The Foreign Institutional Investors (FIIs) who are known for their big ticket investments in the Indian equity market constitute around 17% of the total market capitalisation.
In the last calendar year (i.e. year 2011), as worries of Euro zone debt crisis, loomed around the global economy and the world’s largest economy ballooned their debt-to-GDP ratio, FIIs turned net sellers in the Indian equity markets to the tune of Rs 2,714.2 crore.
FIIs exuding confidence in the Indian Equity markets off late
(Source: ACE MF, PersonalFN Research)
But ever since, the tensions in the Euro zone receded and the U.S. started showing signs of revival with the unemployment rate dwindling to 8.3% and their fourth quarter GDP growth being at 3%, the FIIs have poured in around U.S. $ 9 billion in the first three months of the calendar year 2012, given the fair upbeat sentiment in the global economy.
Moreover, the GDP growth rate clocked by our country also seems to be enthusing FIIs to look at India as an attractive investment destination. March 2012, of course witnessed cautious FII participation in the Indian equity markets, after the Finance Minister proposed to introduce “General Anti-Avoidance Rules (GAAR)” in order to counter “aggressive tax avoidance schemes”. But later when the Finance Minister clarified that Participatory Notes (P-Notes) will be exempted from the GAAR tax proposals; it stimulated FII participation in the Indian equity markets.
Going forward, FII participation will be guided by several global economic factors and even policies put in place by the Government. An unfavourable environment and policy framework would have an adverse effect on FII flows. But we believe to handle this volatile situation investors should adopt the SIP route of investing in the Indian equity markets, as long as India clocks on an average 6.0%-6.5% annual GDP growth rate. It is noteworthy that SIPs will enable you to manage the volatility well and power your portfolio with the benefit of compounding.
However while investing in the equity markets through mutual funds, you should have an investment horizon of at least 3 to 5 years.
Banks, (though not all - but most of them) are considered to be most trusted entities for parking funds. Right since childhood we have been infused with the habit of saving regularly (in a piggy bank) and thereafter encouraged to open a bank account with the money so accumulated. But as the financial markets have evolved worldwide, there have been sea changes in the form and structure of financial products making them more difficult and complex to understand. Investors too, most of the times get lured into the fancy names of products and land up making bad investment decisions. There have been many cases of investors' money being put to risk or investors having been duped of their investments.
However, our country's central bank has been quite vigilant, and has quite often, taken bold steps to uphold investors' interests'.
To read on the recent steps taken by the RBI to uphold investors interests’ please click here.
The investors in the Indian equity markets will now embrace themselves for something special. They will now have a chance to own shares of Stocks Exchanges (place where stocks of different companies are traded). It will be a first of its kind in the Indian equity markets that the Stock Exchanges themselves will have their shares open for subscription by general public.
Let us go through some of the important points which the Securities and Exchange Board of India (SEBI) has laid down for the Stock Exchanges to get themselves listed. To read more on this topic please click here.
This Week's Poll !!!
Have you locked your funds in FDs at the current interest rate level?
In an interview with the Business Standard, Mr Tushar Pradhan – Chief Investment Officer at HSBC Asset Management (India) Pvt Ltd shared his views on equity as an asset class for the FY 2012-13, factors contributing volatility in the markets and the growth and fiscal deficit targets.
Mr Pradhan believes that the FY 2012-13 will be good for the equities. However, he says that there might not be earning upgrades. He thinks that not many asset classes can match the return given by equities from a four to five years’ perspective.
According to Mr Pradhan, there are a combination of factors contributing to the volatility in the equity markets. “There was some disappointment with the (Union) budget, as a lot of optimism had been built around it, which remains unfulfilled. The rate cuts have also not happened. The inflation numbers came stronger and IIP (Index of Industrial Production) numbers were also not up to the mark. So, all this has led to markets coming off their peaks,” he said.
The GDP growth target as given in the Union Budget looks achievable to Mr Pradhan. He is of the view that though the manufacturing growth is slightly slow, its contribution to GDP is also very low. On the other hand he says that the services growth will help meet the GDP growth targets in spite of challenges. “The fiscal deficit target will depend on higher inflows and lower spending and I feel the oil subsidy will be crucial. If crude (oil) remains at these levels, it may pose challenges,” he said.
We are of the view that the fundamentals of the Indian economy are quite resilient, when compared to the Developed Economies. While GDP growth rate has been on a descending trend, for the last 3 quarters of the fiscal year 2012, the GDP growth rate is far appealing than the one clocked in DEs. While corporate earnings have been mixed, they have been modest in our view. In order to tighten seat belts in times of economic turbulence, prudent policy actions too have been taken by the Government and the central bank. It is noteworthy that after the Reserve Bank of India (RBI), starts reducing policy rates (which is expected from April onwards), we may witness uptick in industrial activity, as capex too would increase and consumption story would also thrive. Hence given that, corporate earnings would also get boost and thus the markets may also depict a gradual ascending trend. We believe that investors in equities must have a long investment horizon to benefit from the investments.
