Impact 
The Association of Mutual Funds in India (AMFI), - the industry lobby, has been pushing the capital market regulator SEBI (Securities and Exchange Board of India) to allow mutual fund houses an entry into pension product market, in a bid to garner long-term funds. Interestingly, last month SEBI Chairman Mr. U.K. Sinha had also mentioned that AMCs should look into penetration into the pension fund market and start selling such plans.
At present the mutual fund industry is busy working out the modalities of the right product mix along with right balance between equity and debt. Moreover, the regulatory aspects are also being looked into since at pension products are offered only by insurance firms and Pension Fund Regulatory and Development Authority (PFRDA).
We believe that mutual fund industry's attempt of entering the pension fund market, is intended to provide a fillip to the industry, which is riddled with sagging inflow after the entry load ban in August 2009. Moreover, pension product market is strategically chosen assessing the fact that pension products would help in garnering long-term money.
We recognise that while pension funds are critical to one's portfolio, we believe that mutual fund houses should not enter into the market to garner more AUMs. Instead (if SEBI gives a nod) they should be managed prudently thereby safeguarding from the vagaries of the volatile equity markets. Also, fund managers must show prudence while managing a pension fund portfolio and keep churning at minimum so as to ensure stable returns over a long-term.
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Impact
The Insurance Regulatory and Development Authority (IRDA) has directed all the Third Party Administrators (TPA) to stop servicing health schemes floated by either states or the central Government since these do not fall within its regulatory regime and the Government is not subject to regulatory oversight of the regulator.
In its draft circular the IRDA has stated that given the growth and likely future growth of the health insurance industry, there would be a regulatory burden with considerable reputation risk to the institutions and the industry, in the event of any act of omission and commission by any intermediary if acting directly as an agent of the Government.
Thus, licensed TPAs cannot enter into arrangements for servicing health schemes promoted, sponsored or approved by any non-insurance body, including central, state, local governments, firms and corporates, during the subsistence of the TPA licence granted by IRDA. Moreover, the insurance regulator will have their (TPAs) licences cancelled if they (TPAs) fail to furnish details of such schemes that they are servicing and found to be operational at a later date.
We believe that issuing insurance policies should be left with the insurers only falling under the ambit of the IRDA, since this will ensure safety for the policyholders in case of any discrepancy between settlement of claims. Any non-insurer issuing insurance policies will not come under the IRDA's scanner and thus it has smartly raised the bar and directed the TPAs not to service health schemes floated by the Government.
Also, employees covered under any insurance from their employers must have their own insurance as the insurance cover give by the employer will last only till the employee is employed.
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Impact 
Continuing its downward streak, the Index of Industrial Production (IIP) for May 2011 mellowed down further to 5.6% from 5.8% (revised downwards from 6.3%) in April 2011. When assessed on a year-on-year basis too, the industrial growth looks unappealing thereby showing signs of a slowdown in the economy.
(Source :CSO, PersonalFN Research)
The dismal performance of the IIP can be attributed to the following factors:
- Core sector growth: The core sector (including eight key infrastructure sectors - crude oil, electricity, steel, cement, petroleum refinery products, coal, fertilisers and natural gas) growth for the month of May 2011 was dragged down to 5.3% as against 7.4% a year ago.
- Dismal manufacturing growth: The manufacturing index (which constitutes 75.5% in the IIP) managed to grow at 5.6% as against 8.9% in May 2010. Also, on month-on-month basis too, the manufacturing index growth was lacklustre (in April 2011 manufacturing index registered a growth of 6.3%). Clearly, the effects of high inflation leading to high input costs for the manufacturing sector were evident.
- Mixed sectoral performance: Though the consumer non-durables index registered a growth of 5.6% in May 2011 as against 1.9% in May 2010, the consumer durable goods index (5.2% in May 2011 as against 14.7% in May 2010) did suffer a set back due to slowdown in consumption of durables. Overall, the consumer goods index registered a growth of 5.4% in May 2011 as against 7.4% in May 2010. Moreover, the intermediate goods index (grew just 1% in May 2011 as against 11.7% in May 2010) suffered a setback as high borrowing costs shelved capex plans of various companies. Following the suite was capital goods index which registered a growth of 5.9% in May 2011 as against 15.8% in May 2010. However, basic goods index managed to grow by 7.3% in May 2011 as against 6.1% in May 2010.
