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| October 31, 2014 |
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| Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 27,865.83 | 1757.3 | 6.73% | | Re/US$ | 61.45 | 0.4 | -3.49% | | Gold Rs/10g | 26,950.00 | -975 | -3.49% | | Crude ($/barrel) | 85.86 | 2.74 | 3.30% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on on October 30, 2014
*BSE Sensex as on October 31, 2014 |
Impact 
Did you note that the price you paid for fruits and vegetables over the last couple of months was lower than what you spent much earlier? Likewise, the amount spent on car fuel too was lower as the benefit of softening international crude oil prices precipitated to you? Also as inflation has mellowed, the real returns clocked on investments have been positive. Thus the ease in prices of some essential items has made the situation a little comfortable for the aam admi and shored up finances.
But going forward, if the outlook for inflation remains benign reduction in policy rates cannot be ruled out. Now while this would bring a relief to borrowers (whenever it takes effect), for deposit holders it would be disheartening, as banks may soon slash interest rates on deposits as well.
You see, the Reserve Bank of India (RBI) may lower policy rates in early 2015, given the dramatic shift in domestic macroeconomic variables.
Why RBI may lower policy rates now?
There are a number of factors that have started turning positive for Indian economy. RBI considers inflation, fiscal position of the Government, currency strength and Current Account position as important factors while taking any decision pertaining to monetary policy. Recently RBI started a practice of inflation benchmarking; wherein, it takes policy actions only when preset level of inflation is achieved.
Following are the factors that may trigger a rate cut.
- Mellowed down inflation: Inflation measured by the movement of Wholesale Price Index (WPI) and the Consumer Price Index (CPI) fell to 2.38% and 6.46% respectively in September 2014. With this retail inflation (measured by CPI) reached its lowest ever and wholesale inflation (measured by WPI) too recorded a 5-year low. For the same month a year before, CPI had come in at 9.84% while WPI stood at 7.05%. Over last one year, inflation has gradually descended reaching its lowest level in September.
- Falling crude oil prices: Crude oil prices have descended nearly 23% since June 2014. This has helped India save on its import bill. You see, India imports nearly 80% of its requirements. Indian Government recently deregulated diesel ending the administrative pricing structure, which in turn would help pass on the benefit to end consumers. Moreover, it is believed that crude oil prices may continue to remain depressed due to lower demand and relatively uninterrupted supply.
- Improvement in India's economic outlook: Independent rating agency, S&P raised outlook on India's sovereign rating from negative to stable. The agency believes that, the Modi-led-NDA Government may be able to fast-track reforms. The Government has already opened Indian Railway for foreign investments. Likewise the insurance sector and defence sectors are opened up further. Also, with the Government having scrapped planning commission, group of Ministers and Empowered group of Ministers; efficiency is expected to improve with lower bureaucracy which would help the Modi-led-Government to live up to its motto of "Minimum Government and Maximum Governance".
- Improved Current Account Deficit (CAD): India's CAD has substantially improved in the April- June quarter of the current fiscal. At 1.7% of GDP, India's CAD position looks manageable. Although trade deficit recorded an eighteen month high in September following the 450% jump in gold imports, measures are expected to be taken to curtail any further worsening. It is expected that, the Government may reinforce gold import norms which were relaxed earlier. Such measures would be treated as proactive ones and may help India keep check on its CAD.
Impact on bond markets...
The yield on India's 10-Year sovereign bond has already seen softening as expectations of a rate cut by RBI are setting in. Also fall in the fixed payment to lock-in rates for a year using the derivatives, is an indicator that sentiments in the Indian bond market are turning positive.
PersonalFN believes there are reasons for you to consider investing in long term debt funds now. But while you do so, ensure that your exposure to long term debt funds does not exceed 20% of the entire debt portfolio. Also, if you are running away from debt funds because of unfavourable tax treatment, you might be missing an important asset class in your portfolio.
However, as an investor you should give due respect to asset allocation first. Asset allocation should be in line with your financial goals. Holistic approach to investments would help you in the long term. But selection of the category of the mutual fund scheme in the endeavour to achieve your financial goals should be done wisely based on your investment horizon and risk appetite. And remember, debt funds are not risk free.
Do aforesaid factors look promising enough for RBI to consider cutting policy rates? Share your views
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Impact
Flow of foreign capital to Indian markets largely depends on monetary policies of western economies. For last 5-6 years western economies have kept interest rates low and stimulating economic growth by infusing huge liquidity in the system. Federal Reserve (Fed) in the U.S. had launched several monetary stimulus programmes in addition to maintaining interest rates very low.
