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| December 19, 2014 |
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
27,371.84 |
21.16 |
0.08% |
| Re/US$ |
63.11 |
-0.76 |
-1.22% |
| Gold Rs/10g |
27,180.00 |
80 |
0.30% |
| Crude ($/barrel) |
59.89 |
-3.84 |
-6.03% |
| FD Rates (1-Yr) |
7.75% - 8.75% |
Weekly change as on on December 18, 2014
*BSE Sensex as on December 19, 2014
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Impact 
Over the last few weeks the Indian equity market has lost steam. Since the high of 28,693.99 points clocked on November 28, 2014, the equity market has lost nearly 7% (or 1,984 points)...and the descending move witnessed by the market this week has led to some investors pressing the panic button.
So, that brings us to a question: Have fundamentals changed?
Well, there are factors in play - both global and domestic…
- Global cues:
- Slowdown in China's manufacturing - The HSBC Flash China manufacturing PMI has plummeted to 49.5 in December 2014 from 50.0 in November 2014, placing the data marginally in the contraction region and to 7-month low. This is because domestic demand has slowed down considerably while prices too have fallen sharply. And such a data is also now inciting hopes of a stimulus from the People's Bank of China (PBoC), especially when growth estimates for the country for 2015 are downgraded to 7.2% by World Bank.
- Abrupt tightening in policy rates by Bank of Russia - The Board of Directors of Bank of Russia decided to increase key policy rates rather steeply to 17.0% from 10.5% earlier, following the biggest rout to Rouble (which is down nearly 50% this year) against the greenback and bond yields have escalated to 13.4%. It reminded the market of 1997-98 currency and debt default crisis, where Russia's currency and bond markets were on free-fall on the back of the collapse in oil prices and the sanctions facing its invasion of Ukraine.
- Softening in price of international crude oil - The international crude oil has slipped further more. Brent crude oil is below U.S. $60 per barrel (to be precise at U.S. $59.38 per barrel as on December 17, 2014) with the effect of supply outpacing demand in 2015. And despite falling oil prices, oil production nations are not going slow on production.
- Domestic macroeconomic variables:
- Indian rupee plunges to a 13-month low - After having shown resilience quite a long due to prudent monetary policy stance adopted by the Reserve Bank of India (RBI) and supportive macroeconomic factors, the Indian rupee has plunged to 63.62 against the U.S. dollar - a 13month low. This is on account of increased demand for the greenback from importers and the aforementioned global factors in play.
- Pressure yet again on India's trade deficit - The trade deficit of India has also widened to 18-month high with the data for November 2014 coming in at U.S. $16.86 billion. Exports seem to be gathering pace by recording a rise of 7.27% (on year-on-year basis) in November 2014. But higher imports are a spoiler for India's trade balance position. You see, gold imports shot up by over 500% this November to U.S. $5.61 billion from U.S. $835.83 million in November last year and over 34% on a month-on-month basis.
- Q2FY15 CAD has widened - For Q2FY15 country's Current Account Deficit (CAD) has widened to U.S. $10.1 billion from U.S. $7.8 billion in the previous quarter, as per a statement released by RBI. The gap amounts to 2.1% of the GDP, which has resulted on account of slowdown in exports (due to recession in Japan and gloomy economic outlook for the Eurozone) and surge in gold imports.
But it is noteworthy that at present CAD data is not much of concern as it is yet lower than 2.5% which the central bank considers sustainable. Moreover, the Balance of Payment (BoP) is in surplus of U.S. $6.9 billion for Q2FY15, it being the fourth consecutive quarter of surplus, although lower than U.S. the $11.2 billion surplus in the previous quarter. Also, crude oil which is the principal item in the import bill and which usually contributes to CAD in a big way (as India imports about 80-85% of its requirements) has softened by more than 40% since June 2014. Nevertheless, the weakness may make CAD data appear vulnerable.
