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!


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. Source: nseindia.com. Table Performance as on 31st October 2014



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