                                                   The Rosenberg Take
Capital is not a thing or a category; capital is a living, breathing                                  Scary Math
phenomenon. Capital is an expression of the human relationships
                                                                                                      • 1 in every 10 American homeowners missed a mortgage
that generate economic value. Just as these relationships are                                           payment in Q1 (a record)
dynamic, so is capital. The most important attribute of capital as it
                                                                                                      • 1 in 6 Americans are either unemployed or underemployed
functions in the real world is that it is a relationship; as such it has
                                                                                                      • Over 4 in 10 unemployed Americans have been out of work
the capacity to change form.                                                                            for at least six months.
This is often described as its liquidity function.                                                    • 1 in 4 Americans with a mortgage have negative equity in their
Capital is also a human construct; it is not something found in nature                                  homes.
or subject to scientific laws, despite the misguided attempts of                                      • 1 in 10 Americans believe their income will rise in the next six
today's rocket scientists to claim that it possesses such qualities.                                    months.
Most importantly, capital is unstable. If capital were better                                         • 1 in 5 Americans see business conditions improving in the next
understood for what it is, it could be better managed and regulated.                                    six months.
                                                                                                      • 1 in 50 Americans plan to buy a home in the next six months.
Because capital is not properly understood, however, it is abused.
And the consequences of that abuse are not theoretical – they are                                     • 1 in 8 Americans believe that current government policy is
                                                                                                        actually helping the economy.
human. Our ill-begotten economic policies have exacted an
incalculable toll on the citizens of this country and around the world.                               • 1 in 10 American small businesses have a job opening.
Millions of people have lost their jobs and their homes.                                              • 1 in 10 American’s credit card usage is being written off (a
The official jobless rate is still around 10%, and the real jobless rate
                                                                                                      • There are 5 unemployed workers competing for every job
is closer to 20% when discouraged and underutilized workers are
                                                                                                        opening (hence downward pressure on wage growth).
included. Economic hardship and the stresses of unemployment
have led to the break-up of families and higher rates of addiction and                                Deflation The Primary Trend
suicide.                                                                                              • Credit is contracting.
At the end of last year, one in eight Americans was receiving part of                                 • Wage rates are stagnating.
his or her nutrition from food stamps, including one in four children.                                • Money supply growth is vanishing
Communities around the country are being destroyed by house                                           • The U.S. dollar is strong.
foreclosures, and the American heartland has been decimated by                                        • Commodities have peaked.
the failure of the American automobile industry.                                                      • U.S. home prices are rolling over … again.
And our country is facing even greater challenges ahead in terms of                                   • Lumber prices tumbling (down nearly 17% from April 2010
caring for its aging population, dealing with unsustainable fiscal                                      highs)
deficits, reducing the growing cost of healthcare, not to mention the                                 • Wal-Mart is cutting prices on 10,000 items.
incalculable costs of dealing with the inevitable but unknowable                                      • Home Depot just cut prices on flowers, fertilizers, lawn
Black Swans that are bound to occur, such as Gulf oil spills, terrorist                                 equipment and outdoor furniture.
attacks, or nuclear proliferation.                                                                    • Taco Bell is offering two dollar combo meals.
Only a sound financial system will place us in a position to deal with                                • The April U.S. retail sales report hinted at deflation in groceries,
these challenges. The Death of Capital is intended to contribute to                                     electronics, apparel and sporting goods.
the discussion of how we achieve such a system.                                                       Given all these, the U.S. bond market looks poised to outperform.
                                                                                                      Nuff said. In the U.S. equity markets, April 26 was very likely the
John Mauldin’s Note: This week's Outside the Box is an essay by Michael Lewitt. He has                peak of the bear market rally.
written a brilliant book, the Death of Capital, which should be on your short reading list. I
asked him to give us a note for Outside the Box and he graciously complied. It is a thoughtful        Source: These are edited extracts from the daily report by David Rosenberg,
and fun read with wonderful lines you will want to read again peppered all the way through
this all-too-short piece.The book is a ringing indictment of both the regulatory and money            Chief Economist & Strategist, Gluskin & Sheff + Associates Inc, a wealth
management worlds. Get it at Source: This article is reproduced (with                     management firm based in Canada. This report must be part of your daily
permission) courtesy John Mauldin and InvetsorsInisght.(
Copyright 2009 John Mauldin. All Rights Reserved                                                      read and you can subscribe to the report at
The views presented by the author (s) do not necessarily represent that of                            The views presented by the author (s) do not necessarily represent that of
Sundaram BNP Paribas Asset Management. The article / posts have been                                  Sundaram BNP Paribas Asset Management. The article / posts have been
reproduced with permission or from reports available in the public domain in order                    reproduced with permission or from reports available in the public domain in
to provide readers access to a diverse range of views on the economy and asset                        order to provide readers access to a diverse range of views on the economy
markets.                                                                                              and asset markets.

 Sundaram BNP Paribas Asset Management                                                           26                                        The Wise Investor June 2010
                                                                                                                         Blog Picks

                                                                   Nations Over Banks
                                                          (Who Serve Only Themselves)
Are you listening Mr. Obama? “The lack of rules and limits can make                Unlawful? Yep. We have at least two known examples among the
behavior in financial markets driven purely by the profit motive                   banksters (the GIC conspiracy and Jefferson County), including this
destructive and lead to an existential threat to financial stability in            fabulous quote I cited yesterday:
Europe and even the world,” Angela Merkel told lawmakers in Berlin                 “The whole investment process was rigged across the board,”
“The market alone won’t correct these mistakes.”                                   This isn't capitalism. It's thuggery and when institutionalized and
Yes indeed. But the profit motive isn't evil or bad. It's only bad and             formalized as a policy of "we have a legal shield behind which we will
troublesome when it comes with lawlessness and conflicts of                        do this as we won't be prosecuted for breaking the law in the
interest.                                                                          process of ripping everyone off" it can also be thought of as fascism.

For example, Goldman Sachs: As the housing crisis mounted in                       Remember that John Dillinger "made money" too. But he was, at
early 2007, Goldman Sachs was busy selling risky, mortgage-related                 least, honest about the fact that he stole it.
securities issued by its long-time client, Washington Mutual, a major              The banks, on the other hand, are dishonest about how they steal it:
bank based in Seattle.                                                             they rig bids, they intentionally obscure bids and offers so as to be

Although Goldman had decided months earlier that the mortgage                      able to screw people on the spread, they trade against their clients

market was headed for a fall, it continued to sell the WaMu securities             using the information they gain from them, thus giving them an unfair

to investors. While Goldman put its imprimatur on that offering,                   advantage, they browbeat governments into unsound reductions in
                                                                                   capital requirements (example: Hank Paulson's petition to remove
traders in the same Goldman unit were not so sanguine about
                                                                                   the 14:1 leverage limit less than two years before he became
WaMu’s prospects: they were betting that the value of WaMu’s stock
                                                                                   Treasury Secretary) and then when their bets blow up they extort
and other securities would decline.
                                                                                   taxpayer bailouts and changes in the law so they don't have to
Got that? Oh, and it wasn't just WaMu; the article documents trades
                                                                                   recognize their own bankruptcy.
against Bear Stearns, the State of New Jersey, AIG and Thornburg,
                                                                                   Then there's the old-fashioned "advice" that Goldman hands out to
with the worst being AIG that they profited from twice - first by
                                                                                   "clients" and which Bloomberg compiled a list of since the first of the
their demise, then again when they managed to get paid at "par" for
                                                                                   year: Seven of the investment bank’s nine “recommended top trades
bets with AIG that were in fact worth zero as the company was
                                                                                   for 2010” have been money losers for investors who adopted the
bankrupt! Yet Lloyd has said:
                                                                                   New York-based firm’s advice, according to data compiled by
“Questions have been raised that go to the heart of this institution’s             Bloomberg from a Goldman Sachs research note. Has Goldman
most fundamental value: how we treat our clients.” — Lloyd C.                      been taking the other side of those recommendations?
Blankfein, Goldman Sachs’s C.E.O., at the firm’s annual meeting in
                                                                                   You can best look at Germany's action as The Banks .vs. The
                                                                                   Sovereigns. In Germany, the government is reasserting it's primacy
Oh there's no question at all Lloyd. Goldman and the rest of the                   over those entities it licenses to do business, as it should. But in Italy,
large banks have made clear that their interest is singular: Whatever              the response was to suspend mark-to-market on government
makes money the banks will do, irrespective of how "clients" are                   securities held in "available for sale" portfolios, demonstrating that in
treated or, in many cases, whether what is being done is legal.                    that country, primacy goes to the banksters, and that they in fact run
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        27                                         The Wise Investor June 2010
                                                                                                                         Blog Picks
the government, not the other way around.                                          Alice's Restaurant Theory of Central Banking Rapidly

Then we have Spain, which had an actual bond auction failure. Yes,                 Falling Apart

it was a real honest-to-God failure, with the nation trying to sell ⇔8             Central banks are about to learn the global economy is not Alice's
                                                                                   Restaurant (
billion but only managing to place ⇔6.44 billion. That's a fail. And
                                                                                   In case you don't know the tune, here is the crucial line: "You can get
let's remember that Spain is one of the nations that has been tapped
                                                                                   anything you want at Alice's Restaurant"
to "bail out" Greece, and that they have to issue to do it. How's it
                                                                                   Anything you want, seems to be the attitude of central banks. The
working out to choose the side of the banksters, Spain?
                                                                                   problem is, it is virtually impossible for every central bank to get
In this nation, we saw a plethora of "let the banksters steal from all             what it wants at the same time, when they all want the same thing,
of you" candidates get blown to bits. There wasn't an establishment                cheaper currency relative to each other to stimulate jobs and
candidate who thought that letting banks rob the people was a good                 exports.
idea who won.                                                                      Here are a few examples to help explain what I mean.

