💎 UK’s Pound, China’s Growth & India’s Bond (2nd October, 2022)

What’s there ahead?

1.In our Expert Take section, we cover the following:

• Why has the pound fallen to a record low against the dollar?

• Why is China lagging behind its East Asian neighbours?

• Why is there a delay in India’s inclusion in global bond index?

2.Also, this week onwards, we introduce a new section on Investment Insights, where we talk about: P2P lending.

Expert Take

1.Why has the pound fallen to a record low against the dollar?

The UK took the biggest tax cuts in 50 years and that led to their currency, the pound falling to a 40-year record low against the dollar.

So here is what the UK proposed: drop the income tax rate for most people to 19% from the current 20%, while the highest rate will drop to 40% from 45%. They also canceled a planned increase in the corporate tax rate to 25%, leaving it at 19%.

The scheme of events

• The country is facing a cost of living crisis: inflation is at 40 year high of almost 10%.

• And wait, there is recession too: UK economy's growth went negative for a consecutive 3rd quarter.

• Now, the government's idea is: Cut taxes and give people more money to spend so as to revive growth.

But it can bite them back

These unfunded taxes will lead to a mounting tax burden: the IFS has estimated that it will push UK's borrowing to 190 billion pounds this year. As a result, government debt will rise to about 94% of GDP by 2026-27.

That's huge for sure and not to forget the increasing interest burden. The bad part is, these measures will boost demand and lead to a further rise in inflation.

Our take

Out of the above concern, we saw the investors selling the currency and other UK assets like government bonds, leading to a fall in the pound's value. Well, fiscal sensibility is important to investors.

You need to have your math right when it comes to figuring out your income sources. With such not-so-coherent policy measures, the country loses its credibility in the eyes of the investors.

2. Why is China lagging behind its East Asian neighbours?

For the first time since 1990, China is expected to lag behind the other countries in East Asia. As per World bank forecasts, China is expected to grow 2.8% this year while other economies are expected to expand much higher: Vietnam by 7.2%, the Philippines 6.5%, Malaysia 6.4% and Indonesia 5.1%.

What's working well for other economies?

• They are a lot into commodity exports and hence benefit from the high commodity prices like coal.

• To keep inflation in check, the countries like Indonesia, and Thailand facilitated fuel subsidies.

• Liberal lockdown measures and quicker opening up also spurred the consumption post covid.

What went wrong with China?

China's harsh pandemic lockdowns and mass testing have limited mobility and consumption.

Also, the real estate sector, which makes up 30% of China's economy, has been going through a crisis, led by the stalled construction activity, leading to a loss in jobs and income of the economy as a whole.

Our take

A country's way of handling a crisis and macro situations like inflation are important determinants of growth in the future. This becomes a relevant decision-making point for investors to keep in mind while deciding upon their global portfolios.

In the past, China as a market might have been very lucrative for the investors. But currently, unless China takes corrective measures, it might not be a preferred avenue for the investors.

3. Why is the inclusion of Indian bonds in the global bond index delayed

India has been trying to get included in the global bond indices since 2013 and it has got delayed yet again to the next year. Basically, the underlying reason is operational issues around the clearing and settlement of Indian debt on international platforms.

These Indian government bonds are a way through which the government borrows money from investors. Passive inflows of around $30 billion are expected from India's inclusion, in a staggered way over 10 months from the month of joining.

How would the inclusion benefit India?

• When listed with other bonds in the global index, the Indian bond gets credibility in the eyes of global investors.

• It also helps us get the foreign flows in dollars, which aids the stability of the Indian currency.

• It can act as a significant source to finance the borrowing for the government.

But the other side

India's inclusion in the global bond index, also makes it more vulnerable to global events such as the US Fed rate hikes or investor sentiments in other major economies.

It could be the US sneezing and India catching a cold.

Our take

After inclusion, India's macros will be closely watched by global investors. It will be imperative for the government to take care of crucial numbers like total borrowings, tax revenues, and control over spending.

Hope, for the bond inclusion, along with the operational issues to solve, the government would take care of the above too.

Investment Insights : P2P Lending

Well, today we’ll help you understand an interesting and highly talked-about investment avenue — P2P Lending.

P2P is short for Peer-to-Peer, where individuals borrow money from other individuals directly, and repay it to them with interest. This is done via RBI-regulated fintech platforms.

Now, most people assume peer-to-peer platforms to be products where one investor lends money to one borrower. But all P2P platforms don’t work that way.

You see, some of them have innovated very smartly. They take money from thousands of investors like you, pool it together and then lend it to another set of borrowers. This way, your money is split across multiple borrowers, so even if one of them defaults, your investment amount is only hit marginally.

P2P Lending is an interesting and helpful product for both, borrowers and investors.

For starters, it helps folks with low credit scores get loans, so it’s a highly preferred option for such borrowers. It also has a great user experience in terms of the end-to-end application and disbursal process, making it a seamless journey.

For investors like you and me on the other hand, most P2P platforms offer fixed returns that are not affected by market volatility, which adds stability to your portfolio. And these returns could be 1.5 - 2 times your typical FD returns!

But, like everything else in life, they also come with their own set of caveats.

A major concern here is that even though P2P platforms take steps to reduce the risk, they’re still not 100% risk-free. The borrowers on these platforms are people with a wide range of credit scores — sometimes as low as 500; which is why these platforms offer higher returns.

Now, because P2P platforms don’t ‘guarantee’ returns to investors, there is a possibility that an investor could make low returns, or even erode her capital. And that is why, as is for any other product, it’s always prudent for investors to do their research before investing in P2P.

As someone considering this investment avenue, you should

• First do your due diligence to check the credibility of the platform and the NPA value (percentage of borrowers who default).

• Then check their operating model — whether the investments are being pooled or not. If not, then the return for the higher risk should also be higher.

• Lastly, some platforms also show the borrower list to investors. So make sure you check this where you can.

All-in-all, while P2P platforms offer fixed, better-than-FD returns, they come with a higher risk. As an investor, you should make sure you’ve covered all the bases before investing with them.