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| November 28, 2014 |
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| Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 28,693.99 | 359.36 | 1.27% | | Re/US$ | 61.88 | 0.07 | 0.11% | | Gold Rs/10g | 26,620.00 | -60 | -0.22% | | Crude ($/barrel) | 76.35 | -0.25 | -0.33% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on on November 27, 2014
*BSE Sensex as on November 28, 2014 |
Impact 
The market movement has greatly influenced many Indian investors. They are switching to asset classes based on the underlying trend. For example, when gold was in demand for various economic (and emotional) reasons they displayed their inclination to the precious yellow metal. You see, when gold became bold in 2010 and 2011; there was a rush to buy gold in various forms, including gold Exchange Traded Funds (ETFs) and gold savings funds.
Likewise, in anticipation of a rate cut, investors lapped up debt funds in 2012. The onset of calendar year 2013, saw investors starting to dump Indian equities, until when the Bharatiya Janata Party (BJP) announced Mr Narendra Modi as their prime ministerial candidate ahead of 2014 Lok Sabha election which again encouraged investors to evince interest in Indian equity hoping ‘acche din’ for the Indian economy. And now that Modi-led-NDA Government has won by a thumping majority and reform measures are being taken, expectations are heightened which is rolling in buying interest wherein retail investors are once again participating.
Now that equity markets are trending higher, Indian investors are chasing equity assets aggressively. So much so that, weight of equity oriented funds in the total Assets under Management (AUM) of the mutual fund industry has gone up to 24% in October 2014 from 18% in October 2013. Besides, thriving performance of equities over last one year, there are some more factors that are making investors go gaga over equity assets, they include…
- Gold losing sheen (delivering negative returns thus far this calendar year)
- Dire state of real estate
- Momentum gathering for the economy
- Stable Current Account Deficit (CAD)
- Steadier rupee
- Robust foreign exchange reserves
- Mellowed down inflation
- Debt as an asset class turning out to be unattractive (due to changes tax provisions)
The only bright spot in the current trend is mode retail investors have opted for investing. It has been observed that, investors prefer to investing through Systematic Investment Plans (SIPs) or Systematic Transfer Plans (STPs) these days.
PersonalFN believes investors need to identify their financial goals and chalk out an appropriate asset allocation plan for achieving goals. Chasing asset classes is nothing but trying to make hay when the sun shines without giving due respect to asset allocation most appropriate for you. While expectations of further ascension may be estimated, it is noteworthy that valuations seem stretched thereby reducing the margin of safety. If you fail take cognisance of this, your portfolio may take a hit. On the contrary, if you balance out your exposure by including asset classes that share negative correlation with one another, you stand a better chance to benefit over the long term.
Do you think it is a good strategy to invest in an asset class that has a buying momentum? Share your views
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Impact
Your investment in debt funds may have generated good returns over last 3-4 months. Depending on the category of debt funds you hold in your portfolio, say long term debt funds or short term debt funds, you may have generated anywhere between 2% to 6% returns approximately on your investments, over last 3 months. If you expect that your investments would reward you in a similar manner even going forward, then you need to tone down your expectations.
This is why…
It is widely anticipated that, the Reserve Bank of India (RBI) may cut policy rates (thereby indicating a loosened monetary stance) at the monetary policy review scheduled on December 02, 2014. The expectation build up reflects in bond yields which have been falling incessantly for last 3-4 months. Yield on India’s 10-Year Government bond have decreased from about 8.65% in the second week of August to 8.14% this week. Bond yields and bond prices are inversely related. There are some obvious reasons why investors have been bullish on Indian debt.
Why investors are bullish on Indian debt?
Falling crude oil prices at the international market are exerting downward pressure on energy prices in India. Moreover, India’s oil imports have fallen substantially lately. Falling energy prices and price moderations in food article segment have helped India lower the overall rate of inflation considerably. In September 2014 inflation measured at wholesale and retail level touched multi-year low. Moreover, Indian Rupee has remained relatively strong as compared to some of other emerging market currencies under the ‘rising dollar’ scenario. The NDA Government has been reiterating its commitment to fast-track reforms for getting the economy back on the growth path. All these factors are proving to be positives for the bond market.
However, there are some reasons why RBI may not oblige to the request for a rate cut…
RBI Governor seems to have remained steadfast with his stand on interest rates and flow of money in the economy. Going by his recent comments it appears that, it is likely that he would hold rates unchanged on December 02, 2014. Dr Raghuram Rajan, the Governor of RBI, is looking beyond just one data point that is, inflation. True that, inflation has been one of the biggest factors for not lowering rates so far, but that is not the only factor. Dr Rajan has been of the view that, fixing loopholes pertaining to legal matters in the financial system may help in bringing down borrowing cost even without a rate cut. Pointing at unscrupulous practices of a few promoters, the Governor of RBI asked banks to tackle with the problem of Non-Performing Assets (NPAs) more effectively.