The people of this nation have had it with this crap, yet Washington,                     China’s Trade Surplus Shrinks 87%: China’s trade surplus

thus far, doesn't appear to be listening. November is going to be a                       shrank 87 percent in April from a year earlier as imports grew
                                                                                          faster than exports because of stimulus-driven domestic
bloody month for incumbents if they don't cut it out here and now,
stopping the looting and starting with the prosecuting!
                                                                                          A 79 percent decline in the trade surplus in the first four
Oh, and the "reaction" in the capital markets to Germany's
                                                                                          months of 2010 from a year earlier may ease pressure for
announcement? How much more clear can it be?                                              gains in the yuan and support Premier Wen Jiabao’s argument
The Stock Market has been advancing not on improving economic                             that the currency isn’t undervalued. The sovereign-debt crisis
prospects but because the banks were given a license to rob the                           in Europe that prompted a loan package of almost $1 trillion
                                                                                          to help nations under attack from speculators may also
people in 2009, and they have done so. But now the people, along
                                                                                          encourage Chinese officials to delay ending the yuan’s peg to
with a few wise governments (cough-Germany-cough) are saying
                                                                                          the dollar.
"enough!" to robbery not of, but by the banks.
                                                                                          Yuan gains would be “a disaster,” Song Zimin, an executive in
No nation can survive when the rule of law becomes subordinate                            the import and export department of apparel maker Shanghai
to a handful of rich and powerful people who simply steal anything                        Dragon Corp., said in an interview at China’s biggest trade fair
they want with impunity. The economy of such a nation ultimately                          in Guangzhou on May 3. “If the yuan rises 3 percent, where’s
is bled dry by that corruption and theft, with the people over time                       our profit? Many, many factories will close.”

refusing to innovate and provide their effort when it will simply be                      India and Brazil have backed calls from the U.S. and Europe for

robbed away from them.                                                                    a stronger yuan.
                                                                                          India, Brazil, the US, Europe, and Japan all want the Yuan to rise.
There's a lesson in here for Washington and President Obama, but
                                                                                          That is not what China wants at all.
the time available for both to act is limited; should the "let 'em rob
'em all" mentality persist the market will solve this problem in a                        Europe is China's biggest export partner. Since China pegs to
                                                                                          the US dollar, China's exports to Europe just got a lot more
most-unpleasant fashion.
                                                                                          expensive following this mini-crash of the Euro.
It is time to choose Washington. Choose.
                                                                                          Adding fat to the trade war fire, the US is threatening to label
Blog: The Market Ticker; Blogger: Karl Denninger; Link to this post:                      China a currency manipulator on the misguided notion that                                                                      US exports will rise if the yuan rises.
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        28                                         The Wise Investor June 2010
                                                                                                                         Blog Picks
        Japan Wants the Yen to Sink
        The Bank of England is counting on a weak pound to boost
                                                                                             The Wrong Kind of Thinking
        exports.The sovereign debt crisis in Europe has darkened the                  One misconception that helped bring about the worst financial

        outlook for U.K. exporters at a time when domestic demand                     crisis this century (and which persists to this day) stems from a
        may come under pressure from measures to tackle the public                    failure to acknowledge the natural limits that apply in every
        finances.                                                                     aspect of our lives.

        Make no mistake.. Trichet wants a cheaper Euro to help                        It's one thing, for example, to believe that home prices can keep
        European exports, even as the UK is at the mercy of demand                    going up over the long run; it's an altogether different story to
        in Eurozone countries.                                                        assume, as many did during the bubble, that prices could
        To top it off, the US does not want a cheaper Euro or a                       outpace rents and incomes until the end of time. People now
        stronger dollar out of fear of losing Boeing contracts to Airbus,             know this is ridiculous.
        and grain exports to Brazil and Australia.                                    The same holds true when it comes to the issue of debt
In 2001-2002 Greenspan thought slashing interest rates and printing                   burdens. Back when credit was easy to come by, many believed
money was a free lunch. Instead, it spawned the biggest real                          that individuals, households, businesses, municipalities, and
estate/debt bubble the world has ever seen. For a while,                              countries could take on virtually unlimited amounts of debt as
Greenspan's efforts created jobs.Then came the global bust.                           long as they could handle the short-term carrying costs.
The debt still remains, the jobs don’t.                                               As we've learned from the latest European debt crisis, this
Now the EU has adopted the same nonsensical plan.Yet all the EU                       perspective is dangerously short-sighted.
has accomplished is to increase the amount of debt that cannot be                     The notion that certain industries, including finance, real estate,
paid back. Trichet needs a clue, and here it is: You cannot fight                     and retailing, could garner an ever-growing share of the
deflation by taking on more debt. Here's a second clue: central banks
                                                                                      economy is another example of simplistic and short-sighted
can print, but they cannot dictate where the money goes.
                                                                                      thinking. In the end, it is clear that this kind of outcome is the
The housing bubble collapsed years ago, but the global central                        result of bad policies and unsustainable malinvestment, and is
banker’s fight against deflation still remains, with one big beneficiary:             not the natural course of events.
                                                                                      A similar delusion about the mess Washington has created is
Amazingly, until this crisis started last week, there was near
                                                                                      also coursing through mainstream discussions about what
unanimous opinion that the US dollar needed to sink and for the
                                                                                      needs to be done. Many "experts" argue that a debt burden like
Yen,Yuan, Pound, and Euro to strengthen.
                                                                                      ours can be wiped out by sustained growth, even though the
"Near Unanimous" is the opportune phrase because Japan wanted
                                                                                      assumptions involved are unrealistic and largely unprecedented
the Yuan to rise but not the Yen, and China was just happy with the
                                                                                      (not to mention the fact that there are other serious financial
status quo.
                                                                                      challenges ahead).
If that is not one totally *upped daisy chain of impossible Central
                                                                                      In contrast, others say that the real "solution" is for our
Banker wants and needs, what is?
                                                                                      government to extract more ransom resources from the
Hello Ben Bernanke, Jean-Claude Trichet, and Mervyn King, this is
                                                                                      existing tax base. But again, such thinking seems seriously
Alice, and you are in Wonderland, not my restaurant. At Alice's
there is no free lunch.We only take gold.
                                                                                      Blog: Financial Armageddon; Blogger: Michael Panzer; Link to this
Blog: Mish Global Economic Analysis; Blogger: Mike Shedlock; Link
to this post:
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                        29                                         The Wise Investor June 2010

                                                                    Is the US too big to fail?
                                                             Some markets find favour with                        government in the world whose national
                                                             global investors.1 Credit becomes                    financial institutions were in as deep
                                                             readily      available,    asset   prices            disarray as those of the US, investors
                                                             percolate, and many categories of                    would have run for the hills – cutting off
                                                             spending are buoyed.                                 the offending nation from global capital
                                                        •    Act Two:         Day      of   Reckoning.            markets. But for the US, just the opposite

Carmen M. Reinhart                                           Recognition that some of that                        has happened.
                                                             enthusiasm was overdone spreads                      Rather than facing prohibitive costs of
                                                             among investors. New credit flows                    raising funds, US Treasury Bills have seen
                                                             cease, collateral is sought, asset                   yields fall in absolute terms and markedly
                                                             prices crash, and prominent private-                 in relative terms to the yields on private
                                                             sector icons crumble.                                instruments.This has been called a “flight
                                                                                                                  to safety”.3 But why do global investors
                            Kenneth S. Rogoff           •    Act    Three:      Restoration.     Here
                                                             governments pick up the pieces,                      rush into a burning building at the first
First posted 17 November 2008, this                          typically passing on the cost to                     sign of smoke?
column's analysis is more relevant than                      future generations by issuing a vast                 The answer lies in part with the
ever. It asks why investors rush to                          volume of debt. The cost can be                      exchange market practices of key
government securities when the US was                        punishing because investors pull                     emerging market economies.
at the epicentre of the financial crisis?                    away from the governments of                         Since the last global market panic, the
This column attributes the paradox to                        emerging market economies as                         Asian Financial Crisis of 1998, many
key    emerging     market      economies’                   forcefully as they do from private                   governments have stockpiled dollars in
exchange     practices, which       require                  creditors.                                           their attempts to prevent their exchange
reserves most often invested in US                                                                                rates from appreciating.
                                                        American exceptionalism: But there has
government        securities.    America’s              been one prominent exception to this                      At the same time, the long upsurge in
exorbitant privilege comes with a cost                  classic tale. With fitting irony, the US,                 commodity prices has swollen the
and a responsibility that US policy                     which is the epicentre of the crisis, has                 coffers of many resource-rich nations.
makers should bear in mind as they                      avoided Act Three. The US enjoyed a                       International reserves of emerging
address financial reform.                               capital inflow bonanza that funded                        market economies are expected to have
A familiar script has played as the global              yawning current account deficits, and                     increased $3.25 trillion in the last three
financial crisis has spread, picking up                 asset prices spiralled upward only to                     years.The bulk is in dollars.
speed and intensity.The drama has three                 crash. While the crash has constricted                    The dollar portion of these reserves is
acts that have been written out in the                  credit and is redrawing the financial                     most often invested in US government
historical record for as long as there have             landscape, the US has not been punished                   securities, which offers excellent market
been open financial markets.                            by investors in typical Act-Three fashion.                liquidity, and US government debt is also
•     Act One: Unbounded Enthusiasm.                    If this had happened to any other                         considered as safe as anything (following
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

