‘Market has moved from distressed to fair-value zone’

Domestic institutions played a major role in enabling the market to consolidate in January-March 2009, by buying when FIIs were selling. The Indian market didn’t crack when developed markets did.

The market is in fair value zone, and has discounted an improving picture on future earnings. Asserting that it was the domestic institutions that held up markets in January-March 2009, Mr Sanjay Sinha, CEO of DBS Cholamandalam AMC, shares his views on the nature of the recent rally and why realty and technology are not among his preferred sectors at this juncture.
The stock market has come a long way from its March lows. Do you think there is more upside left for 2009? We believe there is some more room for upside from hereon for rest of the year given that business confidence has gone up dramatically. Almost all stocks have run up sharply during the recent rally.
Upside from current levels would be driven by some sectors performing better relative to others either on account of valuations or events.
Analysts have already started revising their GDP and earnings growth targets for FY10 and therefore justifiable market levels may need to be reviewed.
Sensex is currently trading at a trailing price-earnings multiple of about 15 times. But the PE expansion hasn’t been driven by any significant earnings upgrades. Do you feel earnings upgrades may soon follow or was it just that India got re-rated on expectations of a stable government at the Centre?
Market levels are influenced more by forward price- earnings multiples and not trailing ones. It has been seen in the past that sell-side research has always lagged, not only in terms of earnings downgrades/upgrades but also on the extent of downgrades/upgrades. We believe that from here on, earnings upgrades will pick up.
Our thought is that market has come up from distressed case valuations to a fair value zone. No doubt, the overwhelming election results have been an important factor for pushing markets faster to near the fair value zone, but the journey from here on will depend on the policy announcements and how the economy responds to them.
The rally so far has been driven mostly by the increasing FII interest in Indian equities. Do you think domestic fund managers, who were earlier on the sidelines or were holding cash, may now join the party? How have you tackled the same?
We don’t subscribe to the view that the FIIs alone have led the rally. We accept the fact that they have been key participants in accelerating the direction of the market in the recent upsurge. But this rally has to be seen in context of the period prior to it.
Data show that domestic institutions played a major role in enabling the market to consolidate in the January-March 2009 period, when the FIIs were selling. All the developed market indices were hitting new lows during the period, while the Indian market didn’t crack to October lows in this phase.
Hence, we believe domestic institutions have also played an important role in setting the stage for current rally. Specifically, as far mutual fund industry is concerned, it is true that on an overall basis, cash levels were relatively high. Reasons for such high cash levels would depend on the individual mutual fund player’s view on the market and economy.
We believe fund managers in the industry would deploy cash gradually depending on opportunities available and also based on the incremental information on the policy measures, economic revival, etc. However, the amount of cash sitting on the sidelines waiting to be invested in mutual funds may be far higher than the cash which has not been deployed yet. As far as our performance in the rally is concerned, we believe we have participated to the best extent possible. Our broader call to remain almost fully invested, and that too in right sectors, has paid off well.
What are the key aspects you will be looking at to select stocks now, considering that most of them have run up considerably from their lows? Do you think mid- and small-cap stocks may also hold potential? While it is true that stocks have run up sharply from their lows, it is also equally true that they have fallen very sharply to those levels. Generally, we would like to follow a top-down approach for picking sectors. Some of the key aspects while selecting stocks within a sector would be the position of the company in the industry, revenue and earnings growth prospects, profitability measures, such as return on equity (RoE) and return on invested capital (RoIC), apart from events having an impact on the company’s fundamentals.
Mid-cap and small-cap stocks have seen the maximum erosion in their prices during the turmoil, mainly because of sharp decline in earnings. Hence, in the event of economic recovery, there is also the likelihood of their earnings bouncing back. Moreover, some of the macro factors, such as availability of finance and lower interest rates will play an important role in improving their profitability.
There’s been a sharp sector divergence in the rally so far. Which, according to you, are the sectors that may now stand a better chance of participating in the rally? Which are the ones you would rather stay away from?
We believe financials, infrastructure and the rural economy-driven segment of the market will continue to do well in the times to come. The reason for the better performance would be that a) they are largely domestic focused, b) major reforms and policy measures will be targeted at these segments c) government will give priority to these segments to revive growth and finally d) there is huge opportunity for expansion in the segment.
We believe IT and real estate would not do as well as other sectors, though we will be exposed to these sectors on selective basis. The IT sector is largely exposed to external factors, which are still uncertain, leading to some question marks on business and earnings growth potential.
The rupee too is expected to gain ground, which may impact margins. Lower volumes and higher competition means higher pressure on margins for these players. On real estate, a revival in the end-user’s confidence depends on economic revival and an increase in earnings, which would take some time.
Companies in the sector are still in balance sheet restructuring mode. That suggests that earnings may remain subdued for some more time. The reluctance of real estate players to reduce prices to drive demand, due to improving sentiment and the rush to issue paper, are also issues.

