Forecasts for the economy & markets in 2008

Author: Abheek Barua, Chief Economist, HDFC Bank
Source: Rediff

Since this is my last piece this year I thought I would write about the forecasts I have made for the global economy and financial markets for 2008. There is an important caveat, of course. The global macroeconomic and financial environment remains terribly volatile and a number of these predictions could go wrong.
Let me get to the forecasts. The jury appears to be still out on whether the US is headed for a recession next year (going by the textbook, a situation in which GDP growth turns negative for two successive quarters) or whether swift action by the US Federal Reserve is likely to prevent such a situation. US consumption data like retail numbers occasionally surprise positively and US inflation is far from dead. However, despite this bit of fuzziness I remain somewhat sanguine about the following trends.

Whether it qualifies technically as recession or not, the US is likely to see a marked slowdown at least in the first half of 2008, which could last well into the second half of the year. Besides, despite central banks' best efforts, it will take a while for American and European banks to resume lending to each other and to even slightly risky borrowers. Thus, I see the credit squeeze in the US and Europe continuing and perhaps even getting worse in the near term.

The US slowdown is likely to have knock-on effects on the global economy and world GDP growth is likely to moderate. More specifically the result of sharp currency appreciation, harder interest rates and a credit squeeze will begin to take a toll on euro-zone growth. The UK is well into a cyclical downturn.

As I have argued in earlier columns, I think it is impossible for Asian economies to remain immune to a downturn in the developed economies and growth rates will soften in this region as well. I honestly don't know much about Latin America but I think it is sensible to assume that what applies to Asia applies to these economies as well.

Global energy and food prices are likely to remain elevated in the first quarter but are likely to dip subsequently as demand compression on the back of slowing world demand begins to reflect in prices. I am, for example, convinced that concerns about fresh oil supplies and oil peaks notwithstanding, slower global growth is fundamentally incompatible with oil prices at over ninety dollars a barrel.

The same logic might just apply to other assets including stocks. If indeed the signs of global slowdown become more acute, large investors might begin to dump equities and hold on to safer assets like treasury bonds. If there is growing aversion to equities as an asset class, Asian markets (including Indian stock markets) will also take a hit. The slide in stock prices will not be due to risk-aversion alone.

If global growth slows, the slowing down will begin to impact the top line and bottom line growth of companies across economies. That in turn will buttress the negative sentiment towards risky assets. The bottom line: be prepared for a "correction" in the Indian stock market next year.

There is a potential offset. The US Fed is likely to follow a policy of phased quarter percentage point cuts in its target interest rate - I expect the American central bank to cut the Fed funds rate thrice next year. Thus while inflation risks will weigh on the Fed's mind, I expect growth concerns to dominate and spur the Fed to cut rates some more. I expect the European Central Bank to hold interest rates until the second half and then start cutting signal rates.

My bank's research team has forecast two rate cuts next year, possibly in the second half. The Bank of England is likely to be swifter with two quarter percentage point cuts in the first half of 2008. We also expect more direct liquidity both through unilateral cash infusion by central banks and perhaps through more co-ordinated intervention.

The question is: what happens to all this liquidity when central banks turn on their cash spigots? If investors remain terribly risk-averse, a lot of it would go into low-risk government bonds.

US treasury bond prices will continue to move up and yields will decline as this process continues. Besides, if US assets keep getting cheaper and cheaper, investors will sniff a bargain and start buying these assets. In fact, some of the bigger funds have already started picking up chunks of the American financial industry where valuations have hit rock-bottom. Asian sovereign investment funds, for instance, are bailing out cash-strapped American banks, picking up significant equity stakes in the process.

Finally, there is also a chance that some of the money will start finding its way into emerging financial markets where growth rates, at least in relative terms, will remain high in comparison with the rest of the world. What happens then? My prediction is that emerging markets including India are likely to get buffeted by the crosswinds of rising global liquidity and cheaper interest rates, on one side, and concerns about slowing growth, on the other. This means two things.

Our stock markets will remain volatile for a while to come and sharp upswings could be followed by a quick downturn. Ditto for the currency markets. The interplay of these opposing forces also means that these markets will be stuck in a range. Thus I do not see the possibility of prolonged phases of decline, nor do I see the prospect of an untrammelled bull run.

