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| January 22, 2016 |
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Impact 
When the flight of world’s biggest economy passes through rough weather conditions, the entire world feels the jitters. We have seen that happening in 2008-09. What initially appeared as America’s internal problem; later translated into a full blown global financial crisis. Fall of Lehman Brothers was just the tip of the iceberg. After heavy intervention of U.S. authorities for more than 7 years, U.S. economy has somewhat stabilised now. However, the jury is still out on effectiveness of stimulus packages issued by the U.S. monetary authorities.
Many of you might be thinking what’s the point in discussing things that are known to almost all informed people? As the roots of World War II can be traced back to World War I; the upcoming challenge of currency wars can be traced back to global financial crisis of 2008-09.
Read more….
Slowdown in world’s biggest economy dragged the growth in world’s largest manufacturing economy—China. The ripple effect of slack in the U.S. was so long lasting on china that it recently registered the lowest economic growth in last 25 years—nearly 7 years after the global financial crisis came forth. This is not to say that, China has had no internal problems all these years.
When you become habituated to earn big bucks, lower earnings unsettle you easily. The same has happened to China. Suddenly it has started finding capacity excesses in its manufacturing units. In a desperate attempt to prop up its exports, China has started devaluating its currency against the U.S. $. Slowdown in china has been dragging the demand for energy and commodities. The world’s biggest oil cartel is refusing to cut down crude oil production despite of oversupply situation. This scenario is turning ugly by every passing day.
Learn the new equation…
My problems are not just mine; they belong to the entire world—financial crisis, currency crisis, and slowdown crisis.
These are inter-dependency crisis. You like it or not, if you depend on the external world, you will be dragged into the crisis. Take example of Indian Rupee.
Currency wars and position of India
As per the latest RBI disclosures, India has an import cover of 9.8 months. Low crude oil prices are helping India improve its foreign exchange reserve position. As far as domestic factors are concerned, there’s nothing particularly wrong about India. Although the growth in corporate earnings is still lacklustre, it hasn’t been anemically low. Still, Indian capital markets are seeing exodus of Foreign Institutional Investors. Admittedly, valuations in India have been expensive and global recessionary atmosphere is making foreign investors nervous. In first 20 days of 2016, FIIs have taken out U.S.$ 649 million (approximately Rs 5,210 crore) from Indian capital markets. Rupee has taken a hit.
Lately, Indian Rupee breached a 68-mark against U.S.$. The all-time low of 68.85 was recorded on August 28, 2013. So now the question is, is it going to hit a new low?
RBI deserves a pat on the back
The RBI has been trying its best to avert the further currency devaluation. It’s been selling U.S.$ in both spot market and the future market. But, the job of RBI is tougher than you may believe it to be. It can neither let the Rupee fall freely nor can it allow it to become too strong. Among the emerging market currencies, Indian Rupee has been one of the best performing currencies.
Sliding board | Currency | Performance against U.S.$ | | Argentine Peso | -55.9% | | Brazil Real | -54.4% | | South African Rand | -45.3% | | Turkish Lira | -31.0% | | Mexican Peso | -25.5% | | Russian Rouble | -19.0% | | South Korean Won | -12.6% | | Indonesian Rupiah | -10.5% | | India Rupee | -9.3% | | Chinese Yuan | -6.1% |
Data as on January 15, 2016
(Source: Bloomberg.com, PersonalFN Research)
Nitty-gritties of Forex Management
Rate of currency depreciation and the rate of inflation have to go hand in hand to maintain the competitiveness of Indian exports. Exporters, mainly incur costs in Rupee terms but when the revenues are realised in U.S.$ terms; unwarranted currency appreciation can make Indian exports uncompetitive at the global scene.
As you must have guessed it right, inflation adjusted movement of a currency against the basket of currencies is important. In finance, this is called Real Effect Exchange Rates (REER). Between January 2015 and December 2015; retail inflation measured by the movement of Consumer Price Index (CPI) has averaged out at 4.91% in India. Moreover, India’s Current Account Deficit (CAD) has moderated to U.S.$ 8.2 billion in July-September quarter in 2015. This comes to 1.6% of GDP versus 2.2% of the GDP recorded a year ago during the same time period. CAD shows the mismatches between country’s receivables from and payables to the outside world.
