  | | November 12, 2010 | Impact 
The Federal Reserve (central bank of the United States) in order to improve the economic health of America initiated a move to buy additional $600 billion of U.S. Treasuries till June 2011, as measure of its Quantitative Easing 2 (QE2) programme. Thus now, about $75 billion on a monthly basis will be bought by the Federal Reserve.
Justifying the move, Fed's Open Market Committee (FOMC) said, "Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the committee judges to be consistent, over the longer run, with its dual mandate."
Hence, now cheap money available from the U.S. would flow in emerging economies such as India, on account of robust economic outlook (GDP growth rate at 8.8% for Q1 of fiscal year 2010-11, and strong Q2 earnings) posed by India. However having said that, this may also lead to "creation of asset bubbles" in the emerging economies (such as India), which may in turn lead to positive correlation between equity and gold (generally equity and gold display an inverse relationship), as investors along with betting on equity, would take refuge (hedge their positions) by buying the precious yellow metal - gold.
 (Source: ACE MF, PersonalFN Research)
We strongly affirm that a paper driven stimuli, makes cheap funds available for investment in promising emerging markets. Hence given that we strongly opine that along with making hay when the sun shines (by investing in equity), one should also park some portion of the investible amounts to the precious yellow metal, and take refuge as the risk of asset bubble, especially in equity persists. Multibagger Stock Ideas
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Impact
In order to create awareness amongst investor community and impart education, the Securities and Exchange Board of India (SEBI) wants Mutual Fund (MF) houses to invest a part of their profits in building ties with the investors, rather than giving high commissions and freebies to agents.
This appeal by SEBI to the MFs comes on account of SEBI's concern over large-scale outflow of funds from mutual fund schemes (outflow in October 2010 was  5,727 crores approximately). SEBI is of the view that fund houses can improve their commission bargaining power by working on consolidation in the distribution network, and bringing down the number of agents and distributors.
After the entry load ban (since August 1, 2009) most MF houses, have displayed positive impact on profits. And now, SEBI's Executive Director - Mr. K.N. Vaidyanathan has emphasised on the point of strengthening relationship with investors. He said, "A part of the additional profits earned in FY'10 could be invested in 'investor connect' to cement relationship with investors and for training the distributors to adapt to the new environment".
We believe that such an initiative if taken up in the right spirit, will definitely do good for investors, distributors as well as MF houses in the long run, since it will enable building healthy relationships and keep a check on the outflow of money from the mutual fund schemes which is crucial for the overall development and growth of the (mutual fund) industry. |
Impact
SEBI is planning to curb smart investing by investors (mostly companies) who take advantage of the loopholes in the system at the cost of other investors. Such investors tend to make a quick buck by playing around the cut-off timings that mutual funds have for accepting applications in liquid funds.
In such a practice, these investors (mostly companies) put money in liquid schemes, where corporates park surplus money for a short term, usually on a Friday or Monday before 12 p.m., which helps them (investors) to get the previous day's NAV (Net Asset Value). At the time of submitting a liquid scheme application, investors also instruct the mutual fund to switch the investment to a liquid plus scheme on the same day (Friday or Monday) before 3 p.m., which in turn enables helps them (investors) get the liquid plus scheme's NAV for Friday in addition to the liquid scheme's NAV for Thursday (previous day's NAV). By following such a practice, investors enjoy the advantage of an extra day's return without taking any significant risks or even locking in the money for the period.
We believe that such a step should have been taken earlier as this practice was prevalent for years. If such a plan is executed, the flows into liquid and liquid plus schemes will be affected which account for 14% (approximately) of the mutual fund industry's assets under management of about 6.5 lakh crore as on September 30, 2010. SEBI should keep the implication of such a move in mind before implementing the same. However, a stop on this smart investing if implemented will reduce the volatility in the liquid and liquid plus schemes and also reduce the pressure of frequent buying and selling for the fund manager. | | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 20,156.89 | (736.7) | -3.53% | | Re/US$ | 44.33 | 0.0  | 0.05% | | Gold /10g | 20,425.00 | 780.0 | 3.97% | | Crude ($/barrel) | 88.65 | 3.2 | 3.70% | | FD Rates (1-Yr) | 6.50% - 7.50% | Weekly change as on November 11, 2010
*BSE Sensex as on November 12,2010 |
In this issue
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In an interview with CNBC-TV18, Mr. Munish Verma, Head of Global Markets at Deutsche Bank shared his views on Quantitative Easing 2 (QE2) announced in U.S., high liquidity in the Indian markets, and weakening of the dollar.
Mr. Munish Verma believes that the liquidity in Indian markets is looking strong, as the QE2 announced by U.S. will be more of accommodative in nature and further asset purchases will be made if the economic situation warrants, which in turn will lead to flows in the emerging markets like India. He thus perceives liquidity situation to be very positive for the next foreseeable future.