What will take the markets out of the doldrums? Since the problems of the US economy lie at the heart of all the problems, it will take some clarity on the situation there to do this. Any strong signal that the US cycle has bottomed out will lead to a quick re-pricing of risk and realignment of asset prices.

Car Models in India

Listed below are some of the major automotive brands and their models on Indian roads:

Latest Cars
Chevrolet Spark | Fiat Grande Punto | Mahindra Ingenio | Mahindra Renault Logan | Maruti Suzuki SX4 | Mitsubishi iCar | Skoda Fabia | Toyota Lexus LS 460

Hyundai Motors India
Hyundai Elantra | Hyundai Accent | Hyundai Getz | Hyundai Santro Xing |
Hyundai Sonata Embera | Hyundai Terracan | Hyundai Tucson | Hyundai Verna

Maruti Udyog
Maruti 800 | Maruti Alto | Maruti Baleno | Maruti Esteem |
Maruti Grand Vitara XL-7 | Maruti Gypsy | Maruti Omni | Maruti Swift | Maruti Suzuki SX4 | Maruti Versa | Maruti Wagon R | Maruti Zen | Zen Estilo

Sports Cars
Ferrari 248 F1 Racing Car | Ferrari F1-2000 | Ferrari F2001 Racing Car | McLaren F1 Racing Car | McLaren SLR 722 Sports Car

Bentley Motors Limited
Bentley Arnage | Bentley Azure | Bentley Brooklands | Bentley Continental Flying Spur | Bentley Continental GT

Lamborghini India
Lamborghini Gallardo | Lamborghini Gallardo Spyder | Lamborghini Murcielago LP640

Mercedes
Mercedes Benz C-Class | Mercedes-Benz CLS | Mercedes Benz E-Class | Mercedes Benz SLK-Class | Mercedes-Benz SL-500

Ford Motors
Ford Endeavour | Ford Fiesta | Ford Fusion | Ford Ikon | Ford Mondeo

Fiat India
Fiat 1.6 Sport Adventure | Fiat Grande Punto | Fiat Palio | Fiat Petra

Honda India
Honda Accord | Honda City ZX | Honda CR-V | Honda Civic

Hindustan Motors
Ambassador Car | Mitsubishi iCar | Mitsubishi Lancer | Lancer Cedia | Mitsubishi Pajero

General Motors
Chevrolet Aveo | Chevrolet Aveo U-VA | Chevrolet Forester | Chevrolet Optra | Chevrolet Spark | Chevy SRV | Chevrolet Tavera | Opel Corsa | Opel Corsa Sail

Skoda Auto
Skoda Fabia | SkodaLaura | Skoda Laurin & Klement | SkodaOctavia | SkodaOctavia Combi | SkodaSuperb

Porsche
Porsche Boxster | Porsche Carrera GT | Porsche Cayenne

Tata Motors
Tata Indica | Indica V2 Xeta | Tata Indigo | Tata Indigo Marina | Tata Indigo SX | Tata Safari | Tata Sumo Victa

Toyota Motors
Toyota Camry | Toyota Corolla | Toyota Innova | Land Cruiser Prado | Toyota Lexus LS 460

Reva

Mahindra & Mahindra
Mahindra Bolero | Mahindra Scorpio | Mahindra Ingenio | Mahindra Renault Logan

BMW
BMW 530i | BMW 760Li

Audi
Audi A4 | Audi A6 | Audi A8 | Audi Q7

Nissan Motors
Nissan X-Trail

Rolls-Royce Motor Cars
Rolls-Royce Phantom

BPO Sector Outlook

According to:

Dick Vleesenbeek
- Talent shortages are driving labour markets to become increasingly more global, competitive, and employee-driven
- BPO predicted to be an $80B industry by 2009/10
- RPO (subset of BPO) estimated to grow into a $20B by 2009/10
- Vendor Management Solutions (Managed Service Provider) Market predicted to grow to be $4.2B by 2009/10
- Clients are searching for true global solutions and partners
- Trend toward complex, comprehensive solutions (workforce management models) to blend the expertise of internal/external partners
- The trend toward solutions providing off-shoring and shared service components continues
- Staffing and consulting firms face an environment of evolving legislation, increasing consolidation, and technological advancements impacting the business

