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| February 27, 2015 |
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| Weekly Facts |
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Close |
Change |
%Change |
| S&P BSE Sensex* |
29,220.12 |
-11.29 |
-0.04% |
| Re/US $ |
61.76 |
0.58 |
0.93% |
| Gold Rs/10g |
26,850.00 |
-250.00 |
-0.92% |
| Crude ($/barrel) |
61.30 |
2.77 |
4.73% |
| F.D. Rates (1-Yr) |
7.25% - 8.75% |
Weekly change as on on February 26, 2015
*BSE Sensex as on February 27, 2015
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Impact 
Equity markets have so far ignored quite a few negatives such as sustained lull in the industrial output, lack of recovery in corporate earnings and more importantly little signs of overall economic recovery. Markets have been pinning their hopes to government initiatives and showing confidence in the reformist agenda laid out by the NDA Government. Finance Minister has also indicated several times that, the forthcoming budget would introduce second generation reforms. In the pre-budget sessions, markets have witnessed hope-rallies. S&P BSE Sensex closed at a fresh high on January 29, 2015. Stock markets also witnessed some volatility in the interim. Equity markets are becoming more cautious as the day of budget is getting closer.
Is market rally tiring?
Data as on February 26, 2015
(Source: Ace MF PersonalFN Research)
Rail Budget for the Financial Year (FY) 2015-16 was announced on February 26, 2015. Although BJP leaders may have patted on the back of the Railway Minister for presenting a budget which is progressive in their view; markets fell about 1.0% on the day railway budget was presented. Freight hike on transportation of coal, steel and cement was unexpected; no change in passenger fares may have left some market participants unhappy as freight rates are already high in the country which may trigger inflation, although the impact is expected to be very low.
Economic Survey 2015-16 that came a day before budget; was optimistic. It suggests that, it is possible to achieve double digit economic growth now. Economic survey also hints at higher investments from the Government. The survey provides outline to meeting fiscal deficit targets and containing Current Account Deficit (CAD). The survey also indicates that containing CAD and the fiscal deficit to 3.0% and to 1% of the GDP respectively remains the key to providing fiscal space to be able to absorb unforeseen shocks in FY 2015-16.
Equity markets closed a day before budget on a very strong footing; taking cues from the global as well as domestic factors. On the global front, recent remarks of Federal Reserve (Fed) chair provided more clarity on monetary policy stance Fed might adopt in near future; which is likely to be accommodative. Loose monetary policy in the west and relatively fast recovery in the U.S. is considered a positive for Asian economies. As cited by S&P, an independent rating agency, India is likely to grow at 7.9% in FY 2015-16 as against the growth of 6.2% forecasted earlier. Falling crude oil prices may continue to provide India a significant advantage as it is one of the major oil importing economies.
PersonalFN is of the view that, you shouldn't forget that, budget can't provide exhaustive reform measures. Rather it is always a possibility that major reform announcements may come outside budget. Therefore, speculating on the budget can be harmful to your portfolio. Furthermore, you shouldn't forget that, great hopes from the budget have already pushed market valuations very high. If the budget fails to live up to market expectations, markets may correct post budget. Long term equity investors should opt for Systematic Investment Plans (SIPs) route provided by the mutual funds. It not only helps you counter market volatility but also helps you do rupee cost averaging without speculating on the market movement.
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Impact 
Long wait for the first full budget of Modi-led NDA Government would come to an end tomorrow. While Budget is expected to provide roadmap to second generation reforms; it remains to be seen how it provides monetary support to infrastructure growth which is imperative to achieving higher economic growth. Given that banks face a serious problem on the asset quality front today, depending much on them won't be a good choice. Public Private Partnership (PPP) model may not be workable in many cases considering bad state of finances of infra companies. Depending on retail savings maybe a good option but funds collected through this route may not be sufficient to funding big projects. You may wonder what options Government may chose then? It is believed that the Government may tap overseas markets for meeting funding requirements of infra sectors and issue bullet bonds.
What are bullet bonds?
In simple words, a bond that can't be redeemed before it gets due and pays interest at a fixed rate is known as a bullet bond. These bonds carry relatively lower interest as the investor is not exposed to re-investment risk since the bonds are not callable.
Why bullet bonds?
Infrastructure projects have a long gestation period; i.e. they become profitable to investors at much a later stage. Therefore, getting investors in is a problem in many cases. Further, using bank financing to infrastructure development is a bad idea as most of the deposits banks garner are either short term or medium term in nature. Against that providing big ticket long term loans to infrastructure companies is always a risk. On the other hand, issuing bullet bonds abroad for funding infrastructure projects which have longer yet attractive yield potential is viable. It is also believed that in case, the Government goes ahead with issuing bullet bonds, Infra bonds may not be issued u/s 80CCF to retail investors.