After a descending move, there is some pull back or short covering witnessed by the Indian equity market as on the time of writing this article. But market would be watchful of global cues and domestic macroeconomic variables while treading its path going forward. You see, as the market has scaled a new high in the recent past and as valuations appear stretched, impulses in the market would be followed by gradual corrections. While the winter session on the parliament is going on, there appears to be a resistance as the market seems to be turning cautious with the functioning of the parliament being impeded due to various issues raised by the opposition parties on host of factors which have an effect of jeopardising India's democracy.
Thus in the background of the above PersonalFN is of view that if your risk appetite permits and if your asset allocation calls for you to invest in equities, staggering your investment would be a prudent approach while taking exposure to equity. You shouldn't panic nor buy aggressively because the markets have corrected, but rather be selective in your approach. Thoughtlessly investing or speculating can be hazardous to your wealth and health. You see, don't allow history to repeat itself, where in the aftermath of 2008-09 investors burnt their fingers and opted to sit out of the market nearly for 5 years. Whether you are buying stocks or mutual funds you need to choose them carefully. While buying into mutual funds, PersonalFN recommends one to opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years. Also PersonalFN believes that your investment discipline and asset allocation would decide your success in investing.
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Impact
We are little over a couple of months away from before finance minister (FM); Mr Arun Jaitley presents his first full budget. And while, Mr Jaitley may have rolled up his sleeves preparing for union budget 2015-16, expectations are rising from all quarters.
As corporates are expecting second round of reforms through friendlier policies, tax breaks and other concessions (that may improve their business prospects), farmers are expectant of reliefs in the form of various subsidies and water conservation as a national priority. The aam admi who voted the Modi-led-NDA Government to power by a thumping majority, is also hoping that the Government lives up to promises of 'acche din' possibly by enunciating more tax leeway along with providing better infrastructure. But question is: Will the Government live up to hopes of grand budget?
Let's assess…
You see, if we take count of the situation at present, the tax revenues in the first eight months of the fiscal year have not been encouraging. During April-November 2014, the Modi-led-NDA Government has achieved only 52% (or Rs 3,28,662 crore), of the targeted revenue of Rs 6,23,244 crore on the indirect tax front…and now to achieve the remainder, has only four months in hand. It is noteworthy that these numbers assume significance in the backdrop of a scenario where the fiscal deficit has already touched 83% (at Rs 4.38 lakh crore at the end of September 2014) of the budgeted target in the first six months of the fiscal year. This is worse than the situation at the same time last year when the fiscal deficit was at 76% of the budget estimate for the full year and the then UPA government was forced into massive spending cuts to stay within the target. Thus taking cues from the fiscal deficit data finance ministry officials are now of the view that, the situation may hurt the fiscal deficit target for the current fiscal; but at the same time feel that the last quarter of the current fiscal year will be comfortable as far as collections are concerned.
PersonalFN is of view that the decision of RBI to transfer the surplus amounting to Rs 52,679 crore (which is 60% more than that transferred last year) for the year ending June 30, 2014 to the Government may come to rescue. Similarly, savings on food bill could be act as breather to meet the fiscal deficit target (of 4.1% of GDP). Likewise, a bold step by the Government to deregulate diesel prices (aided by softening in price of international crude oil) would help the economy free from the clutches of fuel subsidy. The recent increase in the excise duty on petrol by Rs 2.25 a litre and diesel by Rs 1.00 litre - the second such increase in three weeks - is expected to help the Government to raise additional Rs 4,000-4,500 crore in the remainder of the financial year. But RBI Governor, Dr Rajan is slightly sceptical. He expressed a view while announcing the 5th bi-monthly monetary policy saying, “The fiscal outlook should brighten because of the fall in crude prices, but weak tax revenue growth and the slow pace of disinvestment suggest some uncertainty about the likely achievement of fiscal targets, and the quality of eventual fiscal adjustment.” While the disinvestment plan could have aided the Government in bridging the fiscal deficit target, the disinvestment plan is way off the track by a wide margin. The Government has fallen short on its disinvestment targets almost every time in the past (Over the last five years, it has raised an average Rs 20,000 crore every year, half of the average budgeted target of Rs 40,000 crore) and thus this poses a threat of slippage to the fiscal deficit target.