Atul Subbiah
Manager - M&A Strategy at Deloitte Consulting
1. The coming of age of the major Indian suppliers
2. The unbundling of contracts where deal size is getting smaller
3. Contracts are getting shorter and work is being spread across multiple providers
4. Large deals are being split, with an increase in number of multi vendor contracts leveraging the near shore and offshore options
5. Large outsourcing contracts signed in the 1990s are coming up for re-bidding

Sunmeet Jolly
A Dropping Dollar may affect the attractiveness and ROI in Outsourcing Industry. The trend needs to be watched carefully over next 2-3 years. Rising wages in Outsourcing Providing Countries also adds to the marging pressures. But Demand for Outsourced Services will definitely increase as projected by Analyst firms. Its likely to become a high volume game and we can see some consolidation on vendor side.

Deverick McIntyre PMP
Industry Leader on China's IT & outsourcing industry
Packaged ITO+BPO+ Infrastructure Management Outsourcing is a significant new trend. We have seen this type of consolidation especially in the Financial Services industry, where, for example, the IT system supporting the outsourced business process is hosted and administered by the same vendor.

It makes sense for many clients to consolidate the BPO and IT contracts with the one vendor to achieve synergies and manage risks. This is not good news for pure BPO players, however for the large Indian outsourcers such as Infosys, TATA and Wipro, as well as international players IBM, Accenture, Cap Gemini etc, it is a perfect fit with their broad solution sets.

Packaged IT/BPO contracts are much larger than pure BPO deals and this trend has led to the increasing use of sourcing consultants such as TPI, Everest Group or smaller players such as TaidaL for thorough due diligence.

The other equally important new trend is contract pricing based on client business revenue/risk. Mainly seen in ITO contracts, the trend to package ITO with BPO will result in more innovative BPO contracts using client business based pricing. It is an interesting trend which has come about as clients force consulting companies pushing solutions to "put their money where their mouth is" and invest in the outcome. "If this solution is good for my business then partner with us in the upside (and downside) risk"

Hossam Elgamal
General Manager of GNSE Group
the Global Business Process Outsourcing sector and just after the launch of the latest ATKearny report, shows a tough competition between different emerging players and existing well established ones like India.
this competition is certainly in the favor of the business, shaping up the processes, increasing the quality and diversifying the options and resources in such global industry.
the result in the coming 1-3 years would certainly be a more rewarding choice to clients with less risk and a more framed quality of delivery, more important an observation that is taking place currently where giant players (indian ones like Satyam, TATA, WIPRO...) are having competency centers outside India to diversify their offering, minimize the risk, better control the cost and benefit more of the other countries benefits... thus becoming truely global... which in turn would lead those countries of choice to learn from the experience, build the expertise and start becoming important players in that market..

but mostly important is the fact that Clients will benefit further and more clearer from the BPO, which will come to a maturity stage.

a) the emerging significant developments/trends would be the diversifications of the countries for large BPO players, and the globalizations in the true meaning of the services.

b) driving this trend are: 1. the clients experience and need for better risk management, further more options and choices, better quality, managed cost. 2. the Giant BPO players need to maintain competitive advantage, and capitalizing on the globalization opportunity 3. the Awarness of the emerging countries in that industry, their government support, and their industry maturity.

c) as i said, the key players are moving more agressively into a globalized diversified offering, not standing still in one country only. example for that WIPRO and SATYAM moved recently to open competency centers with 1000s of resources in Egypt, as the government is agressively supporting the initiative by providing incentives, and building the capacity of the local resources, while cost is very competitive and mastering arabic as well as different european languages help providing a competitive advantage!!

Source: LinkedIn

Future of IT / ITES / KPOs

We seem to have come a full-circle actually. Outsourcing started with low end menial data entry jobs that were discrete and modularized tasks, not interwoven into the company’s real-time environment. Then we graduated upwards to application maintenance, then onward to application development and then design and system architecture work. Call center and BPO brought about a mission-critical real-time and process driven mode of outsourcing with SLA and metrics based performance measures. With the rise of KPO, the emphasis is now on skills-based and decision-making type of work that is neither “mission-critical” nor “real-time” – yet it is more intimately tied to the top-line performance of companies than ever before in the past. With KPO, there are no metrics, no SLAs, no cultural or accent issues, no time-zone barriers and a productized consulting model that is driving a new breed of companies. With a combination of data aggregation, research, analytical, modeling and consulting skills KPO is redefining the boundaries of outsourcing.

