Market Overview

The year 2013 thus far has begun on a positive note for the Indian equity markets. In the month of January 2013 the Indian equity markets (i.e. the BSE Sensex) ascended by good +2.4% (or 468.27 points) with the Government setting tone of reformism during the winter session of the Parliament. Also the several statements from the Government on its commitment to achieve the fiscal deficit target, aided the month gone by to end in positive terrain.

After about first four trading session of the month, nervousness infused into the markets with RBI Deputy Governor, Dr. K.C. Chakrabarty mentioning that the Reserve Bank of India (RBI) would look at the macroeconomic picture before deciding on a rate cut. Also with rating agency, Fitch stating that the Government is likely to miss its fiscal deficit target for the current financial year, and that the country may face a credit rating downgrade in the next 12-24 months (since the recent macroeconomic trends have been quite disappointing); made the mood somber until the WPI inflation data for December 2012 was released. The WPI inflation for December 2012 dropped to 7.18% (from 7.24% recorded a month prior) and there was downward revision in October 2012 data which made some signs of moderation evident, and encouraged the markets to believe that now that RBI could reduce policy rates by at least 25 basis points, thereby depicting concerns for growth risks. Likewise a 'see-saw' movement in Index of Industrial Production (IIP) data with contraction reported in November 2012 (-0.1%, as against a sharp up-tick of 8.2% shown in October 2012) got the markets to believe that indeed the RBI would think about a rate cut now. Also with the IMF pegging India's growth to 5.9% for 2013 and 6.4% for 2014 (both lower projections!); it was quite certain that the RBI would reduce policy rates in its 3rd quarter review of monetary policy 2012-13. And indeed on the policy date (i.e. January 29, 2013) the RBI not only reduced policy repo rate by 25 basis points (bps) but also cut the Cash Reserve Ratio (CRR) by 25 bps; thereby injecting primary liquidity worth Rs 18,000 crore in the banking system. But on the date of announcement, the Indian equity markets ended the trading session in red, and in the ensuing trading sessions (until the month ended) too, the trend was pretty descending as the RBI revised its GDP forecast to 5.5% (from 6.5% as mentioned in the 1st quarter review of monetary policy 2012-13). Also the guidance from monetary policy cautioning over the risk of twin deficit (occurred by ballooning fiscal deficit and widening Current Account Deficit (CAD)) got the markets in a submissive mood. The news of the U.S. economy reporting shrinkage of -0.1%in Q4 GDP growth (due to downturn in private inventory investments, cut in federal government spending, and in exports), also resulted in the negative mood during the tail of the month; but with Fed interest rates low until 2016 to support economic growth rate there seemed some respite evident for the markets; and thus far too the markets haven't fallen by a great magnitude. Going forward it remains to be seen how responsibly the Government treads overs the path of fiscal consolidation and what the Union Budget 2013 pronounces for the economy.

As far as the precious yellow metal - gold is concerned; it continued with its corrective move as it did in December 2012. But this time, the downward move has rather restricted with a loss of mere -0.5% (or Rs 155.00). With catalysts for gold again getting evident due to downbeat economic data and uncertainty looming around in the domestic economy gold prices plateaued, as smart investors preferred to take refuge under the precious yellow metal. Likewise with stockist buying in order to meet marriage demand also led to gold prices remaining rather firm. At present, while the Government has raised the custom duty on import of gold to 6.0% in an attempt to curb gold imports, we think that would not impede the demand for gold in India and in fact buoy up import of gold through an illegal activity such as smuggling. Likewise lower gold imports, could hurt jewellery exports. So it is quite a tricky situation given the robust consumption story of India while the Government endeavours to reduce CAD.

Speaking about Brent crude oil, the uplift in sentiments at the beginning of January 2013 with the U.S. fiscal deal struck, bailout package doled out for Greece and Spanish bank loan restructuring permitted; imbued confidence in the global economy which help Brent Crude oil pave its upward path (gained +4.6%) on economic hopes. The bond-buying stimulus plan of the U.S. also helped fuel optimism in oil demand. Likewise, China's promising economic growth forecast for 2013 has raised expectations for robust demand for fuel from the top energy consumer. But a surprise contraction in the U.S. Q4 economic growth rate and a surge in crude stocks to a seasonal record in the world's top oil consumer kept a lid on gains. But going forward supply worries stemming from geopolitical tensions in the Middle East would underpin oil prices.