    Sundaram BNP Paribas Asset Management                                      30                                        The Wise Investor June 2010
a precedent laid down by the first                         As the tone of those words suggests,                        An exorbitant privilege that comes with
Secretary of the Treasury, Alexander                       another         lesson    from     the    earlier           a cost and a responsibility: These
Hamilton).                                                 experience is that foreign resentment                       advantages come with a cost and a
All this explains the dollar’s popularity                  with a US-dominated arrangement                             responsibility. Open access to markets
with foreign investors who might                           grows over time. That America could be                      probably allowed US officials to drift in
otherwise be expected to shun the US.                      a source of financial instability and a                     their response to the financial crisis.They
Foreign official entities now own almost                   haven of sovereign financial security                       initially mistook a solvency problem for a
                                                           seems to some, to quote Valerie Giscard
one-quarter of outstanding government                                                                                  liquidity one.When action was ultimately
                                                           d'Estaing, to be an “exorbitant privilege.”
securities. These holdings of securities                                                                               forthcoming, Treasury officials failed to
constitute about 10% of non-US nominal                     In this episode,Treasury yields have fallen                 articulate a clear sense of principles and
GDP.                                                       and the foreign exchange value of the
                                                                                                                       priorities for intervention.
                                                           dollar      has      appreciated         recently.
Our currency, your problem: Herein lies                                                                                This ad hoc improvisation has probably
                                                           Moreover, many European financial firms
the special status of US government                                                                                    stretched out and intensified the crisis. In
                                                           have had funding difficulties associated
securities. For a few of the world’s key                                                                               a crisis in an emerging market economy,
                                                           with a lack of access to dollar liquidity.
decision makers, it is not in their                                                                                    the sudden stop of credit to the
                                                           This has made it necessary for European
economic interest to stop, or even slow,                                                                               government forces painful adjustment to
                                                           officials, caps in hands, to seek swap
the purchase of Treasury Bills. As Keynes                                                                              be done quickly. These adjustments may
                                                           arrangements with the Federal Reserve
once said: “If you owe your bank a                                                                                     have been painful, but a quick response
                                                           to acquire dollars to re-lend to their
hundred pounds, you have a problem.
                                                           national champions.                                         tends to reduce the overall bail-out cost.
But if you owe a million, the bank has a
                                                           Recent enthusiasm in Europe for                             As for responsibility, officials must
problem.” Potential capital losses on
                                                           fundamental reform of the international                     recognise that investors have granted the
existing stocks keep foreign investors
                                                           monetary system finds its roots, in part,                   US its reserve-currency status for
locked into US government securities.
                                                           in this resentment.They do not want our                     reasons. Size matters, but other reasons
The last time foreign official purchases
                                                           dollar to be their problem, and they want                   include a respect for the rule of law and
bulked so large in the US government’s                     to erode some of that privilege. Put it                     for contract enforcement and the
financing was from 1968 to 1973, when                      those terms, however, it seems clear that                   predictability and transparency of the
the Bretton Woods system of managed                        this     will    mostly       be   a     one-way            policy process.
exchange rates broke down. At that time,                   conversation.
keeping the system going required                                                                                      When US officials move to the next
                                                           US officials must recognise that their
increasing     support      from      abroad,                                                                          stage of the crisis – the search for
                                                           nation’s funding advantage rests on the
primarily from Europe.                                                                                                 legislative protections to prevent a
                                                           unrivalled, for now, position of US
                                                                                                                       recurrence – it will be important to
This time around, the source of that                       government securities in global financial
                                                                                                                       preserve these attractive aspects of US
support has shifted to Asian-Pacific                       markets. Thus, they will listen and agree
economies and Middle East exporters. In                    to work-streams for groups to report
both cases, the message from the US                        back in the future. But whether it is this                  Author Background: Kenneth Rogoff &
seems best summarised in the words of                      Administration or the next, advantages                      Carmen Reinhart are co-authors of This
then-Treasury-Secretary John Connolly,                     to the US, unfair as that may seem as                       Time Is Different – Eight centuries of
who famously advised, “the dollar is our                   viewed from abroad, will seem worth                         Financial Folly. For more, please check the
currency, but your problem.”                               preserving.                                                 hyperlink to the article.
Hyperlink to this article: Source: ( is a policy portal set up by the Centre for Economic Policy Research ( in
conjunction with a consortium of national sites)
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                              31                                         The Wise Investor June 2010
                                                                                                                     Taking note of

                                                          The biggest oil spill in history
• Explosion of the Deepwater Horizon, a rig owned by BP (British
  Petroleum) in the Gulf of Mexico has now caused the worst oil
  spill in history placing the Exxon Valdex of 1989 in second slot.
• BP oil spill hits the coast, death and devastation – and it's just the
• Oil has washed up on a vast stretch of beaches and poisoned
  wildlife in the ecologically sensitive area.
• It could take months or years for the true impact of the spill on
  surrounding ecosystems to emerge,
• BP clashes with scientists over quantum of spill and deep sea oil                    We have not been able to stop the flow.This scares everybody, the
  pollution & denies existence of underwater oil clouds.                               fact that we can't make this well stop flowing, the fact that we
• Scientists say the have detected huge underwater plumes of oil,                      haven't succeeded so far. Many of the things we're trying have been
  including one 120 metres (400feet) deep about 50 miles from                          done on the surface before, but have never been tried at 5,000 feet.
  the destroyed rig.                                                                                                  Doug Suttles, Chief Operating Office of BP
• Team Obama incensed that the company failed to inform it for                         It may take 9000 days, or 24 years, before the first oil leak to
  a day and a half after suspending the failed "top kill" operation to                 threaten a US presidency will stop a-gushin’-and-a-flowin’.
  plug the spill using rubber tyres and mud.                                              Matt Simmons, writer of several highly insightful books on black gold,
• Heart-broken and enraged Barack Obama now says the buck                                                                                        recently warns
  stops with him.                                                                      It's all lose, lose, lose here.The failure of the top kill really magnified
• BP hit by avalanche of compensation claims over US oil spill as                      this disaster exponentially. I think there's a realistic probability that
  business owners claim company ignored evidence of broken seal                        this enormous amount of oil will keep coming out for a couple
  on Deepwater Horizon well.                                                           months.This disaster just got enormously worse.There is a lot of oil
• BP went ahead with the casing (which had been described                              going into the sea there. It does degrade over time, but before it
  internally as worst case scenario in June 2009), but only after                      degrades it is toxic, and it wreaks havoc.
  getting special permission because it violated safety policies and                          Rick Steiner, a retired University of Alaska marine scientist who's
  design standards.                                                                          familiar with both the current Gulf oil spill and the Exxon Valdez
• Lloyds expects to meet claims of $300m and $600m arising                                                                             disaster two decades ago.
  from the loss of the offshore platform.                                              Whether or not to “disperse” oil has been a key strategic question
                                                                                       since combating spills began in earnest in the 1960’s. The answer
• The five affected US Gulf states alone have, between them, a
                                                                                       depends on whether the priority for protection is birds and beaches,
  $2.2 trillion economy.
                                                                                       or other forms of marine life such as fish, shrimps, and mollusks. If it’s
• There’s a serious threat that the entire Mississippi watershed and                   birds and beaches, disperse; if it’s fisheries, don’t.The decision has an
  river will have to be closed for -much of its- traffic.                              obvious public-relations dimension. Oil-contaminated birds and
• Fury and despair as BP admits oil could leak for months and                          beaches make appalling pictures, whereas dead fish and shrimp
  Obama administration warns that the most environmentally                             larvae go unnoticed by cameras.
  disastrous spill in US history may continue until August                              Arne Jernelov, a UN expert on environmental catastrophes, is Professor
• The only thing that will help BP as a going concern retain some                      of Environmental Biochemistry, an honorary scholar, and former Director
  of its value is that Exxon and Shell are both eager for a take-over.                      of the International Institute of Applied Systems Analysis in Vienna.
Source for facts and opinions cited in this compilation:The Guardian, McClatchy, The Automatic Earth, Project Syndicate and The New York Time
The views presented by the author (s) do not necessarily represent that of Sundaram BNP Paribas Asset Management. The article / posts have been reproduced
with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

 Sundaram BNP Paribas Asset Management                                           32                                           The Wise Investor June 2010
Jeremy Grantham, Co-Founder and Chief Investment Strategist of GMO, articulates his views on the economy, financial world and markets
once in a quarter. His quarterly report to investors is a recommended must-read and can be accessed at In his latest report
published in the last week of April, Grantham, is as usual, forthright and relentless. We present a selection from a 14-page report, which also has
great charts on market trends.

         Bernanke is, in fact, begging us to speculate, and is being mean only to conservative investors like pensioners who cannot make a
         penny on their cash. Collectively, we forego hundreds of billions of potential interest, but at least we can feel noble because we are
         helping to restore the financial health of the banks and bankers, who under these conditions could not fail to make a fortune even if
         brain dead

         Bernanke begs us to speculate, and we are obedient. Despite being hammered down twice in 10 years and getting punished for
         speculating, we again pick ourselves up off of the canvas and get back into the good fight. Such persistence is unprecedented – 20
         years for each really painful experience has been the normal recovery time – but Uncles Ben and Alan have treated us so well in
         these two disasters that, with hindsight, they don’t feel so bad after all.

         The key shift seems to be the confidence we now have in Bernanke’s soldiering on with low rates and moral hazard to the bitter end,
         if necessary, cliff or no cliff. The concept of moral hazard has changed. It used to be a vague expression of intent: “If anything goes
         wrong, I will help you if I can.” It seems to have been transmuted into a cast-iron commitment.The Fed seems to be pledging that it
         will bail us out after every flood. All that is lacking is a rainbow!

         Speculators are not stupid.They see that after each crash, a long, artificial period of low rates and easy financial borrowing has been
         delivered.They see that Bernanke is an unreconstructed Greenspanite in that he refuses to address bubbles, but will leap to help ease
         the pain should a bubble break. With asymmetry like that, why not speculate? And so another bubble appears and then another.

