Market Overview
The Indian equity markets (i.e. the S&P BSE Sensex) encountered vehement turbulence in the month of August 2013 and ended the month losing starkly by -3.8%.
It is noteworthy that, host of macroeconomic variables traced the movement of the Indian equity markets. The month began on a fretful mood with HSBC’s Purchasing Managers’ Index (PMI) data for India’s manufacturing coming in at 50.1 in July 2013 (data released in August 2013) as against a marginal uptick seen in June 2013 to 50.3 from 50.1 for May 2013. Likewise, the services activity too slumped to the lowest in four years in July 2013 as the HSBC Services Business Activity Index fell to 47.9 in July from 51.7 in the previous month (the lowest reading since April 2009); thereby reflecting contraction in the activity. Moreover, with the HSBC Composite Index at 48.4, the overall situation in the economy appeared grim. The core sector data which comprises of eight core sector industries such as crude oil, natural gas, cement, coal, electricity, steel, petroleum refinery products and fertilisers; too came in flat for June 2013 (data released in August 2013) suggesting an detrimental impact on Index of Industrial Production (IIP). And indeed when the data for June 2013 IIP came in, it depicted a contraction in industrial activity, but the equity markets did not react negatively to IIP data; because just a day prior, the export data for July 2013 revealed a growth of 11.64% and imports fell (which is a rare bright spot for a struggling economy), although the trade deficit remained nearly flat at U.S. $12.27 billion in July 2013 (in June it was U.S. $12.26 billion). Also a statement from the Finance Ministry, drawing a line on Current Account Deficit at 3.7% of GDP (or U.S. $70 billion) and drawing a plan to safely finance the same, helped the markets in the intermediate even when WPI inflation for July 2013 (data released in August 2013) inched-up to 5.79% led mainly by food articles and fuel & power.
However when the Indian rupee depreciated, and when to tame such a fall, the Reserve Bank of India (RBI) partially rolled back the currency’s convertibility and imposed capital controls on resident Indians; rampant volatility crept in. Signs of economic vigour depicted by the U.S. economy, which in turn made the greenback stronger, were responsible for flight of capital from India and exertion on the rupee. It is noteworthy that the rupee has depreciated -8.8% thus far in August 2013 (i.e. as on August 26, 2013) and on year-to-date basis is down -20.2%. It is noteworthy that the Indian rupee hit an all-time low of Rs 68.85 against the U.S. dollar.
Warnings from a few rating agencies for a downgrade on India, also sent shivers to the markets. Fitch at present, while has maintained a stable outlook with 'BBB-' sovereign credit rating; it has said that it was getting more challenging for India to meet its fiscal deficit target in the current fiscal year ending March 2014 with revenues slowing and the rating agency could act if the Government fails to calm financial market tensions. Likewise, Standard & Poor's too cautioned about India’s fiscal deficit and maintained its negative outlook for the economy, which stands at barely investment grade sovereign rating. It is noteworthy that the Food Security Bill passed recently in the Lok Sabha, has a support of Rs 1,30,000 crore (the largest in the world) and that subsidy in itself has an effect of putting a burden on country’s fiscal deficit, albeit Finance Minister Mr Chidambaram is confident that the fiscal deficit would be contained at 4.8% of GDP.
Speaking about gold, with the aforementioned downbeat economic variables in play for the domestic economy and no tapering of U.S. bond-buying programme (U.S. $85 billion per month), gold like last month (i.e. July 2013) became bold and ascended by good +12.0%. Geopolitical tensions in Syria also led to gold prices zooming up, as investors preferred to take refuge under the precious yellow metal due to its store of value. Central banks of Russia, Azerbaijan and Kazakhstan also returned to gold markets sighting tensions. In India too, gold demand rose in August 2013 (although the Government intervened to stifle it). Stockist piled up their inventories to meet demand ahead of the festive season. But at elevated levels some investors were encouraged to sell gold as liquidity crunch too prevailed in the markets. It is noteworthy that according to the World Gold Council (WCG), gold demand in India could reach a record 1,000 tonnes this year as consumers buy for the festival and wedding season in the second half. This could scamper India’s efforts to lower gold imports and thus impact its trade deficit.
