Sunday, September 15, 2013

path of recovery

Rupee completed its biggest weekly gain since October 2009 amidst optimism over increasing dollar supply. The INR closed at Rs. 63.50 against the USD. Equity markets traded with a cautious note ahead of the US Fed meet scheduled on 18th September 2013. The most actively traded 7.16%2023 10 Yr Benchmark bond closed 11 bps lower than the previous week implying a yield of 8.50%. The credit spread between G-secs and corporate bonds remained unchanged across tenors.
US economy is largely driven by consumer spending, amounting to about 70 per cent of their economy. Americans are being hampered by weak pay, increase in social security tax and tepid hiring. Average weekly pay checks have grown just 1.3 per cent since the recession ended more than four years ago. Both the giant retailers Wal – Mart and Macy reported a disappointing profit for its second quarter and cut its outlook for the year signifying the weakness in the consumer spending.

Wal-Mart is considered an economic bellwether as it accounts for nearly 10 per cent of nonautomotive retail spending in the United States. It's a picture the Federal Reserve will weigh, while deciding the scale of QE . In my considered opinion, the revival of US economy is a long drawn process.

IIP (India’s Industrial Production) data for the month of July at 2.6% was much stronger than the consensus estimate reflecting the recovery in the economy. Under manufacturing sector, 14 out of 22 industries have shown increased production activity during July 2013 as compared to June 2013. Among the sectoral performances except mining; manufacturing & electricity grew by 3 & 5.2% respectively compared to the previous year. Looking at the user-based classification, all segments except Consumer Goods have shown a positive m-o-m growth in July 2013. Probably during Diwali festival, the same is expected to display a higher degree of traction.
Recently, the chief equity strategist of Asia’s one of the leading brokerage group made a reference regarding the risk of sovereign crisis for India. There is no merit in this argument since the Government borrowings are pre dominantly funded internally due to our high house hold savings. Bank deposits constitute 46% of the Indian house hold savings followed by currency, PF, Insurance, and shares constituting a meager 3.4%. Debt to GDP ratio is one of the lowest at 51.6% as against other Asian (except China) and developed countries.

With macro data pointing towards the path of recovery and the INR showing strong signs of stability, there is a definite case for the RBI to ease liquidity and soften interest rate to accelerate growth in the forthcoming monetary review policy scheduled on 20th September 2013. Investors in the long duration funds should stay put and will start reaping dividends for their patience. It’s also time to start increasing allocation to diversified equity funds through the systematic transfer plan ie invest in liquid funds and transfer a fixed amount at regular intervals over a longer period of time.

Happy investing!

Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.

Monday, September 9, 2013

weekly round up

Last week was an action packed one with the new RBI governor Raghu Raman Rajan announcing slew of   short term measures to attract capital inflows and long-term measures like new banks and financial inclusion which infused confidence in the markets. Sensex surged by 650 points taking it to 19,270.

RBI’s promise to give banks more powers in handling the NPA menace has given bank chief executives a sense of new hope. Banking index was the top gainer by 10% followed by PSU, Oil & Gas, Capital Goods, Metal, Power and Realty indices adding 3-8%. FIIs turned buyers to the tune of Rs 982 cr for the week Vs net sell of Rs 2,825 cr previous week.

 INR appreciated by three rupee. Money market yield (CP/CD) across tenors softened between 100 – 130 bps. The 10 Yr benchmark bond yield came down to 8.39% on 4th September ie  22bps lower than the previous week closing and hardened by the week end, closing at 8.61%.

In order to support banks to pump in more FX deposits, RBI opened a special window to swap the fresh foreign currency non-resident (banks) FCNR(B) dollar funds, mobilized for a minimum tenor of three years at a  subsidized fixed rate of 3.5 per cent per annum.  The funds mobilized on an incremental basis are exempt from CRR and SLR requirements & would help banks to reduce their cost of funds.

But, there’s a catch. As per the current RBI guidelines, Banks are  prohibited from granting fresh loans or renewing existing loans in excess of Rupees one crore (Rs.100 Lacs) against FCNR (B) deposits, which is a dampener for the banks to offer leveraged position through their off shore branches. RBI should address this lacuna which can accelerate dollar flows significantly given the fact that the Interest on FCNR – B deposits are exempt from income and wealth tax. Rupee stability will provide room for the central bank to take monetary measures to spur growth. Equities look attractive with Sensex trading at 1 year forward PE of 14.4x which is below the historical valuations.