Now it seems that, the process of injecting massive liquidity has come to a full circle. At the recent meeting, Fed concluded its bond-buying programme entirely showing confidence in the U.S. economic recovery. The Fed is of the view that, job market is recovering gradually. Furthermore, it believes, U.S. economy has adequate underlying factors that may support economic recovery. Having said this, it was further clarified that, the low interest rate regime may be maintained for 'considerable time'.
As long as interest rates in the U.S. are maintained low, liquidity in in the global financial system may not be constrained. Fed has also indicated that, it will reinvest the proceeds of maturing securities indicating that the large balance sheet would be maintained.
PersonalFN is of the view that, although bond buying programme has been wound up, Fed can launch another stimulus in any other name. As long as real interest rates in the U.S. remain low, asset preferences of global institutional investors are unlikely to change. In other words, this means, they would look at India as an attractive investment destination (along with the other economies on their investment radar), which will be a positive for the Indian capital markets.
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Impact
Most Sprinters run fast but they run only a short distance. While marathon runners run at a slower speed but run miles. Stocks are just like runners. A few run too fast in no time; while others move gradually. Still, people tend to get attracted to those which give quick returns. Unfortunately, many of us think of buying stocks when they look exhausted - having run-up a lot in euphoric times and not in times of panic. While at PersonalFN we recognise that it is quite challenging to time the market, we believe it is imperative to give due respect to valuations.
Now that the current market rally has sustained for about a year and the market having scaled a new high, retail investors have started getting back to market. A comparative analysis of returns clocked by various categories of the market capitalization segment reveal that the mid and small cap oriented funds, have outperformed the large cap ones over last 1 year. Nonetheless, large cap funds have beaten their respective large cap indices. Also, a few mutual fund houses having dedicated funds for exploiting opportunities in the small and micro-cap domain have also clocked appealing returns while assuming very high risk. You see, some of them have nearly doubled since their inception - at a time where a number of fund houses launched New Fund Offers (NFOs) in early period of 2014.
It has been observed that, aggressive funds in the mid and small cap category attract more assets after they record impressive performance. A similar trend has been observed in the current market rally. In the quarter gone by, (July- September) broader markets fell from their all-time highs. The fall was nominal in large caps, moderate in mid caps but was sharp in the small cap domain.
Do smallcaps look attractive on valuations?
Data for the July to September quarter
(Source: Ace MF, PersonalFN Research)
The valuation chart given above may give you a feeling that, small caps look more attractive than the large caps. However, it is noteworthy that, historically, large caps trade at premium valuations to small caps. Furthermore, valuations may suddenly start looking expensive if smaller companies fail to record higher growth.
To read more about this news and PersonalFN's views on it, please click here.
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Impact
At companies, most management decisions have an impact on shareholders wealth. But, not all decisions affect every shareholder equally. In simple words, sometimes, corporate decisions are taken in such a way that, minority or nominal shareholders may not always feel the impact of the management decisions, but the large shareholders do. For example, royalty paid to the promoter for extending its goodwill to the company. Such a decision may help promoter earn by way of royalty but nominal shareholders stand to lose. This is just an example and there could be many more, which can have a bearing on shareholders wealth.
To read more about this news and PersonalFN's views on it, please click here.
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- Liquid and liquid plus funds, which are popularly known as money market mutual funds, saw a massive outflow of nearly Rs 67,000 crore in September. On the other hand, equity mutual funds received net inflows of more than Rs 7,700 crore last month.
There are two factors that have caused outflows from money market mutual funds of this magnitude...
- Government imposed long term capital gain tax of 20% on debt oriented funds (up from 10% charged earlier).
- Definition of long term for the purpose of calculation of gains changed from '12 months' earlier to '36 months' now.
- Equity funds are being pushed hard by mutual fund houses and brokers to take advantage of the current market rally
PersonalFN is of the view that, investors shouldn't pull out their money from debt oriented mutual funds only due to change in the taxation or because of strong market rallies. PersonalFN has always believed that, investors need to stick to their asset allocation. If your time horizon of only about 6 months; you have little options and money market mutual funds still remain attractive even after considering the recent changes in the taxation. Similarly, if you are investing in equity assets regularly and in a disciplined manner, you need not worry about timing the entry and exit.
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Credit Default Swap: A swap designed to transfer the credit exposure of fixed income products between parties. A credit default swap is also referred to as a credit derivative contract, where the purchaser of the swap makes payments up until the maturity date of a contract. Payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the loan. A CDS is considered insurance against non-payment. A buyer of a CDS might be speculating on the possibility that the third party will indeed default.
(Source: Investopedia)
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Quote : "Time is the friend of the wonderful company, the enemy of the mediocre." - Warren Buffet
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