PersonalFN believes, although it may be a good idea to tap money globally to develop infrastructure to India; the Government will have to be very careful with quantum it borrows. Borrowing abroad would depend on robustness of foreign exchange reserves. Doing cost-benefit analysis, the Government may have to hedge its risk effectively. Furthermore, issuing infrastructure bonds to retail investors may also be considered simultaneously; considering the quantum of investments required. Channelising domestic savings may help in achieving overall infrastructure growth.
Do you think the Government should go ahead with the idea of issuing bullet bonds to global investors? Share your views |
Impact
Every time you pass by a commercial hub in your city, multi-storey office buildings with attractive façades, swanky hotels, restaurants and the other infrastructure may be catching your attention. But it's not all hunky-dory. What looks rosy from the exterior is not healthy from within. The fact is commercial properties are finding few takers in metros these days.
According to the findings of DTZ India reported by one of the business dailies, barring Bengaluru, the other major metro cities have not witnessed growth in large lease deals (of 1 lakh sq. ft. and above) in the Q4 of the calendar year 2014 vis-à-vis in Q4, 2013. In the Delhi-NCR not a single large lease was signed, though smaller offices – between 10,000 and 30,000 sq. ft. found takers. The other metro cities such as Mumbai and Hyderabad have seen slower growth over that reported in Q4 of the calendar year 2013.
The situation in the commercial property segment is grimmer than that in the residential property segment. Following are some of the reasons:
- Economic slowdown
- Falling demand
- Lesser demand from prominent sectors such as banking and financial services
- High rents in some regions
- Excess supply
There has been a trend that wherever rents are high and supply is in excess; demand has remained lower.
To read more about this news and PersonalFN's views on it, please click here.
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Impact
Be The count down for the first-full budget of Modi-led NDA Government has begun. Industry is busy presenting its wish-list to the Government. It is widely anticipated that, the budget is going to have a big thrust on reforms. The big question is what's there for the aam aadmi in the budget who voted the Modi-led-NDA Government by a thumping majority.
Given that the Government has a herculean task of meeting fiscal deficit target, there is a little scope to be generous on tax incentives. However, there is a possibility of some announcements might come from the north block which may benefit not only the industry, but also the common man. The Indian mutual fund industry is waiting for one such announcement.
What does the mutual fund industry expect?
The Association of Mutual Funds in India (AMFI) in proposal to the Union Ministry of Finance has made a plea to broaden the list of 'specified long term assets' under Section 54EC of the Income Tax Act, 1961 to include mutual fund units, whether equity or debt. To simply put, AMFI is asking for inclusion of mutual funds in the exemption list under Section 54EC of the said Act.
If this proposal is accepted, one may claim a tax exemption on capital gains made on a capital asset by investing proceeds in units of mutual funds. It is proposed that, underlying investments, be it in debt or equity oriented funds, can be made in infrastructure sub-sector based on the risk appetite of the investor, with a lock-in period of 3 years.
To know more about this story and to read our views, please click here
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- Investors of debt mutual funds received a shock on July 10, 2014; when the finance minister changed the tax treatment for non-equity funds. However, taking advantage of a loophole; a few mutual funds launched arbitrage funds which are classified as equity oriented schemes but a risk-return potential comparable with that of an ultra-short term fund.
Now there is a speculation that, this time, FM would change the taxation rules further and classify arbitrage funds as debt funds for the purpose of taxing gains. It is also being feared that, the Government may impose new tax provisions retrospectively.
PersonalFN is of the view that, it would be a welcome move if, FM plugs the loophole and classify arbitrage funds as debt funds. However, if changes are applied with retrospective effect; it would defeat the objective of NDA Government to maintain predictable and stable tax regime.
PersonalFN is of the view that, although you should consider post-tax return potential of any asset class before investing in it; you shouldn't lose the broader picture. Taxation shouldn't be the basis for investing in or not investing in any asset class. On the contrary you should focus on your financial goals and try to invest with an objective of achieving them.
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Bullet Bond: A debt instrument whose entire face value is paid at once on the maturity date. Bullet bonds are non-callable. Bullet bonds cannot be redeemed early by an issuer, so they pay a relatively low rate of interest because of the issuer's exposure to interest-rate risk. Both corporations and governments issue bullet bonds, and bullet bonds come in a variety of maturities, from short- to long-term. A portfolio made up of bullet bonds is called a bullet portfolio.
(Source: Investopedia)
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Quote : "In the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand." - Ben Graham
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