Volatility in equity markets to take centre-stage in coming weeks (coming weeks because CHINA GDP and earning season could provide little more upside to market at-least till the end of earning season) on wake of debate around reversing policy actions, actions by regulators around the globe (especially emerging market) to prevent their respective currencies appreciate drastically against weakening Dollar (Brazil being the classic case), continued lower treasuries yields (with FED not expected to reverse its policy any time soon), Money finding its way to safe heavens, continuing commodities surge (base metals). The Brazilian 2% tax debate on foreign funds purchases of Fixed-income securities and equities: The debate around Brazilian Finance Ministry move late Monday to imposed a 2% tax on foreign purchases of fixed-income securities and equities, effective Tuesday: The after effects: Brazil's Bovespa index fell 2.9% to 65,303.11, its worst percentage decline since late June, but managed to fight its way back from an intraday fall of nearly 5%. Brazilian Real tumbled 2.2% hit on Tuesday on the back of same news.

1. 1 The Chinese (GDP) and Brazilian (2% tax) Effect on Financial Markets across the globe
Volatility in equity markets to take centre-stage in coming weeks (coming weeks
because CHINA GDP and earning season could provide little more upside to
market at-least till the end of earning season) on wake of debate around
reversing policy actions, actions by regulators around the globe (especially
emerging market) to prevent their respective currencies appreciate drastically
against weakening Dollar (Brazil being the classic case), continued lower
treasuries yields (with FED not expected to reverse its policy any time soon),
Money finding its way to safe heavens, continuing commodities surge (base
metals).
The Brazilian Effect
The Brazilian 2% tax debate on foreign funds purchases of Fixed-
income securities and equities: The debate around Brazilian Finance
Ministry move late Monday to imposed a 2% tax on foreign purchases of fixed-
income securities and equities, effective Tuesday: The after effects: Brazil's
Bovespa index fell 2.9% to 65,303.11, its worst percentage decline since late
June, but managed to fight its way back from an intraday fall of nearly 5%.
Brazilian Real tumbled 2.2% hit on Tuesday on the back of same news.
Temporality (believe only for a day or two), there have been some profit- taking
across all emerging markets after Brazil announced a tax on foreign capital
inflows.”
The Brazilian currency had been up about 38% against the dollar since
the start of this year and the Bovespa was up nearly 80% before new tax
was announced.
21st October, 2009
In my understanding, these events are extremely short-lived and are reactive in
nature. Investors give a spontaneous reaction to these news and things turn to
normalcy after a couple of days or weeks. The return to normalcy though this
time around could be tough because of strong appreciation in Brazilian Real
against Dollar one of the main reason attributed to this was the huge foreign
Vinit Tulsyan http://vinittulsyan.wordpress.com

2. 2 The Chinese (GDP) and Brazilian (2% tax) Effect on Financial Markets across the globe
fund inflows seen in Brazilian equity & fixed income markets. If investors forget
this one off event, and Brazilian currency and equity market continues to be
buoyant, some other bomb shell could be dropped by the regulator.
How much drop in the foreign fund inflows in Brazil happens due to this move,
how much the currency depreciates against dollar, needs to be seen in coming
weeks. I personally doubt whether this particular move will be able to
put a curb to appreciating Real or to equity markets, which on the back of
strength in Brazilian economy, higher commodity prices, a credit rating upgrade
from Moody’s (to investment grade on Sep. 22, after Latin America’s largest
economy built record foreign reserves and averted a prolonged recession amid
the global financial crisis) and forecasts for faster economic growth, all time low
interest rates in developed world, money available at cheap rates, money trying
to find its way to economies where the risk & return profile is still favorable etc.
The new tax will make it more expensive for Brazilian companies to raise
financing because investors will demand a steeper yield to compensate for the
additional cost. Another thing to consider is that if Investors are having double
digit returns by either investing in Equities of through exposure to currencies,
will a 2% move deter investor to park their money in Brazilian economy. One
thing is for sure that all these on the back of prevailing uncertainty will just
make investors life terrible and make markets extremely volatile.
Generalization of Brazilian effect to Indian Currency: To continue its
buoyancy against USD in near to medium term
21st October, 2009
I expect Indian Rupee to continue its appreciative journey against USD
in near to medium term. The confidence stems from the same reasoning
applying to Brazilian economy. On the back of strength in Indian economy,
consumption returning to normalcy, higher commodity prices, an expected credit
rating upgrade from rating agencies (on the back of govt. stability, an expected
6.5% growth, record IIP numbers etc), record foreign reserves, resilience of
Vinit Tulsyan http://vinittulsyan.wordpress.com