The major trigger for the week will be the outcome of US Fed meet scheduled on 18th September followed by the Indian Central Bank’s second quarter review of monetary policy on 20th September.

Liquidity will remain tight this week due to advance tax outflow. With an inverted yield curve, it makes more sense to be overweight at the shorter end of the yield curve; preferably fixed maturity plans (up to 1 year)/Short term funds with an average maturity of around 2 years.
Happy investing!

Sunday, August 25, 2013

RBI's reversal stance

Last week the Central Bank took us by a surprise with some of the retrograde steps which calmed down the unrest in the fixed income and equity market. The measures included Liquidity infusion amounting to Rs. 8000 Crores through OMO (open market operations), scaling down  issuances of cash management bills hitherto intended to suck out liquidity and letting banks to move their SLR securities to HTM category (held to maturity) from available for sales up to the limit of 24.5% as an one time measure. Else, banks would have ended up booking huge market to market losses to the tune of 40,000 crores.
Indian government bonds posted their biggest weekly gain in four-and-a-half years and the new
Benchmark 10-year bond yield fell 62 basis points over the week, the sharpest since January 16, 2009. For the week, the new 10-year bond yield was down by 62 basis point from last week's close of 8.89%.
It appears that the antiquated approach of ‘liquidity tightening ‘to prop up the currency proved to be counterproductive as the yield across tenors hardened, adversely impacting the flow of credit to the productive sectors of the economy. With the country’s GDP at a decade low in the last fiscal and the recent downward growth revision to 5% for the FY 2013 -14 is posing a bigger challenge to the country’s economy.
Today, the country is experiencing a slow growth accompanied by high inflation, which technically known as stagflation. We are already witnessing the signs of the same like price rise, unemployment, volatility, lack of confidence in capital markets, reactionary manoeuvres by the central bank etc. The effects of stagflation are much worse than recession and inflation experienced separately, as there is no easy fix. Recessionary conditions call for reduction in interest rates and increased government spending. However, these can lead to more inflation, which is half of the problem when dealing with stagflation.
But, if we take a closer look at our inflation data, it’s the food inflation which is taking the toll. This can better be managed by addressing the supply side constraints & improving efficiency in public distribution system.  A recent report suggests that fruits, grains and vegetable worth Rs 44,000 crores are lost every year due to inadequate storage facilities.
The reversal of RBI’s monetary stance is probably a realization that things are going out of hand due to significant tightening of liquidity and an indication of its focus towards ‘GROWTH’
The fiscal deficit during the first quarter jumped to R 2.63 lakh crores i.e.  Half of the Budget target for the entire 2013-14, increasing the anxiety over the state of the economy. The primary reason for the high fiscal gap was due to sluggish revenue growth even though government spending remained robust.
The total receipts during April-June were at R 1.19 lakh crores or just 10.6% of the budget estimate for 2013-14, while expenditure were at R 3.82 lakh crores or 23% of the Budget estimate. Of the revenue receipts of R1.17 lakh crores during April-June, tax receipts accounted for R1.02 lakh crores.
The capital receipts were just Rs. 2,172 crores during the first quarter in absence of any big-ticket disinvestment. On the spending side, the centre's non-plan expenditure was at R2.67 lakh crores during the first quarter, which was 24.1% of the budget estimate. The plan expenditure was at Rs.1.15 lakh crores or 20.7% of the BE. The revenue deficit in the first quarter was at R2.1 lakh crores or 55.4% of the budget estimate for the entire 2013-14.
In the light of all the above, there is a higher need for a co- ordinated effort by the Central Bank and the Government to accelerate growth. Lest, the fiscal deficit projection of 4.8% of the GDP would remain a herculean task.
Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments

Wednesday, August 14, 2013

cyber crime by symantec corporation

Friends, Beware!
Today, there was an unauthorized transaction by Symantec corporation towards automatic renewal of Norton anti virus software using my citi bank credit card. I neither shared my card details nor opted for auto renewal. Upon taking up with Symantec, they agreed to reverse the transaction but could not explain/justify themselves regarding the same. This amounts to committing a cybercrime.

Please remain alert against online card transactions.

Friday, August 9, 2013

challenging times!