Is fiscal position shaky?
However, India’s fiscal position looks tight. In November 2015, it touched to 87% of the full year target set for the Financial Year (FY) ending on March 31, 2016. Moreover, there have been possibilities of Government going slow on austerity in FY 2016-17. The fiscal deficit demonstrates the gap between the Government’s revenue and spending. Therefore, higher deficit is many a time negative for the currency movement. That being said, it largely depends on quality of spending. If the Government spends on building infrastructure and promoting growth, it need not be negative always.
On the other hand, if the deficit is a result of fiscal mismanagement, it negatively affects the currency. Fiscal deficit and inflation are interlinked too.
How the movement of Indian Rupee may affect investors?
As long as purchasing power of the Rupee remains intact and exports don’t become uncompetitive, fall of Indian Rupee may not worry investors. At present, the equity market valuations are expensive, but with the current fall they might start turning reasonable again. If global investors find some value in Indian equities, they might buy aggressively in future. Inflows of foreign capital would provide strength to the Rupee.
It is advisable that you shouldn’t read too much into the current slide in the Rupee and outflows of foreign capital from markets. On the contrary, you should think about putting money in equity markets when valuations turn attractive. Don’t forget to consider your overall asset allocation. In case you have no time to do research on your own and select stocks for your portfolio; you may simply prefer to invest in well-researched diversified equity mutual funds. PersonalFN provides unbiased mutual fund research services which you may like to try out.
As far as investing in debt goes, inflation, interest rate movement and the fiscal deficit numbers would be the guiding forces. PersonalFN cautions you against speculating on any of them. If you have a longer time horizon of say 3 years plus, you may invest in long term income funds. But, in that case, restrict such exposure to 20% of your fixed income portfolio. Short term income funds would have lesser impact of aforesaid factors.
How the Rupee may affect your life style?
Don’t underestimate the impact of the Rupee strength or weakness on your lifestyle. Rupee affects the rate of inflation in the domestic economy as well. Your foreign travels may cost you more now. Save money by planning tours smartly. The good news is, the e-commerce war and the fall in the Aviation Turbine Fuel (ATF) cost has made airline companies become little generous in pricing.
Avail discounts, fly high but ensure your investment portfolio is deeply anchored.
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Impact
If you hold any insurance policy that has survival benefits and is market linked or gives you bonuses, you are likely to earn more returns on them from the next financial year. It seems that, the Insurance Regulatory and Development Authority (IRDA) hasn’t been happy with the high cost structure of the life insurance industry. It recently released the draft payment of commission or remuneration or reward to insurance agents and insurance intermediaries) regulations, 2016. The comments and suggestions are invited by January 27, 2016.
Proposed rules aim to
- Bring uniformity in the expenses and solvency margin computation.
- Bring insurance agents on par with and insurance intermediary for the entitlement of commissions and remunerations.
- Allow higher rewards to insurance intermediaries (over and above the commissions and remunerations) vis-à-vis rewards offered to insurance agents, recognising the higher establishment costs and compliance requirements in the case of the former.
The cap on rewards to intermediaries is placed at 40% of first year commission and that for insurance agents is 20% of first year commission. PersonalFN believes insurance agents may be frowned with this disparity. The draft rules also put thrust on insurance companies having board approved policies for payment of commission or remuneration to insurance agents and insurance intermediaries. The rules offer some protection to insurance agent by discouraging insurance companies for terminating their agency over frivolous issues.
PersonalFN believes, cap on commissions and uniformity in expenses management across insurance segments and across insurance companies may work for the betterment of the policyholders in the long run. Insurance is still a pushed product. Rationalization of expenses may make insurance more popular. The new rules would also keep a check on unscrupulous practices of intermediaries who are greedy of higher rewards.
While IRDA discourages wrong advisors; PersonalFN wants to encourage ethical advisors. It has created a new platform that has an objective of getting all like-minded, ethical and competent financial planners and advisors on a dedicated platform. Lakhs of people are starving for good advice. This platform will make a huge difference to this situation.
