Investment Ideas

Saturday, August 23, 2014

Market Bubble

Nifty rose to an all time high at 7929 on 22^nd august 2014. Unlike last year, the Jackson Hole meeting held between 21- 23^rd August 2014 proved to be a non-event from India’s stand point. US continues to be plagued with challenges of the aftermath of the 2008 recession. As it appears, interest rate shall remain near zero for the foreseeable future due to myriad macro - economic challenges.

In the recent market rally, quite a number of stocks have run up sharply disproportionate to their earnings/fundamentals. The Q1 earnings result for the FY 2014 – 15 is just a case in point. Let’s look at the sample of few companies, their quarterly year on year profit growth and their appreciation in the stock prices. (Appreciation from 3/3/14 to 31/7/14)

Co_Name	Y_o_Y_PAT_Growth	Sh Price Growth
NHPC Ltd	-14.35	27.30%
JP Associates	-124.1	44.32%
Sesa Sterlite	-188.7	66.38%
Tata Motors	-44.02	8.78%
Reliance Power	-83.77	52.77%
Ashok Leyland	-66.17	119.61%
Adani Power	-80.44	57.88%
H P C L	-103.15	47.86%
Adani Enterp.	-100.76	64.38%
B H E L	-58.43	40.35%
DLF	-51.62	42.47%
IDBI Bank	-65.85	58.63%
I O C L	-181.56	32.16%
Cairn India	-67.63	-3.53%

There are at least a dozen more companies that can be added to this catalogue. The objective is not to put these companies in poor light but, to caution investors against falling prey to the current market euphoria.

Whether you’re a direct equity or a Mutual Fund investor, the focal point should be the quality of the stocks.

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

Tuesday, August 19, 2014

Arbitrage funds

Arbitrage fund, the lesser known product category has suddenly come to the limelight after the changes in the taxation structure of the debt oriented mutual funds. Recently, a mid-sized mutual fund galloping INR 5400 crores in a span of 2 – 3 weeks in their arbitrage fund has raised the eye brows of the industry players.

By definition, arbitrage is a financial transaction that has no or minimal risk.Arbitrage equity funds employ such strategies to take advantage of the price differential of a security between the exchanges, cash and the derivatives segment.

These funds simultaneously buy shares in the cash segment and sell futures (derivatives segment) of the same company as long as the futures are trading at a reasonable premium. On expiry, the cash and futures price coincide thus leading to positive returns for the investor. Such funds do not take a naked exposure to equities as each buy transaction in the cash market has a corresponding sell transaction in the futures market. Hence, the portfolio is generally neutral unlike a long only equity fund. This strategy helps the scheme generate almost risk free equity return in line with the liquid fund/ money market mutual funds.

The shortcomings in this product are manifold. At the outset, the arbitrage opportunities are far and few. In the absence, the fund would mimic the portfolio of a liquid/money market mutual fund. Here lies the trick; As per the provision of Sec. 10(38), an equity oriented fund is defined that which not only invests in equity shares of the domestic companies to the extent of more than 65% and suchpercentage to be computed with reference to the annual average of the monthly averages of the opening and closing figures. Hence, the tax treatment of an arbitrage fund could vary subject to the fund fulfilling the aforesaid criteria due to market considerations.

1. In case the allocation to equity is above 65%&above : the tax treatment will be similar to that of Equity Scheme

2. In case the allocation to equity is 65% or below:the tax treatment will be similar to that of Debt Scheme.

If you’re investing in these funds to take advantage of the equity taxation,(ieno long-term capital gain tax if held for more than a year and no dividend distribution tax) you need to re think. In addition, some of the arbitrage funds have mandate to invest a small portion of the portfolio in buybacks, open offers, delisting, takeover bids, mergers and IPOs. This could add to the volatility of returns from these funds.As the devil lies in the detail, Investors should read the fine print before investing.

Saturday, August 9, 2014

Good time to invest

Indian stock market witnessed somewhat a steep correction in the last 2 trading sessions due to US President Barack Obama’s decision to authorize air strikes against militants fighting in Iraq. Consequently, INR came down to 6 months low at 61.74 to the dollar in the intraday and recovered a bit due to exporters selling dollars and closed at 61.14. Brent crude oil was 1% higher at 106 dollar per barrel in the futures market.

Market is abuzz with speculations of a further correction. I felt it would be appropriate to look at some key data points before arriving at any conclusion. Reserve Bank of India in the third quarter review of monetary policy has indicated a GDP growth in the range of 5 -6 percent in the year 2014 -15. The recent World Bank report also points India’s growth at 5.5 percent for the fiscal 2014 -15, accelerating to 6.3 percent in 2015-16.

On a year-to-date basis (till July end) India received $11.8 billion in equities, which is similar to the $12.2 billion received in the corresponding period last year and remains the highest among key emerging market peers. Country’s foreign exchange kitty zoomed to $320.564 billion from $243 billion in the month of July – august 2013 on a healthy increase in the core currency assets. With this jump, the total reserves are shy of the all-time high of $321 billion achieved in late 2011.

Indian Markets as measured by BSE SENSEX on a YTD basis has generated an absolute return of 22.1% in dollar terms (7^th August 2014) compared to most of the emerging market peers even as global markets have faced headwinds from the Ukraine crisis, militant attacks in Iraq and Argentina debt crisis during this period.

During the April-May period of the current fiscal, the IIP recorded a growth of 4 percent, as against contraction of 0.5 percent in the first two months of 2013-14. Manufacturing, which constitutes over 75 percent of the index, grew 4.8 percent in May, compared to decline in output by 3.2 percent a year ago. For April-May, the sector recorded a growth of 3.7 percent, compared to a contraction of 0.7 percent in the year-ago period.

I believe, Indian Markets are driven by bottoming out of growth, improving risk appetite accompanied by a decisive government at the centre. The current fall in the market is a knee jerk reaction and can be used as an opportunity to increase exposure to equities/Equity mutual fund, especially those missed out the recent rally. Risk aversion investors may stagger their investment through systematic investment plan.

Happy Investing!

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 18^th 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 20^th 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!

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 4^th 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 20^th 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.

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.