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| February 28, 2014 |
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
21,120.12 |
419.37 |
2.03% |
| Re/US$ |
61.99 |
0.24 |
0.39% |
| Gold Rs/10g |
31,010.00 |
60 |
0.19% |
| Crude ($/barrel) |
109.55 |
-1.03 |
-0.93% |
| FD Rates (1-Yr) |
8.00% - 9.00% |
Weekly change as on February 27, 2014
*BSE Sensex as on February 28, 2014
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Impact 
Many global Exchange Traded Funds (ETFs) and hedge funds have been losing faith in India as an investment destination. Factors such as poor stock market returns and political apathy in getting the economy back on track have been affecting the investor's sentiment. Even Indian retail investors have been shying away from investing in equity and exiting at every market rally.
Despite of several negatives, long term foreign investors such as endowment funds and sovereign wealth funds have been showing keen interest in investing in the Indian economy. Although, easy liquidity situation in the global financial system and expansive monetary stance of central banks of the developed world are the major reasons, preference given to India over other BRIC countries by the long term foreign funds, stands out.
Performance of Global Indices
Data as on February 26, 2014
(Source: ACE MF)
Indian equity markets have outperformed other markets in the BRIC pack. S&P BSE Sensex, one of India's widely tracked indices, has done particularly well in the past 1 year.
After having witnessed stronger developed markets and weak emerging markets over 1 year, the trend is expected to reverse sooner or later. However, as far as India is concerned, growth has so far remained tepid. Whether it has bottomed out or we are still away from the bottom of economic cycle is uncertain. Capex cycle remains fractured with little interest of corporate to expand capacities. Higher inflation may limit the consumption growth. Higher interest rates are making it difficult for a large number of companies to control costs and maintain profitability. Under such a scenario markets have rallied from 17,000 levels to 21,000 levels based on 4 factors;
- Weakness in the rupee during first 2 quarters of the current fiscal and marginal improvement in sentient in the U.S. and Europe drove earnings of Indian I.T. industry. Their heavyweight in Indian indices helped broader markets do well. The same holds true for some pharmaceutical companies.
- India is in a much comfortable position on Current Account Deficit (CAD) front at present than it was about 9 months ago. Rupee has been stable. This took off some pressure of the market.
- There is a hope that the new government will make efforts to turbocharge economic growth
- Sooner or later, corporate earnings may bottom out and they will rebound strongly once inflation and interest rates move down.
PersonalFN is of the view that although Indian economy is passing through a difficult phase, it is still in a much better position than most of the other economies from developed as well as the developing world. India may still return to a growth path, if favourable business environment is created. Demographic trends are still positive for India and may work for the country over long term. PersonalFN believes that Indian investors need to look at the equity markets from relatively a longer term perspective. When other nations are showing faith in India, Indians themselves have a huge trust deficit.
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Impact
Till now minority shareholders have had very little or no say in corporate decision making. However, lately things seem to have been improving. All retail investors and even HNIs are minority shareholders in large companies whether they invest through mutual funds or invest directly. Mutual funds invest in equity shares of various companies on behalf of unit holders. Protecting their interest is the responsibility of mutual funds.
However, for quite some time, mutual funds refrained from voting against management decisions. This is mainly because large companies park their excess money in the debt and liquid schemes of mutual funds and thereby own about 75% of the assets of the mutual fund industry. Hence casting a vote against any corporate would mean losing a large amount of the assets under management (AUM) for any mutual fund house. Moreover fund managers are of the view, that their stake in the Indian capital markets is minimal. Thus, instead of casting a vote or creating a tiff most fund managers prefer redeeming their investments in that particular company. In this scenario, the interest of minority shareholders is often sacrificed.
However, lately fund managers have started expressing their discontentment when corporate decisions are not in the interest of the shareholders. For example, recently Maruti wanted to strike a deal with Suzuki to let the latter set up a plant in the state of Gujarat. However, as fund managers believed that this would hurt the interest of investors, they actively opposed the management's moves. Another such instance was when the Life Insurance Corporation (LIC) stood up and casted its vote against Ambuja Cements who wanted to acquire stake in ACC.
