Why invest in midcaps?

Midcap stocks historically have demonstrated superior returns relative to large cap stocks over a longer period of time. Yet, investors remained underexposed to this part of the equity market segment. Mid-caps are hidden gems, provide a leveraged play, compliment large cap portfolio and provide better diversification.

Over the last 10 years period (1^st April 2003 to 30^th June 2013) CNX Midcap(100) index delivered an impressive annualized return of 22.68%, while the Nifty index returned 18.98%. Contrary to the general perception, mid cap indices have shown lower volatility (Standard deviation) of 24.65% compared to over 25.77% for nifty.

CNX Midcap Index has exposure to 29 industries against 17 in the CNX Nifty. In terms of concentration, there are only four industries with more than 5% exposure in the mid-cap index compared to nine for the CNX Nifty Index. The top 10 stocks by weightage in CNX Midcap is 22.11% vs Nifty at 58.18%. Thus, greater diversification and lower concentration help lower the risk.

Apart, CNX Midcap Index has a 23% allocation to defensive sectors such as consumer staples and pharmaceuticals that are less volatile, while the CNX Nifty Index has 10% allocation to these sectors.  Indeed, CNX Midcap Index is more diversified vis-a-vis the CNX Nifty Index at both sector and stock levels.

 

With close to 80% of revenues coming from domestic sources, midcaps have grown faster than Indian economy and large caps.

Particulars	Dec-05	Dec-09	Dec-12	7 Yr CAGR
Nominal GDP Growth (%)	14.4	16.8	12.4	17.10%
Sales Per Share
CNX Nifty	1273	2397	3566	15.80%
CNX Midcap	2485	5862	9384	20.90%
Earnings Per Share
CNX Nifty	184	208	361	10.10%
CNX Midcap	198	403	564	16.10%

 

Mid cap index is currently trading at an attractive PE multiple of 9 and 7.44 for the FY 14 & FY 15 respectively.

Measure	CNX Nifty Index			CNX Midcap Index
Fundamentals	Current	FY 14	FY 15	Current	FY 14	FY 15
EPS	360	489	557	476	829	1003
Dividend per share	92	117	134	127	160	168
Book value per share	2321	2966	3458	5384	6427	7155
Sales per share	3297	4376	4706	8378	10578	11369
Valuation
Price/EPS	16.27	11.98	10.52	15.7	9.01	7.44
Dividend Yield	1.57	2	2.29	1.7	2.14	2.26
Price/Book	2.52	1.97	1.69	1.39	1.16	1.04
Price/sales	1.78	1.34	1.24	0.89	0.71	0.66

 

The flip side is, mid-caps are under researched and so are the associated risks. Investors should avoid taking stock specific bets and rather use ETF platform to play the mid cap story. Alternatively, those seeking alpha may consider investing in actively managed mid cap mutual funds. Interestingly, the top 10 mid cap funds delivered an average annualized return  of 16.22% for the last 5 year period.

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

 

 

 

Corporate NPS

Let me now dwell on one of the most attractive investment products, which unfortunately has been off the limelight – The Corporate NPS (New pension scheme).  I believe, lack of awareness could be one of the prevailing reasons for its non-scalability.

 

As we all know, NPS is available to all Indian citizens on a voluntary basis w.e.f 1^st May 2009 in his/her individual capacity. However, in order to provide larger impetus, PFRDA (Pension Fund Regulatory & Development act) introduced a separate model to the employees of the corporate entities including public sector undertakings since December 2011 named NPS – Corporate sector model.

 

This facility is extended to almost all category of entities say Private, Public Ltd, Proprietary, LLP, Society Trust etc. with no minimum restriction on employee strength and the contribution being as small as Rs 6000.00 per person per financial year. Product offerings are fairly simple to choose viz,. Equity, Corporate Bonds & Government securities based on one’s risk taking ability. The default option is ‘auto choice’, where   the investments would be made in a life cycle fund across all the three asset classes in a pre-defined portfolio based on the age profile of the investor. For instance, up to 35 years of age, 50% weightage goes to equity, 30% & 20% allocation towards corporate bonds & Government securities respectively. Progressively with age, the allocation towards risky assets comes down increasing the weightage to safer assets.

 

The characteristic feature that stands out is the tax benefit up to 10% deduction on the Basic+DA of the employee’s contribution without any upper ceiling, in addition to the one lakh benefit available under section 80C. On the contrary, voluntary NPS contribution in the individual capacity would fall under section 80C limit. In simple words, if the employer deducts 10% (max allowed) towards NPS, it does not count for the taxable income irrespective of your tax slab. All that you need to do is a minor re alignment in your current CTC by removing some taxable components to accommodate NPS.