3. 3 The Chinese (GDP) and Brazilian (2% tax) Effect on Financial Markets across the globe
Indian Economy to not only avert this economic crisis but to emerge stronger,
forecasts for faster economic growth (in coming years), all time low interest rates
in developed world, money available at cheap rates, money trying to find its way
to economies where the risk & return profile is still favorable etc.
I personally do not think that Indian regulators will make such a move of
imposing a tax on foreign purchases of either equities or fixed-income securities.
RBI might intervene in the market and support USD but the reasons given
above would ultimately let the market dynamics determine the exchange rate.
Further, I am of conviction that RBI would reverse its monetary policy much
before most of the advanced economies especially US, in that scenario as well;
the Indian currency will further be strengthened.
The one and only reason as of now which could put a PAUSE (a pause
not a stop) on currencies appreciation would be the expected sideways
and volatile movement in equity markets, which could propel fund
flows to get narrower than in the last few months.
The Chinese GDP effect: Chinese economy has become such an
important indicator for global growth to resume.
Today, all the emerging markets paused ahead of Chinese GDP and in my
expectation that when China reports its third quarter GDP tomorrow, it
will become the most important reason for the financial markets to
react. All major investment avenues within all emerging markets will take a
cue from it, be it currencies, commodities, equities, OIL etc. The emerging
21st October, 2009
market currencies will take a cue from it and on the back of strength from
Chinese markets; all other currencies will derive strength on the back of
strength in GDP numbers. The bond yields should rise with the expectation that
if the GDP number is good, it might result in policy action to be reversed sooner
than later. The commodities will surge (if the number is good) due to positive
sentiment from Chinese US$ 580 billion stimulus, which has started showing its
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4. 4 The Chinese (GDP) and Brazilian (2% tax) Effect on Financial Markets across the globe
effects? The after effects are visible enough with Sesa Goa., India’s biggest iron-
ore exporter expected to more than triple production because of a rebound in
prices and demand from China and diversify into making steel. BHP Billiton’s
(World’s largest mining company) iron ore production rose to a record, driven by
a rebound in global steel demand. Steel companies are resuming output at mills
in China, the largest consumer of iron ore, Europe and the U.S. to supply auto
and appliance makers on signs of a global recovery in industrial demand. BHP
in its quarterly production report said that “Chinese economic growth continues
to be robust on the back of strong domestic-focused consumption and
infrastructure- based stimulus spending”.
One caveat is that if China’s economic growth for the third quarter fall short of
market estimates, everything could reverse temporally (temproraliy because
investor psychology would then focus on optimism going forward). Expectations
for emerging market currencies (including YUAN appreciation) appreciation
may take a halt; the positive bias in equities could easily turn to flat to negative.
The commodities (including oil) rally could halt as well. Though I believe, all
these would lead to higher USD on the back of expected weakness in emerging
market for the time being (if Chinese GDP figures turn ugly). The expectation
(as surveyed by Bloomberg) is that GDP should rise 9 percent from a year earlier
in the third quarter, the biggest increase since the same period of 2008.
***
Thanking You,
Warm Personal Regards,
21st October, 2009
Vinit Tulsyan
http://vinittulsyan.wordpress.com
***
Vinit Tulsyan http://vinittulsyan.wordpress.com