For the bond markets, while the RBI cut rates as expected by 25 bps and also infused liquidity worth Rs 18,000 crore vide a 25 bps CRR cut, it didn't help much to improve sentiments of the Indian debt market. Liquidity remained tight as the LAF borrowing stood about Rs 94,000 crore in January 2013. Thus short-term CD yields ended the month rather stiff, with 1-month and 3-month CD yields at 7.9% and 8.7% respectively. However taking guidance from RBI monetary policy that further monetary policy action would greater emphasis on growth risk, the 8.15% 2022 (10-Yr) G-Sec yield mellowed by good 22 bps to end the month at 7.89%. But going forward liquidity is expected to remain tight in February 2013 with the central and the state Government borrowing Rs 48,000 and Rs 20,000 crore respectively. Likewise, with forward dollar-rupee contracts maturing there will be further drain on the liquidity. The Indian debt markets are also watchful of how the Government would be tread on the path of fiscal consolidation and what the Union Budget 2013 enunciates. If the budget 2013 is very populist, it may not send good signals to the Indian debt markets.

  Monthly Market Roundup

	As on Jan 31, 2013	As on Dec 31, 2012	Change	% Change
BSE Sensex	19,894.98	19,426.71	468.27	2.4%
S&P CNX Nifty	6,034.75	5,905.10	129.65	2.2%
CNX Midcap	8,363.70	8,505.10	(141.40)	-1.7%
Gold (Rs/10 gram)	30,335.00	30,490.00	(155.00)	-0.5%
Re/US $	53.23	55.00	1.77	3.2%
Crude Oil ($/BBL)	115.94	110.84	5.10	4.6%
8.15% 2022 (10-Yr) G-Sec Yield (%)*	7.89	8.11	(0.22)	22bps
1-Yr FDs	7.50% - 9.00%

*The 8.15% 2022 is the new 10-Yr benchmark which was introduced on June 9, 2012
(Monthly change as on January 31, 2013)
(Source: ACE MF, PersonalFN Research)  

As far as Foreign Institutional Investors (FIIs) participation in the Indian equity market is concerned, it was quite heartening to see the ascending trend to continue in 2013 as well. With the U.S. fiscal deal struck in December 2012 and reform measures taken by the Indian Government, it helped infuse confidence and thus they net bought to the tune of Rs 22,874 crore, as against Rs 25,088 crore net buying activity seen in December 2012. Some of the crucial announcements which enthused them to participate such a roaring manner were:

 

• General Anti Avoidance Rules (GAAR) being deferred until to April 2016
• Exclusion of Participatory Notes (P-Notes) from GAAR
• Corporate earnings meeting expectations
• WPI inflation easing
• Weak Indian rupee
• RBI signaling that henceforth monetary policy action would address to growth risks
   

BSE Sensex vs. FII inflows

(Source: ACE MF , PersonalFN Research)  

Moreover, the easy monetary policy adopted by the central bankers in the developed economies aided money flows into attractive investment destinations in the Emerging Market Economies (EMEs), and India was one of them.

 

Mutual Fund Overview

Contrary to the roaring participation of Foreign Institutional Investors, domestic mutual funds (MFs) continued to be net sellers in the Indian equity markets yet again. They net sold Indian equities worth Rs 4,734 crore, thereby accelerating further from their net selling activity worth of Rs 2,699 crore seen in December 2012.

The fund managers seemed to be concerned about the following domestic issues, although the global economic environment has improved in the intermediate.
 

