Subprime?

What is Subprime?

In the US subprime Lending is primarily advanced to cusomter who typically have low credit scores and histories of payment defaults or bankruptcies. According to S&P subprime originations totaled $421 billion in 2006. Due to a big plunge in the housing market from the last 18 months subprime lenders felt the heat as most of the customers failed to meet the payments ending in foreclosures.

How is subprime connected to Financial Companies,Hedge Funds and Investment Bankers?

Majority of the Top notch Investment Bankers, Hedge funds and Financial Companies in the US, Austrailia, Europe and even Chinese Banks(unconfirmed reports say Bank of China might take the hit) as part of their diversification strategies invest in subprime mortgage based companies either directly or indirectly. The extent of investments are completely left to the individual companies. The downturn has indeed affected every one in the industry. While the biggies are likely to absorb the hit the small and medium sized companies with greater exposure to subprime are likely to collapse.

How does this impact India/Indian Stock Markets?

Luckily Indian Companies/Banks have almost no exposure to the subprime market except for a few IT companies like IGate Global and Tavant(unlisted) having clients in the sector. The only major direct impact we foresee is the FII sell off. India is a hot destination and considered safest among the emerging markets by the FII's. It would be a last resort on the behalf of an FII to sell his holdings in the emerging markets. Recently we mentioned that BSMA might sell some of its holdings and we proved right. The fund slowly started liquidating few positions atleast. Luckily the selling is absorbed with out any pain by other major funds. The extent of the subprime trouble is a mystery. Majority believe this as a disaster but how far is definitely not any body's guess. We believe though Indian Markets will not take a direct hit the credit tightening in the US will lead to a decent sized correction in our markets giving just an awesome oppurtunity for the investors to re-enter. Crude in the coming days will supplement subprime keeping the bulls at bay. We do not see the subprime fading away from the picture till the end of the year so do the bears in the Indian Markets.

Which India based big FII's has exposure to subprime

Goldman Sachs, Bear Stearns(a potential victim or a buy out might happen), Morgan Stanely, Merryl Lynch,Citigroup, BNP Paribas. Of these funds we are only skeptical on Bear Stearns while others are likely to absorb any kind of hit.