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| 14th September, 2012 |
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
18,464.27 |
780.5 |
4.41% |
| Re/US$ |
55.42 |
0.2 |
0.41% |
| Gold Rs/10g |
32,000.00 |
300.0 |
0.95% |
| Crude ($/barrel) |
115.87 |
2.0 |
1.78% |
| FD Rates (1-Yr) |
7.25% - 9.00% |
Weekly change as on September 13, 2012
*BSE Sensex as on September 14, 2012
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Impact 
The IIP data for July 2012 (released on September 12, 2012) sent signal that our economy is paining and isn't any great economic health. To, the very marginal positive growth of +0.1%, the saviour was only the production of consumer durables goods data (which managed to post a growth of +1.4%), as they were produced more ahead of the festive season to meet consumption. On the other hand, manufacturing (which constitutes about 76% of the IIP) displayed negative growth (of -0.2%).
(Source: CSO, PersonalFN Research)
The lacklustre growth in the IIP led the industry worry about the future business prospects in the country and sought immediate action on the part of the RBI to cut interest rates. Moreover, the inaction on the part of the Government to put important policy reforms on fast track may further deepen the macroeconomic stress on the country and eventually may lead to a sovereign rating downgrade. Such a scenario could make foreign investors revisit their investment outlook for India.
We believe that, despite the slowing down of India's growth engine, the RBI may not budge to cut interest rates as the upside risks to the headline inflation still persists. Moreover, with the Brent crude oil hovering around $115, there is always a risk to high fuel inflation fuelled by the depreciation of the rupee against the dollar. Thus, interest rates may continue where they are for some more time, before they head for the southward journey.
Apart from RBI, the Government of India too should wake up and initiate policy reforms required to bring the growth engine back on track. If there were to be a sovereign ratings downgrade for India, it may prove hazardous for the economic health of the country.
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Impact
With asset classes other than equity performing well in the recent past, many investors have shifted their preferences to other asset classes such as gold and fixed income in order to generate better returns. However, this change in investment preference has led to equity as an asset class bear the brunt and is underperforming for quite some time now. Descending movement in equities is also fuelled by debt crisis in the Euro zone, stumbling economic growth in world's largest economy - the United States and rising Brent crude oil prices. To add to it, this season's uneven and deficient rainfall (in some parts of Maharashtra and Karnataka) has infused in inflationary pressures as well (due to impact of rise in commodity prices).
Thus in the backdrop of such a scenario - and being petrified, investors have preferred to redeem their investment from equities. So far, in the current fiscal i.e. April 2012 - August 2012, the net outflow from the equity schemes has been about Rs 3,035 crore, as against a net inflow of Rs 1,703 in equity schemes during the same period in the previous year. With the Sensex having returned about 1% gains in Aug '12, investors seem to have booked profits in light of the prevailing uncertainties and acute slowdown in the domestic economy. Moreover, the month of August 2012 witnessed one of the sharpest declines in number of equity folios, wherein the mutual industry lost 4.6 lakh equity folios (including those of equity linked saving schemes or ELSS). This took the overall number of equity folio closures in current calendar year to a massive 2.36 million - an unseen figure for the country's fund houses in a span of 8 months.
However, a decent influx of money was observed in the Gold ETFs. One of the preferred asset classes of investors today, Gold ETFs saw net inflows to the tune of Rs 88 crore in the month of Aug '12 for the second consecutive month. Earlier, in the month of Jul'12, the net inflows into this asset class had been to the tune of Rs 95 crore.
We believe that, the change in investment preferences have weighed heavily on the equity asset class for now. But investors should keep in mind that over the long term (not just 3 or 5 years) equity asset class has the mettle to provide inflation beating returns and thus, investors should adopt the strategy to invest in equities during downbeat investment sentiments to benefit from the upswings in the future. Moreover, instead of timing the market - which most people do often, in such turbulent times it would be prudent to adopt the SIP (Systematic Investment Plan) route to equity investments (offered by mutual funds) and thereby manage the volatility well through rupee-cost averaging and power your portfolio with the benefit of compounding.
As far as gold and fixed income asset classes are concerned, they form an inseparable part of one's investment portfolio. Hence, investors should therefore allocate their assets amongst different asset classes in proportion which best suits their risk appetite, income, age, goals, etc.