         Greenspan was lucky enough to inherit Volcker’s good work, and that gave him a base from which he could launch or blow a huge
         equity bubble; he also had the advantage that the country’s balance sheet was in excellent shape. Even Bernanke inherited a reasonably
         solid position from which to fund a second bailout. But a third time? It is hard to work out where the resources would come from
         to resuscitate the economy.

         We all know that there is plenty that could go wrong. Some combinations would be enough to break the market but still leave the
         economy limping along.This would be far better than having the market rise through the fall of next year by, say, another 30% to 40%,
         along with risk trades similarly flourishing and then all breaking (possibility: nerve-wrackingly high).The developed world’s financial and
         economic structure-none too impressive- would buckle at the knees.

         As a provable, statistical fact, industries are more dependably mean-reverting than stocks, for individual stocks can on rare occasion,
         permanently change their stripes à la Apple. Sectors, like small caps, are more provably mean-reverting than industries.The aggregate
         stock market of a country is more provably mean-reverting when mis-priced than sectors. And great asset classes are provably more
         mean-reverting than a single country.

         Asset classes are the most predictable of all: when a bubble occurs in a major asset class, it is a near certainty that it will go away. (A
         bubble for us is defined as a 2-sigma event, statistical talk for an event that would occur randomly every 40 years under normal
         conditions, a definition that is arbitrary but at least to us feels reasonable. And we define a “near certainty” as over 90% probable.)

         Serious economic setbacks can give us serious value traps.We had one starting in late 2006, where cheap companies became cheaper
         and cheaper and quite a few ceased to exist. And several more that were blatantly bankrupt were bailed out by the government for
         reasons that still seem quite arbitrary and desperate rather than capitalistic. With a less corporate-friendly government, the loss
         involved in this value trap would have been far worse.

         Even though the “quality” factor is now cheap, it has still outperformed by a decent (maybe you’d say “modest”) 40% over almost 50
         years. But this 40% is an amazing free lunch. Warren Buffett doesn’t really talk much about the fact that he is playing in a superior
         universe. Why should he? It’s like having the Triple A bond outperforming the B+ bond in the long term by 1% a year when, in a
         reasonable world, it “should” yield, say, 1% less.
 Sundaram BNP Paribas Asset Management                                   33                                      The Wise Investor June 2010
                                     The journey of Rs 100 invested every month in the Sensex
 Years          Jan          Feb          Mar          Apr            May       Jun        Jul      Aug       Sep        Oct       Nov            Dec
2010           107.3        106.9        100.2        100.0

2009           186.3        197.5        180.9        154.0           120.1     121.1     112.1     112.1     102.5      110.5     103.7        100.5

2008            99.5         99.9        112.2        101.6           107.0     130.4     122.3     120.6     136.5      179.4     193.1        182.0

2007           124.6        135.7        134.3        126.6           120.7     119.9     112.9     114.6     101.5       88.5      90.7          86.6

2006           177.0        169.3        155.7        145.8           168.9     165.5     163.4     150.1     141.0      135.5     128.2        127.4

2005           267.8        261.5        270.4        285.3           261.5     244.1     230.0     225.0     203.4      222.5     199.8        186.8

2004           308.3        309.8        314.1        310.5           368.9     366.2     339.6     338.2     314.5      309.6     281.6        265.9

2003           540.2        534.7        575.9        593.2           552.0     486.8     463.0     413.7     394.3      357.8     348.1        300.7

2002           530.3        492.9        506.1        526.0           561.7     541.2     587.7     551.9     587.0      595.3     543.8        519.9

2001           405.8        413.4        487.1        498.9           483.5     507.9     527.4     541.1     624.5      587.4     534.1        538.2

2000           337.3        322.3        351.1        377.0           396.0     369.8     410.3     392.2     429.3      473.2     439.2        442.0

1999           529.6        543.0        469.5        528.0           443.0     424.0     386.6     358.5     368.5      395.1     379.9        350.8

1998           544.6        484.7        451.1        438.2           476.3     540.2     546.8     598.5     566.0      624.3     624.7        574.7

1997           519.1        480.8        522.4        457.1           467.6     412.6     407.8     453.0     450.0      461.7     493.2        479.9

1996           598.9        517.7        521.6        458.8           471.4     460.6     496.4     499.6     542.0      555.0     607.5        569.1

1995           485.2        513.2        538.5        560.4           523.9     540.7     518.5     524.6     502.7      512.9     586.4        564.5

1994           438.7        409.7        464.6        468.7           459.3     429.7     416.4     382.7     410.2      411.2     425.8        446.8

1993           655.0        624.2        769.9        827.3           800.8     788.3     754.2     666.7     648.0      656.7     543.1        522.2

1992           762.6        620.2        409.8        451.6           584.1     570.0     650.6     579.2     532.6      620.7     697.3        671.4

1991         1787.5       1438.8        1503.4       1421.6          1343.1    1382.7    1075.4     977.7     931.4      929.1     922.5        919.9

1990         2569.6       2596.6        2248.1       2208.3          2192.6    2064.5    1699.5    1407.5    1236.5     1355.7    1467.8      1675.0

1989         2587.0       2645.0        2460.6       2250.1          2540.5    2216.5    2451.1    2394.5    2347.2     2351.9    2545.8      2255.0

1988         3973.0       4282.4        4407.6       3724.0          3028.4    3009.2    2909.0    2957.2    2649.5     2684.1    2482.0      2635.4

1987         3170.6       3190.0        3440.5       3663.7          3798.4    4046.0    3589.9    3636.9    3906.1     3899.2    4081.7      3971.0

1986         2936.9       2673.0        3058.4       2933.6          2806.5    2899.5    2944.4    3201.8    2984.1     3049.8    3513.1      3348.0

1985         6104.8       5782.9        4962.0       4537.7          4396.1    3673.7    3410.5    3750.7    4036.8     3687.7    3537.6      3329.5

1984         7067.0       7010.3        7157.2       7463.2          7293.3    7039.3    6920.2    7047.7    6610.7     6556.4    6767.9      6458.5

1983         7921.5       8024.3        8301.6       8198.9          7395.6    7394.7    7457.2    7360.0    7433.5     7411.2    7309.7      6942.4

1982         7983.8       7698.8        8065.2       7772.8          7670.2    8250.9    8124.5    8205.4    7693.8     7904.3    7702.2      7445.5

1981        11974.8      10963.2      10123.8        9425.5          9916.8    8296.5    8440.9    9074.7    8548.5     8425.5    8183.6      7710.7

1980        14213.0      13695.3      13656.9      13798.6       13938.8      14374.7   13653.7   12475.1   13063.5    13411.8   12529.4 11844.0

1979                                               13823.6       14148.8      14001.0   15155.1   15122.5   14676.3    14177.4   15190.5 14785.0

Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management                                                                         Analysis: S Vidhya
 Sundaram BNP Paribas Asset Management                                           34                                   The Wise Investor June 2010

                                                                                              Growth Across The Cap Curve
                                                 Top 100 Stocks by Market Cap on the NSE - Sector Composition
                                  Dec-00        Dec-01       Dec-02     Dec-03     Dec-04     Dec-05     Dec-06     Dec-07     Dec-08     Dec-09     March-10 Change
   GICS Classification
                                    %             %            %          %          %          %          %          %          %          %           %     % Points
Consumer Discretionary                4.6           3.5           3.5        4.4        4.1        4.9        5.0        2.9        3.1        5.0         4.8        0.2
Consumer Staples                     18.0          19.8          13.6        8.5        5.7        6.1        4.9        3.0        6.0        4.1         4.5      -13.5
Energy                               15.2          18.5          25.9       29.2       22.8       22.0       17.0       19.2       19.7       18.6        17.0        1.8
Financials                            7.5           9.0          12.4       14.3       14.5       15.0       14.2       15.3       15.8       14.9        14.8        7.2
Financials - Real Estate              0.4           —             —          —          —          —          2.0        6.2        2.3        2.1         1.7        1.4
Health Care                           7.0           8.3           6.8        6.6        6.4        4.2        3.4        2.0        3.9        2.8         3.1       -3.9
Industrials                           4.3           4.5           5.5        7.2        6.6       10.5       11.0       12.8        9.2       10.0        13.5        9.2
Information Technology               30.1          21.8          18.9       11.4       16.1       16.1       16.3        7.7        7.0       10.7         9.9      -20.1
Materials                             7.2           7.7           7.5       10.0        9.8        8.1       10.6       11.4       10.2       15.8        15.7        8.6
Telecommunication Services            3.3           3.8           2.8        3.6        4.7        4.9        8.9        8.7        9.4        4.2         3.8        0.4
Utilities                             2.3           3.3           3.1        4.9        9.3        8.1        6.7       10.8       13.3       11.8        11.1        8.8
Market Cap (Rs. Crore)            471209        397407        490012     986014    1303883    1828863    2650440    4875498    2333891    4475171     4656951        9.88
% to NSE Market Cap                  89.4          90.4          89.1       86.7       84.2       80.1       79.0       75.6       80.6       78.0        77.0     -12.40
NSE Market Cap (Rs. Crore)        527081        439609        549912    1136790    1548742    2281975    3356910    6451640    2895264    5740082     6048121       11.47

