  | | March 07, 2014 | | | | | | | Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 21,919.79 | 799.67 | 3.79% | | Re/US$ | 61.12 | 0.87 | 1.40% | | Gold Rs/10g | 31,630.00 | 620 | 2.00% | | Crude ($/barrel) | 107.46 | -2.09 | -1.91% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on March 06, 2014
*BSE Sensex as on March 07, 2014 | |
Impact 
Markets have been hitting highs frequently these days. Cheering the victory of BJP at state assembly elections in December, markets had touched a new high then. They slipped in a corrective mode thereafter, giving investors a feeling that, it was a knee jerk rally in deed which has started petering out.
But suddenly, 'bulls' took 'bears' by the horns. In March, markets not only have made a new high but also have surpassed it the very next day. Many of you might be getting tempted to jump in with both feet. If you have really planned something like this, please wait a while and do some assessment before you commit your money. Although, fundamentals for India are certainly improving, they are not alone driving the stock prices. In fact, the major force that makes investors feel confident about India is likely change in the political regime and not just improving fundaments. As we are drawing closer to elections, markets are getting euphoric.
Are fundamentals improving?
On the positive side, Current Account Deficit (CAD) which was the biggest worry uptil few months ago has shrunk substantially in the 3rd quarter of the current fiscal. CAD for the December quarter stood at just USD 4.2 billion. Rupee has remained firm and has appreciated against US dollar over last few months. There has been some respite on the inflation front. Inflation measured by the movement of Wholesale Price Index (WPI), dropped to eight-month low (5.05%) in January. Retail inflation too, as measured by Consumer Price Index (CPI) stood at 8.79% for January, which is a 2-year low.
On the negative side, fiscal deficit is still a big worry. Finance ministry tried all tricks in the books to make fiscal deficit number look better. PersonalFN is of the view that, fiscal deficit achieved by way of deferment of certain payments and cutting some important expenditures rather than raising tax income, may not provide any respite. On the contrary it would put pressure on the new Government to keep the fiscal deficit under check. HSBC Purchasing Managers' Index for manufacturing which gauges the expansion / contraction in the manufacturing activity has hit a one-year high in February. However, it remains to be seen whether this trend continues going forward, or the performance of manufacturing sector resumes its lacklustre show. GDP growth is likely to be negative for the current fiscal. Markets believe that the new Government will have answers to all these problems. PersonalFN is of the opinion that the coming Government will have a herculean task of creating conducive atmosphere for business.
If markets sense that BJP-led National Democratic Alliance (NDA) would get majority at the 16th Lok Sabha elections, they might rally before the poll results are announced. In such as case, markets run a risk of getting over-exuberated. Any disappointment in the electoral mandate would throw a spanner in the rally.
PersonalFN is of the view that, markets have a tendency to over-react on both sides, upside as well as downside. Therefore, you shouldn't disregard the importance of valuations. This season, about 1329 listed companies have declared their 3rd quarter results so far. Though, the corporate earnings initially appeared to be robust as profit growth of companies announcing results was about 20% on an average till few days ago. But as more and more companies announced results, profitability has declined (about 3.4%).
PersonalFN believes, for corporate earnings to grow, many factors have to show substantial improvement and "political will" tops the list. Markets believe that NDA led Government may pull up the economy from a state of lull. However, PersonalFN is of the view that there are certain risks to this assumption. Mr Narendra Modi who is considered as a ball of fire, may have several restrictions while making decisions. Unless, NDA attains "272+ figure" on its own, markets are likely to fall eventually, post elections even if NDA forms the government. Hung parliament would be a disaster for markets. In the era of collision-Government hoping miracles on the decision making front may be unwarranted. Having said this, sweeping victory with BJP winning majority of seats would further boost the rally. Going by even the most optimistic election polls, this looks farfetched.
PersonalFN believes investors should take this opportunity to get rid of stocks and mutual funds which are inconsistent and have odds against them when assessed on risk-return parameter. Markets are irrational sometimes, but you can't afford to be. Hope is just like gas in the balloon; it either fizzles slowly or erupts violently; all depends on when the balloon is pricked. You should continue with your existing investment plan if it is in line with your long term financial goals.
|
Impact 
Real estate has become a very popular asset class among investors since the last few years. Many people are of the view that investing in real estate will not only help them in generating wealth for their long term portfolio but also diversify their investments across different asset classes. However, the state Government is of the view, that due to such 'investors' who merely buy houses for investment purposes and do not rent them out, there has become a large scarcity of houses especially in Mumbai.
The Government is of the view that at a time when large number of people are genuinely in need of a house (on rent as well on ownership basis), there has been a shortfall in the availability of homes largely due to investors purchasing multiple houses for investment purposes. Due to these reasons, the decision makers or Government is contemplating issuing a tax or penalty on people who opt for more than 1 house. This means that investors in Maharashtra who own more than 1 home and have not let them out to anyone, or have not yet sold it might have to pay taxes or penalties to the state government.
It is believed that if investors stop parking their funds in multiple houses and own just 1 home, then this could reduce the incredibly high property prices and could also lead to lowering of rents paid by rental home residents. This might help resolve a major problem in the housing sector.