As far as Brent crude oil is concerned, prices escalated by +7.7% due to geopolitical tensions in Syria and oil outages in Iraq, South Sudan, Libya and Iran. Going forward if the U.S. opts for a military retaliation to chemical attack in Syria; Brent crude oil prices could escalate further as supply from Iran, Iraq and Strait of Hormuz may be impacted. This in turn may pose a worry for India (which imports about 80% of its oil requirements) and that can put pressure on India’s Current Account Deficit (CAD) and take the rupee to even lower levels.
Speaking about the bond markets, well due to the aforementioned macroeconomic variable in play, they too witnessed rampant volatility. With liquidity being tight in the system, bond yields – especially the short-term ones – inched-up rather sharply. While the 1-month CDs saw some mellowing of 44 basis points (bps) from July 31, 2013 level of 11.03%, the 3-month CD yields inched-up further by 77 bps placing it at 11.80% as August 30, 2013. The 7.16% 2023 10-Yr G-Sec yield too hardened by 69 bps and ended the month at 8.82%. But prior to settling down there, it has inched-up as high as 9.45% on rupee depreciation which is yet posing a challenge for country’s CAD target.
Monthly Market Roundup
|
As on Aug 31, 2013 |
As on July 31, 2013 |
Change |
% Change |
| BSE Sensex |
18,619.72 |
19,345.70 |
(725.98) |
-3.8%  |
| S&P CNX Nifty |
5,471.80 |
5,742.00 |
(270.20) |
-4.7% |
| CNX Midcap |
6,589.80 |
6,872.95 |
(283.15) |
-4.1% |
| Gold (Rs/10 gram) |
31,950.00 |
28,525.00 |
3,425.00 |
12.0%  |
| Re/US $ |
65.71 |
60.37 |
(5.34) |
-8.8% |
| Crude Oil ($/BBL) |
116.11 |
107.83 |
8.28 |
7.7% |
| 7.16% 2023 (10-Yr) G-Sec Yield (%)* |
8.82 |
8.13 |
0.69 |
69 bps |
| 1-Yr FDs |
8.00% - 9.00% |
*The 7.16% 2023 is the new 10-Yr benchmark which was introduced by on May 17, 2013
(Monthly change as on Aug 31, 2013)
(Source: ACE MF, PersonalFN Research)
As far as participation of Foreign Institutional Investors (FIIs) in the Indian equity market is concerned, Foreign Institutional Investors (FIIs) continued to be net sellers in the Indian equity markets to the tune of Rs 5,923 crore. Cumulatively in the June, July and August, they have sold Indian equities net to tune of Rs 23,035 crore.
BSE Sensex vs. FII inflows
(Source: ACE MF , PersonalFN Research)
Apart from the aforementioned macroeconomic variables, FIIs seemed to be concerned about the following factors which are in play in the domestic economy:
- Reform measures not translating very well (although the economy has been opened up with increase in Foreign Direct Investment (FDI) limit);
- Lack of consensus on policies;
- Deteriorating state of governance ;
- Scam stories unveiling; and
- Structural bottlenecks
While the Securities and Exchange Board of India (SEBI) brought in reforms (towards June-end) aimed at including creation of an umbrella class of investors that will do away with the separate category for FIIs and approving doing away with the current practice of FIIs and their sub-accounts requiring a prior direct registration to operate in Indian markets; it hasn’t enthused them to exude confidence in Indian equities.
Mutual Fund Overview
Unlike FIIs, who went on dumping Indian equities, domestic mutual funds (MFs) this time turned net buyers in the Indian equity markets. They net bought to the tune of Rs 1,025 crore in the month gone by, thereby taking advantage of the descending move of the Indian equity markets, as valuations appeared relatively attractive. But with turbulence persisting in markets there was reluctance from investors to deploy fresh money and there were following concerns as well in play:
- Reform measures not translating very well (although the economy has been opened up with increase in Foreign Direct Investment (FDI) limit);
- Slowdown in economic growth rate;
- Pressure on CAD limiting a scope of rate cut;
- Weak Indian rupee;
- Hike in short-term rates;
- Contraction in liquidity;
- Deteriorating state of governance;
- Scam stories unveiling;
- Structural bottlenecks; and
- Global economic headwinds
BSE Sensex vs. MF inflows
Data as on Aug 31, 2013
(Source: ACE MF, PersonalFN Research)
As far as the performance of various categories of mutual funds is concerned in the diversified equity funds category, barring a few funds following an opportunities and flexi-cap style of investing, all the rest including large cap funds, mid cap funds, value style and growth style funds felt the brunt of turbulence in the Indian equity markets and ended the month gone by in red. And a noteworthy point is that magnifying losses were seen across categories of diversified equity funds.