According to Mr. Verma, the valuations of the Indian companies aren't that expensive with 12 months' forward P/E at 17 times (10% premium to last 5 year average) and market capitalisation of the entire market at 1.2 times the GDP (1.6 times the GDP at 2007 levels). However, being cautions he is of the view that if this liquidity run continues and $600 billion gets expanded further, there is a possibility that some sort of an asset bubble is created amongst other assets including equities as well.
So, given that, according to him, structurally the case for dollar weakness and the case for dollar being bear are very sound. He further adds that people worldwide have different issues and as the focus shifts from one issue to the other, a pullback in the dollar cannot be denied.
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Price to Earnings Ratio : A valuation ratio of a company's current share price compared to its per-share earnings.
(Source:Investopedia) |
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- The World Bank raised its forecasts for economic growth in China to 10% in 2010 up from 9.5% earlier, due to strong domestic fundamentals in China which will enable them in offsetting the expectations of slowdown in the global economy. The next year's estimate has also been raised marginally to 8.7% from 8.5% earlier.
- The Credit Information Bureau of India Limited (CIBIL) is planning to launch value added products like Score and Automation to make the process of obtaining one's credit score a simple and smooth.
Automation, when launched, will generate reports in seconds. Score, on the other hand, would be a three digit number, ranging between 300 and 900, wherein a high number would indicate a low risk profile of an individual and vice-a-versa. These products will be launched early next year.
- The food inflation declined to 12.30% for the week ended October 30, 2010 from 12.85% last week (October 23, 2010).
Finance Minister Mr. Pranab Mukherjee commented on food inflation by saying, "I hope this (declining food inflation) trend will continue. Therefore, the basic point which you can derive is that though the coming down is slow ... because this time last year also base was reasonably high."
- In order to quicken the pace of its growth, India is eyeing to setup a $10 billion infrastructure fund jointly with the United States of America. The investment in infrastructure is envisaged at $1 trillion for the 12th Five Year Plan (2012-13: 2016-17).
Exuding confidence in the Indo-US ties, United States Undersecretary of Commerce and Industry said, "Infrastructure is an important area and within that power generation, alternate energy... These all are areas where I believe the US companies can contribute."
Commerce & Industry Minister, Mr. Anand Sharma endorsed the above view by saying, "The (Indian) finance minister and the US treasury secretary are directly discussing what modalities should be adopted to put in place an infrastructure debt fund. In principle, it has been agreed."
- The Organisation for Economic Cooperation and Development (OECD), based on its composite leading indicator index asserted that China, India, Britain, France and Italy could be heading for economic slowdown. The OECD further added that the level of industrial production will fall below its longer-term trend.
- The Insurance Regulatory and Development Authority (IRDA) has warned the investors to watch out for unscrupulous people selling insurance policies by claiming to be the regulator's representatives.
IRDA said, "Any person making any kind of transaction with such individuals or agents will be doing the same at their own risk. If any member of the public notices such instances, he or she may lodge a police complaint in the local police station."
- The Reserve Bank of India (RBI) in its report Trend & Progress of Banking in India 2009-10 has raised concerns over management of Non-Performing Assets (NPAs) and liquidity becoming critical for banks. The report observed that apart from the increase in NPA ratio, there was also deterioration in the distribution of NPAs of commercial bank between 2009 and 2010 as was evident from an increase in the percentage of loss making and doubtful assets of Scheduled Commercial Banks (SCBs).
However, despite an increase in NPA ratio, the Capital to Risk Weighted Assets Ratio (CRAR) for SCBs stood at 14.5% as against the stipulated ratio of 9%.
- The Securities and Exchange Board of India has directed that the broker / clearing members would be responsible for sale and redemption of units being bought by investors from the secondary market. This is perceived as a big relief to the Asset Management Companies (AMC).
SEBI in its directive said, "Payment of redemption proceeds to the broker/clearing members by MF/AMC shall discharge MF/AMC of its obligation of payment to individual investor. Similarly, in case of purchase of units, crediting units into broker/clearing member pool account shall discharge MF/AMC of its obligation to allot units to individual investor."
- The Pension Fund Regulatory and Development Authority (PFRDA) is planning to revamp the two-year old, not so successful New Pension Scheme (NPS) by engaging corporate houses.
The NPS's non-performance can be attributed to the structural problems including low incentives to those distributing the products, functioning of companies managing the funds and problems over who will do the marketing in a saturated market where NPS competes with the aggressive insurance and mutual fund companies.
- Reliance Life Insurance launched Reliance Life Insurance Classic Plan, a Unit Linked Life Insurance Plan (ULIP). This plan provides flexibility and triple benefit of savings, insurance and investment. The benefits of the plan are as below:
- Dual benefit of market linked return and insurance protection
- Accidental death benefit.
- Option to avail policy loan after two years
- Exchange option to take advantage of any new plans offered in the future
- Optional rider benefits to enhance protection cover
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