Gold accomplish new high May 28, 2010

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May 28, 2010

Weekly Facts
	Close	Change	%Change
BSE Sensex	16,666.40	146.7	0.89%
Re/US$	47.30	0.5	1.05%
Gold Rs/10g	18,570.00	480.0	2.65%
Crude ($/barrel)	70.33	1.9	2.67%
FD Rates (1-Yr)	5.00%-6.50%

Weekly change as on May 27, 2010

Gold accomplish new high

Impact

Data as on May 26, 2010
(Source: ACE MF)

After oscillating in a narrow range of Rs 16,200 and Rs 17,000 for almost 2.5 months, gold price (per 10 grams) showed an impulsive run-up from Rs 16,750 levels and has gained by 11.5% in the past 1 month (26 April 2010 to 26 May 2010) to reach Rs 18,690 levels.

Sluggish equities and weakening Indian rupee has compelled investors to go for an alternate safe investment like gold. Among all asset class, gold is the only asset to show an upward trend, while all other assets have been on a loosing streak in the month of May 2010. The price of gold got a boost on account of hectic buying by stockists and retail investors amid global cues. The increase in gold prices (across the globe) has been nourished primarily by the European debt worries, while the excess rally witnessed in the Indian gold prices has been due to the steep depreciation in the Indian Rupee against the US Dollar and the local demand for the precious metal due to the ongoing marriage season.

We believe gold is the classic safe haven in times of prevailing global economic uncertainty. Gold can be seen as an "insurance policy", on account of the rising concern about "currency devaluation", "sovereign debt crisis" and "inflation". Hence in such situations, we suggest that Investors should gradually keep allocating to gold and make the most of any declines by increasing allocations to this asset class.

Redrafting the Direct Tax Code - an uphill task

Impact

The finance ministry has been bombarded with suggestions in the form of emails, letters and presentations from various quarters, including Government departments.

The Central Board of Direct Taxes (CBDT) received about 10,000 suggestions on the Direct Tax Code, which seeks to replace the Income Tax Act of 1961. Maximum number of queries received are on Minimum Alternate Tax (MAT) and the Exempt-Exempt-Tax (EET) regime; while most of these comments also revolved around the nine areas, which the Finance Minister promised to revisit, such as capital gains tax, Double Taxation Avoidance Agreement, taxation of charitable organisations and foreign companies in India, retirement benefits and income from house property.

The suggestions (which are quite repetitive) are being vetted by a seven-member task force on DTC. As the revised draft of DTC is to be released for public debate in the first week of June 2010, the task force is left with just two weeks to go through the suggestions and take them into consideration while drafting the code. The redrafted code would be open for public discussion for 15 days. Officials of the revenue department will have to take into account the comments received during this period while finalising the code.

We think that the infested suggestions will make the finance ministry rethink on the broader changes it had proposed to make while replacing the Income Tax Act of 1961 with the DTC - like Exempt-Exempt-Tax regime, Retirement benefits and income from house property etc., all of which will have a huge impact on the savings of an individual. We feel that such a move is in the interest of most individuals, as it will help reduce the tax burden.

Mumbai land blaze in record deal

Impact

In an auction conducted by Mumbai Metropolitan Region Development Authority (MMRDA), The Lodha group of real estate developers emerged as the highest bidder to acquire a 22.5-acre plot in Wadala, central Mumbai, for Rs 4,053 crore, making it the largest-ever land deal in the country. The Lodha group quoted Rs 81,818 per sq mt, or Rs 7,604 a square foot, for the plot at the Wadala Truck Terminal, a few metres away from the construction site for a monorail that would link Chembur in the central suburbs with Jacob Circle in central Mumbai.

Given the staggered terms of payment, Lodha developers will shell out Rs 5,700 crore over the next five-years, with an initial 10% of the bid value due in the next three months. The developer will hold the right to construct a multi-storied apartment complex and a truck terminus.

According to MMRDA, the project would have a Floor Space Index (FSI) of 20, allowing a total saleable area of 75 lakh sq ft. Mumbai city enjoys a FSI of 1.33. But against this, Lodha developers will be able to build 20 square feet on every square foot of land bought by them.

The developer plans to build a residential complex and to sell apartments in the price range of Rs 13,000-Rs 14,000 per sq ft. The project is expected to be completed over the next five to seven years. At present, residential buildings around the Wadala Truck Terminal command a price of Rs 9,000 to Rs 10,000 a sq ft.

We think such a massive deal could change the sentiments of the realty market. The short supply of land in Mumbai is compelling developers to pay high value for metropolitan city land. The steep rise in the property prices by around 40% to 60% over the last six months is forcing developers to take such bold steps. We feel that such steps by developers will pump more air in the property bubble, as buying a dream house will be beyond the reach of a middle class individual. The absence of a regulator for the Indian realty market is one of the major reasons, which is leading to unorganised real estate markets.

INTERVIEW

In an interview with the Economic Times, Mr. KN Sivasubramanian, head of equity portfolio management, Franklin Templeton Asset Management (India), shared his views on the impact of Eurozone crisis on the global markets and his outlook for the Indian equity markets.