Among the sector funds, those investing in Information Technology (IT) sector continued to generate stellar returns aided by favourable undercurrents for the sector. Likewise, mutual fund schemes focusing on investing in export and other services also did well led by weakness in the Indian rupee. Defensive sector funds such as FMCG and pharma however ended the month in red, except for one fund – Reliance Pharma Fund – which managed to generate positive returns. Sector and thematic funds focusing on investing in infrastructure and banking & financial services sector too ended the month in red saddled by detrimental factors for the respective sectors. PSU sector funds and power sectors funds were also hurt by the turbulence of the Indian equity markets.
As far as ELSS funds (which follow fluid investment style) are concerned, barring one fund, ICICI Prudential Tax Plan, the rest eroded investors’ wealth due to downward move of the Indian equity markets. Maximum loss was reported by Tata Infrastructure Tax Saving Fund which generated a negative return of -9.3%.
In the Fund of Fund (FoF) category, those investing in world gold funds, world mining funds, and global commodities funds topped the list with double-digit returns. Likewise FOFs investing in global and emerging markets generated luring returns for investors aided by favourable outlook for such markets. However, the domestic equity FoF schemes felt the pressure due to turbulence in the Indian equity markets, resulting in eroding investors’ wealth.
Speaking about hybrid funds, the performance of balanced funds took a hit due to a descending move in Indian equities. Also with yields moving upwards, their debt portfolio also came under pressure. But in case of Monthly Income Plans (MIPs) (which invest a dominant portion of its assets in debt securities across maturities), by playing well on the yield curve some of them managed to end the month gone by in green, while the rest too felt the brunt of volatility in the Indian debt market.
Monthly top gainers: Open-ended Equity Funds
(1-Mth returns as on August 31, 2013)
(Source: ACE MF, PersonalFN Research)
Monthly top gainers: Open-ended Fund of Funds
(1-Mth returns as on August 31, 2013)
(Source: ACE MF, PersonalFN Research)
Monthly top gainers: Open-ended Hybrid Funds
| Balanced Funds |
1-Mth |
Monthly Income Plans |
1-Mth |
| Sundaram Balanced Fund (G) |
-0.62% |
Religare Invesco MIP (G) |
1.93% |
| Kotak Balance |
-1.56% |
ICICI Pru Multiple Yield -2-E (G) |
1.85% |
| Birla SL '95 Fund (G) |
-2.23% |
Religare Invesco MIP Plus (G) |
1.12% |
(1-Mth returns as on August 31, 2013)
(Source: ACE MF, PersonalFN Research )
Monthly top gainers: Open-ended debt funds
(1-Mth returns as on August 31, 2013)
(Source: ACE MF, PersonalFN Research )
As far as performance of debt mutual fund schemes is concerned, with unfavourable macroeconomic variables for the Indian debt market such as widening CAD, challenges in the path of fiscal consolidation, weakness in the rupee, partial capital controls, fear of rating downgrade, intermediate inflationary pressures, and liquidity conditions amongst host of others; yields climbed up. But with the scenario appearing a little better for the shorter end of the yield curve, short-term debt mutual funds such as short-term floating rate funds, short-term income funds and short-term gilt funds did well in the month gone by as compared to July 2013. With rise in yields of longer maturity papers too, longer maturity papers came under pressure although some long-term floating rate funds, long-term income funds and long-term gilt funds also moved up.
And in the aforesaid backdrop liquid funds and liquid plus fund category (also known as ultra-short-term funds) did better as compared to July 2013.