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Impact
A pariah is making a comeback on the global scene after an absence of over 9 years of trade and military sanctions. As the UN imposed sanctions on Iran are being lifted, one of the major oil producing countries warms up to realigning itself with the global economy. It’s good news for Iranians. They can now pump in more oil and export it to the world markets. Iran can now import eatables from outside and can think of getting its infrastructure back on track.
But for some countries Iran’s fresh start might be seriously concerning, for more than one reason. As Iran joins the crude export market soon, other oil exporting nations such as Saudi Arabia, Russia, and Venezuela among others are going to feel the heat. This comes at a time when the crude prices are already down in doldrums.
Clearly, one man’s gain is another man’s loss. This holds true in the case of gold as well. Gold performed poorly over last 2-3 years, but it seems to be featuring in the investors’ good books. As the equity markets have begun their downward spiral in major economies of the world, gold has started gaining higher ground.
Gold started off well in 2016 
Data as on January 13, 2016
(Source: ACE MF, PersonalFN Research)
In the 2015 calendar year, the gold prices in India lost about 7% as against the fall of 11% in the international markets. While the Indian Rupee lost about 5% against U.S.$ in 2015. This shows that, the gold prices in India were partially supported by the weaker Indian Rupee, mainly because India imports gold to meet majority of its demand.
Within 13 days of the New Year, the gold prices have rallied about 3.6% in India and close to 2.7% in the international market. The Rupee has declined by around 1.6% against the U.S. $ during the same time. One could peg this as the usual pullback that happens when the gold reaches the lower band of the range the yellow metal has maintained for the last 5-6 months. However, many experts believe that fundamentals for gold have started improving now.
To ready more about this story and PersonalFN’s views over it, please click here.
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Impact
At present the mutual fund industry in India has more than 40 players and a total asset base of more than 13 lakh crore. However, the reach of mutual funds to the vast majority is abysmally low, limited mainly to Metro and tier I cities. Numerous studies have shown the primary reason why mutual funds are less popular with Indians is the lack of awareness. Going by the asset base, mutual fund houses should have spent approximately Rs 2,600 crore on investor education. Against this, they have spent just 330 crore between October 2012 and April 2015, as reported by the Economic Times dated January 19, 2016.
Earlier, the SEBI had decided to walk the extra mile to reach out to Indian investors. It had taken a number of initiatives and encouraged the launch of investor education programmes. It had given a responsibility to mutual fund houses as well, directing that the fund houses should spend a minimum of 0.02% of their Assets under Management (AUM) on investor awareness programmes each year. But lately, it has found that the mutual fund houses haven’t held up their end of the bargain, diverting funds meant for investor education programmes towards other purposes. This didn’t go down well with the capital market regulator.
PersonalFN hoped the capital market regulator would have censured the mutual fund houses for their blatant misgivings and for launching New Fund Offers (NFOs) when the valuations are high. The launching of NFOs, regularly, is a sign that shortcuts to success were taken to grow AUM. The fact is, there are no shortcuts to informing and educating investors. Which is why PersonalFN believes what the Securities and Exchange Board of India (SEBI) is doing now should have been done much earlier.
To ready more about this story and PersonalFN’s views over it, please click here.
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Robots are now being considered a cheaper alternative to humans in many fields. They are emerging as the future of many industries. For example, in engineering industry, a robot can replace 3-4 workers. The company may run a robot for 3-5 years and save great costs, boosting profits.
While many industries are struggling to make both ends meet as their cost structure is too high. For them, reducing human intervention by applying robotics may be a need not a liberty. In India, growth of mutual fund industry is plagued by multiple factors. One among them is lack of standard and quality advice. Cost is another equally important factor. Mutual funds have now started investing in robotics believing that, this standard and cost effective route will turn their fortunes. Let’s wait and watch.
Although PersonalFN is of the similar view, it believes, there’s no alternative to educating investors.
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Nominal Effective Exchange Rate: The weighted average of a country's currency relative to an index or basket of other major currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one country's currency, with each other country within the index.
(Source: Investopedia)
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Quote : “The rich invest in time, the poor invest in money.”
-Warren Buffett
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