| 10th August, 2012 |
| || || |
| Weekly Facts |
| ||Close ||Change ||%Change |
|BSE Sensex* ||17,557.74 ||359.8 ||2.09% |
|Re/US$ ||55.30 ||0.5 ||0.97% |
|Gold Rs/10g ||29,765.00 ||(80.0) ||-0.27% |
|Crude ($/barrel) ||112.20 ||6.4 ||6.02% |
|FD Rates (1-Yr) ||7.25% - 9.25% |
Weekly change as on August 09, 2012
*BSE Sensex as on August 10, 2012
In an effort to make the investment climate more conducive for the insurance companies, the Insurance Regulatory and Development Authority (IRDA) has come up with draft guidelines, wherein it has suggested certain measures in this regard. The insurance companies are expected to give their feedback on the same within 15 days.
If IRDA has its way, the insurers could participate in credit default swaps (CDS), securities lending and borrowing (SLB) and reverse repo and repo trades in Government and corporate debt securities. The CDS will be allowed in corporate bonds which will allow the insurers to diversify and hedge their long-term risks. Participating as lenders in SLB schemes (whereby they can lend upto 10% of their total equity holdings) will help bring down their investment cost by earning interest income from sale of securities. Moreover the draft also permits insurers to participate in reverse repo and repo trades in Government and corporate debt securities.
We believe that, allowing the insurers to participate in the CDS and SLB could be a source of encouragement for them to pan out more long-term annuity products. It may help insurers to hedge their risk and improve their cost of investment. But it is noteworthy that the flip side of holding a credit derivative product such as CDS could also prove to be detrimental, if not strategized appropriately. Pension products address to individual’s need for building a retirement corpus, hence the guidelines should be framed with utmost care. Investors should note that, while the lump-sum amount received (subject to maximum of one-third of the corpus) is tax free under a pension plan, the rest payable in annuity is subject to tax as per the marginal rate of taxation.
The global slowdown led by the European nations and U.S. from the front has had its effects on nations around the globe. But despite this slowdown, some of the Asian nations have been able to deliver adequate returns on a year-to-date (YTD) basis.
(Source: ACE MF, PersonalFN Research)
As depicted by the chart above, some of the export oriented nations like Indonesia, Hong Kong, Taiwan; have delivered decent returns, whereas others such as Singapore and India have given stellar returns. China however, has produced negative returns due to a slump faced by its economy and exports being hampered due to the global economic slowdown.
One of the important reasons for Singapore to deliver stunning returns is the fact that cost of executing a trade in the Singapore equity markets is just one-third of what it takes in India. For India, although relatively the cost of trade remains relatively high, the robust Foreign Institutional Flows (despite policy inaction on the part of the Government) close to $11 billion (Rs 55,000 crore), have been a saviour and aided the Indian equity markets to clock an appearing return of +13.46%, amid gloomy global economic conditions.
We are of the view that, amid a situation of debt-overhang in the Euro zone and dismaying growth in the developed economies, the FIIs are looking at the Emerging Market Economies (EMEs) – and India is one of them. Among the Asian economies, we are the second fastest economy after China, and our non-overdependence on exports seems to be enthusing FIIs to participate in the Indian equity markets. However, going forward for the Indian equity markets to do well and to attract robust FII flows what is required is decisive polices from the Government (which can help to in clocking better economic growth) and stable political environment where myopic oppositions aren’t a cause of impediments in economic reforms. Also infrastructure reforms are needed as that can aid the economy to clock better Foreign Direct Investment (FDI) growth as well, which is needed for long-term growth of the country.
Difficulties are a part of everyone’s life. Some people try and avoid difficulties in one way or the other while the brave ones face the difficulty head-on in order to over the same. The stance adopted by the brave ones help them to taste success in the long run while those who try and escape difficulties never achieve anything remarkable in their life. The noteworthy aspect of a brave individual’s life is the ways and means adopted by the individual to overcome the challenges and difficulties placed by life before him or her.
Similarly, the mutual fund industry too, is going through a rough patch (rather a long one), since the entry load ban in August 2009. Various Asset Management Companies (AMCs) have adopted different means to cope up with the difficult times. Some have shut shop and merged with their counterparts, some have embarked on a different cost-revenue model while some have carried on with their distributor free model. But despite different measures undertaken by different AMCs, there is struggle for attracting more and more investors to the mutual fund industry. To know more about the steps taken by SEBI to revive the mutual fund industry please click here.
