Investment Ideas: 2014

Sunday, November 16, 2014

TRADE FACILITATION AGREEMENT

The week has seen one of the most long awaited breakthroughs between India - US regarding Tarde Facilitation Agreement (TFA) with WTO (World Trade Organisation). TFA is largely seen as an effort by developed countries to access vast markets of the developing economies. The deal is expected to add around $1 trillion to the global trade.

What is TFA?

TFA aims to smoothen any movements of goods among the member countries by cutting down bureaucratic obligations. TFA ran into a rough weather due to a unfair clause that restricts farm subsidies to 10% based on 1986-88 prices when the prices of food grains were relatively lower. If the cap is breached other members can challenge it and go on to impose trade sanctions on the erring country. Also, this will open up the country’s stock piling to International monitoring. Ironically, US provide $20 billion per annum as farm subsidies to its farmers.

How does it benefit India?

We would gain immensely on ease of doing business and higher market access. India currently has around USD 800 billion of merchandise trade. As per the market estimates, with uniform standards at customs and port clearance, the transaction cost would reduce by over 3% leading to a savings of approximately $20 -25 billion.

Macros Update

The YOY Consumer Price Index (CPI) for October 2014 was at 5.52%, softer than 6.46% compared to the previous month lead by sustained decline in the prices of vegetables and fruits. The latest reading on inflation remains the lowest in the current series of CPI has given a positive boost to the expectation on the interest rates. Debt market has recently been trading bullish amidst expectations of easing in interest rates earlier than what was projected before. It appears that the central bank may not be in a hurry for any monetary softening now unless they see a more sustained softening in inflation.

The IIP growth of 2.5% for the month of September 2014 (YOY) was higher than the broad market consensus. The higher reading was primarily a factor of improved manufacturing activity lead by capital goods by 11.6%.Under manufacturing sector, 14 out of 22 industries comprising 50% of the weight has showed improvement in production activity during September compared to the previous month, pointing towards a sustained economic demand. As per the recent Morgan Stanley estimates, India is expected to grow by 6.3% in 2015 and would enjoy the fastest growth among the Asian countries due to improved business confidence, proposed reforms and lower oil prices.

Investment Recommendation

Despite a case for easing of interest rates, Retail Investors shall avoid Long Duration Income Funds due to its tactical nature, heightened volatility and the prevailing debt taxation of 3 years to qualify LTCG benefit. One can spread his debt investment between a fixed maturity plan and an accrual product with a 3 year investment horizon. Given the bullish outlook, Equity continues to remain an attractive option for investors with a long term horizon of 3 to 5 years.

Happy investing!

Disclaimer: Views are personal. 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.

Sunday, November 2, 2014

AVOID INFRA FUNDS

Indian stock market recorded one of the largest gains on the last working day of October 2014. The benchmark as measured by CNX Nifty scaled up by 154 points taking the index to 8322. On a year to date, market has appreciated by 32%, being the best performing equity market index among the world’s 10 biggest markets. Japan’s surprise expansion of massive program, domestic de regulation of oil prices, proposed opening up of coal sector, and relaxed rules for FDI in construction coupled with a sharp 24% slump in the global crude oil price were the major contributors.

The impact of fall in oil price will soften the country’s fiscal, current account deficit and inflation. The impact of each of these constituents will have a cascading effect on the country’s GDP. Since inflation as measured by Consumer Price Index is showing steady signs of deceleration, there is a case for a potential rate cut in the near term. Lower inflation will boost disposable income and push consumer discretionary demand. Falling input prices would lead to improved profit margins for the corporate sector.

Investors who missed the recent equity rally should start allocating funds to diversified large cap equity mutual funds in a calibrated manner. There is again a lot of buzz like in 2008-9 regarding Infrastructure funds, trying to capitalize the current market momentum. Excepting a few, most of the infrastructure companies are plagued by high debt, project execution delays due to Legal and regulatory reasons and Poor cash flow. For instance, GVK Power, GMR Infra and JP associates have a high debt equity ratio of 5 to 7 times. The company’s interest cost has also moved by 20 – 30 fold from 2008 -9 and have reported losses at the PBT (Profit before Tax) level for the second year in a row. A quick turn around in most of the infra companies are unlikely given that they are struggling to pay off their old debts. Similarly, PSU Banks have also been hit due to their high exposure to infra sector. Investors should avoid funds having high exposure to Infra sector and PSU Banks.