                                    The Next 100 (101 - 200) Stocks by Market Cap on the NSE- Sector Composition
                                  Dec-00        Dec-01       Dec-02     Dec-03     Dec-04     Dec-05     Dec-06     Dec-07     Dec-08     Dec-09     March-10 Change
   GICS Classification
                                    %             %            %          %          %          %          %          %          %          %           %     % Points
Consumer Discretionary               21.1          23.3          16.9       22.0       18.2       17.5       13.5       11.5       11.6       11.4        11.2        -9.9
Consumer Staples                      5.1           6.1           5.7        4.2       10.0       15.1       11.4        5.2       11.3       11.0         9.7         4.6
Energy                                3.0           3.4           2.8        2.2        0.8        2.4        5.3        3.3        3.9        4.1         5.5         2.5
Financials                            9.5          11.8          12.3        9.6       12.8       11.0        9.0       18.5       20.6       16.0        16.0         6.6
Financials - Real Estate              —             1.2           —          —          —          —          3.2        7.8        4.2        2.3         2.5         2.5
Health Care                           6.5           9.6          11.1       11.9       14.1       13.3       11.2        5.3        4.6       11.2         8.8         2.3
Industrials                          13.5          11.8          10.5       13.2       12.7       15.9       24.0       21.8       16.2       19.6        17.3         3.8
Information Technology               12.6          10.6          11.0        7.6        5.4        2.8        4.7        3.2        6.7        2.1         5.6        -7.0
Materials                            28.0          21.7          27.3       26.5       24.1       18.8       14.4       17.2       12.6       13.6        14.5       -13.5
Telecommunication Services            —             —             —          —          —          —          1.0        0.9        3.3        2.4         2.7         2.7
Utilities                             0.7           0.6           2.3        2.7        1.9        3.3        2.4        5.4        5.0        6.4         6.3         5.6
Market Cap (Rs. Crore)             31902         23563         35262      88556     131575     219309     340934     694419     268354     579526      636904         20.0
% to NSE Market Cap                   6.1           5.4           6.4        7.8        8.5        9.6       10.2       10.8        9.3       10.1        10.5         4.5
NSE Market Cap (Rs. Crore)        527081        439609        549912    1136790    1548742    2281975    3356910    6451640    2895264    5740082     6048121         11.5

                                    The Third 100 (201 - 300) Stocks by Market Cap on the NSE - Sector Composition
                                  Dec-00        Dec-01       Dec-02     Dec-03     Dec-04     Dec-05     Dec-06     Dec-07     Dec-08     Dec-09     March-10 Change
   GICS Classification
                                    %             %            %          %          %          %          %          %          %          %           %     % Points
Consumer Discretionary               29.1          21.5          23.8       25.9       22.3       20.7       18.8       13.7        9.7        8.1        14.2       -14.9
Consumer Staples                      3.6           4.5           2.8        5.1        4.9        4.5        5.1       13.5        6.7        8.1         6.8         3.2
Energy                                1.2           2.2           4.0        1.9        2.2        0.9        —          2.0        2.9        2.4         2.2         1.0
Financials                            9.4          10.7           8.1        9.2        6.2       13.0       15.8       11.7       14.5       17.6        15.8         6.4
Financials - Real Estate              2.9           —             1.0        0.8        0.7        2.2        —          5.1        3.5        5.6         6.8         3.9
Health Care                           6.8           6.2           5.5        5.0        5.7        8.6        7.7        7.5       11.5        4.7         4.7        -2.1
Industrials                          14.7          19.6          19.6       15.6       19.6       18.9       17.9       17.2       16.7       22.7        19.8         5.1
Information Technology                8.1           8.0           9.6       12.5       12.4       11.7        9.7        7.9        5.9        8.9         8.9         0.8
Materials                            22.9          26.3          24.6       24.0       21.9       17.7       20.4       19.2       22.4       16.4        14.4        -8.6
Telecommunication Services            —             —             —          —          —          —          1.8        2.2        1.2        2.2         2.1         2.1
Utilities                             1.3           0.8           1.0        —          4.0        1.8        3.0        —          5.0        3.3         4.3         3.0
Market Cap (Rs. Crore)             12027          9356         14042      34934      59316     109921     156962     341971     119713     279142      305420         25.4
% to NSE Market Cap                   2.3           2.1           2.6        3.1        3.8        4.8        4.7        5.3        4.1        4.9         5.0         2.8
NSE Market Cap (Rs. Crore)        527081        439609        549912    1136790    1548742    2281975    3356910    6451640    2895264    5740082     6048121         11.5

Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management                                                                                   Analysis: Satish Mahadevan
 Sundaram BNP Paribas Asset Management                                                   35                                        The Wise Investor June 2010
                                                                                               Performance Tracker Global
                                                                          Year-To-Date             One Month                Three Months            Six Months                One Year          Three Years           Five Years
                                                                        Return        Rank Return Rank Return                           Rank Return Rank Return Rank Return                             Rank Return            Rank

S&P 500                                                                      -2.3          8         -8.2         14          -1.4         14         -0.6         14         18.5         12   -28.8      21          -8.6        23
Dow Jones                                                                    -2.8          9         -7.9         12          -1.8         15         -2.0         15         19.2         11   -25.6      20          -3.2        21
Nasdaq Composite                                                             -0.5          6         -8.3         15           0.8           8         5.2           4        27.2          5   -13.3      13           9.1        18
Nikkei 225                                                                   -7.4         19        -11.7         22          -3.5         19          4.5           5         2.6         25   -45.4      25         -13.4        25
Dax                                                                           0.1          5         -2.8          2           6.5           4         6.0           3        20.7          9   -24.3      18          33.7        15
FTSE 100                                                                     -4.1         12         -6.6          5          -3.1         18          0.0         12         17.4         13   -21.6      17           4.5        19
S&P GSCI Index Spot                                                          -6.9         17        -11.2         21          -5.7         24         -4.8         19         10.2         22     3.7          7       37.6        14
MSCI World                                                                   -7.6         21         -9.9         19          -4.7         22         -6.0         22         11.3         20   -33.2      22          -5.3        22
MSCI Europe                                                                  -3.7         11         -5.7          3          -0.4         10          2.2           8        16.9         15   -38.4      24         -10.2        24
MSCI Asia ex-Japan                                                           -6.2         15         -8.8         16          -0.5         11         -2.2         16         17.0         14    -9.2      11          53.3        10
Crude                                                                        -4.5         13        -14.2         25          -3.8         20         -5.4         20         13.5         18     7.7          4       48.0        11
Gold                                                                        10.9           1          3.1          1           8.8           3         3.1           6        24.2          6    84.1          1     191.5         1

Emerging Markets (MSCI Indices)

BRIC                                                                         -8.7         23         -9.0         17          -3.0         17         -7.3         23         15.5         17    -1.0          9     122.8          6
Brazil                                                                     -12.5          25        -10.9         20          -5.9         25        -11.5         25         19.3         10    15.6          3     187.2          2
Russia                                                                       -7.1         18        -12.3         23          -4.3         21         -4.1         18         11.1         21   -33.2      23          45.0        12
India                                                                        -2.0          7         -8.2         13           2.1           7         1.3         11         22.3          7     1.8          8     136.2         5
China                                                                        -8.5         22         -6.5          4          -2.0         16         -8.1         24         11.4         19     5.6          6     137.8          4
Korea                                                                        -5.9         14        -13.4         24           0.0           9         1.9           9        28.1          4   -21.3      16          43.2        13
Taiwan                                                                     -11.1          24         -9.8         18          -1.3         12         -3.5         17          6.3         24   -16.1      14           2.0        20
Singapore                                                                    -6.5         16         -7.5         10          -1.3         13         -0.4         13         16.4         16   -24.6      19          27.8        16
Honk Kong                                                                    -7.5         20         -6.8          7          -4.7         23         -5.6         21          6.5         23   -10.6      12          25.1        17
Indonesia                                                                     7.7          2         -7.7         11           9.5           2        13.6           2        62.5          1    37.4          2     170.3          3
Mexico                                                                        0.5          4         -6.6          6           2.8           6         2.4           7        34.0          3   -21.1      15          85.5         8
South Africa                                                                 -3.0         10         -7.4          9           2.9           5         1.7         10         21.3          8    -7.4      10          72.2         9

Turkey                                                                        1.5          3         -7.3          8          10.2           1        19.0           1        49.5          2     7.4          5       89.1         7

Top Performer                                                                   Gold                    Gold                   Turkey                   Turkey                Indonesia             Gold                   Gold
Worstt Performer                                                               Brazil                  Crude                   Brazil                   Brazil               Nikkei 225           Nikkei 225            Nikkei 225

Source: Bloomberg; P/E: Price-to-Earnings ratio; P/B: Price-to-Book ratio; 12-M: 12 Months; Returns is in percentage and in U.S. Dollar terms for each period and not on an annualised basis.                      Analysis: A Preetha
 Sundaram BNP Paribas Asset Management                                                                                 36                                                             The Wise Investor June 2010
                                                                                                          Performance Tracker India
                                                                             Year-To-Date             One Month                 Three Months             Six Months          One Year          Three Years           Five Years
                                                                           Return        Rank Return Rank Return                             Rank Return Rank Return Rank Return                            Rank Return          Rank

 Cap-Curve Indices
 BSE Sensitive Index (Sensex)                                                  -3.0          18         -3.5         13           3.1          16           0.1        19   15.9          17    16.5         18 152.3                8

 S & P CNX Nifty                                                               -2.2          15         -3.6         15           3.3          14           1.1        18   14.3          19    18.4         17 143.6             12

 Nifty Junior                                                                   4.2           6         -2.3           6          7.1            7          8.9         5   44.8           6    34.9          8 147.9             10

 Nifty 100                                                                     -1.2          12         -3.4         11           3.9          12           2.3        13   18.5          15    20.9         14

 CNX Mid-Cap                                                                    4.3           5         -3.8         17           8.2            5          8.5         7   44.9           5    37.4          6 153.7                7

 BSE Mid-Cap                                                                    1.7           9         -4.9         20           6.8            8          6.5         8   35.2          10     9.8         20 109.4             18