Hence in the backdrop of the above, PersonalFN is of the view that hopes of 'acche din' may be dashed for those who are placing too much faith on the first full budget of Modi-led-NDA Government. The Government may continue to walk tight on the path of fiscal consolidation.
Are you expecting a grand first full budget from Modi-led-NDA Government? Share your views
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Impact
Continuing its downward journey, inflation made another low in November 2014. Both, the Wholesale Price Index (WPI) and Consumer Price Index (CPI) inflation moderated substantially, wherein at the wholesale level it recorded a 5 ½ year low, while at the retail level (measured by CPI inflation) an all-time low (since the new data series was launched in January 2011).
WPI inflation has fallen to 0.00% in November 2014 vs. 1.77% in the month before and from 7.52% registered in November 2013. You see, inflation in manufacturing products under WPI softened to 2.04% in November 2014 vs. 2.43% in the month before. Likewise, fuel and power inflation under WPI came in at -4.91%, contributing to zero level WPI inflation and so was the fall in prices of vegetables and fruits.
Retail inflation reduced further to 4.38% in November 2014 from 5.52% recorded in the month before and 11.16% in November 2013. Decline in food inflation led by sharp fall in vegetable prices has lowered the overall inflationary pressure. Similarly, softening in fuel prices also contributed to the fall.
Inflation mellows down further...
(Source: MOSPI, Office of Economic Advisor, PersonalFN Research)
The chart above suggests that inflation pressure appears to be waning since June 2014. Thus the RBI too in its monetary policy stance and rationale to 5th bi-monthly monetary policy has cited that consistent with the risk set out in the 4th bi-monthly monetary policy, headline inflation has been receding steadily and current readings are well below the January 2015 target of 8.00% as well as January 2016 target of 6.00%.
To read more about this news and PersonalFN's views on it, please click here.
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Impact 
The Index of Industrial Production (IIP) contracted to -4.2% in the month of October 2014 from an expansion of +2.8% recorded in September 2014. This contraction was largely contributed by the 7.6% decline in the manufacturing sector, which constitutes to about 75.5% of the IIP. Some relief was provided by the mining and electricity sectors which grew by 5.2% and 13.3% respectively. The IIP for the month of September 2014 was revised upwards from 2.5% to 2.8%
Lacklustre growth
(Source: CSO, PersonalFN Research)
As can be seen in the graph above, the industrial activity has been lacklustre with a see-saw trend depicted.
However, there are some positives as well...
To know more about this story and to read our views, please click here
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- The Employees Provident Fund (EPF) which is created by the Employees Provident Fund Organization (EPFO), a statutory body under the Government of India under the labour and employment ministry; which is an effective medium for those in employment to create a corpus for retirement through monthly contributions made employer and employee under the scheme. Since the contributions are eligible for a deduction under Section 80C of the Income Tax Act, 1961 plus the beneficiary also earns a tax-free rate of interest and the maturity proceeds are exempt from tax, it is tax conducive. At present organisations having more than 20 or more permanent (on-roll) employees are bound under the Employees Provident Funds and Miscellaneous Provisions Act, 1952.
But now a proposal to cover all the companies having more than 10 employees under the EPF scheme is under consideration of the Government. Moreover, the Government has proposed to merge three schemes - Rashtriya Swasthya Bima Yojana (RSBY), Aam Aadmi Bima Yojana (AABY) and Indira Gandhi National Old Age Pension Scheme (IGNOAPS) being run for workers of unorganised sector and to provide the benefit of the scheme through single smart card to workers.
PersonalFN is of view that if the aforesaid proposal goes through, it would expand the base of coverage to the scheme which can help many individuals in their retirement planning and ensure that employees from the unorganised sector have access to social security.
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Budget: An estimation of the revenue and expenses over a specified future period of time. A budget can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money. A budget is a microeconomic concept that shows the trade-off made when one good is exchanged for another.
(Source: Investopedia)
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Quote : "We must consult our means rather than our wishes." - George Washington
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