MACROSCAN July 2015

Economics and International Business Club of IIM Indore

Contents (Click on any box to go to the respective section)

International Business

• Chinese Stock market plunge

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International Economy

• Eurozone clinches bailout deal with Greece

National Business

• SoftBank, Bharti and Foxconn to form JV for Renewable Energy

• IPO market heats up

National Economy

• India becomes a 2 trillion economy

• Retail inflation at a 8 month high

• PMI down

Concept Cracker

• Decoy Effect • Banana Republic

Fact-a-Base

• Personalities • Alexis Tsipras • Lei Jun

Chinese stock market plunges

• Last three weeks saw stock markets in China tumbling. The plunge knocked about 30% off Chinese shares since mid-June. Hundreds of Chinese companies have suspended dealings in their shares in a bid to arrest a frenzy of selling. There has also been a surprise rate cut

• China’s stock markets had previously been among the highest performing in the world. Investors had been piling in, encouraged by falling borrowing costs as the central bank loosened monetary policy.

• The rise was also fuelled by a switch away from property investment following a clampdown by the government on excessive lending by banks. Laws liberalising the stock market also made it easier for funds to invest and for firms to offer shares to the public for the first time

Shares plunged 30% in three weeks

International Business Anubha Aggarwal

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…Chinese stock market plunges

• Why did the market turn?

Analysts were already warning that the dramatic rise in China’s stock markets was driven by momentum rather than fundamentals. Stocks were looking wildly overvalued at a time when the Chinese economy was losing steam. As fears grew that the rise in many stocks was unsustainable, the selling started.

• How could so many people afford to buy shares?

At the centre of the dramatic stock market slide are individual investors borrowing from a broker to buy securities. There has been an explosion in so-called margin lending. Under that system, the broker can make a demand for more cash or other collateral if the price of the securities has fallen – known as a margin call.

• Drastic official efforts over the past two weeks, including a ban on sales by executives and big shareholders, appear to have at least temporarily halted the decline.

Shares plunged 30% in three weeks

International Business Anubha Aggarwal

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Eurozone clinches bailout deal with Greece

• Eurozone leaders have finally clenched a deal with Greece to negotiate a third bailout of about €86bn for 3 years to keep the almost bankrupt country in Eurozone.

• However the tough conditions imposed by international lenders led by Germany could bring down Prime Minister Alexis Tsipras' government and cause an outcry in Greece.

• The terms of the agreement are not immediately known however EU officials said the toughest condition for Tsipras to swallow was Germany's insistence that Greek state assets worth up to 50 Bn euros be placed in a trust fund beyond government reach to be sold off with proceeds going directly to pay down debt.

• The Greek leader also dropped resistance to a full role for the IMF in the bailout, which German Chancellor Angela Merkel had declared essential to win parliamentary backing in Berlin.

• Had the summit failed, Greece would have been in economic abyss with its banks on a brink of collapse and having to print a parallel currency and exiting from the European monetary at the same time.

Greece remains in EU, third bailout deal with tougher conditions clenched

International Economy Anubha Aggarwal

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Eurozone clinches bailout deal with Greece

• Tsipras will now have to rush swathes of legislation through parliament this week to convince his 18 partners to release bridging funds to avert a state bankruptcy and just to begin negotiations on the three year loan

Greece remains in EU, third bailout deal with tougher conditions clenched

International Economy Anubha Aggarwal

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SoftBank, Bharti and Foxconn to form JV for Renewable Energy in India

• Japan’s SoftBank, Sunil Bharti Mittal-led Bharti Enterprises and Taiwan’s Foxconn Technology on Monday teamed up to form a joint venture (JV) to set up a 20 gigawatt (GW) of solar and wind energy projects in India at an investment of about $20 billion.

• The new JV will be called SBG Cleantech and will have SoftBank as majority control in the with Bharti and Foxconn as minority stakeholders.

• SBG Cleantech will have Manoj Kohli, a Bharti veteran, who until recently led Bharti’s emerging businesses, as Executive Chairman and Raman Nanda, as the CEO

National Business Pratik Bandishte

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SoftBank, Bharti and Foxconn to form JV for Renewable Energy in India

• Following the Indian Prime Minister's 100GW solar and 60GW wind target by 2022, the venture will invest in and develop renewable energy plants across India. The company intends to participate in the 2015-16 round of solar power plant tenders under the National Solar Mission (NSM) program and state-specific solar programs

• The Japanese telecom and Internet major SoftBank Corp had in 2011 set up SB Energy Corp to develop clean energy projects following the Fukushima nuclear disaster in Japan. It is working on 20 such projects there.

• Solar power in India is likely to grow by 250% in 2015. Globally, renewable energy outpaced the growth of fossil fuels in 2015 and a record 107 GW was added through wind, solar, geothermal and other natural sources.

National Business Pratik Bandishte

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IPO market heats up; over 30 companies line up public offers

• After a prolonged lull, the IPO space has become very active and over 30 companies have lined up plans to raise funds totalling over Rs 20,000 crore through public offers.

• Cafe Coffee Day, Matrix Cellular and RBL Bank have approached the regulator last week itself, while some others including IndiGo are expected to file their draft prospectus this week. GVK Group also plans to list its airports business arm, GVK Airport Developers, and may raise an estimated Rs 3,000 crore.