• Widening Current Account deficit (which has reached 5.4% of GDP for September 2012 quarter and is expected to rise further to 6.0% for December 2012 quarter)
• How the fiscal deficit target would be achieved (although the Government is quite ambitious on its path of fiscal consolidation)
• Risk of sovereign rating downgrade (due to the aforementioned twin deficit problem)
• Persistent weakness in the Indian rupee (despite RBI intervention)
• Impact of removal of subsidy on diesel and most fertilizers, on inflation
• Lull in industrial activity
• What the Government would enunciate in Union Budget 2013
• Political turbulence ahead of 2014 general elections
   

Apart from the aforementioned issues, ascending move of the Indian equity market in the last few months has also built-up redemption pressures for fund managers (as investors have preferred to either book profits, or are wary of the markets), which has caused them to be net sellers, despite the Government bringing in reforms in the winter session of the parliament. In fact until last year the industry has seen a massive closure of 6,00,000 equity portfolios, never seen in the industry's history.

  BSE Sensex vs. MF inflows

(Source: ACE MF, PersonalFN Research)  

As far as the performance of various categories of mutual funds is concerned, in the diversified equity funds category, gains were large cap funds, flexi cap, multi cap and values styled funds. However since the mid cap index underwent a corrective many mid and small cap funds and those betting on emerging businesses, descended.

Among the sector funds, those focusing on investing in the technology sector occupied the top position aided by the persistent weakness in the Indian rupee for most part of the month, which helped the underlying stocks in their portfolio (especially the export oriented ones) perform well. Likewise PSU sector funds, banking & financial services sector funds and some infrastructure funds also did well. However pharma funds which are defensive in nature, ended in red. Similarly affected by the capex cycle, funds focusing on investing in capex opportunities also eroded investors' wealth. As far as ELSS funds are concerned, most of them created wealth for their investors well supported by their fluid investment style and up-move in the market.

In the Fund of Fund (FoF) category, those focusing on investing the world markets (by being feeder funds by nature) topped the list. Amongst them were world energy funds, agri-business funds, China opportunities funds, Indo Asia equity funds and global real assets funds. FoFs focusing on domestic equity also did well in the month gone by, but they were placed comparatively lower on returns front. Gold savings funds and gold mining funds however delivered negative returns.

Speaking about the hybrid funds; amongst the balanced funds majority of them managed to deliver positive returns, treading with upward movement of the Indian equity markets. Likewise the debt portion of their portfolio also gained with gradual softening of yields on expectation of rate cut. Thus Monthly Income Plans (MIPs), which invest a dominant portion of its assets in debt securities, gained from descending move depicted by yields across maturities, but gains were more prominent in the medium to long-term debt papers since they benefited from more reduction in yields. The equity portfolio of MIPs also helped MIPs to perform well with the ascending move of the Indian equity markets.

  Monthly top gainers: Open-ended Equity Funds

Diversified Equity Funds	1-Mth	Sector Funds	1-Mth	ELSS	1-Mth
Axis Focused 25 Fund (G)	4.60%	SBI Infotech Fund (D)	11.67%	DWS Tax Saving Fund (G)	3.08%
ICICI Pru Top 100 Fund (G)	3.51%	DSPBR Technology.com Fund (G)	10.85%	HDFC Long Term Adv Fund (G)	2.95%
HDFC Long Term Equity Fund (G)	3.43%	Franklin Infotech Fund (G)	10.14%	Quantum Tax Saving Fund (G)	2.64%

(1-Mth returns as on January 31, 2013)
(Source: ACE MF, PersonalFN Research)    Monthly top gainers: Open-ended Fund of Funds

Fund of Funds	1-Mth
DSPBR World Energy Fund (G)	5.03%
DWS Global Agribusiness Offshore Fund (G)	4.81%
DSPBR World Agriculture Fund (G)	3.70%

(1-Mth returns as on January 31, 2013)
(Source: ACE MF, PersonalFN Research)    Monthly top gainers: Open-ended Hybrid Funds

Balanced Funds	1-Mth	Monthly Income Plans	1-Mth
SBI Magnum Balanced Fund (G)	2.73%	Baroda Pioneer MIP Fund (G)	1.36%
ICICI Pru Balanced Plan (G)	2.64%	Birla SL MIP Fund (G)	0.83%
Sundaram Balanced Fund (G)	2.55%	Birla SL MIP II-Savings 5 (G)	1.25%

(1-Mth returns as on January 31, 2013)
(Source: ACE MF, PersonalFN Research )   Monthly top gainers: Open-ended debt funds