According to me, some of the major drivers were:

• BPO found a niche customer due to a huge demand in back office customer support. BPO was and is mainly successful due to costs effectiveness and the availability of cheap labor – it found a huge pool of workforce as the unemployment rate among English speaking graduates was very high. It created a perfect sector which could find an effective solution to all its workforce requirements among the huge pool of university English speaking graduates.

Slowly countries like India found that although BPO was exploiting the general mass of graduates yet another potential pool of qualified engineering, medical, legal, financial professionals was untapped. There was a clear synergy between the mid-level staff across various companies in US & European regions and this pool in India. Gradually it was realized that the mid-level staff which is mainly involved in offering knowledge based services can be replaced with the pool of talented professionals in countries like India at a much lower cost.

• We can say that BPO has slowly reached to a stagnant point as the factor of realization of using BPO services in new avenues is decreasing. OR we can quote unquote what most industry insiders feel - With the opening of the world economy, many surprises have taken place in the business scenario. This is true for countries across the globe both from outside and within the countries.

The western world has started realizing the potential and the importance of smaller countries of Asia in providing quality services at much lesser rates and are treating this fact as a revolution. Similarly, within the Asian countries revolutionary trends are taking place in terms of expansion and spread of service providers to small cities. BPO is giving place to a new name i.e. Knowledge Process Outsourcing (KPO).

Now coming to what could be the next stage of transformation: - According to NASSCOM, KPO is expected to reach $17 billion by 2010, of which $12 billion would be outsourced to India. In the future, it is envisaged that KPO has a high potential as it is not restricted only to IT or ITES sectors, and includes other sectors like Intellectual Property related services, Business Research & Analytics, LPOutsourcing, Web Dev. Application, CAD/CAM, Finance & Accounting Management, Clinical Research, Publishing, Market Research etc.

Taking into account the huge potential of intellectual property within India, I strongly feel that next stage of KPO could be a more evolved involvement ie Consulting. As of now, we are only creating the groundwork and consultants abroad use our findings to offer advisory services to their clients. In the next 2-3 years, India could become a One Stop Shop for research, analytics as well as Consulting and Advisory services. Hence future IT/ITES SMEs in India would evolve themselves as Consulting Companies.

Top 3 concerns when outsourcing to Asia - Uncensored

Excerpts from one of the discussions going on at LinkedIn. Pretty interesting stuff

Here you go

Senior Software Development Engineer, Toshiba America Electronic Components
In my experience culture, distance & communication are big issues when outsourcing.

First of all, we often outsource software dev to realize cost savings. This savings is often eaten up due to logistical and cultural issues which impede the outsourced projects.

1) Communication issues: Especially with China, communication can be difficult because of the lack of qualified English speakers. I interviewed a team that had daily 10 PM phone conferences from the US to China where only 1 guy on the China side could speak English. The Americans would talk for several minutes, then the one English speaker would translate in 15-20 seconds that content to his team members. A lot was 'lost in translation'.
In another example, members of an American software team had great difficulty working with Indian team members over tele-conference because of the accent issue. The company stateside eventually fired several members of their American staff because they would not cooperate fully with the remote Indian team due to language frustration. This damaged morale of the team, and did little to help the ongoing issues.

2) Culture. Sometimes "yes" does not mean "yes". Teams think they are on the same page with their overseas counterparts, when they are not.

3) Distance (physical and metaphorical) - Software development requires a tight interface between the developers and the stakeholders / customers. When separated by distance, time-zones, culture, and language you are adding a significant project risk that the work being done will not mesh with the (often dynamic) requirements for the end product. Not only are problems more likely to occur, but it will take more time to identify them for all of the above-mentioned reasons.

Executive Producer for Video Games
The 3 biggest concerns would be:
- Cultural background: you will experience vast differences in use of color, shapes, facial features, technical detail etc. from country to country. Don't expect Western style unless you guide extremely well.

- Language barrier: definitely an issue in Japan. Not so problematic in India. Mixed in China.

- Reliability. I don't want to say we've been disappointed so far. But we are fully aware that our legal possibilites are very restricted in China and India. This is not really an issue in Japan though.