Source: http://www.thehindubusinessline.com/iw/2009/05/24/stories/2009052450740700.htm

Equity Funds — Who participated in the rally

Investors must refrain from buying into the top performers in this rally to perk up portfolio returns. Though the funds outperformed in this brief period, not all of them have a long-term track record that bears close scrutiny.

After falling many paces behind the bellwether index in the initial part of this stunning stock market rise, equity mutual funds have begun to catch up in recent weeks. Diversified equity funds (as a category) now sport a three-month average return of 52 per cent, while the Sensex has risen 57 per cent. Which funds recorded the highest participation in this rally? An analysis.
Only about one in four equity funds outpaced the Sensex’s 70 per cent gain from its March low. In the diversified category, the list of outperformers is topped by funds such as DBS Chola Opportunities, Canrobeco Emerging Equities, Magnum Global, ING Contra and Fidelity Special Situations Fund. Funds playing on mid-cap stocks – Magnum Midcap, Principal Junior Cap, JM Small and Midcap and Principal Emerging Bluechip also did impressively- rising 95 to 105 per cent from their March low. Among theme funds, those riding on banking (Reliance Banking, Banking BEES) and infrastructure, led by Taurus Infrastructure, JM Basic, Sundaram Capex Opportunities also outpaced markets.Midcaps aid performance

What helped the top performers in the diversified category win through? A sizeable allocation to mid-cap stocks, sector weights in favour of banking and capital goods and a relatively small size were the features shared by the top performers in this period.
With mid-caps catching up with large-caps quite rapidly in this rally, the BSE-500 index (up 75 per cent) has moved ahead of the Sensex in this rally. Many of multi-baggers of this period have also come from the mid-cap and small-cap space.
That has contributed to strong participation from funds such as Magnum Emerging Businesses, Principal Junior Cap, Magnum Midcap, JM Emerging Leaders and Small and Midcap Fund and Sundaram Select Midcap in this surge.
In terms of sector preferences, overweight positions in banks or capital goods helped the top performers make the best of the post-election re-rating in these sectors. A majority of the funds with market-topping returns were small ones, with assets under management of less than Rs 500 crore.
About six out of every 10 funds that beat the market also had a starting NAV that was below Rs 10, a sign that the rally was led by beaten-down themes and sectors. In fact, JM Small and Midcap and JM Emerging Leaders sported a NAV of less than Rs 3 per unit during the market low of March 9.
Should investors buy into the top performers in this rally to perk up their portfolio returns? No, they should refrain. Of the funds have outperformed in this particular period, not all have a long-term track record that bears close scrutiny. What to buy
While it is true that one leg of this rally was triggered by a re-rating of Indian stocks from distress valuations to ‘fair’ levels, there has also been a substantial “momentum” component to the gains, especially over the last two weeks. A good number of small and mid-cap stocks without much of a claim to fundamentals have delivered stunning gains. There also remains considerable doubt about whether sectors such as realty and commodities, which have led from the front, will see a quick recovery in earnings. Going by the tenet that what rises the most must fall the most, it is the top gainers of this rally that will be most at risk in a sharp correction. All this suggests caution towards the stocks, themes (and equity funds) which have been the frontrunners from the March lows.
It may be best for fund investors to stick to funds with good three- and five-year records, which have also delivered good participation in the recent rise. Going by this yardstick, HDFC Equity Fund, HDFC Top 200 Fund, Templeton India Growth and DBS Chola Opportunities are a few funds that fit the bill.

Source: http://www.thehindubusinessline.com/iw/2009/05/24/stories/2009052450791000.htm

Most India funds outpace Sensex since March 9

Out of 150 India equity funds, 89 have outperformed Sensex.

