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| August 28, 2015 |
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| Weekly Facts |
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Close |
Change |
%Change |
| S&P BSE Sensex* |
26,392.38 |
-973.69 |
-3.56% |
| Re/US $ |
66.05 |
-0.5 |
-0.76% |
| Gold Rs/10g |
26,400.00 |
-250.00 |
-0.94% |
| Crude ($/barrel) |
41.69 |
-3.61 |
-7.97% |
| F.D. Rates (1-Yr) |
6.25% - 8.20% |
Weekly changes as on August 27, 2015
*BSE Sensex as on August 28, 2015
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Impact 
As the saying goes "One man's loss is another man's gain"; in today's context, while China is plagued with variety of problems (viz. shrivelling exports, cooling domestic demand, burgeoning debt and bleak economic growth prospects), all eyes could be on India and it could stand to gain on account of promising economic growth potential it offers.
Commodity prices are on a downswing and could slip further as China begins to dump goods. This could make the environment rather challenging for export-oriented economies. But for India the steep depreciation of the Indian rupee vis-à-vis the U.S. dollar, may go on to limit the effect of depressed commodity prices to an extent.
The data published by the commerce ministry suggest that, crude oil and other commodity form a large portion of India's imports. In the Financial Year (FY) 2014-15 India's imports under the head of 'Mineral Fuels, Mineral Oils And Products Of Their Distillation; Bituminous Substances; Mineral Waxes' amounted to about U.S. $156 billion, accounting for 34.9% of imports. Another major group that cost the exchequer close to U.S. $33 billion in 2014-15 was, 'Electrical Machinery And Equipment and Parts; Sound Recorders And Reproducers, Television Image And Sound Recorders And Reproducers, and Parts'. Indian imports under these two major segments along with those under 'Plastic' and 'Fertilisers' are expected to provide major respite to the exchequer this fiscal year.
The World Bank report released in July 2015 predicts that lower commodity prices would persist even in future.
Weaker commodity prices may help India to...
- Bring down input cost for certain sectors of the economy which are dependent on foreign goods as raw materials;
- Improve Balance of Payment (BoP) situation;
- Shore up investments and build infrastructure; and
- Perhaps even be supportive to "Make in India" programme of the Government
However, a lot depends on the resilience of the Indian rupee. On a Real Effective Exchange Rate (REER) basis, the Indian rupee has outperformed other emerging market currencies over the last one year. Going forward too, if the rupee remains strong on REER basis, commodity prices may remain sombre.
So, will RBI cut policy rates going forward?
Well, at present there is a lot of pressure from north block and the industry to cut rates, in order to provide impetus to economic growth. However, the Reserve Bank of India (RBI) would watch the inflation trends ...and monsoon will be one of the big factors given its impact on food prices and rural demand. In the RBI's annual report for 2014-15, it is stated that the risks to inflation trajectory are balanced as the weather related uncertainties are offset by falling crude prices. Inflation developments will warrant close and continuous monitoring as part of the overall disinflation strategy that requires inflation to be brought down to 5.0% by January 2017. In this path, it would also remain crucial to assess how efficiently Government works in removing the bottlenecks in supplies. "The Government's commitment to the agreement also enhances the credibility of the framework, bringing confidence about the process of fiscal consolidation and supply management, both of which are highly relevant for maintaining price stability," Dr. Rajan said.
To improve economic growth, how the Government implements the reform agenda needs to be seen. While releasing RBI's annual report, Dr. Rajan has emphasised on reforms; making a point that that incremental policy change was essential for strengthening the economy and putting it back on a high-growth trajectory. "For a country as big and populous as India, reforms cannot be shots in the dark, subjecting the economy to great uncertainty and risk. Wherever possible, we have to move steadily but firmly, ever expanding the scope of reforms while always limiting the uncertainty they create. The Chinese term this 'crossing the river by feeling the stones'. It is an appropriate metaphor to guide our own reforms," he said.
PersonalFN is of view that the central bank would look for more assuring data on the aforesaid before reducing policy rates. So at least a rate cut before the 4th bi-monthly monetary policy statement for 2015-16.
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Impact
It's not only stock markets that are feeling the heat; real estate markets too are going through a turbulent phase. Property markets, especially in metropolitan cities such as Mumbai are depressed due to higher inventory and lower demand caused by persistently high prices.
However, situation is gradually changing. Property prices in Mumbai have begun to drift downwards. According to Liases Foras, average cost of a 2 BHK apartment in Mumbai has come off about 3% to 2.91 crore in 2015 from nearly Rs 3 crore in 2014. Although drop in prices in Metropolitan and Suburb Regions is just about a percent so far, there is tremendous downward pressure on property prices. In Navi Mumbai region land cost is so high that it is said to be forcing builders to heighten prices.
Are property prices bound to fall?
PersonalFN is of the view that, unless interest rates fall and builders begin to turnover inventory, buying a property may not look really affordable to genuine buyers. This would keep demand sluggish in the real estate sector, at in the residential segment. Sales would not take off much unless overpriced real estate market witnesses a significant price correction. Moreover, as the new supply comes to market, clearing inventory will become more difficult. While there has been huge appreciation in property prices over last 7-8 years, there has been a little change in the inflation adjusted wages. This leaves little scope for the needy to buy a home.