Floating Rate Funds	1-Mth	Income Funds	1-Mth	Gilt funds	1-Mth
Short Term		Short Term		Short Term
Reliance FRF ST (G)	0.77%	Axis Income Saver Fund (G)	1.39%	Religare Gilt Fund - SDP (G)	5.56%
Principal Debt Opp Fund-Cons Plan(G)	0.73%	UTI ST Income-Reg (G)	1.19%	HSBC Gilt-ST-Reg (G)	1.79%
ICICI Pru Floating Rate Plan (G)	0.73%	ICICI Pru Banking & PSU Debt Fund-Ret (G)	1.17%	ICICI Pru Gilt-Treasury (G)	1.42%
Long Term		Long Term		Long Term
Birla SL FRF-Long Term Plan (G)	0.76%	ING Income Fund (G)	2.61%	ING Gilt-PF-Dynamic (G)	3.81%
HDFC FRIF-Long Term Plan (G)	0.74%	UTI Bond Fund (G)	2.16%	IDFC G Sec-PF-Reg (G)	2.18%
HSBC FRF-Long Term Plan (G)	0.65%	Tata Dynamic Bond Fund-Plan A (G)	1.92%	Birla SL G-Sec-LT (G)	2.11%

 

Liquid Funds	1-Mth	Liquid Plus funds	1-Mth
Escorts Liquid Plan (G)	0.78%	JM Money Mgr-Reg (G)	0.76%
Principal Retail Money Mgr (G)	0.76%	Birla SL Savings-Ret (G)	0.76%
BOI AXA Liquid Fund (G)	0.73%	Indiabulls Ultra Short Term Fund (G)	0.75%

(1-Mth returns as on January 31, 2013)
(Source: ACE MF, PersonalFN Research )  

Since short-term yields ended the month rather stiff (in relation to the level seen at the beginning of the month), the softening which occurred ahead of an expectation of an aggressive rate cut helped short-term floating rates and short-term income funds perform slightly better as compared to in December 2012. With RBI 3rd quarter review of monetary policy 2012-13 signally that going forwards monetary policy action would address to growth risk, gilt funds focusing on investing in the shorter end of maturity also performed well.

Debt funds mandated to invest in the longer maturity papers (i.e. medium to long) performed better as yields on medium to long-term debt papers displayed good drop. Thus long-term floating rate funds, long-term income funds and long-term gilt funds did well in the month gone by, and the performance was better than in the month December 2012. Going forward, with GDP projected to be lower at 5.5% by RBI and now even the Central Statistical Organisation (CSO) pegging at 5.0%, long-term yields are likely drop further thereby positively impacting debt funds holding longer maturity papers; because policy rates could be cut further by in RBI the 4th quarter mid-review of monetary policy (scheduled on March 19, 2013) to address to growth risk and liquidity too may be infused.

It is noteworthy that in the Indian debt market, both FIIs and domestic mutual funds continued to be net buyers in the Indian debt market. In the month gone by, FIIs bought net to the tune of Rs 3,326 crore thereby accelerating from December 2012's net buying worth Rs 1,704 crore. Likewise domestic mutual funds too participated in the Indian debt markets in a roaring manner in January 2012 by buying net to the tune of Rs 43,880 crore (as against Rs 43,625 crore in December 2012).

  Performance across various categories of mutual funds

(1-Mth average returns of funds in various categories as on January 31, 2013)
(Source: ACE MF, PersonalFN Research)  

The graph above depicts how various categories of mutual funds performed in the previous month. Amongst the sector and thematic funds, infrastructure funds and pharma funds reported losses, while those investing in sector such as banking & financial services and technology gained due to positive undercurrents in the respective sectors. In the diversified equity fund category, from a market capitalisation bias perspective, large cap funds created wealth for investors while those betting on mid caps and emerging businesses, descended with the corrective witness in the mid cap index. From a fund management style perspective, flexi style funds and value style funds, did well by citing opportunities in the market.

Tracing with the marginal descending move in the precious yellow metal - gold, Gold ETFs exhibited marginally negative returns for investors (on average -0.1%).

