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| August 14, 2014 |
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| Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 26,103.23 | 774.09 | 3.06% | | Re/US$ | 61.22 | 0.01 | 0.02% | | Gold Rs/10g | 28,680.00 | 80 | 0.28% | | Crude ($/barrel) | 102.05 | -1.74 | -1.68% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on August 13, 2014
*BSE Sensex as on August 14, 2014 |
Impact 
While equity markets are optimistic about the growth revival and betting on the performance of corporate India, danger alarm has rung. The industrial growth measured by the performance of Index of Industrial Production (IIP) has cooled off for the month of June 2014. After rising by 5.0% in May, IIP growth shirked to 3.4% in June.
So, what dragged the performance?
IIP number was dragged mainly by the lacklustre performance of Consumer Goods. Consumer Durable segment registered negative growth of -23.4%, while Consumer Non-durables too reported a dismal growth of 0.1%.
Basic Goods along with Capital Goods were a saviour registering a growth of 9.0% and 23.0% respectively. However the manufacturing sector after some recovery in April and May, once again slowed clocking 1.8%. In terms of industries, 15 out of 22 industry groups in the manufacturing sector experienced positive growth in June.
IIP on a see-saw
(Source: CSO, PersonalFN Research)
Mining activity grew moderately by 4.3%, while electricity & power clocked an impressive growth of 15.7% in June.
While, IIP recorded mediocre performance, the retail inflation data measured by the movement of Consumer Price Index (CPI) rose to 7.96% in July 2014 vis-à-vis 7.46% in the month prior. A rise in prices of cereals, vegetables and milk products resulted in higher food inflation. You see, food prices are having a greater impact on CPI number.
The Impact on Markets...
While rising inflation and cooling industrial growth appear to be a cause of a concern, equity as well as debt markets didn't react negatively to these macroeconomic variables. Although bond yields were down post announcement and equity markets were largely flat, IIP and CPI numbers didn't affect investor sentiment.
PersonalFN is of the view that, uptick in CPI was expected due to delayed monsoon. However, after dramatic recovery in monsoon, situation seems to have improved. Vegetable prices have been softening and inflation expectations have become moderate. This may cap the upward movement of inflation. Having said this, PersonalFN is of the view that, stickiness in inflation is likely to remain. As far industrial activity is concerned, although the data for June 2014 has come in positive, a see-saw movement is evident and therefore the data for the ensuing months need to be watched closely. Going forward, industrial performance and the retail inflation would have a higher impact on markets.
If industrial production fails to revive and stay in green, markets; at some point, the chances of an economic recovery would be under doubt. Sticky inflation may result in RBI continuing with its tight monetary policy stance. This might be a wake-up call to those investors who are super-bullish on Indian markets at present.
Equity and bond markets are unaffected despite of falling industrial production and rising retail inflation. Is such optimism about economic recovery warranted? Share your views
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Impact
The Foreign Institutional Investors (FIIs), after having net bought aggressively in the Indian debt market to the tune of Rs 22,978 crore in July 2014, are now turning to be net sellers in August. Thus have sold, net to the tune of Rs 5,909 crore in the Indian debt market as on August 12, 2014.
So what is nudging them to sell?
Well, there is a confluence of factors...
- The concern that a reduction in Statutory Liquidity Ratio (SLR) by 50 basis points (bps) by the Reserve Bank of India (RBI) may encourage banks to sell illiquid securities;
- Fiscal deficit already run-up 56.1% of the Budgeted Estimates (BE) of Rs 5.31 lakh crore for 2014-15 in the first three months of current fiscal year;
- Stickiness in inflation;
- Possibility of an early rate hike by the Federal Reserve in U.S. in the backdrop of signs of economic vigour depicted by the U.S. economy; and
- Geopolitical tension in Ukraine, Iraq and Gaza
As a result, the low demand for Government securities have led to drop in prices thus pushing the yields upwards (at the longer end of the maturity curve). But there has been some respite of late.
RBI's has decided to transfer a surplus amounting to Rs 52,679 crore for the year ending June 30, 2014(which is 60% more than that transferred last year) to the Government. You see, this in consequence would lead to yields of 10-Year bonds soften. This is because, such a move from the central bank would be a welcome gift for the Government in managing the fiscal deficit target set at 4.1% of GDP for the current fiscal year ending March 2015.
Will it be prudent to take exposure to longer end of the maturity curve now?
Global risk aversion is yet persistent. Likewise, there are chances that RBI may delay cutting policy rates amid stickiness in inflation and global headwinds. So in this backdrop, we are of the view that there is risk yet in investing at the longer end of the maturity curve. Nonetheless, some debt fund managers are taking the risk and taking more exposure to longer maturity papers as they believe that the rate hike regime is behind us. But in case if you as an investor wish to play the interest rate cycle, dynamic bond funds (which are enabled by their mandate they hold debt instruments across maturities) would be a better route to take. Nonetheless, PersonalFN thinks that one should not hold more than 20% of their debt portfolio in longer tenure funds. While G-sec funds may start delivering returns as policy rates start to relax, going overboard now may not be prudent until macroeconomic scenario gets clearer.
With liquidity conditions being stable in the system and RBI likely to actively manage liquidity situation, the shorter end of the maturity curve looks attractive. But while investing for the short-term as well, define your time horizon and accordingly invest in respective categories of short-term debt funds.
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Impact
Markets are driving in the top gear these days, but the aam aadmi has mostly watched the market up-move sitting on the fence or a few have evinced interest at the market top. To change this situation and encourage greater retail participation, varied attempts are being made. Recently, the Finance Minister (FM) asked the Securities and Exchange Board of India (SEBI) - the capital market regulator, to bring in more retail investors. Although FM didn't speak about it overtly to the media, SEBI chief, Mr U.K. Sinha later indicated that FM gave a few important messages to the capital market regulator.
Important message
FM asked capital market regulator to make functioning of capital markets more transparent and talked about creating investor awareness as well. Also, SEBI was advised to remain wakeful against probable violations in the capital markets. FM also urged the capital market regulator to focus more on redressing investor grievances.
To read more about this story, please click here.
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Impact
To increase the investor-base and open up another financing avenue for real estate developers, the Securities and Exchange Board of India (SEBI) considered allowing Real Estate Investment Trusts (REITs) in India. The initial draft on regulation this effect was shaped in 2008, but subsequently the regulator withdrew it due to non-transparent valuation norms, dissimilar stamp duty structure across different states and the lack of uniformity in land and property pricing. Later in October 2013, SEBI revived the plan by issuing draft regulations for launching REITs in the country; and now recently the regulator has issued final guidelines for REITs.
To read more about this news and PersonalFN's views on it, please click here.
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- Your responsibility as an investor doesn't end after having done your investments. You need to regularly monitor the progress of your portfolio. Many of us fail to do that because we don't get access to our consolidated portfolio of all investments easily.
But such a difficulty may end soon. All financial sector regulators have been working on developing a common interface which will enable you to holistically view all your investments at one place. Besides, you may expect some important developments such as;
- Common KYC for all financial investments
- Single demat account for all financial assets
PersonalFN is of the view that, developing a common interface is a good initiative. However, while monitoring the portfolio one needs to review the portfolio wisely to take timely actions.
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Core Inflation: A measure of inflation that excludes certain items that face volatile price movements. Core inflation eliminates products that can have temporary price shocks because these shocks can diverge from the overall trend of inflation and give a false measure of inflation.
(Source: Investopedia)
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Quote : "Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little." - Fred Schwed
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