International equity funds for India have seen an appreciation of almost 74 per cent in the total value of their assets between March 9 and now, according to data collected from Bloomberg.
The total assets of these funds increased from $15.86 billion on March 9 to $27.52 billion on May 21 — a rise of 74 per cent. In comparison, the benchmark BSE Sensitive Index posted a return of 68.33 per cent during the same period.
Out of 150 India funds, the 89 which have outperformed the benchmark indices show an average return of 81.55 per cent. The remaining 61 funds, who underperformed the market, gained 56.28 per cent during the same period, on an average. These funds are based in Luxembourg, Mauritius, South Korea, Japan, Britain and the USA.
As per Bloomberg, the Net Asset Values (NAVs) of all funds have appreciated over 30 per cent during the period. As many as 17 funds posted impressive returns of more than 90 per cent, 108 funds between 50-90 per cent and the remaining 25 funds between 30-50 per cent.
One of the oldest India funds, JPMorgan Indian Investment Trust, which is listed in the UK, showed a return of 60 per cent, while the NAVs of Jupiter, Neptune and New India Investment trust funds increased by around 50 per cent in the period.
They are mobilising resources from overseas investors to invest in equity markets of major countries.
The Indian-stock Exchange-Traded Funds (ETFs) enjoyed more gains as NYSE-listed funds joined in the buying spree during the recent market rally. PowerShares India Portfolio, Barclays iPath ETN and WisdomTree Investments Inc — which track a broad gauge of stocks listed on the Bombay Stock Exchange and the National Stock Exchange — have posted a return of more than 85 per cent.
Top holdings of these funds were Reliance Industries, Infosys Technologies, ICICI Bank, Housing Development Finance Corp and HDFC Bank.
Investing in India presents vast opportunities for global equity investors, especially when contrarian outlooks reveal beaten-down value funds. The funds' objective is long-term capital appreciation. They invest in large-cap Indian equity securities and A-plus rated instruments, giving 100 per cent exposure to the MSCI India Index. The funds also look at market timing to take advantage of the high volatility in the Indian markets and invest in companies whose activities are closely related to the economic development of India.
The India funds, which operate from the US, top the value-appreciation chart, with an average return of 93.86 per cent. The total assets of these funds increased from $973 million on March 9 to $1.89 billion. They were followed by Mauritius (79.57 per cent), Luxembourg (78.50 per cent), France (76.25 per cent), Singapore (70.72 per cent), Finland (68.90 per cent), UK (56.47 per cent) and South Korea (52.78 per cent).
The NAV of Luxembourg-listed HSBC GIF India equity fund has almost doubled between March 9 and May 21. The world's largest single holding of Indian equities outside the nation, this fund's total assets stood at $2.78 billion as on May 21.

Source: http://www.business-standard.com/india/news/most-india-funds-outpace-sensex-since-march-9/358982/

