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| March 27, 2015 |
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| Weekly Facts | | | Close | Change | %Change | | S&P BSE Sensex* | 27,458.64 | -802.44 | -2.84% | | Re/US $ | 62.67 | -0.15 | -0.24% | | Gold Rs/10g | 27,000.00 | 860.00 | 3.29% | | Crude ($/barrel) | 54.36 | 0.07 | 0.13% | | F.D. Rates (1-Yr) | 7.25% - 8.75% | Weekly change as on on March 26, 2015
*BSE Sensex as on March 27, 2015 |
Impact 
As you may know the Indian equity market is under a correction mode at present. After hitting a high of 29,682 (on closing basis) on January 29, 2015, the S&P BSE Sensex has plummeted over 6.0% since then. The Indian Rupee too, on the other hand, has lost around 1.1% against the greenback since the aforesaid date. This is because signs of economic vigour are depicted by the economy and thus the expectation that the Federal Reserve (Fed) in the U.S, may start raising rates has crept in, although they have adopted a patient approach thus far. Nevertheless, the Indian Rupee has done reasonably well when compared to other major currencies of the world. So therefore, there is belief that Indian equities may bounce and do well going forward.
But can the Indian stock market indeed bounce?
Well, when a rally in the U.S. dollar halts, it is believed that the Indian Rupee does well. In the Q2FY14, after hitting an all-time low of Rs 68.80 against the U.S. dollar (on August 28, 2013) the Indian Rupee recovered well. Thanks to the steps taken by RBI that the rupee altered its course and also the improvement in India's Current Account Deficit (CAD) data.
Where are the Indian equities headed in FY16?
*YTD Returns i.e from April 01, 2014 to March 25, 2015
(Source: ACE MF, PersonalFN Research)
In the current fiscal year, while the U.S. dollar is buoyant the Indian Rupee is showing resilience. But PersonalFN believes, along with the currency movement there are host of other important economic indicators that would guide the course of the Indian equity market; which can't be ignored. Such factors include:
- Market valuations
- Corporate earnings
- Economic growth
- Monetary policy actions of the central bank
- Inflation level
- Borrowing of the Indian Government
- Current Account Deficit data
- Fiscal deficit data
- Employment data
- Performance of the Government
...and much more!!
It is vital to take cognisance of the following facts such as...,
- Market valuations are not cheap or even reasonable;
- Growth in corporate earnings has been shaky;
- Unseasonal rains are inflicting risk to food inflation;
- RBI is yet cautious on inflation although it has reduced policy rates this calendar by 50 bps so far;
- Rating agencies cautioning on India's fiscal deficit;
- Geopolitical tensions and its impact on India (the latest one being air strikes on Yemen); and
- Global economic headwinds
PersonalFN believes a combination of these factors may limit the upside of equity markets even if rupee does well going forward and although hopes rest on Modi-led-NDA Government to reinvigorate economic growth.
Therefore it would be inappropriate for investors to time the market. Instead while investing in equity in accordance to your asset allocation stagger the investment. While investing in equity through mutual funds, opting for Systematic Investment Plan (SIP) mode would be appropriate as it facilitate rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term. Also PersonalFN believes that your investment discipline would decide your success in investing.
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Impact
Foreign Institutional Investors (FIIs) are bullish on Indian debt. Reform agenda of the NDA Government and improving fundamentals are keeping FIIs optimistic. This is visible from the kind of response sovereign bonds have received from foreign investors. They have exhausted their quota for G-sec investments. So far in this financial year, FIIs have invested about U.S. $26.38 billion in Indian bonds.
Yield on 10-year benchmark G-sec bond has been in the range of 7.60% to 7.80% over last couple of months. Retail inflation has fallen considerably throughout the current financial year and RBI has slashed policy rates twice over last two months. Moreover, the Government has clarified in the budget 2015-16 that, it would initiate the process of reviving capex.