PersonalFN is of the view that, active participation of institutional investors such as mutual funds work in two ways. It not only protects investors' interest but also keeps check on companies which are reluctant to address issues of minority shareholders. However, those corporate which are repeatedly found favouring only promoters should be assessed carefully by mutual funds before making investments. PersonalFN believes that rational opposition to management decisions may positively affect stock prices and thus work in favour of long term investors. Growing activism of mutual fund houses at shareholders' meetings is a positive change.
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Impact
“If I outlive the policy term, I must get something in return for all the premiums that I paid”, is a typical mindset. Knowing the pulse of the market, insurers have been attracting people to buy endowment and money-back policies for years. However, in the last decade, another category of insurance, Unit Linked Insurance Plans (ULIPs) garnered crore of rupees. Some insurance agents marketed ULIPs as a substitute to mutual funds providing life insurance benefits, while others pitched them as an innovative product giving policy holders immense flexibility. Mis-selling happened to such an extent that 15-year plans were sold as 3-year premium paying plans, while the fact was the minimum premium paying term was 3 years.
What are the consequences?
Investors are disappointed as they are not seeing any return on their ULIPs even after holding it for longer term say 5-6 years. They are pulling out money fast. Year after year, the value of insurance policies surrendered is going up. The proportion of ULIPs in total surrendered policies has always remained very high. Private insurers are seeing higher cases of surrendered policies.
Opting out...
(Source: IRDA, PersonalFN Research)
Are range-bound markets to be blamed?
True, markets haven't generated attractive returns over last 5-6 years but that can't be an excuse for unprecedented rise in cases of surrendering. It is mis-selling by intermediaries and misinterpretation of policies by investors has to be blamed.
To read more about this news and the view of PersonalFN over it, please click here.
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Impact
The Employee Provident Fund Organization (EPFO) has denied member's money to be parked in equities and also holds reservations for investing in the infrastructure space as it perceives these asset classes to be risky. It believes that risky instruments could erode the investor's retirement savings due to their inherent volatile nature. Hence in order to protect the retirement capital of employees, the Central Board of Trustees (CBT) (the apex advisory body of the Employees' Provident Fund) implemented new rules in November 2013, allowing retirement savings to be invested only in debt instruments.
Recognising this concern of EPFO and also to boost inflows in the mutual fund sector, the Securities and Exchange Board of India (SEBI) has recently suggested that only the pension funds of workers earning over Rs 6,500 per month and under the age limit of 40-45 years should be invested in mutual funds. The regulatory body believes that while keeping an age limit would protect investors who are nearing retirement from unnecessary risks; the income limit would ensure that workers with a low salary would be safe from the volatility of capital markets. SEBI has proposed that the choice of opting for an equity component as a part of retirement savings, be left to the employee or member contributing to the Employees Provident Fund. It further states that in order to limit the risks an investor is exposed to, investment in mutual funds can be restricted to 20-25% of the employee's contribution.
To read more about this news and the view of PersonalFN over it, please click here.
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- When one invests in the public issue made by any company, it is natural to wonder if the issue proceeds would be utilized towards the objective as stated by the company. More often than not, the investors are not aware about the utilization of their funds. In order to address this concern of the investors, Securities and Exchange Board of India (SEBI) has made it compulsory that a monitoring agency will have to be appointed for all issues, irrespective of the size of the issue. Earlier this was a requirement for only those companies which were raising money in excess of Rs 500 crore. However, in order to ensure that shareholders are updated with the manner in which their funds are being utilized, SEBI has made it mandatory for all companies raising money to appoint a monitoring agency and to send the report prepared by it to stock exchanges for public scrutiny.
This report prepared by the monitoring agency would include whether the company has deviated from the object of the issue in its utilisation of proceeds. Moreover, any reasons for such deviation and the comments of the board would also be inculcated. SEBI has proposed that the reports should be submitted every quarter till the proceeds are completely utilized for regular updates and disclosures.
PersonalFN is of the view that if such rules are implemented, then the utilization of proceeds by companies raising funds would come into light and any misuse of public funds could be curbed to a large extent.
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Exchange-Traded Fund - ETF: A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
(Source: Investopedia)
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Quote : "Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it." - Warren Buffett
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