In the debt mutual fund category, those with a mandate to invest in shorter maturity instruments displayed slightly better returns as compared to those seen in December 2012, as the yields soften ahead of expectations of an aggressive rate cut from RBI. Likewise, those mandated to invest in medium to long-term maturity papers also did well due to drop in yields of medium to longer maturity papers.

Other News and New Fund Offers

• Today in the world of financial exuberance and with the market being flooded with host of investment products, what many investors want is, to be in safe hands and a prudent advice to put personal finances in place. Some players in the financial services industry while offering third party investment products, have unfortunately resorted to the practice of pushing products rather than "advising" (taking into account their client needs and risk profiling) them, which has led to several cases of mis-selling and investors feeling betrayed. In case of mutual funds too, with a plethora of mutual fund schemes to invest in, many investors haven't been advised schemes appropriately (taking into account their investment objective, risk profile and investment horizon) infusing in them a feeling being duped, while distributors have made hay - earned good commissions.
  
  But now to correct this anomaly and crack the whip, the capital market regulator - Securities and Exchange Board of India (SEBI) has recently (on January 21, 2013) issued the much awaited regulations for investment advisors (vide a notification in the Gazette of India). To know what these regulations are and to read our view over it, please click here.
   
• As many of you may be aware that beginning this year (i.e. from January 01, 2013), the Securities Exchange and Board of India (SEBI) made it mandatory for mutual fund houses to provide direct plans for their existing and new schemes, and directed that a separate NAV thereto should be disclosed. We also wrote how opting for "direct plans" offered by mutual funds could help you enhance your returns. We said that an extra mile covered could earn an extra buck!
  
  But later in the past few weeks some mutual fund houses imposed exit loads for existing investors who wished to move on from their existing plan (i.e. distributor supported) to "direct plans" (which are effective from January 01, 2013); but conversely didn't levy an exit load if one wants to shift from a "direct plan" to an existing / standard plan (which is distributor supported). It is noteworthy that exit loads as high as 3% for exits / switches made within six months are imposed by mutual fund houses for moving to direct plans (from existing / standard plans).
  
  And now further dampening the spirit of investing in "direct plans", the Association of Mutual Funds in India (AMFI) has put in an extra condition (which is restrictive in nature) on its members (who are mutual fund houses). In a recent note, the industry body wrote to its members asking them not to share data feeds of direct plans with mutual fund advisors. To know what this news mean and to read our view over it, please click here.
   
• In an attempt to curb gold imports and channelize investments of retail investors from physical gold to gold-linked instruments, SEBI has proposed to allow gold ETFs to park upto 20% of their gold holdings with commercial banks. The proposal is line with the RBI's recent suggestion to put gold ETF corpus to effective use.
  
  In a draft report on gold imports released on January 2, 2013 the RBI had suggested that gold ETFs be allowed to invest their gold holdings in gold certificates with banks. The proposed mechanism is that, banks are expected to loan the gold received from ETFs to jewellers and pass on a part of their returns from such loans to ETFs as interest income, which in turn will share the profits with their unitholders.
  
  We are of the view that, such a proposal puts the banks as well as unitholders of gold ETFs at risk, because the problem may occur in case their large redemptions and if the bank itself does not have the requisite expertise to deal in large volumes and hedge their risk. Moreover, we think such a proposal may not help in actually curbing gold imports.
   
• Indiabulls Mutual Fund launched an open-ended gilt scheme, named "Indiabulls Gilt Fund (IGF)" having a mandate to invest in a diversified basket of Government Securities and Treasury Bills. To manage the liquidity position in the portfolio at optimal level; the fund may also invest in cash and equivalent instruments. As per its offer document the investment objective of the scheme is "to generate income and capital appreciation by investing predominantly in sovereign securities issued by Central Government (including Treasury Bills) and/or by State Government, without any restriction on the maturity of the portfolio. However, there is no assurance that the investment objective of the scheme will be realized and the scheme does not assure or guarantee any returns". Hence going by IGF's investment objective the fund manager will take active calls on interest rates which will not only affect the composition but also the maturity profile of the portfolio.
   

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3ggyszov7@mail.com Jan 07, 2015 Wonderful expatnalion of facts available here.

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