The following table would give an insight regarding the historic long term performance of these sectors.

	NIFTY	CNX PSU BANKS	CNX INFA INDEX
YEAR TO DATE	32%	45%	32%
2 YEAR CAGR	22%	10%	15%
3 YEAR CAGR	16%	5%	7%
5 YEAR CAGR	12%	3	-0.30%

Happy investing!

Saturday, September 27, 2014

India's Soverign Rating

Indian stock market has been showing signs of weakness for the past 10 days and the Supreme Court verdict on the 24^th September regarding cancellation of coal blocks came as a major dampener. The blessing in disguise was the upgrade of India’s sovereign outlook by the global rating agency Standard & Poor from Negative to stable citing improved political setting conducive for reforms boosting the country’s potential growth prospect and improved fiscal prudence. Industry experts believe that this move would considerably improve investor confidence and enhance company’s access to international funds.

Markets reacted jubilantly to the news and NIFTY jumped by 57 Points closing the week at 7960, lower than the psychological level of 8000. INR surged to RS.61.11 to the US dollar against the previous close of RS. 61.34.

Sovereign credit ratings are an assessment of the creditworthiness of a Government’s ability and willingness to make timely servicing of principal and the interest of its debt. Rating is an estimate of a potential occurrence of default but do not address the default risk of other issuers of the same country. Typically, ratings of foreign currency denominated debt are lower than those of the domestic currency debt as the former takes into account sovereign transfer risk and also puts pressure on the sovereign to secure sufficient FX reserves. The sovereign debt, unlike a corporate debt is characterized by the absence of bankruptcy code and thus in the event of default, the lender does not have access to the obligor’s asset. Rating takes into account factors such as Political risk (Institutional & governance effectiveness), External liquidity and international position, Fiscal & Debt burden and monetary flexibility.

India’s external debt to Gross Domestic Product (GDP) is one of the lowest at 23% ($440 billion- March ending 2014) compared to most of the developed and developing nations. The increase in external debt was primarily due to sharp rise in Non Resident Indian (NRI) deposits mobilized last year during September to November under the RBI swap scheme to shore up Forex reserves.

Our House Hold savings at 39% of the GDP is one of the highest in the world. Despite a sharp increase in the Government’s borrowing year on year, (4 Lakh crore in FY 2012 to 6 Lakh crore in FY 15), the ability to comfortably fund was due to high house hold savings. India has 4 times the solvency. One of the Goldman Sachs report suggests that the domestic savings of India would rise to $800 billion by 2010, translating to 150% of the bank deposits. This is one of the reasons why India could de couple itself from other major economies during the 2008-9 global financial meltdowns.

India has already overtaken Japan to become the world’s third largest economy in purchasing power parity terms. China is already facing increasing pressure to hold onto its FDI & GDP growth. Manpower cost in China is becoming considerably more expensive and the demographics pointing towards losing labor force over the coming years. India has a far more favorable demographics adding to its pool of available workers.

Our growth in FDI was three times over china for the previous year and investment trends are now moving away from China into other emerging ASIAN countries and India is well poised to become the manufacturing hub of the world.

Happy India Investing!

Saturday, September 20, 2014

FDI - INDIA

There is a strong linkage between foreign direct investment and economic growth. Large capital of foreign investment aid the country to achieve a sustainable high trajectory of economic growth. Unlike FII Portfolio investment that flows into the secondary market, FDI is strategic; increases production, employment opportunities and revenue for the government by means of taxes. It helps narrow current account deficit and strengthen the domestic currency, which is the need of the hour.

For the FY 2014 excluding oil, the biggest hole in CAD was due to net import in electronics and heavy engineering amounting $37.5 billion. India’s consumption of engineering goods will only increase over the coming years. Recent measures taken by the Centre to increase the FDI limit for Insurance and Defense sector to 49% and attracting investments from Japan & China totaling 55 billion$ are expected to lessen considerable FX outgo and accentuate economic growth.

In the last 100 days, the BJP led government has cleared 240 of 325 projects worth Rs 2 lakh crore that was on the back burner under the previous government. The clearances are expected to bring in fresh investment and give infrastructure boost to sectors like roads, power plants and oil exploration. The Brent crude has fallen from a high of US$114/bbl in Jun'14 to ~US$100/bbl in the last two weeks. A US$1/bbl fall in the oil prices will reduce subsidy bill by ~1% translating to 7bn INR and a sustained softening would help reduce inflation too.