CEO Bertin Services
1.As you probably know India is the WW Leader in software development, and gatheres probably 80% of CMMI5 companies in the world... but check what is covered by their CMMI certificate to understand the major concern there : It always looks perfect (english culture). Real Life is often not so bright, although they have competencies and want to make it. dig to make a difference between what they say and what they do.
2. I'd rather go in India than in China, because they're under english culture (easier to work with), software oriented, highly educated, and India is the largest democracy in the world. but they're not so cheap...
3. Outsourcing to Asia will require a lot of lawyers' time to make sure you get a fair Deal, and will take very long in India. Let's also be clear about the risks you'll face to have them copy your production and take the business from you, especially in China.

4. Last but not least : I believe that a key of success of operations set up in Asia I was part of is a very strong involvement of Key people of your company, including having a very reliable peron (at least one) staying down there for a year to ensure everything it going to be taken care of.

Software Development Process Reengineering Manager
NINE offshoring advices.
1. Always take care of your local workers.
2. Focus on core competencies.
3. Work with big established companies.
4. Offshore projects that require minimal interfaces.
5. Do not overemphasize process.
6. Focus on communication.
7. Test offshoring team with some pilot project
8. Read some offshoring articles.
9. Conclusion and evaluation using eSCM.

Reference: LinkedIn

KPMG Predicts that Global M&A Market is about to Peak

By Big4.com Staff Writers, August 2007

Global M&A Predictor of KPMG Corporate Finance suggests that the Global Mergers and Acquisitions market is going to peak, and further predicts a fall in overall deal volumes this year. KPMG believes that in the year 2007 the global deal volumes will be much less than those achieved in the year 2006.

Global 1,000 M&A Predictor of KPMG Corporate Finance also believes that the latest data of Dealogic which illustrates increasing average deal size on lower volumes, signifies a "final hurrah" with less, but bigger deals being completed.

Stephen Barrett, International Chairman, Corporate Finance at KPMG, comments that "Global activity is about to peak, certainly in terms of deal volume, and we foresee a continued fall in deal numbers during the course of 2007."

Global 1,000 analysis of KPMG reveals that in the first five months of the year 2007, there was a major inconsistency between the main trend indicators of deal values and volumes. The study done by KPMG further reveals that in spite of conservative balance sheets, the appetite for M&A transactions seems to be slowing down.

Europe, out of the major global regions, mainly remains positive in terms of potential M&A activity. In terms of valuation, the U.S remains static. In terms of sector regions, M&A prospects seem to exist in Oil and Gas (North America), Basic Materials (North America), Utilities (Europe), Industrial (Europe) and Consumer Service (Europe). The analysis done by KPMG shows that out of all the main global regions, Europe continues shows the strongest M&A picture.

Indian M&A Deals Update (Mar-July 07)

North America and Asia were the favourite hunting grounds of India Inc on global acquisition chase as the takeovers deals in these region touched $7 billion and $4.2 billion in the first four months of 2007-08, according to Assocham Eco Pulse Study (AEP). India Inc's global acquisition deals have been worth $15.3 billion. Deals with US-based companies worth $5.1 billion were accomplished during the period April-July 2007 as tracked by the AEP in Study on Mergers & Acquisitions during April-July 2007-08. Tata Group was at the forefront with their total deal values worth $2.13 billion in steel, hospitality and automotives sector. Essar Group acquired Minnesota Steel for $1.65 billion in the US. Reliance Communication expanded to US communications market by acquiring Yipes for $300 million while Infosys plans to acquire Phillips Global for $200 million. Another big acquisition was that of Globeleq by D S Construction for $542 million.

"The equation of business relations with the western countries is undergoing a significant change. Indian business leaders are aiming inorganic expansion through the most industrialised country of the world", said Venugopal Dhoot, President, Assocham, commenting on the success of Indian entrepreneurs in acquiring high value companies based in US. Metal companies in Canada were traced by the Indian bluechips with the war chest of $1.7 billion. Whereas Essar Global acquired Algoma Steel for $1.58 billion, Aditya Birla acquired announced take over of Utkal Alumina International for $0.19 billion. Among the Asian countries, Vietnam was the largest receiver of the deal money as Tata Steel entered into a joint venture with Vietnam Steel with 65% stake for $3.5 billion. Indonesia, Israel and Singapore are the other nations.

12 August 2007, Excerpts sourced from Financial Express