 BSE Small-Cap                                                                  2.3           8         -7.2         21           5.9          10         13.6          3   42.8           7    15.3         19      98.7         20

 BSE 100                                                                       -2.0          14         -3.6         14           3.2          15           1.4        17   18.6          14    21.1         13 151.0                9

 BSE 200                                                                       -1.3          13         -3.5         12           3.9          13           2.2        14   21.4          13    21.9         12 142.0             14

 BSE 500                                                                       -0.9          11         -3.7         16           4.0          11           3.0        11   22.9          12    20.1         15 139.7             15

 S & P CNX 500                                                                 -2.4          16         -3.2           9          2.4          18           2.0        15   18.1          16    18.6         16 130.4             16

 Sector Indices

 BSE Auto                                                                       3.6           7         -1.3           5          7.4            6          9.7         4   67.0           2    53.6          2 173.0                5

 BSE Banks                                                                      6.2           4         -4.5         19           8.4            4          6.1         9   29.0          11    40.1          5 180.2                4

 BSE Capital Goods                                                             -3.3          19         -2.6           7          1.4          19           2.5        12   14.6          18    22.4         11 279.8                1

 BSE Consumer Durables                                                        18.9            1         -3.1           8         12.5            1        29.0         1    63.2           3     7.3         21 142.3             13

 BSE FMCG                                                                       6.8           3           3.6          1         12.0            2          3.8        10   42.2           8    56.3          1 147.7             11

 BSE Healthcare                                                                 9.4           2           2.7          2         11.8            3        15.2          2   59.8           4    42.9          4 102.4             19

 BSE IT                                                                        -0.2          10         -3.4         10           0.0          20           8.8         6   72.6           1     6.7         22      88.4         21

 BSE Metal                                                                   -12.9           22       -14.3          23           -7.7         23          -7.0        22   39.2           9    45.6          3 171.5                6

 BSE Oil & Gas                                                                 -2.8          17           2.6          3          6.1            9         -1.0        21    -2.3         22    30.6          9 228.7                2

 BSE Public Sector                                                             -4.2          20           0.2          4          -0.9         21          -0.1        20     8.4         20    35.5          7 111.2             17

 BSE Power                                                                     -4.9          21         -4.4         18           2.4          17           1.8        16     5.2         21    29.6         10 188.6                3

 BSE Realty                                                                  -19.7           23       -11.3          22           -4.3         22        -15.4         23   -18.9         23     —           —         —          —

 Top Performer                                                              Consumer Durables              FMCG              Consumer Durables Consumer Durables                    IT            FMCG               Capital Goods
 Worst Performer                                                                    Realty                  Metal                    Metal                    Realty           Realty                  IT                   IT

Source: Bloomberg; P/E: Price-to-Earnings ratio; P/B: Price-to-Book ratio; 12-M: 12 Months; Returns is in percentage for each period and not on an annualised basis.                                              Analysis: A Preetha
  Sundaram BNP Paribas Asset Management                                                                                    37                                                            The Wise Investor June 2010
                                                                 Best & Worst Performers India
  Month/Year/Category     S&P       S&P            2009                 One                    Three                   Six                 One              Three                Five
                        CNX Nifty CNX 500           YTD                Month                   Months                 Months               Year             Years               Years
May-10     Best          5086     4227       Consumer Durables    FMCG               Consumer Durables          Consumer Durables    IT                FMCG                Capital Goods
           Worst                             Realty               Metal              Metal                      Realty               Realty            IT                  IT
Apr-10     Best          5278     4368       Consumer Durables    Consumer Durables Consumer Durables           Consumer Durables    Consumer Durables Metal               Capital Goods
           Worst                             Realty               Oil & Gas          Public Sector              Realty               Oil & Gas         IT                  Healthcare
Mar-10     Best          5249     4313       Consumer Durables    Metal              Consumer Durables          Metal                Metal             Metal               Capital Goods
           Worst                             Realty               Public Sector      Realty                     Realty               FMCG              IT                  IT
Feb-10     Best          4922.0   4128.0    Consumer Durables    Consumer Durables Consumer Durables           Metal                Metal             Metal               Capital Goods
           Worst                             Realty              Realty             Realty                     Realty               MCG               IT                  Healthcare
Jan-10     Best          4882     4156      Consumer Durables    Consumer Durables Small-Cap                   Small-Cap            Metals            Metals              Capital Goods
           Worst                            Realty               Realty             Realty                     Realty               FMCG              IT                  Healthcare
Dec-09     Best          5201     4329      Metals               Small-Cap          Metals                     Auto                 Metals            Metals              Capital Goods
           Worst                            FMCG                 FMCG               Realty                     Capital Goods        FMCG              IT                  Healthcare
Nov/09     Best          5033     4145      Metals               Metals             Metals                     IT                   Metals            Metals              Capital Goods
           Worst                            FMCG                 Reality            Reality                    Reality              FMCG              IT                  Healthcare
Oct/09     Best          4712     3853      Metals               FMCG               Healthcare                 Metals               Metals            Oil & Gas           Capital Goods
           Worst                            FMCG                 Realty             Realty                     Oil & Gas            Oil & Gas         IT                  Healthcare
Sep/09     Best          5084     4119      Auto                 Banks              Small Cap                  Realty               Auto              Oil & Gas           Capital Goods
           Worst                            FMCG                 FMCG               FMCG                       FMCG                 Oil & Gas         IT                  Healthcare
Aug/09     Best          4662     3840      Auto                 Realty             IT                         Realty               Auto              Oil & Gas           Banks
           Worst                            Healthcare           FMCG               Oil & Gas                  FMCG                 Capital Goods     IT                  Healthcare
Jul/09     Best          4636     3764      Metals               Auto               Realty                     Metals               Auto              Oil & Gas           Capital Goods
           Worst                            Healthcare           Capital Goods      Oil & Gas                  FMCG                 Realty            IT                  Healthcare
Jun/09     Best          4291     3470      Metals               IT                 Realty                     Metals               Public Sector     Banks               Capital Goods
           Worst                            FMCG                 Realty             FMCG                       FMCG                 Realty            IT                  Healthcare
May/09     Best          4449     3580      Auto                 Realty             Auto                       Power                FMCG              Oil & Gas           Capital Goods
           Worst                            Consumer Durables    FMCG               Consumer Durables          Consumer Durables    Realty            Consumer Durables   Healthcare
Apr/09     Best          3474     2663      Auto                 Realty             Auto                       Power                FMCG              Oil & Gas           Capital Goods
           Worst                            Consumer Durables    FMCG               Consumer Durables          Consumer Durables    Realty            Consumer Durables   Healthcare
Mar/09     Best          3021     2295      Auto                 Metals             Auto                       FMCG                 FMCG              Oil & Gas           Capital Goods
           Worst                            Realty               FMCG               Realty                     Realty               Realty            Small-Cap           Auto
Feb/09     Best          2764     2113      Auto                 Auto               Auto                       FMCG                 FMCG              Oil & Gas           Capital Goods
           Worst                            Realty               Realty             IT                         Realty               Realty            Consumer Durables   Metals
Jan/09     Best          2875     2209      Oil & Gas            Oil & Gas          Power                      FMCG                 FMCG              Oil & Gas           Capital Goods
           Worst                            Realty               Realty             IT                         Realty               Realty            Small-Cap           Auto
Dec/08     Best          2959     2296      FMCG                 Realty             FMCG                       FMCG                 FMCG              Oil & Gas           Capital Goods
           Worst                            Realty               IT                 Metals                     Metals               Realty            Auto                Metals
Nov/08     Best          2755     2093      FMCG                 FMCG               FMCG                       FMCG                 FMCG              Oil & Gas           Capital Goods
           Worst                            Realty               Realty             Realty                     Realty               Realty            Auto                Metals
Oct/08     Best          2886     2226      FMCG                 IT                 FMCG                       FMCG                 FMCG              Oil & Gas           Capital Goods
           Worst                            Realty               Realty             Realty                     Realty               Realty            Small-Cap           Metals
Sep/08     Best          3921     3059      FMCG                 FMCG               Public Sector              Healthcare           FMCG              Oil & Gas           Capital Goods
           Worst                            Realty               Realty             Metals                     Realty               Realty            Small-Cap           Healthcare
Aug/08     Best          4360     3489      Healthcare           Banks              Healthcare                 Healthcare           Healthcare        Oil & Gas           Capital Goods
           Worst                            Realty               Small-Cap          Realty                     Realty               Realty            Small-Cap           Healthcare
Jul/08     Best          4333     3457      Healthcare           Public Sector      Healthcare                 Healthcare           Oil & Gas         Capital Goods       Capital Goods
           Worst                            Realty               IT                 Realty                     Realty               Realty            Auto                FMCG
Jun/08     Best          4041     3203      Healthcare           Capital Goods      Healthcare                 Healthcare           Oil & Gas         Capital Goods       Capital Goods
           Worst                            Realty               Realty             Realty                     Realty               Realty            Auto                FMCG
Dec'07     Best          6139     5355       Power                Consumer DurablesSmall-Cap                    Metal                Power             Capital Goods       Capital Goods
           Worst                             IT                   Capital Goods      IT                         IT                   IT                Healthcare          IT
Rank based on returns in INR terms. Sector Information is based on BSE Indices; Data Source: Bloomberg; Analysis: Sundaram BNP Paribas Asset Management                   Analysis: A Preetha
  Sundaram BNP Paribas Asset Management                                                       38                                                  The Wise Investor June 2010
                                                           Best & Worst Performers Global
Month/Year/Category         MSCI                MSCI             2010                 One                  Three         Six         One              Three          Five
                       Emerging Market          World             YTD                Month                 Months       Months       Year             Years         Years
May-10       Best          926                1080          Gold                 Gold                     Turkey      Turkey      Indonesia     Gold           Gold
             Worst                                          Brazil               Crude                    Brazil      Brazil      Japan         Japan          Japan
Apr-10       Best          1020               1199          Indonesia            Indonesia                Turkey      Indonesia   Indonesia     Gold           Brazil
             Worst                                          China                Honk Kong                Russia      Honk Kong   Japan         Japan          Japan
Mar-10       Best          1010               1201          Indonesia            Turkey                   Turkey      Mexico      Indonesia     Gold           Brazil
             Worst                                          Taiwan               Gold                     Taiwan      Taiwan      Gold          Japan          Japan
Feb-10       Best          936                1133          Gold                 Crude                    Japan       Russia      Indonesia     Gold           Brazil
             Worst                                          Taiwan               Turkey                   China       Japan       Gold          Japan          Japan
Jan-10       Best          934                1119          Russia               Turkey                   Turkey      Russia      Indonesia     Gold           Brazil
             Worst                                          Brazil               Brazil                   Honk Kong   Honk Kong   Gold          Japan          Japan
Dec-09       Best          989                1168          Brazil               Turkey                   Crude       Indonesia   Brazil        Gold           Brazil
             Worst                                          U S (Dow)            Gold                     Korea       Japan       U S (Dow)     Japan          S&P 500
Nov/09       Worst         953                1149          Brazil               Gold                     Brazil      Indonesia   Indonesia     Gold           Brazil
             Worst                                          Japan                Japan                    Japan       Japan       Japan         Japan          Japan
Oct/09       Best          914                1106          Indonesia            Crude                    Russia      Indonesia   Indonesia     Gold           Brazil
             Worst                                          U.S (Dow)            Korea                    Japan       Japan       US (Dow)      Japan          US (Nasdaq)
Sep/09       Best          914                1127          Indonesia            Brazil                   Russia      Indonesia   Indonesia     Brazil         Brazil
             Worst                                          Gold                 Japan                    Crude       Crude       Commodity     UK             US (Dow)
Aug/09       Best          839                1086          Indonesia            Turkey                   Turkey      Indonesia   Gold          Brazil         Brazil
             Worst                                          US (Dow)             Hong Kong                Russia      Gold        Russia        Russia         US (S&P 500)
Jul/09       Best          844                1045          Indonesia            Indonesia                India       Indonesia   Gold          China          Brazil
             Worst                                          UK                   Commodity                Gold        Gold        Russia        Russia         US (Nasdaq)
Jun/09       Best          761                964           Crude                Indonesia                India       Crude       Turkey        China          Brazil
             Worst                                          UK                   Russia                   Gold        UK          Russia        Russia         UK
May/09       Best          773                970           Russia               India                    Russia      Indonesia   Gold          Brazil         Brazil
             Worst                                          US (Dow)             US (Nasdaq)              Gold        US (Dow)    Russia        Japan          Japan
Apr/09       Best          663                893           Brazil               Russia                   Russia      Indonesia   Gold          Gold           Brazil
             Worst                                          US (Dow)             Gold                     Gold        Crude       Russia        Russia         Japan
Mar/09       Best          570                805           Crude                Korea                    Crude       Gold        Gold          Gold           Brazil
             Worst                                          Dax                  Gold                     Dax         Crude       Russia        Russia         Taiwan
Feb/09       Best          499                751           Gold                 Taiwan                   Gold        Gold        Gold          Gold           Gold
             Worst                                          Mexico               Korea                    Mexico      Russia      Russia        Russia         Taiwan
Jan/09       Best          530                839           Crude                Crude                    Gold        Gold        Gold          Gold           Gold
             Worst                                          South Africa         South Africa             Russia      Russia      Russia        Russia         Taiwan
Dec/08       Best          567                920           Gold                 Indonesia                Gold        Gold        Gold          Gold           Gold
             Worst                                          Russia               Crude                    Crude       Russia      Russia        Russia         Taiwan
Nov/08       Best          527                893           Gold                 Gold                     Gold        Gold        Gold          Gold           Brazil
             Worst                                          Russia               Crude                    Russia      Russia      Russia        Russia         Taiwan
Oct/08       Best          571                957           Gold                 UK                       US (Dow)    Gold        Gold          Gold           Brazil
             Worst                                          Russia               Indonesia                Russia      Russia      China         Japan          Taiwan
Sep/08       Best          787                1182          Gold                 Gold                     US (Dow)    Crude       Crude         Gold           Brazil
             Worst                                          India                Russia                   Russia      Russia      China         Japan          Taiwan
Aug/08       Best          956                1345          Crude                Turkey                   Crude       Crude       Crude         Brazil         Brazil
             Worst                                          India                Russia                   India       India       Europe        Europe         US (Dow)
Jul/08       Best          1042               1367          Crude                Turkey                   Crude       Crude       Crude         Brazil         Brazil
             Worst                                          India                Russia                   India       India       Europe        Europe         US (Dow)
Jun/08       Best          1087               1402          Crude                Gold                     Crude       Crude       Crude         Brazil         Brazil
             Worst                                          India                India                    India       India       Europe        Europe         US (Dow)
Dec'07       Best          1246               1589          Brazil               India                    India       India       Brazil        Brazil         Brazil
             Worst                                          Japan                China                    Japan       Japan       Japan         US (S&P 500)   US (Dow)
Europe: MSCI Europe; Commodity: S&P GSCI Index; Rank based on returns in $ terms.Date Source: Bloomberg                                                        Analysis: A Preetha
  Sundaram BNP Paribas Asset Management                                                          39                                         The Wise Investor June 2010
                                                                                                                                                                  Equity Chart Book
                                                                       MSCI World                                                                                                       MSCI Emerging Markets