NIFTY corrected by 100 – 140 points during the first half of the week due to expected policy announcement by US FED and later bounced back significantly. Since QE began in Dec-08, US GDP has grown at a snail’s pace of 2%. M3 (money supply) hasn’t grown by a dollar in four years despite the Fed injecting 3.5 trillion$. Most of the funds never went to the economy and was lying in the FED reserves as banks preferred to earn risk free 25 bps per annum as against lending it to a weak credit. If the US FED increases the interest rate, banks will be more than happy to get paid more for leaving their reserves sitting in the Fed’s basement, where they’ve been for the past five years. The problems for US are deep rooted and revival is a long drawn process.

India growth story is gaining higher momentum and most of the economic indicators are pointing towards a secular bull run. Investors not wanting to take high equity risk should consider balanced fund. By design, they invest a minimum of 65% - 75% in equities and the remaining goes into debt instruments providing fixed return and stability to the portfolio; qualifies as an equity fund from taxation standpoint. Dividends are tax free and do not attract dividend distribution tax unlike a debt fund. Long term capital gains are NIL if held for more than one year from the date of investment/allotment.

Ironically, the average return differential between the TOP10 (as per valueresearch online dated 19^th September 2014) ‘large & mid cap equity’ and balanced funds over a 3 & 5 year period is negligible and the risk return tradeoff favors Balanced fund category.

Period	Balanced Funds	Large & Mid cap funds
3 Year	21.61% CAGR	23.76% CAGR
5 Year	17.08% CAGR	17.19% CAGR

Safe investing.

Saturday, September 13, 2014

IIP

India’s Index of Industrial production grew by 0.5% in July, a sharp climb-down from the earlier peaks of 5% in May 2014 and 3.40% in June 2014. However, if we were to look at the growth figure for the last 4 months (April to July 2014), IIP has grown by 3.3% against a contraction of 0.1% in the same period of 2013-14. Index of Industrial Production (IIP) is one of the key indicators of the industrial activity in a country. IIP index is composed of 3 broad heads with manufacturing sector having the highest weightage of 79% followed by Mining & Electricity.

Are IIP & GDP correlated? Let’s look at the sectoral break up in the GDP for the FY 2013-14. 60% is dominated by services followed by agriculture and manufacturing at 14% and 26% respectively. Hence, slowdown in the manufacturing sector need not necessarily have an adverse impact on the country’s GDP.

In the next 5 – 6 years, the working age population of our country is expected to rise from 804 million to 856 million, requiring 10 million jobs per year. The Ministry of Labour’s “Third Annual Employment & Unemployment Survey 2012-13”, published November last year, shows that the unemployment among graduates (from the lesser known colleges) stands at 32% vs illiterate youth at a mere 3.7%, signalling lack of inclusive growth and growing economic imbalances.

The new Government at the centre is focusing on manufacturing led economic revival than big bang reforms. As per the CMIE (Centre for monitoring Indian economy), projects worth Rs 22,700 Crores were stalled in the march 2014 quarter due to delay in getting clearances from various ministries. Environment, Power & Road ministries apart from the Project Monitoring Group in the cabinet Secretariat have been at the forefront of urgent execution. In all likelihood, the impact of the same should manifest to better IIP Growth in the next 2-3 quarters.

CPI based inflation softened marginally to 7.80% in august compared to 7.96% the previous month. The silver lining is core inflation (minus food) eased to 6.8% for the first time since 2012, providing some room to the central bank for a potential rate cut if the trend continues at least for the next 2 quarters. Debt fund investors are better placed in short duration income funds given the favourable risk return trade off.

Equity has been the darling of the market. In the last one year NIFTY delivered an absolute return of 37% and majority of the same has come in the last 6 months led by strong FII inflows. On an YTD basis, FII’s have pumped in over 12 billion USD in the Indian stock market.

Investors should not be swayed by the near term performance but have realistic performance expectation to avoid disappointment. The following table would give some food for thought.

Period	NIFTY
1 YEAR	37% ABSOLUTE
3 YEAR	17% CAGR
5 YEAR	11% CAGR
10 YEAR	17% CAGR

Happy investing!