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Impact
Excess of anything is bad. This tenet holds true in our daily lives as well as to a large extent in the financial arena too. For instance, if you have excess of sweets you might develop a condition wherein your body does not produce enough insulin or the cells do not response to insulin that is produced. This results in serious ill effects on your health. Similarly, when financial products are tweaked to make them more complex and sophisticated due to financial exuberance, it turns detrimental to the investors' financial health. Complex financial products may have appeal due to their aesthetic value, but when it comes to delivering returns, they falter either due to very high risks (occurring due to unwarranted financial innovation) or imprudent fund management. Another example worth mentioning here is debt mutual funds; as the characteristic of the portfolio held by them determines, the investment proposition it offers. In the recent past it has been observed that many mutual fund houses in their debt mutual fund schemes have been taking large exposure to debt instruments from a selected few sectors, thereby exposing its investors to high risks. To know what to check before investing in debt mutual funds please click here.
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Impact
The uncertainty around the tax policies seems to be still swirling in the Indian economic environment. It's been hardly any time that the convulsions faced by the industry over GAAR have been relaxed, the Parthasarathi Shome Committee, appointed by the Finance Ministry now seems to have a relook at the General Anti-Avoidance Rules (GAAR) and other tax proposals related to foreign investments submitted some comprehensive proposals. One of the most contentious issues proposed by the Committee was the abolition of tax on short-term gains from transfer of listed securities whether treated as capital gains or business income. This would be applicable to both residents as well as non-residents. But to compensate the Government due to absence of tax on short-term gains, the Committee has recommended a commensurate increase in Securities Transaction Tax (STT). However, there is no explicit mention in the Committee report regarding treatment of tax on gains in investments through Mutual Funds. To know more about the Government's stance on short term gains tax please click here.
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- To rein in the fiscal deficit and save India from a sovereign credit rating downgrade, the Government raised the prices of highly subsidised diesel by Rs 5 per litre. The hike in the prices of diesel translates as a 14% rise including taxes and a first in 15 months. Moreover, the Government also decided to limit the number of subsidised cooking gas cylinders per household to six per year. Any LPG cylinders bought over this ceiling will be at market rates, which could almost double the price.
We are of the view that, the hike in diesel prices will help in bringing down the subsidy burden of the Government. However, the Government in power should show resilience against the Opposition Parties demanding a roll back of the hike in diesel prices. The hike in diesel prices will also have a direct impact on the fuel inflation thus contributing to the overall headline inflation. This may preclude the RBI from going ahead with the rate cuts at its upcoming second quarter mid-review of monetary policy scheduled on September 17, 2012.
- With the price precious yellow metal on a record breaking spree, sailing over Rs 32,000/10 gms, the Reserve Bank of India's (RBI's) Deputy Governor - Dr Subir Gokarn urged the public against choosing gold as an asset for savings or investment. Dr Gokarn was of the view that the All India Bank Depositor's Association (AIBDA) should educate the general public regarding investment options other than gold. The Deputy Governor added that the $60 billion worth of gold India imported annually was one of the main reasons behind the current account deficit.
This is the second time that RBI has voiced against investing in gold. Dr Gokarn had earlier said that there was a need for a socio-cultural revolution to help Indians overcome their love for gold. India is the world's largest consumer of gold and is estimated to have imported close to a 1,000 tonnes in 2011. It is noteworthy that although imports have dropped following the increase in customs duty in the 2012 budget, the value of imports continues to remain high thanks to the rise in prices and the weakening rupee. Despite the import drop, domestic gold prices continue to rule high with the yellow metal being seen as a strong hedge against inflation and global economic uncertainty.
We are of the view that, decision to buy gold especially gold jewellery is driven by a lot of emotional attachment in India. It is recognised as a store of value and a hedge against inflation and global economic uncertainty. In fact recognising this trait central banks across the world hold huge reserves of gold in their coffers. The United States of America (U.S.A) holds the largest reserves of gold in the world and India tops the charts as the largest consumer of gold. Certainly, there are other financial instruments which investors can opt for instead of gold and help the country bring down its current account deficit (CAD). But we think that the general public are well versed with the traits of gold, and therefore are holding it in their portfolio.
For investors, we recommend holding gold the smart way - i.e. by investing in gold ETFs as they offer a cost advantage while you hedge your portfolio.
- In order to provide ease to the EPFO and employee, the Government has proposed to provide unique numbers to all provident fund account holders with life-time validity. The proposal, if implemented, would see an employee having the same unique number despite changing jobs and having new employers.
We believe that, unique numbers to all Provident Fund account holders will have far reaching effects on streamlining the entire PF industry. Streamlining of the process may eventually help the employees in knowing their updated provident fund amount instead of the present system wherein the employee is able to know one year old balance in his or her provident fund account.
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Rupee Cost Averaging: The method of buying a particular investment on a regular basis with a fixed amount of rupee regardless of the price of the investment. More units or shares are purchased when prices are low and fewer units or shares are purchased when prices are higher.
Source: (PersonalFN Research)
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Quote : "Nothing can stop the man with the right mental attitude from achieving his goal; nothing on earth can help the man with the wrong mental attitude." - Thomas Jefferson
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