We believe that the economy is showing signs of a slowdown and thus we continue to remain cautious on the equity markets. Indian equity markets are expected to remain volatile and display some sideways movement. However having said that, we recommend that investors gradually start investing now, because the Indian equity markets have already corrected by good 12% from their last peak of 21,004.96 (made on November 5, 2010). Moreover our year-on-year GDP growth rates is good (at 8.5%) and we expect monsoons to pick up and be normal this year, which in turn would lead to a better harvest thus also fuel farm sector growth and bring relief to food inflation.
In our opinion it would be wise to stagger your investments. All those who have enrolled for the SIP (Systematic Investment Plan) / STP (Systematic Transfer Plan) mode of investing need not worry, as this will enable you to manage the volatility of the equity markets well (through rupee-cost averaging) and also provide your investments with the power of compounding.
Remember, while investing select only those equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.
We are also of the opinion that RBI would not refrain from increasing policy rates, as for them sticky inflation remains a major concern, and we believe that they would increase policy rates - both the repo rate as well as the reverse repo rate by 25 basis points in its first quarter review monetary policy review scheduled on July 26, 2011. | | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 18,561.92 | (296.1) | -1.57% | | Re/US$ | 44.51 | (0.1) | -0.20% | Gold /10g | 22,750.00 | 670.0  | 3.03% | | Crude ($/barrel) | 117.60 | 3.7 | 3.23% | | FD Rates (1-Yr) | 7.25% - 9.25% | Weekly change as on July 14, 2011
*BSE Sensex as on July 15, 2011
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In an interview with the DNA Money, Mr. Manishi Raychaudhuri - Head of Research at BNP Paribas Securities, India shared his views on macroeconomic headwinds in India, correction in the Indian equity markets and inflation.
Mr. Raychaudhuri believes that the macroeconomic headwinds are still around which could lead to some correction in the near term - about quarter or so. He asserts that the macroeconomic headwinds in terms of interest rates going up further are not yet over. On the corporate earnings he said,, "Our earnings estimates have declined about 4-5% if I measure it from the beginning of the year and we think that there is another 3-4% downside. The Earnings Per Share (EPS) for the Sensex could settle around  1,190 - 1,200. This is almost 8% decline from the beginning of the year when we were looking at 1,277." Moreover, Mr. Raychaudhuri is of the view that India has always traded at a premium relative to Asia for several reasons including that India is more capital efficient and there is sustainably high return on equity. But that average premium used to be around 15-17% he says; now it has gone to 23-25%, so that premium has to correct. Thus, he says that, "So, a combination of macroeconomic headwinds, earnings decline and the continuing premium of India relative to the rest of Asia is a recipe for some more correction in the market."
As far as correction in the Indian equity markets, he thinks that, "Currently, the Indian market is trading possibly at around 15 times its one year forward earnings, which is close to the long-term average. The last 17 year average is around 15.2. If you look at the trough, at when India traded at its minimum valuations, they were in the range of 9.5 to 9.7. We reached those valuations three times, in 2001, 2003 and then again in late 2008 and early 2009. This was during periods of what I call a global washout. Events like the Lehman collapse or 9/11 attacks in the United States — we are not in that kind of a situation now. So even if a correction happens, we could possibly be looking at something in between. I am really looking at 12.5 - 13 times P/E (Price/Earnings), which should imply a bottom of around 16,500-17,000 on the Sensex."
According to Mr. Raychaudhuri, inflation will remain around the current range of 8.5% to 9.5% atleast till September 2011 - October 2011 as the characteristics of inflation is changing. He believes that earlier inflation used to be supply driven related to food and fuel. But now, the biggest driver of inflation is rise in the manufactured products that constitute 60% of WPI (Wholesale Price Index) inflation basket. Explaining further he said, "the other big issue is that when manufactured product inflation rises, it's no longer supply side inflation but a demand side inflation and, therefore, this can be curtailed by monetary policy which is why RBI has been raising the rates. So I think inflation would remain slightly sticky for 3-4 months or so."
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Third-Party Claims Administrator: This type of administrator processes claims for a third-party company. Insurance companies and employee benefit providers often employ third-party administrators to process their claims. These administrators also often help to process employee retirement plans and flexible spending accounts.
(Source: Investopedia) | |
QUOTE OF THE WEEK
"Unless you have a definite, precise, clearly set goals, you are not going to realize the maximum potential that lies within you."
- Zig Ziglar
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