Weekly international investment round up to 24 March 2009
• US announces huge toxic debt plan while India launches tiny priced car
• Stock Markets surge worldwide
Two events which caught the eye this week not only appear to encapsulate current market conditions but also serve to provide an insight into how the financial mess is being cleared up together with what the post-credit crunch world may actually look like.
The first was the announcement of the long awaited plan to remove much of the gigantic toxic waste from America’s financial system which, when implemented, should act to serve as some kind of huge drain cleaner ridding the financials of the contaminated debt blockage from their books. The second was the launch of the world’s cheapest car ‘The Nano’ with its tiny price tag of 100,000 rupees, the equivalent of approximately US$2,000, which may tempt hard hit consumers to start buying again.
If we accept that stock market’s tend to act as weathervanes and help us understand in advance the direction of an economy, market or a company then the course of this storm may finally be changing as following US Treasury Secretary Timothy Geithner’s US$1 trillion plan to remove the banks’ toxic assets, US stocks enjoyed their fourth best daily advance since the 1930s while Tata Motors previous battered share price gained over three percent to close at 166.15 rupees in Mumbai trading.
The BBC’s respected journalist Robert Preston has described how before the market in collateralized debt obligations (CDO’s) started to implode many of these securities constructed out of low-quality subprime loans were sold as highly rated ‘AAA’ investments partly because some of these bonds were insured against default by so called ‘monoline insurers’. He goes on to report how this insurance then turned out to be almost worthless because these specialist insurers didn’t have sufficient capital to absorb the massive losses caused by the loans given to US home owners with poor credit histories. The value of CDO’s then collapsed in turn causing around US$1 trillion in losses for some of the world’s most respected financial names.
Backed by the American tax-payer, Timothy Geithner announced how he believes that the removal of the devalued loans and securities from the banks will encourage them to start lending again in turn breathing fresh life into America’s economy. He said ‘This will allow banks to clean up their balance sheets’, but added, ‘no doubt the government is taking a risk but you cannot solve a financial crisis without the government assuming risk’.
Across the other side of the world India’s Tata Motors are pinning their huge hopes on something small, ‘The Nano’. After seeing their share price shrink by almost 80 per cent last year following their ill-timed purchase of luxury car brand Jaguar and Land Rover, the company is now accepting advance bookings for the world’s cheapest car and has big plans to launch it in Europe in 2011 then soon after in the US.
Although Tata Motors currently face huge financially difficulties ironically, this Indian car manufacturer may be better in-tune with the post-credit crunch consumer who are most likely to seek out better value products with less unnecessary and expensive ‘bells and whistles’ than their American, European and Japanese rivals.