Considering all aforesaid positives, the Government of India has planned to introduce a new bond in the next fiscal year i.e. 2015-16 with a maturity of 40 years. It is for the first time Indian Government is going to issue a bond with such maturity profile. However, it is not very uncommon to see the Government of a nation issuing 40-year bond. It is trying to capitalise on the opportunity presented by the rising interest of FIIs in Indian debt market.
Insurance companies, pension funds and provident funds may be the biggest takers of the bond with 40 years of tenure. In the financial year 2015-16, the Government is planning issue 40-year bond to collect about Rs 10,000 crore.
PersonalFN is of the view that, issuing bonds with such a long maturity, backed by the sovereign guarantee may impress Indian as well as foreign investors. This would not only help Indian Government borrow at lower cost but also borrow for a longer term. As far as insurance companies or pension funds are concerned, PersonalFN believes, longer maturity sovereign bonds may suit their investment requirements. Having said this, these bonds may be less liquid as compared to those with maturity profile of 10 or 20 years.
Do you think 40-Year bond may become a popular instrument with institutional investors? Share your views
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Impact
Over the last few years asset quality of banks in India has come under tremendous pressure; more so of the public sector banks. Until the last financial year (i.e. FY14) gross Non-Preforming Assets of banks touched 4.1% (up from 3.6% in FY13) and this financial year too, the pressure would persist. According to ICRA (an Indian rating agency), the gross NPAs in the entire banking system had increased to 4.5% of the total assets as of December-end. Tough economic conditions and higher interest rates have weighed in, resulting in the slippage of the quality of assets of Indian banks. Moreover, lapse in risk management processes is also responsible for the poor asset quality. But now a decision by the capital market regulator, the Securities and Exchange Board of India (SEBI) is aimed to alleviate this problem faced by banks.
What has SEBI done?
SEBI has approved a proposal prepared in consultation with Reserve Bank of India (RBI) to relax the applicability of certain provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 in cases of conversion of debt into equity of listed borrower companies in distress by the lending institutions.
To read more about this news and PersonalFN's views on it, please click here.
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Impact
If you don't have unaccounted cash, it might be difficult for you to buy a property in India. It might sound very harsh and unreasonable but it's a bitter truth. While we often talk about black money stashed in foreign banks; we must also pay attention to the quantum of unaccounted money that is in circulation within India. Land deals, property deals and purchase of gold bullion and jewellery often involve unrestrained use of black money. Recently union cabinet approved a bill which aims to deal with cases pertaining to black money hoarded in foreign countries. Moreover, the finance minister also hinted at introducing a more comprehensive Benami Transactions (Prohibition) Bill to fight against black money that exists within Indian economy. It is said that, stringent laws dealing with black money may affect India's real estate market in a substantial way. PersonalFN tells you what may change for Indian real estate market.
As reported by Business Standard, dated March 20, 2015, based on the observations made by Mumbai-based Liases Foras Real Estate Rating & Research Pvt Ltd; 30% of transactions in real estate are performed with black money. According to a KPMG report, real estate sector accounts for nearly 6% of India's USD 1.88-trillion economy.
To know more about this story and to read our views, please click here
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- In the current financial year2014-15, the Securities and Exchange Board of India (SEBI) has come down heavily on fraudulent collective investment schemes involving approximately Rs 13,000. It may come to your surprise that, there have been close to 150 such cases in the current fiscal. It is very common in India to come across a scheme promising to double money over just few months. Unfortunately, gullible investors fall prey to such schemes. SEBI has been running an effective SMS campaign these days to spread awareness among investors and warn them against possible attacks from crooks running the fraudulent schemes.
PersonalFN believes it's a good initiative. Revolutionary use of mobile phones in India provides the market regulator an excellent tool to spread awareness. PersonalFN has always believed that, educating investors wisely is the only way to increase their participation in capital markets. PersonalFN works incessantly to educate investors.
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Flat Yield Curve: A yield curve in which there is little difference between short-term and long-term rates for bonds of the same credit quality. This type of yield curve is often seen during transitions between normal and inverted curves.
(Source: Investopedia)
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Quote : "So you think that money is the root of all evil. Have you ever asked what is the root of all money?" - Ayn Rand
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