       1200                                                                                                                                                 1000

       1000                                                                                                                                                  800
        600                                                                                                                                                  200





















  Open 1422                                        High 1682                                       Low 689                        Close 1080              Open 496                         High 1338                                 Low 246                        Close 925

                                                                       MSCI Brazil                                                                                                                     MSCI Russia




        300                                                                                                                                                 100





















   Open 874                                        High 4728                                       Low 278                        Close 3170              Open 223                         High 1642                                 Low 139                        Close 714

                                                                          MSCI India                                                                                                                      MSCI China

      780                                                                                                                                                   100
       80                                                                                                                                                    0






















   Open 160                                              High 694                                  Low 701                        Close 460               Open 34                            High 104                                Low 13                         Close 59
The horizontal in each graph indicates the average level of the respective index since January 2000                                                                                       Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management
  Sundaram BNP Paribas Asset Management                                                                                                              40                                                                    The Wise Investor June 2010
                                                                                   Relative performance
                              MSCI World                                                           MSCI Emerging Markets
                                 MSCI World                                                                         MSCI Emerging Markets
   140                           MSCI Emerging Markets                              300                             MSCI World                                249.1
   120                                                                              250
                                                                   40.1              50
     0                                                                                0



























Both indices re-based to 100 for January 2000 and expressed as MSCI              Both indices re-based to 100 for January 2000 and expressed as MSCI
World relative to MSCI Emerging Markets to reflect relative performance          Emerging Markets relative to MSCI World to reflect relative performance.

                             MSCI Brazil                                                                      MSCI Russia
   250                                                                              400
                  MSCI Brazil                                                                      MSCI Russia
                  MSCI Emerging Markets                                             350            MSCI Emerging Markets
                                                                 188.3              250
   100                                                                              150                                                                       175.0
   50                                                                               100
    0                                                                                 0

Both indices re-based to 100 for January 2000 and expressed as MSCI              Both indices re-based to 100 for January 2000 and expressed as MSCI
Brazil relative to MSCI Emerging Markets to reflect relative performance         Russia relative to MSCI Emerging Markets to reflect relative performance

                              MSCI India                                                                       MSCI China
   190            MSCI India                                                        130
                                                                                                   MSCI China
   170            MSCI Emerging Markets                                             120            MSCI Emerging Markets
   150                                                                              110
   130                                                          163.4
   110                                                                                                                                                        93.9
    90                                                                               70
    70                                                                               60
    50                                                                               50


Both indices re-based to 100 for January 2000 and expressed as MSCI India        Both indices re-based to 100 for January 2000 and expressed as MSCI
relative to MSCI Emerging Markets to reflect relative performance                China relative to MSCI Emerging Markets to reflect relative performance
                                                                                                      Source: Bloomberg, Analysis: Sundaram BNP Paribas Asset Management
 Sundaram BNP Paribas Asset Management                                      41                                             The Wise Investor June 2010
                                                                                                                                      Commodities Chart Book
                                                     Crude Oil                                                                                                                                                     Gold
          170                                                                                                                                         1200
          130                                                                                                                                         1000

          110                                                                                                                                         800


           70                                                                                                                                         600
           10                                                                                                                                         200





















Open 23.9                         High 145.7                             Low 16.6                            Close 73.7                     Open 288.0                                  High 1215.7                               Low 255.6                      Close 1216.2

                                  Baltic Freight Index                                                                                                                                           LME Metals Index

    21700                                                                                                                                      5000
    18700                                                                                                                                      4500
      6700                                                                                                                                     2000
      3700                                                                                                                                     1500
          700                                                                                                                                  1000





















Open 1782                         High 19687                              Low 830                            Close 5217                     Open 1254.2                                 High 4556.6                               Low 958.3                      Close 3178.1

  S & P Goldman Sachs Commodity Index                                                                                                                 S&P Goldman Sachs Agflation Index

   1000                                                                                                                                          700
    700                                                                                                                                          500
    400                                                                                                                                          300
    100                                                                                                                                          100

