  | | June 13, 2014 | | | | | | | Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 25,228.17 | -168.29 | -0.66% | | Re/US$ | 59.26 | 0.07 | 0.12% | | Gold Rs/10g | 27,100.00 | 140 | 0.52% | | Crude ($/barrel) | 110.44 | 2.32 | 2.15% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on June 12, 2014
*BSE Sensex as on June 13, 2014 | |
Impact 
There is a wave of optimism in India at present. Stock markets are rising on the hope that Mr Modi-led NDA Government will revive the sagging Indian economic growth. However, as S&P BSE Sensex has hit the silver jubilee mark of 25,000 points, valuations have started ringing the warning bell. There is doubt afloat on whether this rally sustain will sustain for too long. While there is undoubtedly a hope for better tomorrow, policy announcements from the Government are awaited. And if everything goes on expected lines, economy improves and corporate earnings grow; the rally may sustain.
After a satisfying Current Account Deficit (CAD) and fiscal deficit data, there is good news from industrial activity.
The Index of Industrial Production (IIP) rose 3.4% in April 2014, recording its highest reading in last 13 months. Manufacturing activity seems to have picked up as it grew at 2.6% in April. Likewise, electricity sector recorded an impressive growth of 11.9%. But mining activity grew by a moderate pace of 1.2%. Within manufacturing, cyclical sectors such as basic goods saw robust activity. But, consumer goods were a drag which witnessed a negative growth of 5.1%.
IIP: Finally breaks the shackles
Data for April 2014, as released on June 12, 2014
(Source: CSO, PersonalFN Research)
In the meanwhile, the retail inflation (which was also released on June 12, 2014) measured by Consumer Price Index (CPI) has also eased to 8.28% in May 2014 (from 8.59% in the month prior), placing it at a 3-month low as prices of food article eased.
PersonalFN believes, while these are encouraging data points, it would be important to see the sustainability. This is because, in case of IIP while it has depicted such spikes in the past (see chart above) it has failed to maintain those levels and depicted a see-saw movement. Likewise, while retail inflation for May 2014 has mellowed, with delayed and sub-normal monsoon (due to 60-70% chances of an El-Nino phenomenon), the risk to food inflation yet remains. Also the successive increase in price of diesel, which is an essential transport and industrial fuel, adds to the risk of stoking inflation going forward. So, these are early days to term it as signs of turnaround.
As an investor you need to cautious in your approach going forward. After the announcement of the aforesaid data points, Indian equity indices have descended on profit booking, seemingly being conscious about valuations. This suggests that markets would adopt cautious approach and keep a close eye on further development.
PersonalFN believes, the first budget of the NDA Government (to be presented in the 2nd week of July 2014) would set the tone for markets while monetary policies of RBI may guide about future interest rate movement in the economy. Keeping in mind forecast of a weak monsoon this season, upward risks to inflation still remain. It is unlikely that RBI may cut rates soon. PersonalFN is of the view that, you should follow your personalised asset allocation and stagger your investments, going forward. Investing in markets through Systematic Investment Plans (SIPs) offered by mutual funds is advisable. PersonalFN believes selecting mutual fund schemes for your portfolio matters a lot for your portfolio to do well in the long run. At PersonalFN, through our unbiased and independent research on various mutual fund schemes, we've helped many of our clients in the process of wealth creation. In times when there are host of mutual fund schemes to select from, our FundSelect, FundSelect Plus and DebtSelect services can help you make your job easy and power your investment portfolio. So try our services now!
Do you think, Indian economy is all set to revive and become stronger this year? Share your views here.
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Impact 
Many of individuals keep aside some cash for emergencies. But there are some who have millions parked in as investments and do not feel it necessary to hold enough in cash. But such an approach may prove awry if investments running millions can't be converted into cash immediately when needed it the most - like in case of emergencies.
This phenomenon was observed in case of a few global banks. In spite of having adequate capital, banks faced difficulties in managing liquidity. The importance of prudent liquidity management in the banking system was realised during the phase of financial crisis in 2007-08. In 2008 Basel committee had rendered the detailed guidance on managing liquidity risk. Basel III norms require banks to maintain a predetermined Liquidity Coverage Ratio (LCR).
In India, being committed to complying with Basel III norms, RBI has also asked banks to maintain LCR of 60% from January 1, 2015, which will keep on increasing by 10% every year until it reaches to 100% in 2019. Let's first understand what liquidity risk is and why LCR is being introduced.
Liquidity Risk of a bank
In simple terms, it means a bank may not have adequate resources for satisfying expected and unforeseen monetary obligations or provide collateral wherever needed. Another liquidity related risk a bank is that, it may have adequate liquid assets, but is not able to sell them in time to raise cash. This risk arises if a bank holds more illiquid assets. In extreme cases poor liquidity condition may affect financial stability of a bank negatively.
So as a measure...
RBI has prescribed that, banks should hold minimum of 60% of net cash outflow that may happen in 30 calendar days, in highly liquid assets. This will gradually go upto 100% by January 2019.