 

The recent press release by PFRDA for NPS (private) - non-government employees for the financial year 2012 – 13 has demonstrated sound double digit returns, which fares better than EPF/PPF.

	Weighted average returns of 6 private NPS
Equity	8.38%
Corporate debt	14.19%
Government debt	13.525

 

Upon attaining the age of 60 – 70, you can withdraw 60% as your lumpsum and the remaining in annuities. For earlier withdrawal , the ratio (80%) is tilted towards annuity. In case of any untoward eventualities, nominee would receive 100% of the pension wealth as lumpsum. Other distinctive features that support the offering are low cost (0.25 - 0.35%), convenience, flexibility, transparency & discipline.

I emphatically conclude that there is no better platform than the corporate NPS to channelize long term retail money into capital markets.  

 

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

 

 

Realities of China's shadow banking

Over the past one week, markets have been on a roller coaster due to various global & domestic factors. One of the key concerns was ‘Chinese Credit Crunch’. China being the 2^nd biggest economy in the world contributing a substantial portion of the global GDP, felt like sharing some insights regarding the same to dispel fear among the investing public.

 

China's central bank has been squeezing funds out of the money market, forcing banks to borrow money at historic interest rate levels (interbank lending rate and 7 day repo rate @ 13% & 25% respectively)to curb shadow banking. As I write this, liquidity had already eased due to the intervention of its central bank, People’s Bank of China. However, the intent was no ambiguous signalling the end of a decade old easy credit and forcing the banks to get back to traditional banking, avoid risky loans and excessive expansion of credit.

 

Shadow banking is nothing but financial intermediaries involved in facilitating creation of credit in the financial system whose members are not subject to regulatory oversight. Shadow lending have flourished in China because an estimated 97% of the nation’s 42 million small businesses can’t get bank loans & the industry is expected to be valued at 1.5 trillion USD translating to 60%(approx.) of the country’s GDP.

 

Shadow lenders get their funding from traditional banks, and wealthy individuals wanting higher return on their capital. These lenders then issue loans @ substantially higher rates to those who would not suit the traditional risk profile for normal commercial and retail bank lending, in turn, leading to high systemic risk affecting the financial system and the economy adversely.

 

It is no wonder that the central authorities wanted to crack down on this kind of activity given the magnitude of  the debt issued by the country’s shadow banking sector from about $US2.9 trillion in 2010, to around $US5.7 trillion in 2012, a whopping 96% jump.

 

Money supply (Total social financing), a broad measure of fundraising in the economy that includes bank loans, bond issuance and some forms of off-balance-sheet financing, was  up 52%  year-on-year in the first five months of 2013 aptly signifying ample money supply in the system.

 

It is widely believed that a broader crackdown on the shadow banking would keep borrowing costs high and potentially reduce the flow of credit in the short term. However, this would lead to cleaning up of the system and facilitate money flowing into productive areas of the economy for a more sustained growth in the medium to long term.

 

Happy investing!

Don't panic

Capital markets across the globe reacted panic stricken post US Fed’s announcement on QE withdrawal. Looks like market completely failed to take cognizance of the second half of Mr.Bernanke’s statement ie

‘fed’s action would depend on an improvement in the job scenario and economic recovery’

Indian stock indices corrected their biggest single day loss in 21 months and the rupee fell to a new historic low of Rs 60. As I write this, rupee has bounced back by 30 – 40 paise & Nifty up by 11 points. Slide in the rupee would adversely impact firms with foreign borrowings, especially those who import raw materials like automobile, capital goods, petroleum, power & telecom companies. I don’t foresee RBI to actively intervene in the FX market as it may not want to subsidise the exit of foreign investors.

The primary reason for the FIIs to pull out is they have been losing money in dollar terms both in the stock and Bond market. However, developed economies like US, Japan & Euro are not offering value as much as emerging markets. Lots of these funds will re trace India once the currency stabilizes. Our valuations are attractive and the economy is in the early stages of recovery.

Definitely, this is not the time to panic. Investors should stay put in equities and incrementally take the SIP route in diversified equity funds to take advantage of the current volatility. Since different asset classes behave differently due to domestic and global factors, it is indispensable to follow a disciplined asset allocation approach and not go overboard on any asset class. Equally important is to periodically re view and re balance the asset allocation mix recommended for you.