On the likely impact of the Eurozone crisis in Europe on the global markets, Mr. Sivasubramanian, believes that the sovereign debt concerns will not have any major impact on India / Asia per se. The impact will be in an indirect way due to the change in the global risk appetite climate and through the impact on capital inflows. He is of the opinion that, even as the region experiences stronger growth, market direction is likely to be influenced by global factors and any negative development could weigh on returns. He also expects that the accommodative monetary environment is likely to remain in place for more time than initially expected, which will put pressure on the euro.

Mr. Sivasubramanian believes that emerging markets (especially Asia) deserve a valuation premium compared with markets in the US and Europe, given the relatively stronger economic fundamentals. He also expects consumption and infrastructure spending to drive economic and earnings growth across the emerging markets.

On the outlook for the Indian equity markets, he believes that the domestic economic/ earnings data is likely to remain positive; the markets direction will be influenced by global factors (liquidity/ risk appetite) in the near term. He feels that at these levels, valuations are not excessive from a medium to long-term investment perspective; "given the strong economic growth potential over the medium to long term, valuations do not seem running ahead of fundamentals.” Mr. Sivasubramanian said that "given the increased global uncertainty, RBI might not resort to aggressive monetary tightening and the recent measures are not expected to result in any sharp increase in borrowing costs.”

AND OTHER NEWS...

Addressing his first national press conference after the United Progressive Alliance (UPA) returned to power in 2009, Prime Minister Dr. Manmohan Singh lobbed an unexpected ball in the court of his finance minister by setting a target for inflation reduction. He showed confidence that the rate of inflation would come down to 5% - 6 % by December 2010 from the current nearly 10%. He also added that the economy is likely to grow at about 8.5% in the current fiscal.

According to the data released by the commerce and industry ministry on May 20, 2010, the food inflation rose to 16.49% for the week ending May 8 from 16.44% in the previous week. This was mainly because of nominal increase in the prices of essentials vegetables such as onions, potatoes and pulses. This may raise concerns for the government as, mainly because of expectation of a normal monsoon and significant increase in rabi (winter crop) production, the food inflation rate had just started to look downward a month back.

As a move to prevent a possible liquidity crunch in the banking system, due to expected outflow because of advance tax payments and also payments for 3G licences by telecom companies early next month, the Reserve Bank of India has announced a temporary reduction in the Statutory Liquidity Ratio (SLR) by 50 basis points.

According to the RBI Governor, Dr. D. Subbarao, the current legal and regulatory framework does not support the case of a banking company based on Sharia principles. Dr. D. Subbarao said "but it is possible to set up one through a separate legislation, separate legal and regulatory framework.” The RBI Governor referred to talks that he has had with the State administrations with respect to the formation of a non-finance banking company working on Sharia principles.

As a step to provide a common code for all banks by the Reserve Bank of India, the banks have been instructed to speedily address ATM-related complaints. The banks will have to issue a ticket number within a day of the complain being received and resolve the issue within a week of the filing of the complain. Banks will soon have to put the information on their websites, where a customer will be able to track the resolution of his complain. The move came after the banking regulator had directed the banking association IBA to draft a common code for ATM related complaints.

With Fidelity Equity Fund completing five years this month, Fidelity Asset Management Co. Ltd. has decided to distribute bonus units to those investors who had invested in the new fund offer of Fidelity Equity Fund. Fidelity mutual fund has decided to give two units for every 500 units held by investors. Even if the investor holds less than 500 units, he will be given units proportionately.

DLF, the country's largest real estate company, is planning to launch its Lower Parel high-end housing project soon. Exhibited as Mumbai's ‘largest luxury residential project', the project is expected to have three towers with 1,000 apartments and one of the largest parking lots in the city. The apartments are likely to be in the range of Rs 5-10 crore each, with the minimum size being 2,000 sq ft.

In a move to bring uniformity across the country and replace the existing system which is fraught with legal issues due to inaccuracies in property records, the department of land resources under the Rural Development Ministry has drafted the Land Titling Bill, 2010. The bill provides for establishment and management of a system of conclusive property titles with title guarantees and compensation against losses due to inaccuracies in property titles, through registration of immovable properties. Under the land titling system, the government guarantees conclusive title, as against presumed title, for every immovable property which is tagged with an unique property identification number.

New Issues

Mirae Asset Mutual Fund has launched an open ended equity fund named "Mirae Asset Emerging Bluechip Fund”. The fund is primarily a mid-cap fund that will invest in Indian equities and equity-related securities of companies that are not a part of the top 100 stocks by market capitalisation, but have a market cap of at least Rs 100 crore at the time of investment.

Being a diversified equity fund, Mirae Asset Emerging Bluechip Fund will invest in securities with the objective of generating income and long-term capital appreciation. The New Fund Offer (NFO) period for Mirae Asset Emerging Bluechip Fund will be from May 24 to June 22. The units will be available at Rs 10 each during the NFO period