This is one of the most testing times for the Indian economy. Investors’ confidence in the capital market is dwindling with each passing day. Sentiments are getting further accentuated due to downward revision of GDP and earnings forecast. The broad market Index Nifty  delivered a meagre absolute return of 3.42%, 5.91%, 1.47% and 22% for the past one, two, three and five year periods respectively,  much lesser than Bank FDs, liquid funds and ultra- short term funds.
Some of the recent RBI’s measures to tighten liquidity have made borrowings costlier in a stagnating economy and increased the risk of rising NPA’s. The combined gross non-performing assets and restructured loans for the banking industry is around 10% of the total loan outstanding, and most of the bad loans are from PSU banks. Mirroring the same, banking index fell by 23% on an YTD basis.

Yesterday’s announcement by the RBI to suck out liquidity through the weekly issuance of Cash Management Bills amounting Rs 22,000 Crore would exert additional pressure on the shorter end of the maturities. Liquid fund investors as a matter of caution should invest in portfolios having higher weightage to CBLO to avoid any potential mark to market losses.

Long duration income funds got impacted adversely due to rising yields. Ironically, this is one of the rare instances where investors have been on the wrong side of the markets, both on the debt and equity front. Investors are constantly grappled with thoughts of moving to cash which reminds me one of the famous quotes by warren buffet.

Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value

While there is no quick fix solution, favourable market environment  will prevail once  the central bank moves its stance towards supporting growth,  warranting monetary interventions like liquidity infusion, rate cuts etc.  Investors should stay disciplined and adhere to their respective asset allocation pattern. In case you have missed out, this is the time to consider allocating some funds to principal protected nifty linked product as part of asset allocation.

NLD’s (Nifty linked debenture) as they are popularly known, enables you to participate in the upside of the equity market with the principal being protected. The underlying instrument is generally a non- convertible debenture with the coupon/interest linked to the stock market (Nifty). It is advisable to stick to issuers with high/highest credit ratings because of the increasing credit risks.

Depending on the factors like tenor, interest rate and the volatility, one could get a decent participation rate of the equity market without worrying about the risk of losing capital.

For instance, every Rs.100 invested in a cap protected product; approximately Rs 75 – 80 is allocated to debt providing safety of the principal. The balance Rs 25 is used for buying call options for participation in the upside of the equity market. The Participation rate might typically range between 100 – 150% depending on the price of the option.  If nifty generates a return of 30%, the call options will give a return of 30 – 45%. If the nifty falls below the level at which the investment was made, the investor gets back his principal.

Happy investing!

Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.

Wednesday, July 31, 2013

Time for FMP

Post the announcement of RBI’s policy yesterday, the 10 yr benchmark G-sec softened by 19bps as the key policy rates remained unchanged. However, it gave up all its gains during the day and ended up at 8.24%, 11 bps higher than the previous day’s closing. Interbank call rates remained at 10 – 10.10 levels. Three months CDs remained unchanged at 10.93 % levels and the spread between CP was at 57 BPS.
Surprisingly, the one year CD yields came off by 24 bps compared to the previous day at 10.32%. On the contrary, the yields on CPs inched up by 20 bps at 11%. Given the steepness at the shorter end of the curve, there is a strong case for investors to consider investing in a FMP (Fixed Maturity Plan) with a mix of CP/CD.
Although, the quarterly monetary review policy appears to be lacklustre, lots has been said regarding the burgeoning CAD, food inflation, Growth forecast, and lack of structural reforms to attract FDI. Since Rupee has strong linkages to inflation and CAD, the central bank has sharpened its focus on currency stability than growth. It was also vocal that their intervention to restore stability in the FX market should be construed as a window of opportunity for the Government to put in place policies and reforms to bring the CAD to sub 2.5% of the GDP.
Rise of the International crude oil prices coupled with a sharp depreciation of the rupee since May 2013 will add to the current high inflationary pressure. The immediate option for the government would be to contain the spending on subsidies (food, fertilizers, and petroleum) accounting for 2.5% of the GDP. But, there are serious doubts if government would consider this, with the Loksabha elections around the corner. The other option that is being widely talked about is the issuance of sovereign bonds to fund the CAD.
The Governor’s statement also highlighted considerable challenges on the growth front leading to downward revision in the growth forecast from 5.7% to 5.5% and  concern about the lack of clarity  if the financial markets have factored in the full impact of the prospective tapering of QE.
The only silver lining is, RBI has indicated to roll back the liquidity tightening measures and return to more accommodative monetary policy focusing on growth, once stability is restored to the FX market. Given the current challenges, the prospects of a roll back in the next 6 – 12 months looks less likely. Investors are advised move their assets incrementally to Fixed Maturity Plans of up to one year to enable them to lock in their investment at these higher levels.
Happy investing!