Going forward, longer maturity papers would remain under pressure until the aforesaid macroeconomic risks are in play. Already the measures taken by RBI to contain the Indian rupee have brought in volatility in the Indian debt markets; where duration funds and gilt funds have witnessed rather a volatile period thereby impacting their returns as a result of ascending yields. The RBI in its guidance (in the 1st quarter review of monetary policy 2013-14) has mentioned that India is currently caught in a classic 'impossible trinity' trilemma, where the risk emanates from external sector concerns, volatility in foreign exchange and CAD. But we yet have to see what the new Governor of RBI, Mr Raghuram Rajan has in the offing on the monetary policy stance, albeit pressure persists on curbing rupee and fuelling growth. Moreover, the investment climate remains weak and risk aversion continues. So given such a scenario, PersonalFN is of the view that, it would be best to refrain investing in longer maturity debt papers in the aforesaid backdrop, and instead prefer shorter maturity debt papers.
It is noteworthy that in the Indian debt market, while the FIIs continued to be net sellers in the Indian debt markets as they did in July 2013, domestic mutual funds bought modestly citing opportunity in rising yields. In the month gone by, FIIs net sold to the tune of Rs 9,773 crore (as against net selling worth Rs 12,038 crore in July 2013), while domestic mutual funds net bought to the tune of Rs 3,251 crore, thereby snapping July 2013’s net selling worth to the tune of Rs 23,740 crore.
Performance across various categories of mutual funds
(1-Mth average returns of funds in various categories as on August 31, 2013)
(Source: ACE MF, PersonalFN Research)
The graph above depicts how various categories of mutual funds performed in the previous month. Amongst the sector and thematic funds, banking & financial services sector funds took the maximum beating followed by the defensive sector, FMCG. Even infrastructure funds were battered led by the detrimental undercurrents for the sector. Only tech funds managed to end the month gone by in positive terrain aided by favourable undercurrents for the sector. Amongst the diversified equity funds, on an average basis, irrespective of their investment style and market capitalisation bias, wealth erosion was seen. Passively managed equity index too ended the month in red, led by the turbulence in the Indian equity markets.
Tracing the ascending move in the precious yellow metal – gold, Gold ETFs exhibited luring returns for investors (on average +16.7%).
In the debt mutual fund category, on an average basis, barring short-term floating rate funds, liquid funds and liquid plus funds the rest the longer maturity papers came under of rising yields.
Other News and New Fund Offers
- Within few months from the introduction of colour code system, Securities and Exchange Board of India (SEBI) recently asked Association of Mutual Funds in India (AMFI), to make some modifications. SEBI has directed AMFI to make the colour labels uniform. At present, two mutual fund schemes from different fund houses falling under the same category may be assigned different colours at the discretion of the fund house. This may confuse investors and therefore SEBI has directed AMFI to implement uniform colour code system.
PersonalFN is of the view that, the changes suggested by SEBI are welcome and may make the current system of colour coding slightly better. But even with modifications, the real effectiveness of colour codes would be extremely limited and may be used just as one of the very basic indicators for identifying risk profile. For example, labelling all equity oriented funds as 'risky' doesn't account for difference in risk levels of a large cap fund and a mid & small cap fund. Similarly it may denote no difference in the risk level of a sectorial fund and a diversified equity fund. PersonalFN believes that AMFI would have to take into account such factors. Furthermore, change in fund management style also affects the risk profile. In debt funds too, treating all short term debt fund at par on risk would be inappropriate if there is any difference in the asset quality. Moreover, it is still unclear as to how the AMFI would standardise schemes to be labelled with same colours. Unless AMFI gives clarity on this, effectiveness of colour codes may remain limited. More comprehensive the process of standardisation better it would be for making colour labels a good indicator.
- Concerned with weakness in the Indian rupee which has implication of widening Current Account Deficit (CAD); the Government once again increased the import duty on gold from 8% to 10%. It is noteworthy that this the third increase this calendar year, intended to curb demand for gold in India, the world's largest consumer of gold.
Apart from targeting gold, the duty on platinum too has been increased to from 8% to 10%, and for silver to 10% from 6%. And such a move is expected to fetch Rs 4,830 crore to the exchequer.
Government has drawn a strategy intended to boost dollar flows, but the success of the same remains to be seen. The Government plans to issue:
But amid all this, weakness persists in the rupee and the Indian bond markets are yet volatile, with yields across maturities having risen (as much over 300 basis points since June-end). Taking advantage of such a scenario, mutual fund houses are launching Fixed Maturity Plans (FMPs) which have witnessed inflows as well.
