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!

 

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 13^th largest economy globally.
 

In USD Billion	Revenues	Profits	Networth	M - Cap
>50 bn	8	0	5	12
>25 bn	17	1	10	27
>10 bn	30	5	18	58
>5 bn	50	8	37	95
>2.5 bn	77	16	61	100
>1 bn	97	33	92	100
>0.5 bn	100	61	97	100

 

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
Sales	11.3%	6%
EBITA	17.3%	3.3%
Earnings	19%	-1.2%
Book value	11.8%	8.2%
Cash flow	16.7%	-1.4%

 

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

 

Tenor	Absolute returns
1 Year	20.10%
2 Years	26.30%
3 Years	63.26%
5 Years	65.80%

 

 
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