Will it be difficult for Indian banks to comply?
Indian banks may meet this requirement comfortably. RBI had conducted a "Quantitative Impact Study" on sample bank in December 2013. It was found that, average LCR was in the range of 54% to 507%.
PersonalFN believes, outcome of the impact study conducted by RBI suggests that, complying with the norm of 60% LCR may not be a problem to Indian banks but gradually increasing it to 100% could be. Moreover, liquidity in excess of 100% is also not desired as per Basel III norms. Thus PersonalFN is of the view that, there is a scope for more efficient liquidity management in Indian banking system. Risk management plays a vital role in availability of credit in the economy. Banks with higher proportion of current and savings accounts may be in a better position to comply with LCR norm.
So next time you when you plan to keep a fixed deposit with a bank, do check the LCR. Ratios such as LCR tell you about the financial condition of a bank, which is important from investors' perspective. You should bank only with banks which have comfortable liquidity position.
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Impact
Gold is considered a safe haven traditionally. However, in recent times gold has lost sheen. Looking at its movement in 2014, one may start doubting its outlook. While equity markets in India have given in excess of 20% returns since the beginning of the year 2014, gold has lost nearly 8% in rupee terms over the same time frame. In the international markets too, gold continues to remain weak. It is noteworthy that gold started losing appeal in international markets, from 2013 onwards. But for India, weaker rupee, turbulence in equities, policy paralysis of erstwhile UPA II Government, and levy of high import duty on gold along with other import restrictions; kept gold prices somewhat firm in India.
But now that current account deficit has fallen substantially, and RBI has already relaxed a few of restrictions it had imposed earlier; it is predicted that investment demand for gold might come off even further. If we go by the prediction of India Bullion and Jewellers Association Ltd. (IBJA), gold may touch Rs 23,000 - Rs 24,000 per 10 grams by October 2014. And if that is to be true, many of you might be wondering whether this is a right time to buy gold or you should wait for the yellow metal to fall more.
PersonalFN believes investment demand for gold is falling mainly on account of:
To read more about this news and the view of PersonalFN over it, please click here.
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Impact
"Sell in May and go away". This is a catchy phrase which is popular among investors in the western markets. In United States, it is historically observed that, May-October is a period where equity markets usually stay volatile and they underperform. Therefore, it is believed that, investors and traders sell equity holdings in May and get back to investing only in November. PersonalFN believes one would be better off if one avoided such superstitions. Equity markets can surprise you always like they have surprised many investors in India this summer.
Investors back home seem to be completely ignoring this old investing tenet. Strong mandate to BJP led NDA at Lok Sabha elections has pushed equity markets to new highs. Markets are refusing to correct. S&P BSE Sensex has closed above 25,000 in the first week of June and is still going strong. Assets under Management (AUM) of mutual fund houses are rising. AUM crossed Rs 10 lakh crore-mark for the first time in May. This was a jump of nearly 7% over AUM recorded for the month of April.
Steady rise in Assets under Management
Data disclosed upto May 31, 2014
(Source: SEBI, PersonalFN Research)
In April, AUM went up by about 14.5% as compared to that in March. This rise was mainly on account of huge inflows in liquid and liquid plus funds. But now that equity markets are flying, retail investors have started coming back to markets. Inflows in equity oriented funds have gone up in May which has been the main reason for AUM crossing Rs 10 lakh crore-mark.
About 8 months ago, if someone would have predicted 25,000 levels for S&P BSE Sensex by May 2014; hardly anyone would have taken it seriously. Investors were shying away from equity. Mutual funds were facing redemption pressure and thus were net sellers in the market. Now the situation has reversed. Risk appetite of investors has increased and mutual funds are witnessing huge buying.
To read more about this news and the view of PersonalFN over it, please click here.
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- If you want to invest in in Follow-on Public Offer (FPO) of a company, there may be a reason for you to smile. Soon there will a discount for those investors who are investing below Rs 2 lakh.
The Securities and Exchange Board of India (SEBI) has made it compulsory for all private sector companies that the non-promoter holding should be 25% at least. In order to offload excess stake, promoters often float FPOs. Offer-for-Sale (OFS) has been a preferred route these days. OFS is a separate window provided to top 100 companies by market capitalisation for diluting promoter's stake in a company. SEBI has planned to increase this ambit to top 200 companies.
PersonalFN is of the view that, this is a welcome move considering that it may attract more retail investors to public markets. Moreover, OFS route may make pricing more transparent. Wider market participation and transparent pricing may make a number of issues attractive for investors. Having said this, PersonalFN also believes that equity is essentially for long term. Listing gains should never be a primary reason for investing in any public offer.
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Liquidity Coverage Ratio: It is a proportion of "highly liquid assets held by financial institutions in order to meet short-term obligations. The Liquidity coverage ratio is designed to ensure that financial institutions have the necessary assets on hand to ride out short-term liquidity disruptions."
(Source: Investopedia)
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Quote : "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." - Warren Buffett
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