Debt market outlook

Indian debt market witnessed heightened volatility during the last week due to Central Bank’s measure to curb liquidity in the system by reducing the limit on LAF repo window to Rs 75,000 Cr and simultaneously increasing the cost of borrowing under the marginal standing facility rate by 200 bps to 10.25%. Marginal standing facility rate is the rate at which the scheduled banks could borrow funds from the RBI overnight, against the approved government securities up to 1% of their respective net demand and time liabilities funds.

 

It appears that the one point agenda of the central Bank is to protect INR falling further.

 

A weak rupee will add further to inflationary and fiscal pressures. India’s sovereign rating is currently at the lowest level of investment grading – Baa3 stable. Any further down grade could push the sovereign rating to junk status.

 

Yields across the board surged with the benchmark 10-year bond at its worst week in four-and-a-half years, with the yield rising 40 basis points. Short term instruments like CP – CD’s have been trading at 10 – 10.50% levels. Debt funds including liquid schemes delivered negative returns due to mark to market impact. Market report suggests that Bank treasuries redeemed from liquid funds approximately Rs 50,000 crores. RBI, in the interim opened a liquidity window of Rs 25,0000 Cr to support the Mutual Fund industry to tide over the liquidity pressure.

 

Here are the category averages for different fund categories. The loss is as of 16th July 13 over 15th July 2013.

Category	Avg Return (%)
Gilt Medium & Long Term	-2.59
Income	-2.03
Short Term	-1.39
FMP	-0.92
Others	-0.77
Gilt Short Term	-0.71
Ultra Short Term	-0.47
Liquid	-0.18
Overall	-1.02

On Friday(19^th July 2013) the sale of Government of India’s bond auction was for Rs 15,000 Cr. But, the RBI accepted bids worth Rs 11,473 Cr ONLY and allowed the balance devolve on the primary dealers indicating its intent of not favouring the long term borrowing  costs to shoot up.

 

 Government will be completing 75% of its borrowing by September and by this time some of the initiatives of the central bank and the government would result in stabilizing of rupee and a moderation in inflation providing room for rate cuts.

 

Investors, especially in the long duration funds should not panic due to the current volatility. So long as the holding period is 1 – 1.5 years, one should stand to benefit. As I write this, the10 Yr benchmark bond is at 7.94% and the partially convertible rupee ended at 59.74 per dollar.

 

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. Table source – valueresearch.com

 

 

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!