A restrain imposed upon, often hinders us from acting on own free will. However, certain restrictions enforced upon us are in our own interest. In the walk of life, one may have experienced restriction imposed upon right from parents to teachers; but at most times they are in our own long-term good.
In the investment arena too, a lot of restrictions are imposed by the regulators in order to protect interests’ of majority of investors. No doubt, being conservative pays in the long-term, but too much restriction results in reduced returns which could have otherwise been accrued to the investors. To know more about the difficulties faced by the EPFO in parking its funds, please click here.
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Of late we came across an interview in the Business Standard, where Mr D. K. Mehrotra, Chairman of Life Insurance Corporation (LIC) of India explained the impact of the revised guidelines on the insurers. He was of the view that post implementation of the new guidelines many insurance companies would have to withdraw several products which will impact sales of the insurance companies. Thus, he thinks that the withdrawal process should be done in a phased manner. In context to his views, we believe that yes, any major change should be brought out in a phased manner so that the policyholders too, get some time before the changes take place completely. Any change brought about with an intention to benefit the policyholders should be implemented even if the insurers have to bear low sales in the short to medium term period.
Besides the impact of changes in the new guidelines, Mr Mehrotra also cited that the future of insurance lies with pension and health. However, he believes that first one needs to understand the pension products and annuity. Pension products should actually be utilised at the post-retirement stage, he says while an annuity is a product that can start at any point of one’s life. In context to his views on the future of insurance, we too, believe that there is a lot of scope on the pension products front and health insurance which still remains a push product. With more and more awareness amongst the policyholders about the importance of term insurance (the purest form of insurance), pension products have a large potential considering the retirement needs of the working population. Over here, what is required is education amongst the masses about their retirement needs and how it can be met. Also there should an equal weightage given to educating the masses about health insurance.
- The Securities and Exchange Board of India (SEBI) could soon be allowed to access private conversation to strengthen its insider trading investigations, giving it tools to build strong case against offenders. Phone tapping is within the purview of the Indian Telegraph. The department of telecommunications has a designated list of enforcement agencies that are allowed to listen to private conversation. These include the Intelligence Bureau, Narcotics Control Bureau, Directorate of Enforcement, Central Bureau of Investigation, Central Board of Direct Taxes, Central Economic Intelligence Bureau and the Directorate of Revenue Intelligence. However, the case involving Rajat Gupta and Galleon Group LLC founder Raj Rajaratnam case in the US wherein taped conversation proved crucial may have strengthened the SEBI’s case.
We believe that, under special circumstances such as the one involving an insider trading offense by an individual, the SEBI should be given permission to phone tapping in order to strengthen its case and bring the offenders to justice. However, care should be taken that such permissions are not misused in the name of investigations and personal lives on people is jeopardise.
- In order to attract investments from foreign investors, the Government is mulling ways to make bond offerings from state-run financial institutions more attractive by bundling them with insurance products. Such a move has been initiated following the good response to State Bank of India's overseas bonds sale. The nation's largest lender last month raised $1.25 billion (about Rs 7,000 crore) from an overseas dollar-denominated bond sale. The Government is keen to spur capital flows to fund India's current account deficit that worsened to 4.2% of GDP in 2011-12, causing the rupee to depreciate sharply. Under the proposed plan the state-run general insurers will provide a two-year personal accident or health insurance cover to the bond holder. The proposal is to make the cover available to all investors, although details will be worked out in consultation with the insurers. Such bonds will have a lock-in period of two years and the interest rate, or yield, for both non-resident Indians and foreigners will depend on different benchmarks.
We are of the view that, providing additional incentives along with robust interest rate offerings could attract a lot of attention of foreign investors especially NRIs who wish to return to home country after their brief stint in a foreign nation. However, care should be taken to efficiently price the bundled product as the state-run general insurers are already incurring heavy losses. Also, there should be flexibility in the bundled product to be offered, such that if an investor who does not want insurance cover with the bond issue, he or she should not be forced to take one.
Credit Derivatives: Privately held negotiable bilateral contracts that allow users to manage their exposure to credit risk. Credit derivatives are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of economic agents (private investors or governments).
|Quote : "Create a definite plan for carrying out your desire and begin at once, whether you are ready or not, to put this plan into action." - Napoleon Hill |