The Telegraph
Since 1st March, 1999
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Morgan money-making machine

Mumbai, July 26: Junk that post office monthly deposit scheme; stow that bank deposit application.

Morgan Stanley ' the global investment banker 'has a blowout offer for you if you have the guts and gumption to place your bets on the currencies of India, China, Brazil and Russia.

The currencies of the four best-known emerging economies popularly known as BRIC ' the acronym formed from the first letters of the four countries ' could hand out an annualised return of an eye-popping 20 per cent should you invest in a special instrument that Morgan Stanley plans to float worldwide.

The four currencies in the basket are the Brazilian real, the Chinese renminbi, the Indian rupee and the Russian rouble.

The investment bank plans to float global medium-term notes at a price of $1000 each. This is a capital protected investment, which means that there is no downside risk: you will get back the $1000 investment at the end of three years no matter what happens.

However, if the basket of four currencies ' each has a 25 per cent weightage in the basket ' appreciates against the dollar, investors in these three-year notes will get $1000 plus an additional amount which will depend on how much the basket has appreciated against the greenback. The payout date has been fixed as March 5, 2009.

However, the date of the flotation has not been fixed, but is expected to be finalised soon.

At present, individual investors in India can invest up to $25,000 (a little over Rs 11 lakh) in a calendar year in investment avenues abroad, including stocks, bonds and derivative instruments.

Reserve Bank officials told The Telegraph that there is no bar on individuals investing in Morgan Stanley’s notes as long as they are regulated by a recognised authority ' in this case by the Securities and Exchange Commission (SEC) of the US.

In an elaborate 56-page filing with the SEC on Tuesday, Morgan Stanley said if the basket of currencies appreciates even by 0.01 per cent against the dollar, the investors will automatically get an additional amount of $200.

“If the basket of currencies strengthens relative to the US dollar by more than 10 per cent, the supplemental redemption amount will be greater than $200, representing a greater than 20 per cent return on your investment,” says the filing. The valuation date for determining the payout is February 24, 2009.

In an illustrative table that accompanies the offer, Morgan Stanley says if the basket of currencies appreciates by as much as 25 per cent, the equivalent annualised return will be 17.46 per cent. If the appreciation is 20 per cent, the annualised return will be 14.3 per cent. If the value of the basket swells by 15 per cent, the annualised return will be 11 per cent. And if the increase amounts to just a piffle at 0.01 per cent, the annualised return will be 7.54 per cent, which could match the return on any three-year bank deposit.

Who benefits'

The medium-term notes are being offered to investors worldwide and no minimum application amount has been set in the offer document. But it looks like a great investment opportunity for high networth individuals.

Morgan Stanley said it may not float the notes in Russia, China and Brazil. It was silent on India and the RBI official’s response seemed to signal that it will.

Investors in India will have to open a foreign currency savings account with an authorised dealer in the country (mostly banks). The investment in these notes will be routed through the account.

The investment banker sounded a caveat: “You cannot predict the future performance of the basket currencies based on their historical performance.”

Three of the currencies 'the renminbi, the real and the rouble ' have appreciated against the dollar over the past year. Only the rupee has weakened by as much as 6.3 per cent during the same period.

Of the four currencies, the Chinese renminbi has appreciated the least against the dollar at 1.24 per cent on a year-to-year basis. In July 2005, the renminbi abandoned a dollar peg after the Chinese government permitted a limited managed float against a basket of currencies under pressure from the US government. American exporters were increasingly frustrated because they were unable to storm the Chinese market because of the high cost of its goods that a dollar peg ensured.

When the new system was introduced, the Chinese authorities permitted the renminbi to appreciate by 2 per cent against the dollar, making the cost of imports from the US into China that much cheaper. But since then, the renminbi has been allowed to float in a narrow band of 0.3 per cent against the dollar under the managed float system. Unless the Chinese authorities relent, there doesn’t seem to be a great possibility of the renminbi appreciating against the dollar by very much over the next three years.

Morgan Stanley says the notes will not be listed on any security exchange and, therefore, there may be “little or no secondary market for notes”. However, an affiliate ' Morgan Stanley and Co Incorporated ' will act as a market maker for the notes though it is not required to do so.

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