India’s Political Stability Will Aid Recovery, Mukherjee Says

Pranab Mukherjee, named this weekend as India’s finance minister, will likely take advantage of the government’s stable majority to introduce measures to revive the economy amid a global slump.
The 73-year-old Congress party veteran told the Economic Times yesterday the new government’s numerical strength would encourage credit flows and boost confidence. Mukherjee has been acting in the finance portfolio since January as Prime Minister Manmohan Singh, 76, recovered from surgery.
Mukherjee, who ran a closed economy as the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, inherits one that is now open and exposed to the worst worldwide recession since the Great Depression of the 1930s. He earned a reputation as a trouble shooter in Singh’s cabinet since 2004 by resolving spats among ministries and coalition partners.
“He is a deliverer,” said Alastair Newton, a political analyst at Nomura International Plc in London. “He will have challenges in the economic portfolio given the political realities -- market expectations are high.”
The Bombay Stock Exchange’s benchmark stock index surged by a record 17 percent on May 18, the first day after Singh’s re- election, as investors bet the resounding victory will enable the new finance minister to ease foreign investment rules and sell state assets -- policies that were stalled by Singh’s communist partners in his previous term.
Congress has the support of 322 lawmakers in the lower house of parliament, with the party getting 206 lawmakers of its own. That’s the most since 1991, when Singh as finance minister abandoned Soviet-style state planning and introduced free-market policies that have helped India’s economy quadruple in size.
‘Strong Endorsement’
The victory was as much Mukherjee’s as Singh’s. As the No. 2 in the cabinet, he backed the prime minister’s policies ranging from creating jobs in rural areas and writing off farmers’ loans to closer ties with the U.S., renewing a relationship that began in the early 1980s when he appointed Singh as the central bank governor.
“Despite the strong endorsement from voters, the finance minister may have a tough job pushing through some much-needed reforms,” said Nikhilesh Bhattacharyya, an economist at Moody’s Economy.com in Sydney. “It’s very hard for politicians, for example, to do away with subsidies, which may result in a backlash. Expectations should be tempered.”
India spends one trillion rupees ($21 billion), or a tenth of its budget, on food, fuel and other subsidies each year in a country where the World Bank estimates three-quarters of the people live on less than $2 a day. About 13 percent of spending goes to defense and 20 percent to pay interest on national debt. That leaves little for other needs, such as health, education and power plants, boosting borrowings.
Ballooning Deficit
The federal government budget deficit was at 6 percent of gross domestic product for the year ended March 31, more than double the target of 2.5 percent of GDP.
Moody’s Investors Service places India’s long-term local currency rating at Ba2, two levels below investment grade, and lower than the ratings assigned to Colombia, Romania and Kazakhstan. S&P has a BBB- long term credit rating on India, the lowest investment-grade level.
Investors will be looking at how much fiscal stimulus Mukherjee, who was on the boards of the International Monetary Fund and the World Bank in the 1980s, can provide in his first policy statement -- the budget for this year -- expected in early July.
Singh’s government said before the elections that stimulus of at least another 1 percent of GDP is needed to prop up an economy that’s growing at its slowest pace since 2003.
Policy Conflicts
Mukherjee, who first became a minister in 1973, estimated in February that India may need to raise a record 3.62 trillion rupees from bond sales in the fiscal year that started April 1. The central bank governor Duvvuri Subbarao said May 22 that borrowings have “already expanded rapidly” and that it goes against his efforts to keep borrowing costs low.
“The government faces a challenge to balance two conflicting issues -- to stimulate the economy while preventing fiscal position from further erosion,” said Takahira Ogawa, S&P’s director of sovereign ratings. “There is a possibility for the government to implement various measures to further expand the economy and consolidate the fiscal situation.”
Singh’s administration, which doesn’t need communists’ support for a majority in parliament, could raise as much as $20 billion from sale of state-run companies, according to Rashesh Shah, chief executive officer of Edelweiss Capital Ltd.
Asset Sales
Among the companies that could be placed on the block are NHPC Ltd., India’s largest producer of electricity from water, explorer Oil India Ltd. and fuel retailer Hindustan Petroleum Corp., according to Mumbai-based brokerage Religare Capital Markets Ltd.
Still, analysts such as Seema Desai at Eurasia Group, a London-based political-risk advisory firm, expect economic changes will be “selective and gradual.”
“There is a significant segment within the party that is suspicious of sweeping pro-market reforms,” Desai said.
Mukherjee, who last year successfully rallied China, Japan, Russia and 42 other nations to end India’s nuclear isolation and resume supplies without signing the Nuclear Non-Proliferation Treaty, needs to bring the same acumen to gain support of his party colleagues, many of whom are still tied to the original socialist principles of the Congress party.
At stake is a bill to raise the foreign investment ceiling for Prudential Plc and other insurers to 49 percent from 26 percent, and other proposed legislation aimed at removing a 10 percent cap on the voting rights of foreign investors in non- state banks. The government also wants to allow global retailers such as Wal-Mart Stores Inc. into India.
“Mukherjee is a seasoned politician with excellent skills to bring people around,” said N. Bhaskara Rao, chairman at the Centre for Media Studies in New Delhi. “Expectations from him will be high.”

Source:http://www.bloomberg.com/apps/news?pid=20601091&sid=aXfYx3p_8ztg&refer=india