Disclaimer: Views are personal.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 data as on 10th september 2014

Saturday, September 6, 2014

Close ended funds

Close ended equity funds have caught frenzy due to the current market euphoria. Over 27 schemes were launched in the last 9 months mobilizing Rs 4400 crores. By definition, a close ended fund can be bought ONLY during the NFO (New Fund Offer) period. Post; the unit gets listed on the stock exchanges for the purpose of liquidity.

Unlike an open ended fund, the fund house do not provide window for on- going sale and re purchase of units. Ideal, if you’re willing to commit your money for a defined period.

What is the justification for close ended funds? The proponents point to the following:

Brings a forced discipline
Need for funds with a longer horizon, free from the worry of sudden inflow - outflow
Fund manager shall take concentrated positions in stocks / sectors without pressure on short term performance
Availability of good quality companies with sustainable business models & proven track record
Larger bias towards midcap stocks

Let’s take a look at the performance of ELSS (Equity Linked Tax Saving Schemes) that has similar characteristics (3 year lock in ) visa vie the open ended small & mid cap schemes:

Small & Mid cap Funds	3 Year Return	ELSS Category	3 Year Return	Performance diff
Reliance small cap	27.50%	Reliance Tax saver	24.40%	-3.10%
Birla pure value	25.40%	Birla Tax plan	17.90%	-7.50%
I Pru mid cap	23%	I Pru tax plan	22%	-1.00%
UTI Midcap	25.20%	UTI L.T Adv	16%	-9.20%
DSP Microcap	23.10%	DSP elss	20.50%	-2.60%
Franklin small cos	29.80%	Franklin elss	19.10%	-10.70%
I Pru discovery	27.50%	I Pru tax plan	22%	-5.50%
Religare Mid cap	21.80%	Religare elss	18.60%	-3.20%
HDFC Midcap opp	22.80%	HDFC Elss	17.40%	-5.40%
L&T Midcap	21.80%	L&T elss	13.90%	-7.90%
Axis Midcap	25.20%	Axis elss	25.20%	0.00%
Kotak midcap	17.90%	Kotak elss	13.50%	-4.40%
SBI Magnum midcap	24.80%	SBI elss	20.20%	-4.60%
Source : Moneycontrol
CAGR returns as on 14th august 2014

It is ironical to note that most of them have underperformed their own open ended schemes for a similar period. In the absence of any distinct advantage, Investors are better off in an open ended fund that provides stable & consistent performance, liquidity accompanied by low volatility.

Happy investing!

Disclaimer: Views are personal.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

Thursday, August 28, 2014

Bonus Stripping

I understand from the media that the mutual fund industry body AMFI (Association of mutual funds of India) last week communicated to all its members refraining against prior information regarding Bonus declaration, indirectly turning the spotlight on JM Financial’s Arbitrage Fund. It is widely believed that this scheme has mobilized over Rs 5000 Crore in the month of July 2014 under its bonus plan.

Bonus/Dividend stripping provide investors opportunity to set off their short capital gain tax otherwise, ends up paying tax @ the marginal rate. This involves buying the mutual fund units three months prior to the record date of the dividend/bonus declaration. Upon declaration of the same, NAV (Net Asset Value) of the scheme falls correspondingly leading to a notional capital loss. Unlike dividend plan, Bonus option does not attract dividend distribution tax making it more lucrative.

In the past, one of the larger fund houses too followed this path, declared a stupendous 86% dividend in their LIQUID FUND during the year 2007. I suspect, even the best performing equity fund in their history would have done this. Again in the year 2009, the same fund house declared 30% dividend in their Liquid scheme. Last year, one of the Income Funds declared bonus and raised a huge sum. It is an open secret that dividend/bonus stripping are done to appease certain class of investors for their tax planning, which is against the spirit of the law.

Just to remind readers, as per the mutual fund structure, the role of a Trustee is to protect the interests of the unit holders and ensure full compliance with regulatory guidelines in letter and spirit.

I fail to understand why media, AMFI and all the stake holders were oblivious to such incidents in the past. Irrespective of the stature of the fund house, these acts deserve strong condemnation. It would be an ethical gesture, if Fund houses voluntarily withdraw bonus option in their schemes to avoid such recurrences in future.

Mutual Funds have a bigger role in the financial inclusion. As we stand, 70% of the industry aum (assets under management) is controlled by the top 5 cities.

Happy investing!