Open 194.5                        High 890.3                         Low 162.0                               Close 899.5                    Open 162.8                                  High 499.2                                Low 149.6                          Close 291.3

                                                                                                                                                                                                                                                                     Source: Bloomberg

Sundaram BNP Paribas Asset Management                                                                                                  42                                                                                    The Wise Investor June 2010


                                                                                                                                                                                                                               % 9
                                                                                                         USD Million

                                                                                                                                                                                                  Dec/01                                                                                                                  Jan/00

                                                                          Jan/00                                                                                                                                                                                                                                         Dec/00

                                                            Open 35.1
                                                                                                                                                                                     Open 8.05

                                                                                                                                                                                                                                                                                                            Open 11.23
                                                                           Jul/00                                                                                                                                                                                                                                         Jun/01
                                                                          Jan/01                                                                                                                   May/03                                                                                                                Dec/01
                                                                                                                                                                                                  Nov/03                                                                                                                  Jun/02
                                                                                                                                                                                                   May/04                                                                                                                Dec/02
                                                                          Jan/03                                                                                                                  Nov/04                                                                                                                  Jun/03
                                                                           Jul/03                                                                                                                                                                                                                                        Dec/03

                                                            High 316.2
                                                                                                                                                                                     High 13.91
                                                                                                                                                                                                                                                                                                            High 11.77
                                                                          Jan/04                                                                                                                                                                                                                                          Jun/04
                                                                           Jul/04                                                                                                                 Nov/05                                                                                                                 Dec/04
                                                                          Jan/05                                                                                                                   May/06                                                                                                                 Jun/05
                                                                                                                                                                                                  Nov/06                                                                                                                 Dec/05

Sundaram BNP Paribas Asset Management
                                                                                                                                                                                                   May/07                                                                                                                May/06

                                                            Low 34.7
                                                                                                                                                                                     Low 4.80
                                                                                                                                                                                                                                                                                                            Low 4.99
                                                                          Jan/07                                                                                                                  Nov/07
                                                                                                                                                                                                                                                                                                                                                                10-Year G-Sec Yield (%)


Sundaram BNP Paribas Asset Management
                                                                          Jan/08                                                                                                                                                                                                                                         Nov/07
                                                                           Jul/08                                                                                                                  Oct/08                                                                                                                May/08

                                                                                                                                                  India Forex Reserves ($ billion)
                                                                          Jan/09                                                                                                                   Apr/09                                                                                                                Nov/08

                                                                                                                                                                                                                                                             1-Year AAA Corporate Bond Yield (%)
                                                                                                                                                                                                   Oct/09                                                                                                                May/09

                                                                                                                                                                                     Close 6.55
                                                                                                                                                                                                                                                                                                            Close 7.53

                                                            Close 273.3

                                                                                                                                                                                                                                 bp                                                                                                             bp




                                                                           Jul/00                                                                                                                 Dec/01                                                                                                                   Jan/00
                                                                                                                                                                                                   Jun/02                                                                                                                   Jul/00

                                                                                                                                                                                     Open 210
                                                                                                                                                                                                                                                                                                            Open 126


                                                            Open 3.55
                                                                           Jul/01                                                                                                                 Dec/02
                                                                          Jan/02                                                                                                                  May/03                                                                                                                  Dec/01
                                                                                                                                                                                                  Nov/03                                                                                                                   Jun/02
                                                                                                                                                                                                  May/04                                                                                                                  Dec/02
                                                                           Jul/03                                                                                                                                                                                                                                          Jun/03

                                                                                                                                                                                     High 423
                                                                                                                                                                                                                                                                                                            High 341


                                                            High 12.82
                                                                           Jul/04                                                                                                                 May/05
                                                                          Jan/05                                                                                                                  Nov/05                                                                                                                  Dec/04
                                                                           Jul/05                                                                                                                 May/06                                                                                                                   Jun/05
                                                                          Jan/06                                                                                                                  Nov/06                                                                                                                  Dec/05
                                                                           Jul/06                                                                                                                                                                                                                                         May/06

                                                                                                                                                  WPI Inflation (%)
                                                                                                                                                                                     Low -16
                                                                                                                                                                                                                                                                                                            Low -64

                                                                          Jan/07                                                                                                                                                                                                                                          Nov/06

                                                            Low -1.01
                                                                                                                                                                                                  Nov/07                                                                                                                  May/07
                                                                          Jan/08                                                                                                                  May/08                                                                                                                  Nov/07
                                                                           Jul/08                                                                                                                 Oct/08                                                                                                                  May/08
                                                                          Jan/09                                                                                                                  Apr/09                                                                                                                  Nov/08
                                                                                                                                                                                                                                                                                                                                                                G Sec 1-10 Year Spread (basis points)

                                                                           Jul/09                                                                                                                                                                                                                                         May/09
                                                                                                                                                                                     Close 82

                                                                                                                                                                                                                                                                                                            Close 245
                                                                                                                                                                                                                                                                                                                                                                                                        Fixed-Income Chart Book

                                                            Close 9.59

    The Wise Investor May 2010
The Wise Investor June 2010
                                                                                                                                                                                                                                                             5-Years G Sec AAA Bond Spread (basis points)

                                        Source: Bloomberg
                                                                                                                             In a lighter vein
In a lighter vein features incidents from 1930s to reflect the atmosphere of the times – the only period that was, as of now, worse than now.

• Two New York brokers recently went out for lunch, and in crossing Broadway noticed an open manhole. Surrounding it was the usual iron fence, with the
    painted notice "Men at Work". Said one to his companion: "Don't pay any attention to that sort of junk. "It's just Hoover propaganda."

• (Note: it's funny because it's true.) A mechanic who has lately started buying small lots of stock asked his banker for some suggestions on railroad shares.
    The banker suggested Pennsylvania Railroad and presented a list of statistical information.The investor perused the information, and was particularly drawn
    to the huge number of shareholders reported. "Well, there's one sure thing," he remarked, "if I am making a misstep I'll not be alone."

• "How's business?" a traveling salesman asked the new barber. "Boy," replied the barber, "it's so quiet here you can hear the bonds drawing interest at the bank."

• Guide - Why not go to the top of the mountain? The famous six-fold echo is now twelve-fold.Tourist - How is that? Guide - In the busy season we hire more

                         Source: - A daily summary based on reading of The Wall Street Journal from the corresponding day in 1930.)

    BackPage                                                                                                                                         Investment Quiz
1 Who is the author of Fooled by Randomness-The Hidden Role of Chance in Life and in the Markets?

                                                                                                                                                                                     Compiled by S.Vaidya Nathan
2 What is maximum amount of a single-issuer’s security that can be owned by a fund / fund house in India?
3 Who invented the ATM?
4 Who heads the Office of the Special Inspector General for Troubled Asset Relief Program (SIGTARP)? This is a rare U.S official who has acted
    with objectivity and without being swayed by the too-big-to-fail banks?
5 In whose tenure as Prime Minister did the first major devaluation of the Indian rupee take place?
R     Answers must be mailed to
I     The first 25 responses with correct answers to all questions will receive a prize. Please mention your mailing address in your e-mail. Employees of Sundaram BNP Paribas
Z     Asset Management, its Sponsors and Associates & Group Companies of the Sponsors shall not be entitled to prizes even if they participate and mail correct answers.

                                                                       Answers for May 2010 Quiz
1 Greece                                                                                            4 Sun Trust Bank
2 10% of the assets (and not owning more than 10% of a company’s
  equity)                                                                                           5 UTI Mastershare enjoys the distinction (17 years) though it has been
3 Yves Smith, pseudonym name for the writer of the Naked Capitalism
  blog                                                                                                  an open-end fund since September 2003

Mutual fund investments are subject to market risks. Please read the Statement of Additional Information of Sundaram BNP Paribas Mutual Fund and
Scheme Information Document of Sundaram BNP Paribas Mutual Fund carefully before taking an investment decision. Risk Factors: All mutual funds and
securities investments are subject to market risks. There can be no assurance or guarantee that a scheme's objective will be achieved. NAV may rise or
decline, depending on factors and forces affecting the securities market. There is risk of capital loss and uncertainty of dividend distribution. General Disclaimer:
The Wise Investor, a monthly publication of Sundaram BNP Paribas Asset Management, is for information purposes only.The Wise Investor is not and should not be
construed as a prospectus, scheme information document, offer document, offer solicitation for an investment and investment advice, to name a few. Information in this
document has been obtained from sources that are reliable in the opinion of Sundaram BNP Paribas Asset Management. Opinions expressed by authors do not
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necessarily represent that of Sundaram BNP Paribas Mutual Fund or Sundaram BNP Paribas Asset Management or Sundaram BNP Paribas Trustee Company or the
sponsors. Statutory: Mutual Fund Sundaram BNP Paribas Mutual Fund is a trust under the Indian Trusts Act, 1882 Sponsors (Collective liability is limited to Rs 1 lakh):
Sundaram Finance Limited & BNP Paribas Asset Management. Investment Manager: Sundaram BNP Paribas Asset Management Company Limited. Trustee: Sundaram
BNP Paribas Trustee Company Limited. Past performance of Sponsors/Asset Management Company/Fund does not indicate or guarantee future performance.
Published by Sunil Subramaniam on behalf of Sundaram BNP Paribas Asset Management Company Limited, from its office at Sundaram Towers, II Floor, 46, Whites Road, Chennai 600 014.
Printed by R.Velayudhan at Paper Craft, No.25, C.P.Mudali Street, Pudupet, Chennai 600 002.
Editor: Sunil Subramaniam.
 Toll Free 1800 425 1000                                                                                                           
 SMS SFUND to 56767                                                                                                               E-mail

 Sundaram BNP Paribas Asset Management                                                         44                                                   The Wise Investor June 2010

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