As far as fall in the inflation is concerned, here too, RBI may want to inflation to settle at the lower trajectory. RBI may also like to see the progress of the Government on containing the fiscal deficit. The Finance Minister has recently announced that, one may see second generation reform being introduced in the union budget 2015-16. The central bank may be watchful to such events as well.
PersonalFN is of the view that, rate cut might still be sometime away. If forthcoming monetary policy review meeting gives clarity on the future stance of the RBI and gives the positive guidance on the interest rates, or actually cuts rates, bond prices may continue to rise and yields would fall further. However, lack of clarity or announcement of any tough measures by RBI may send yields upwards and bond prices downward. Considering all possibilities, PersonalFN suggests that investors would do a lot better if they know their time horizon before investing in debt fund mutual funds. After all, debt funds are not risk-free. So, if you have a short-term investment horizon of 3 to 6 months you could consider investing in ultra-short term funds (also known as liquid plus funds). And if you have an extreme short-term time horizon (of less than 3 months) you would be better-off investing in liquid funds. Also since some macroeconomic factors have turned favourable, parking money at the longer end of the maturity curve can be considered. But while you do so, ensure that your exposure to long term debt funds does not exceed 20%-25% of the entire debt portfolio. While G-sec funds may start delivering returns as fundamentals improve and policy rates start to relax, going overboard now may not be very prudent. Fixed Maturity Plans (FMPs) can also be considered as an option to bank FDs only if you are willing to hold it till maturity ideally over 36 months, though they now do not enjoy a favourable tax status post budget 2014-15. Those who are very risk averse may consider investing in bank Fixed Deposits (FDs) now that interest rates are high.
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Impact 
Buying a dream home is what many aspire. Any why not when it is one of the primary needs. But with skyrocketing prices and a slow rise in household income (due to flagging economic growth), hopes of many aspirants are nipped in the bud.
Few months ago, Forbes released some interesting finding as per which an average person in Mumbai needs to shell out roughly 34 years' worth his income to buy his first home. The number of years required for someone to buy a house is execrably high. Price of houses relative to median annual incomes has been about 2.6 times in the U.S. as found by Forbes. The similar ratio for London is 7.5 times. These are rather flabbergasting statistics. In the maximum city or Mumbai (also known as the city of dreams), property prices have gone beyond reach of many.
To read more about this news and PersonalFN's views on it, please click here.
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Impact
Nearly three months hence, Finance Minister (FM) Mr Arun Jaitley would be presenting his first full budget. And mind you, there are huge expectations of electorates who voted the Modi-led-NDA to power by a thumping majority. So everyone’s bound to keep a close watch on the union budget 2015-16. While corporates are expecting second round of reforms through friendlier policies, tax breaks and other concessions that may improve their business prospects; farmers are people engaged in agricultural activities want the FM to address their concerns.
One section of the economy that always has modest expectations from the budget is salaried individuals and the middle-class. However, this year salaried individual and middle-class may be in for a pleasant surprise. Speaking to the media lately, FM expressed his desire not to burden salaried and the middle income earning group with more taxes, but instead expressed that he would go after the evaders in widening the tax net.
To know the salient feature of revamped KVP and and read PersonalFN's views on it, please click here.
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- The pace of economic growth has slowed considerably across the globe. While developed nations are struggling to keep growth in the green, developing economies are finding it difficult to maintain the pace of growth. However, economic conditions are never stagnant. They are always dynamic. India’s growth rate has come down by almost 50% from the peak, but this is not an indication that Indian economy won’t attain in excess of 9% growth again.
In fact as estimated by PricewaterhouseCoopers (PwC), Indian may not only re-gain 9%+ growth but also has a potential to become a USD 10-trillion economy. It believes, as stated in its report, “a concerted effort from corporate India, supported by a vibrant entrepreneurial ecosystem and a constructive partnership with the Government will play a critical role," in making India a 10-trillion economy by 2034. As per the report, key areas driving growth in India would be:
- Education;
- Healthcare;
- Agriculture;
- Retail;
- Power;
- Manufacturing;
- Financial Services; and
- Urbanisation
Moreover, PwC believes, favourable demographics and digitally literate and growing middle-class may give India one rare opportunity to grow its economy and reduce social disparity. PwC cautions against the possible roadblocks such as India's digital as well as physical connectivity requiring new and scalable solutions.
PersonalFN believes, although estimates made by PwC may be achievable, you shouldn’t base your investment decisions on such thesis. Emerging market story and within that, India story has been popular with investors for about past 2 decades. But, now that the world has become a global village it is tough to believe that a particular country or a region can grow in isolation.
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Momentum: The rate of acceleration of a security's price or volume. The idea of momentum in securities is that their price is more likely to keep moving in the same direction than to change directions. In technical analysis, momentum is considered an oscillator and is used to help identify trendlines.
(Source: Investopedia)
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Quote : "Assets require more scrutiny than the liabilities." - Charlie Munger
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