Investment Ideas

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.

Friday, August 9, 2013

challenging times!

This is one of the most testing times for the Indian economy. Investors’ confidence in the capital market is dwindling with each passing day. Sentiments are getting further accentuated due to downward revision of GDP and earnings forecast. The broad market Index Nifty delivered a meagre absolute return of 3.42%, 5.91%, 1.47% and 22% for the past one, two, three and five year periods respectively, much lesser than Bank FDs, liquid funds and ultra- short term funds.

Some of the recent RBI’s measures to tighten liquidity have made borrowings costlier in a stagnating economy and increased the risk of rising NPA’s. The combined gross non-performing assets and restructured loans for the banking industry is around 10% of the total loan outstanding, and most of the bad loans are from PSU banks. Mirroring the same, banking index fell by 23% on an YTD basis.

Yesterday’s announcement by the RBI to suck out liquidity through the weekly issuance of Cash Management Bills amounting Rs 22,000 Crore would exert additional pressure on the shorter end of the maturities. Liquid fund investors as a matter of caution should invest in portfolios having higher weightage to CBLO to avoid any potential mark to market losses.

Long duration income funds got impacted adversely due to rising yields. Ironically, this is one of the rare instances where investors have been on the wrong side of the markets, both on the debt and equity front. Investors are constantly grappled with thoughts of moving to cash which reminds me one of the famous quotes by warren buffet.

“Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value”

While there is no quick fix solution, favourable market environment will prevail once the central bank moves its stance towards supporting growth, warranting monetary interventions like liquidity infusion, rate cuts etc. Investors should stay disciplined and adhere to their respective asset allocation pattern. In case you have missed out, this is the time to consider allocating some funds to principal protected nifty linked product as part of asset allocation.

NLD’s (Nifty linked debenture) as they are popularly known, enables you to participate in the upside of the equity market with the principal being protected. The underlying instrument is generally a non- convertible debenture with the coupon/interest linked to the stock market (Nifty). It is advisable to stick to issuers with high/highest credit ratings because of the increasing credit risks.

Depending on the factors like tenor, interest rate and the volatility, one could get a decent participation rate of the equity market without worrying about the risk of losing capital.

For instance, every Rs.100 invested in a cap protected product; approximately Rs 75 – 80 is allocated to debt providing safety of the principal. The balance Rs 25 is used for buying call options for participation in the upside of the equity market. The Participation rate might typically range between 100 – 150% depending on the price of the option. If nifty generates a return of 30%, the call options will give a return of 30 – 45%. If the nifty falls below the level at which the investment was made, the investor gets back his principal.

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.

Wednesday, July 31, 2013

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!

Monday, July 29, 2013

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.

Sunday, July 21, 2013

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!

Tuesday, July 9, 2013

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!