• Indigo is eyeing Rs 2,500 crore, coffee shop chain operator Coffee Day Enterprises plans to raise Rs 1,150 crore, RBL Bank (formerly known as Ratnakar Bank) plans to mop up at least Rs 1,100 crore and Biocon’s arm Syngene International is looking to raise an estimated Rs 600 crore

National Business Pratik Bandishte

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IPO market heats up; over 30 companies line up public offers

• It also comes at a time when the regulator Sebi has announced a slew of fresh reforms in the IPO space, including for halving the listing period to six days and for making the application process for investors entirely cheque-free.

• A majority of the companies which have approached SEBI are mid-sized and are looking to mop up between Rs 200 crore to 3,000 crore.

National Business Pratik Bandishte

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India becomes a $2 trillion economy

• India’s GDP has breached the psychological barrier of $2 trillion in 2014, according to a latest report released by the World Bank with a growth rate of 7.4% making it the fastest growing major economy along with China, which is a staggering $10.4 trillion in size

• The World Bank data also show that India’s gross national per capita income rose to $1,610 (around Rs. 1 lakh) a year during 2014 compared to $1,560 in the previous year

After taking 60 years to reach the $1-trillion mark, India added the next trillion in just seven years

National Economy Mohit Surana

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Retail inflation climbs to 8 month high

• India’s retail inflation rose to an eight month high in June to 5.4 % year on year compared to 5.01% in May on account of high food prices

• A stronger-than-expected rise in prices is likely to fuel fresh inflation concerns for the RBI, which is targeting inflation of 6 percent by January

• Hence, any hope of a rate cut in the near future is off the table now, given this kind of number, coupled with the fact the monsoon has been weaker in the last couple of weeks

Latest inflation data dampens the hope of a rate cut by the RBI in near future

National Economy Mohit Surana

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Manufacturing PMI weakens in June on slow business orders

• The Nikkei India Manufacturing Purchasing Managers Index, compiled by Markit, eased to 51.3 points in June from 52.6 in the may, in the face of the slowest rise in new orders since September 2014

• The production sector, stressed for over the past two years, has started showing signs of recovery on easing of supply-side bottlenecks. But, Employment levels remained stagnant, reflecting the cautious stance of manufacturers to hiring, according to the Markit report

National Economy Mohit Surana

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Decoy effect (Asymmetric dominance)

• If you thought prices of commodities are fixed without giving much thought to consumer behaviour, think again. Smart companies use behavioural economics to influence buyers.

• Dan Ariely, a professor In duke University and MIT investigated the reason why “The Economist” was giving 3 subscription options. He surveyed his students regarding which subscription would they opt for and got the following results-

1. Web subscription (For $25): 16%

2. Print subscription (For $59) : 0%

3. Print & Web subscription (For $59) : 84%

• He surveyed the students again, but this time with only 2 choices. The results were very different this time.

1. Web subscription (For $25): 68%

3. Print & Web subscription (For $59) : 32%

• So why did the Economist offer the print-only option? It was most likely a decoy, designed to shift purchasers to the higher-priced combo option. What you’re doing with the decoy effect is pricing one item in such a wild way that the other plans/items start to look pretty reasonable.

Concept Cracker Yashvardhan Singh

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Using Behavioural Economics in Marketing

Banana Republic

• A term in political science for a politically unstable country whose economy is largely dependent on the export of a single, limited-resource product

• By the end of the 19th century, Americans realized it was cheaper to import bananas from the warmer climes of Central America, where such tropical fruits grew quickly.

• American companies like United Fruit Company and Cuyamel Fruit in and built roads, ports and railways in return for land.

• They even supplied the weapons and planned coups against the government of Honduras.

• Hence the real meaning of a “banana republic” is a country in which foreign enterprises push the government around.

Concept Cracker Yashvardhan Singh

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A country in which foreign enterprises push the government around

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Fact-a-Base Yashvardhan Singh

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Alexis Tsipras • He is the current and youngest Prime Minister of Greece

and leader of the left wing party Syriza which came to power in January 2015.

• A civil engineer by profession he joined the Young Communist Society giving base to his opposition to neo liberal capitalism.

• He has been crucial in the referendum following which the agreement of granting 80 Billion euros loan to Greece was concluded.

MEASURE VALUE

GDP 2.1 Trillion

USD

CRR 4%

SLR 21.50%

IIP 197.3

CPI (Industrial

Workers)

254

Government

Bond Yield-10

Year

7.84%

INDIA AT A GLANCE

WORLD AT A GLANCE

MEASURE VALUE

LIBOR (Yearly) 0.72%

US One Year

Constant Maturity

Treasury (CMT)

0.23

US Treasury Yield-

10 Year- Coupon-

2.75%

2.27%

Lei Jun • The founder of Xiaomi, the 3rd largest smartphone

maker behind Apple and Samsung

• Before Xiaomi he started a website calledJoyo.com which was acquired by Amazon

• Called the Steve Jobs of China, Lei’s net worth is estimated to be 8.8 billion US dollars

• Lei Jun believes that social networking, ecommerce and mobile Internet will be the three most impactful growth drivers over the next decade in tech

Economics and International Business Club of IIM Indore

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