Volatility in our view will always be an integral part of the equity markets. While many individual do indulge in momentum trading, and get a thrill we are of the view that a trader is only good until his last trade. Investors got to manage volatility, and not play with it. Thus to do so, we think the SIP mode of investing in mutual funds is prudent as it helps in rupee-cost averaging and powers your portfolio with the benefit of compounding.
We too, believe that GDP growth rate as estimated in the Union Budget 2012 can be well accomplished. Now with policy rates expected to move downwards (from April 2012), an uptick in industrial activity, capex and consumption may be witnessed. However, for fiscal deficit target to be achieved, prudent policy actions are needed from the Government. At present rising crude oil prices, may turn to be detrimental for India, as that may bloat the import bill, and impact current account deficit and fiscal deficit. Moreover, on the reforms front the Government needs to be proactive and take smart decisions to attract FDI in the country.
- After having being the first distributor to have offered mutual funds on online platform to its customers via 49 Banks in the country (thereby enabling a complete paper less investment process), Abchlor Investment Advisors have yet again pioneered an offering in the form of an electronic front-end to its customers for setting up an SIP into various AMC's MF schemes (MF iSIP) thru its well-known portal, www.InvestOnline.in.
MF iSIP is an extremely convenient service that would provide investors the ability to set up an SIP (number of months of SIP) without having to complete forms or issue cheques repeatedly.
- Commodities Futures regulator Forward Markets Commission (FMC) is planning to monitor trading patterns, volatility and individual trader positions in black pepper, mustard oil, chana, potatoes, soyabean, cardamom and mentha oil as the prices of these seven commodities have more than doubled in the past three months.
Between January and March 2012, mustard seed prices have risen by 101%, chana 108%, potato 170%, mentha oil 172%, soyabean 118%, cardamom 185% and black pepper 122% on the exchanges. Mustard seed, chana, potato and soyabean are important contributors to the monthly food inflation index and impact consumer budgets.
Such price volatility in essential commodities should be kept under check as the country has been reeling under high food inflation which in turn puts upward pressure on the headline inflation – WPI. The FMC should lay down stringent rules governing the commodities futures and punish those behind these price manipulations.
- The core sector growth comprising of eight core industries viz., coal, crude oil, natural gas, refinery products, fertilizer, steel, cement and electricity grew at an annual rate of 6.8% in February 2012 against a 0.7% rise in the previous month. The strong core sector growth can be attributed to the robust growth in coal, electricity and cement production.
The robust core sector growth will provide fillip to the upcoming Index of Industrial Production (IIP) numbers for the month of February 2012 as the core sector accounts for about 38% of the IIP.
- The SEBI has come out with an extensive set of guidelines that puts the onus on stock exchanges to regulate high-speed, high-risk algorithmic trades. From 200 microseconds, India now trades at 20 microseconds with a time-lag of 8 microseconds, but demands are that it still goes down.
Algo trading or trading at high speeds is a technological advancement in contrast to physical trading. The SEBI should keep checks and balances to track those who misuse this technology for manipulating stock prices rather than discouraging the use of new technology.
- India’s factory output as measured by the HSBC Purchasing Manager’s Index (PMI) , compiled by Markit eased to 54.7 in the month of March 2012 from 56.6 in February 2012. The index has now stayed above the 50 mark - which shows growth rather than contraction - for three years. But with many of its components in a steady decline, that picture may change. Moreover, the Services PMI fell sharply to 52.3 in March 2012 56.5 in the previous month marking its 5-month low.
- India’s exports grew by 4.3% to $24.6 billion for the month of February 2012 while imports grew by 20.7% to $38.9 billion for the same period. The trade deficit thus, widened to $15.2 billion for the month of February 2012. India's overseas sales had surged at the start of the last financial year, but weakening demand from key export markets such as the United States and Europe in recent months has widened the country's trade deficit.
Algorithmic Trading: A trading system that utilizes very advanced mathematical models for making transaction decisions in the financial markets. The strict rules built into the model attempt to determine the optimal time for an order to be placed that will cause the least amount of impact on a stock's price. Large blocks of shares are usually purchased by dividing the large share block into smaller lots and allowing the complex algorithms to decide when the smaller blocks are to be purchased.
QUOTE OF THE WEEK
"Debt is the worst poverty."
- Thomas Fuller