PersonalFN is of the view that, the time of the launch of FMPs would enable investors to yield better risk-adjusted returns. But we think, given the aforementioned backdrop where rupee and CAD have taken the centre stage in the monetary policy which in turns pave the path for interest rates; in our view it would be wise to invest in FMPs offering maturity tenure of 3 months to 1 year and refrain investing in those offering maturity tenure of over 1 year.
- IDBI Mutual Fund launched IDBI Tax Saving Fund (ITSF) an open-ended Equity Linked Savings Scheme (ELSS) offering tax benefit under Section 80C of the Income-Tax Act, 1961. ITSF would invest a dominant portion in equity and equity related instruments (which shall include equity shares, convertible preference shares, fully convertible debenture; amongst host of others) and the rest in debt & money market instruments (such as Certificate of Deposits (CDs), Commercial papers (CPs), Collateralized Borrowing & Lending Obligations (CBLO), Treasury Bill (T-Bills), non-convertible debentures and bonds, short-term deposits, floating rate deposits and securities created and issued by central state Governments). ITSF benchmarks its performance to S&P BSE 200 index as the scheme would hold a diversified portfolio of stocks while maintain higher weightage towards equities. According to the offer document the investment objective of the scheme is “to invest in predominantly in a diversified portfolio of equity and equity related instruments with the objective to provide investors with opportunity of capital appreciation and income along with the benefit of tax deduction (under Section 80C of the Income-tax Act, 1961) on their investments. Investments in this scheme would be subject to a lock-in period of 3 years from the date of allotment to be eligible for income-tax benefits under Section 80C. There can be no assurance that the investment objective under the scheme will be realized.”
- Indiabulls Mutual Fund launched a debt oriented mutual fund scheme named, Indiabulls Short Term Fund (ISTF). The scheme would invests a dominant portion of its assets in money market and debt instruments (including Government securities) with a maturity profile of less than 3 years. Also tapping opportunities in the longer end, ISTF would also be invest small portion in debt instruments with a maturity profile of 3 to 5 years. According to the offer document, the investment objective of the scheme is “to generate stable returns over short term with a low risk strategy while maintaining liquidity through a portfolio comprising of debt and money market instruments. However, there can be no assurance that the investment objective of the Scheme will be achieved.”
- ICICI Prudential Mutual Fund launched an open-ended fund of fund scheme named, ICICI Prudential Global Stable Equity Fund (IPGSEF). It is noteworthy that ICICI Prudential Asset Management Company and Nordea Asset Management have entered into a partnership; and as per the pact, ICICI Prudential will provide all India-related investing needs of Nordea's clients. And Nordea will act as the global partner for areas of global investing for ICICI Prudential's Indian clients. So the launch of IPGSEF is a step in the direction to enable Indian investors to invest in global equities. According to the offer document, the investment objective of the scheme is “to provide adequate returns by investing in the units of one or more overseas mutual fund schemes, which have the mandate to invest globally. Currently the Scheme intends to invest in the units/shares of Nordea 1 - Global Stable Equity Fund - Unhedged (N1-GSE-U). The fund manager may also invest in one or more other overseas mutual fund schemes, with similar investment policy/fundamental attributes and risk profile and is in accordance with the investment strategy of the Scheme.The Scheme may also invest a certain portion of its corpus in domestic money market securities and/or money market/liquid schemes of domestic mutual funds including that of ICICI Prudential Mutual Fund, in order to meet liquidity requirements from time to time. However, there can be no assurance that the investment objective of the Scheme will be realized.”
- IIFL Mutual Fund launched a debt oriented mutual fund scheme named, IIFL Short Term Income Fund (ISTIF). The scheme would invest a dominant portion of its assets in money market and debt instruments (including Government securities) with a maturity profile of less than 3 years. Also tapping opportunities in the longer end, ISTIF would also be invest small portion in debt instruments with a maturity profile of 3 to 5 years. According to the offer document, the investment objective of the scheme is “to generate income and capital appreciation through investment in debt instruments and money market instruments and to achieve stable returns over shorter-term investment horizons.”
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