Mutual fund transactions in for some fundamental changes

Whatever other changes the future brings for the investment community in India, I’m sure that the way mutual funds are bought and sold is in for some fundamental changes. As things stand, the mutual fund industry is starting to stir to life after being in an utterly moribund state for many months.Last week, a new fund offer from ICICI Prudential Mutual Fund actually fetched Rs 800 crore of fresh investments. While this is a paltry sum indeed by the standards of 2007 when NFOs of many thousands of crores had become the norm, it is a huge step forward in the current situation. I know for a fact that these Rs 800 crore has galvanised every fund company’s marketing machinery, and plans to launch a clutch of new funds are being feverishly brought to readiness.Except that things are no longer the same. Till now, new fund offers have been the mainstay of marketing pushes made by the mutual fund industry. There are a variety of reasons that are responsible for this, but the biggest has been that the money needed for intense marketing and advertising new funds used to come from the fund itself.Fund companies could (and most did) deduct up to six per cent from investors’ funds to pay for the NFO’s marketing. This gave them considerable leeway to spend on marketing as well as pay massive commissions to agents for selling new funds. Since distributors’ push always plays a vital role in selling any financial product, the high commissions meant that while the steady stream of NFOs continued, no one was pushing existing funds.The only sensible way of choosing funds is based on their track record. However, market forces drove Indian investors overwhelmingly towards gimmicky new funds whose themes had often been thought up just to facilitate the creation of a new fund.However, the market regulator has eventually put an end to this combination of circumstances that were driving this NFO mania. Since 2006, funds could no longer deduct launch expenses in open-end funds and in 2008, this was effectively banned in closed-end funds as well.By that time, fund investments had dried up due to the stock markets crash and later the global financial panic. Now, as the first green shoots of recovery have started sprouting in the market for investment products, I believe that mutual fund companies as well as investors are stepping into a whole new world.For the first time, a fund company has no more money to spend on a new fund than it has on an older fund that is already in operation. And given that a launch is always going to cost more money than an existing product, this should give a real advantage to mutual funds that already have a track record of outperforming their peers.In theory, this advantage should always have been there, but as we’ve seen above, it wasn’t. This could actually bring about a concordance in the interests of fund companies and investors that has been missing till now.An investment product market in which getting good return is actually more helpful in selling funds compared to inventing new funds could be the best thing to happen. Inevitably, it will make good investment management to the forefront as the one factor that will spell business success for a fund company. Perhaps it sounds like I’m indulging myself in wishful thinking, but even a partial shift towards such a situation would be a great thing to happen.

Source: http://www.mydigitalfc.com/mutual-funds/mutual-fund-transactions-some-fundamental-changes-947

MFs borrowed to meet redemptions

Hit by a landslide of redemptions during October-November 2008, mutual fund houses were compelled to take huge loans in order to process customer requests for cashing out on their MF units.
According to Sebi regulations, mutual funds (MFs) have to disclose borrowings, which amount to over 10% of a fund’s net assets in the half-yearly disclosures.
Leading the chart of borrowers for the 6 months ended March 31, 2009 are Reliance MF (over Rs 6,000 crore), followed by Religare MF (Rs 4,361 crore), Birla Sun Life MF (over Rs 3,400 crore), Tata MF (nearly Rs 3,000 crore), according to data collated by MF tracker ValueResearch shows. Others such as Principal MF, Deutsche MF, Fortis MF, IDFC MF, HDFC MF, HSBC MF and DBS Chola MF borrowed between Rs 200 crore and Rs 600 crore in the same time. Between themselves, 14 fund-houses borrowed around Rs 21,000 crore, data shows.
“Some asset management companies had to borrow around 30% to even 100% of the assets in their short-term funds at the end of September 2008. Though Certificate of Deposits (CD) were used, the rates at which we had to borrow were also high, sometimes touching 12%. Fortunately, most of the money for us and others would have been paid by now,” a top official said.
While mutual funds currently have excess cash amongst investors’ assets on their hands, experts point out that the borrowings done were always a part of the liabilities of the asset management company. “There is no doubt that funds borrowed money at high interest rates, but most of the borrowings have been repaid. This data helps in identifying who borrowed and what amount. Liquid and shortterm debt funds were the ones who faced the most redemption requests,” Dhirendra Kumar of ValueResearch said.
In mid October ‘08, RBI enabled banks and primary dealers to raise Rs 20,000 crore through repo route to help the mutual funds industry tide over the liquidity crisis and withstand the redemption pressure.
It had also permitted banks to provide additional liquidity support of up to 0.5% of their total net deposits to aid these funds. The individual borrowing amounts indicate the nature of desperation and extent of trouble that prevailed at the fund majors, indicate senior MF industry professionals.

Source: http://economictimes.indiatimes.com/Personal-Finance/MFs-borrowed-to-meet-redemptions/articleshow/4568755.cms