PersonalFN is of the view that, if you are purchasing a house with a purpose of living into it, price may not be a barrier for you. Having said this, before you zero on the locality, which is one of the most important factors in determining the real estate prices you need to take count of your financial circumstances. You must revisit your expense pattern and try to check if you can shoulder higher outgo as an Equated Monthly Installment (EMI), when an outright payment is unaffordable. You must provide some breathing space to yourself and shouldn't go neck to neck, as that go on impact the other long term financial goals such as children's education, their marriage, your retirement; amongst a host of others.
If you invest in a project with a motive of earning returns, fundamentals of the real estate market become even more important for you. PersonalFN reiterates, before you commit your money to real estate, do check its role in your overall asset allocation and financial plan.
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Impact
If last time it was Uncle Sam, this time it's the Dragon who has literally sent financial markets across the globe in an awkward quandary. China is plagued with variety of problems right now. Shrivelling exports, cooling domestic demand, burgeoning debt (with Debt to GDP over 280%) and bleak prospects for economic growth have marred Chinese economy. Investors seem to be unconvinced with efforts of Chinese Government and those of People's Bank of China (PBoC) in response to devolving situation in world's most powerful manufacturing hub. The relentless fall of the Chinese stock market, and devaluation of currency have got investors across the globe nervous resulting in a sell-off. On Monday it was mayhem, but the following trading day brought in some relief amidst rampant volatility. Hence, which direction would equity markets head remains the question.
There is a fear that devaluation of Chinese currency might just be the tip of the iceberg or could be the beginning of the grievous currency war. Hence various markets such as equity, commodity, currency and bond have faced the brunt of dragon's tail.
Tough times ahead?
Data as on August 25, 2015
Note: India VIX indicates the investor's perception of the market's volatility in the near term
(Source: ACE MF, PersonalFN Research)
The fall in the Indian equity market is majorly on account of huge selling by Foreign Institutional Investors (FIIs). India is a part of emerging market indices which means, if there are outflows from emerging market oriented offshore funds, fund managers will dump Indian equities as redemption pressure mounts.
As far as currencies are concerned, when Yuan loses value against the U.S. dollar; other emerging market currencies too lose value against the U.S. dollar for two reasons: one, the basket of emerging market currencies get weak against the U.S. dollar and two, on account of the possible impact of these adjustments on domestic macroeconomic variables of a nation.
To know more about this and PersonalFN's views over it, please click here.
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Impact
Costs affect businesses. A company that can't control its costs may either passes them on to the customer or absorbs them compromising on profitability. The situation is worse than you imagine in cases where compensation to the company is immediate, but benefits to the buyer tend to come in future. Puzzled? Consider the case of Mutual Funds or Asset Management Companies (AMCs).
Mutual funds have two types of costs - fixed and variable - much as that incurred by any other business entity. They are combined together and charged to the investor as an expense ratio. India stands among the countries which have one of the highest cost structures in mutual fund business at present. While mutual funds in the U.S. and Netherlands charge expense ratios of less than 1.0%; a few schemes in India charge as high as 2.75%. The average expense ratio is in the range of about 2.25%-2.50% in India. So, what makes Indian mutual funds so expensive when it comes to expense ratio?
To read more about this news and our views, please click here.
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- If you are a middle-aged person looking to take up home loan with slightly extended tenure; banks may not be keen to lend you. Usually, banks prefer to give loans for a tenure that ends before the borrower attains the age of retirement. With changing times, banks have now started coming up with innovative products. PersonalFN believes, though it is important for you to keep yourself updated with latest developments, you need not get excited about all newly launched products.
Lately, ICICI bank launched mortgage guarantee-backed home loans.
Those who are nearing 40, find it difficult to get the home loan for 25 years. Furthermore, since they don't have age on their side, sometimes, borrowers in 40s have to compromise on the lower amount. In case of any shortfall, they either have to bridge the gap by borrowing through personal loans or by taking up special loans such as gold loans. However, mortgage guarantee-backed home loans may now perhaps come to the rescue of such individuals.
What the product is?
Mortgage guarantee-backed home loans allow the borrower to secure a loan with higher amount by extending the tenure of the loan to 25-30 years. This of course comes at an additional cost. The bank will charge you 1%-2%. According to the bank, it's the fee paid as insurance premium. India Mortgage Guarantee Corporation (IMGC) will provide the guarantee to the additional loan paid to the borrower.
PersonalFN is of the view that, carrying over loans post-retirement should be avoided as far as possible. In case you need additional loan, you should always consider the costs involved and ensure that it does not jeopardize your long term financial wellbeing.
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Home Mortgage: "A loan given by a bank, mortgage company or other financial institution for the purchase of a primary or investment residence. In a home mortgage, the owner of the property (the borrower) transfers the title to the lender on the condition that the title will be transferred back to the owner once the payment has been made and other terms of the mortgage have been met.
A home mortgage will have either a fixed or floating interest rate, which is paid monthly along with a contribution to the principal loan amount. As the homeowner pays down the principal over time, the interest is calculated on a smaller base so that future mortgage payments apply more towards principal reduction as opposed to just paying the interest charges."
(Source: Investopedia)
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Quote : "The stock market is a giant distraction to the business of investing." - John Bogle
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