Happy investing!




  
 

Trade deficit

Our trade deficit for the period April 2012 – May 2013 has catapulted to a 7 month high of 20 billion USD. It is no secret that import of gold has been the major dampener.  Exports de grew by 1.1% despite depreciation of rupee. Widening trade deficit, weak IIP data, high retail inflation coupled with weak currency are making things complicated. Retail inflation as I see will remain a persistent problem due to government’s increase in MSP for farm products ahead of elections.

 

Given the heightened global uncertainty, the bigger concern for the central bank will be to fund the CAD. One of the options that are being widely speculated is to float dollar bonds similar to Resurgent India Bond 98 & India millennium deposits 2000. In the past, SBI had lent its balance sheet and this time they have almost said a categorical NO. Given the restriction for Banks in terms of CRR/SLR, government might consider taking up on its own as it would considerably reduce the cost of borrowing

Market is keenly awaiting the outcome of US Fed meeting on bond purchases by Wednesday. There’s a belief about a rate cut if US Fed were to pause further liquidity infusion. I beg to differ as we entirely stare at a different set of challenges.  Strictly speaking, the currency of a county should reflect its economic fundamentals. If one were to apply this principle, USD should have ideally weakened. The primary reason for its strength is most of the global trade happens in USD.

Last week, I happened to read some articles recommending US equity funds.  US was one of the countries that was badly hurt post 2008 – 09 economic crisis. US Fed has been pumping trillions of dollars through buy back of bonds which has largely helped the banks to re capitalize their balance sheet. However, this has not translated to a real growth in their economy. On the contrary, lot of these funds have moved to emerging economies like India for better returns. Investing in India is any day a prudent decision.
  Ramanathan Dwarakanathan

RBI Monetary Policy

RBI kept all the key rates & reserve ratios unchanged in today’s quarterly monetary policy.  This was in line with my view on 13^th June.  RBI has expressed its concern regarding retail inflation as measured by Consumer Price Index being at an elevated level of 9.3%

 

In its outlook, has subtly conveyed its intent of having a very little room to play on the monetary front given the macro economic challenges, while pointing towards the government to provide faster clearance of projects, creating conducive environment for private investment as the key ingredients to reinvigorate growth. With less than a year for general elections, Government will seldom take any major policy related decisions.

 

Given this backdrop, incrementally investors should avoid long duration funds and focus on short term funds. Equity markets will remain volatile in the near to medium term. It’s advisable to take the SIP route with a diversified equity fund as against bulk investment which will enable investors to ride on the market volatility.

 

 In the recent past, we have been witnessing plethora of companies luring investors with high interest rates on their fixed deposits. FD’s by their nature are un secured & investors should ideally consider companies that possess the highest credit rating (AAA).

 

Ramanathan dwarakanathan

 

interest rate view

Post yesterday's release of macroeconomic date on IIP (abysmally low of 2%), there is once again lot of buzz regarding interest rate cuts. we are grabbled with 2 major issues ie current account deficit (CAD) & inflation. While WPI has softened to sub 5%, CPI at around 9% level is still a major concern for the policy makers.

 

Rupee has already breached 58 mark which will make imports more expensive especially oil & gold which constitutes a major chunk of our CAD. For sure, this will lead to inflationary pressure. 

 

The recent hike in the import duty for gold to 8% will have less impact as we have seen in the past. Indians have emotional attachment to this yellow metal and is being used as a hedge against inflation.

 

The size and funding of the current account deficit will remain a key concern as macroeconomic and political uncertainties may result in sporadic portfolio outflows and foreign direct investment (FDI) inflows may not record a broad-based pickup. While deregulation of interest rates on Non-Resident External (NRE) and Non-Resident Ordinary (NRO) Accounts by the RBI in December 2011 contributed to a surge in inflows in 2012-13, additional NRI Deposits are expected to be moderate in FY14 in line with a likely softening of domestic deposit rates. Moreover, the sizable short-term external debt stock continues to pose refinancing risks, even as the recent depreciation of the Rupee would add to the costs of debt servicing. 

 

Given the above, it's going to be far more challenging to manage growth & price stability. As I see, RBI may not tinker with the interest rates at this juncture and would rather focus on doing something to protect rupee falling further.

For investors wanting to play the duration game, this may not be an opportune time to invest in long duration funds. Short term funds would provide relatively a better risk adjusted returns.

ramanathan