PersonalFN is of the view there is no denying that a number of people face difficulties in finding an affordable house especially in the financial capital of the country and this policy of penalizing investors owning multiple houses might help in increasing the inventory of houses available and bring down prices as well. However, keeping in mind the increasing population and rising demand for homes, whether this policy will be effective or not remains to be seen. Also, whether this proposal would get political consensus remains to be seen, given the close nexus of builders and the Government which has thus far kept real estate market buzzing in the state of Maharashtra. In our view, it is imperative for the Government to promote affordable housing schemes the right way rather than only focus on mega projects, which benefit only a section of the society. It is noteworthy that housing is a primary need (as with food and clothing), and thus the Government should take appropriate steps in direction of making housing affordable. For home buyers too, it is imperative that they adopt enough care while buying one to save the nightmare and harrowing times later.
|
Impact
"If I Securities and Exchange Board of India (SEBI) has been taking steps to revive mutual fund industry. SEBI board recently approved long term policy for mutual funds. The main objective of the policy is to promote growth of the industry and allow only serious mutual funds to stay in the business for which it raised the minimum net worth requirement for asset management companies to Rs 50 crore. There has been news that smaller mutual funds may approach the Competition Commission of India (CCI), following the announcement. There is another such proposal which may have more demerits than merits.
What is the proposal?
Now SEBI wants the Government to clear the proposal to allow all Public Sector Undertakings (PSUs) to invest in mutual funds. SEBI aims to mobilise surplus money of PSU companies to mutual funds. It is expected that asset base of mutual funds would significantly grow with this move, if the proposal is accepted. As per public enterprise survey 2011-12, cash and bank balance of around 257 PSUs was approximately worth Rs 2.74 lakh crore as on March 31, 2012. Present norms allow only Navratna and Miniratna companies to invest upto 30% of their surplus in mutual funds floated by public sector companies. SEBI now seeks permission for allowing all PSUs to invest in mutual funds without any precondition requiring it to be a public sector fund house.
Asset break-up of the industry...
At present, income funds and money market funds account for a little over 77% of the assets of mutual funds, as per data released on January 31, 2014. Equity funds constitute about 21% of the total assets under management.
Growth Imbalance...
Data as per portfolios disclosed on January 31, 2014.
(Source: AMFI)
Possible Impact...
If proposal goes through, mutual funds may get thousands of crore rupees under their management. It is expected that the inflows would be mainly in liquid and liquid plus funds. Companies hardly earn anything on their surplus money as most of it is parked in current accounts with banks. This move alone can help mutual fund grow their assets atleast by 10% of the AUM of the industry as on January 31, 2014. Although, companies might fetch better returns on their surplus, banking system may face a liquidity pressure and cost of their borrowing might go up. If companies start putting thousands of crore of rupees in mutual funds, cost of borrowing would go up for banks. Current account deposits and savings account deposits are the cheap source for banks for mopping up money. Furthermore, if companies start making money on their investment in mutual funds, they would become less aggressive on their business and may not think about long term business prospects and let go long term rewarding opportunities for short term gains.
To read more about this news and the view of PersonalFN over it, please click here.
|
Impact
The Earlier, the Securities and Exchange Board of India (SEBI) had allowed investors to make cash investments in mutual fund products upto Rs 20,000 in order to widen the reach of mutual funds and revitalise the industry. However recently, the capital markets regulator has expressed its desire of raising the limit for cash investments to Rs 50,000. The capital market regulator is of the view that this move will allow mutual fund houses to expand their reach into towns and villages which are smaller in size and where the investors would be more comfortable if they were allowed to make transactions in cash.
But this move seems to have gone awry with mutual fund houses as they do not see huge investment inflows coming through this route. Moreover, they believe that the cost involved in handling cash investments (by setting up cash management facility) and accounting complexities are deterrents. Although through this route there would be more equality among different forms of investment (while transacting); in case of insurance products (which are competitors to mutual fund products) however, there is no limit for cash investments. Also, this move is further facing criticism due to the following aspects:
To read more about this news and the view of PersonalFN over it, please click here.
|
Sucker Rally: It is a temporary rise in a specific stock or the market as a whole. A sucker rally occurs with little fundamental information to back the movement in price. This rally may continue just long enough for the "suckers" to get on board, after which the market or specific stock falls.
(Source: Investopedia)
|
Quote : "The Market Can Remain Irrational Longer Than You Can Remain Solvent" - John Maynard Keynes
|
| |
| © Quantum Information Services Pvt. Ltd. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of PersonalFN is strictly prohibited and shall be deemed to be copyright infringement.
Disclaimer: Quantum Information Services Pvt. Limited (PersonalFN) is not providing any investment advice through this service and, does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. All content and information is provided on an 'As Is' basis by PersonalFN. Information herein is believed to be reliable but PersonalFN does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. PersonalFN and its subsidiaries / affiliates / sponsors or employees, personnel, directors will not be responsible for any direct / indirect loss or liability incurred by the user as a consequence of him or any other person on his behalf taking any investment decisions based on the contents and information provided herein. This is not a specific advisory service to meet the requirements of a specific client. Use of this information is at the user's own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. All intellectual property rights emerging from this newsletter are and shall remain with PersonalFN. This is for your personal use and you shall not resell, copy, or redistribute this newsletter or any part of it, or use it for any commercial purpose. The performance data quoted represents past performance and does not guarantee future results. As a condition to accessing PersonalFN's content and website, you agree to our Terms and Conditions of Use, available here. |