Monday, July 29, 2013

global color

As we’re aware, capital markets are prone to diverse changes in a globalized economy. Hence, prudent asset allocation necessitates investors to diversify their risks across asset classes, markets and currencies with low correlation. Such an asset allocation not only compliments investor’s portfolio, also helps manage the risk & volatility significantly. One such international offering that can potentially address this need is Nasdaq100 Index.
Launched in January 1985, Nadaq100 Index consists of the top 100 global non - financial companies like Apple, Google, Microsoft, Intel, Facebook, Starbucks etc. generating revenue of over 1.4 trillion USD, making the index, the 13th largest economy globally.

In USD Billion
M - Cap
>50 bn
>25 bn
>10 bn
>5 bn
>2.5 bn
>1 bn
>0.5 bn

The index comprises companies across major industry groups including technology, hardware, software, pharma, health care, media & telecommunications & retailing. These companies are growing by developing new products, targeting new customer segment & new geographies. As a consequence, revenues generated by these companies are far more diverse and stable. Over the last 10 years, the index delivered a strong sales growth of 10% CAGR and an impressive EPS growth of 22% CAGR
Even during the recent global financial crisis, the index companies demonstrated strong growth momentum. Unlike Nifty constituents, Nasdaq100 companies are debt free since CY 2002 and enjoy a healthy free cash flow.

Per share CAGR growth (USD)
Nasdaq100 Index – CY – CY11
CNX Nifty FY – 08 -11
Book value
Cash flow

Nasdaq100 index delivered an incredible performance across time periods and outperformed most of the domestic & global indices (performance as on 25-07-2013)


Absolute returns
1 Year
2 Years
3 Years
5 Years

Despite an attractive EPS growth of (1yr forward estimates) 20%, the index is just trading at PE multiple of 15.68 (one year forward) providing investors a huge upside. With RBI allowing resident Indians to invest up to 200000 USD in overseas investments, investors should lap it up to give their portfolio a tinge of global color.

Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments. Table source : Bloomberg. Returns expressed are in USD

Sunday, July 21, 2013

Debt market outlook

Indian debt market witnessed heightened volatility during the last week due to Central Bank’s measure to curb liquidity in the system by reducing the limit on LAF repo window to Rs 75,000 Cr and simultaneously increasing the cost of borrowing under the marginal standing facility rate by 200 bps to 10.25%. Marginal standing facility rate is the rate at which the scheduled banks could borrow funds from the RBI overnight, against the approved government securities up to 1% of their respective net demand and time liabilities funds.
It appears that the one point agenda of the central Bank is to protect INR falling further.
A weak rupee will add further to inflationary and fiscal pressures. India’s sovereign rating is currently at the lowest level of investment grading – Baa3 stable. Any further down grade could push the sovereign rating to junk status.
Yields across the board surged with the benchmark 10-year bond at its worst week in four-and-a-half years, with the yield rising 40 basis points. Short term instruments like CP – CD’s have been trading at 10 – 10.50% levels. Debt funds including liquid schemes delivered negative returns due to mark to market impact. Market report suggests that Bank treasuries redeemed from liquid funds approximately Rs 50,000 crores. RBI, in the interim opened a liquidity window of Rs 25,0000 Cr to support the Mutual Fund industry to tide over the liquidity pressure.
Here are the category averages for different fund categories. The loss is as of 16th July 13 over 15th July 2013.

Avg Return (%)
Gilt Medium & Long Term
Short Term
Gilt Short Term
Ultra Short Term

On Friday(19th July 2013) the sale of Government of India’s bond auction was for Rs 15,000 Cr. But, the RBI accepted bids worth Rs 11,473 Cr ONLY and allowed the balance devolve on the primary dealers indicating its intent of not favouring the long term borrowing  costs to shoot up.
 Government will be completing 75% of its borrowing by September and by this time some of the initiatives of the central bank and the government would result in stabilizing of rupee and a moderation in inflation providing room for rate cuts.
Investors, especially in the long duration funds should not panic due to the current volatility. So long as the holding period is 1 – 1.5 years, one should stand to benefit. As I write this, the10 Yr benchmark bond is at 7.94% and the partially convertible rupee ended at 59.74 per dollar.
Happy investing!
Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments. Table source –