Happy New Year

“An optimist stays up until
midnight to see the new year in.
A pessimist stays up to 
make sure the old year leaves.”

May every day of new the

new year glow with

good cheer and happiness

for you and your family.

Happy

New Year!

"Investments are like anniversaries. You can't be a day late."

What's in store for the investors in the New Year?

The Vidya Balan starrer “The Dirty Picture” released at a very appropriate time. Though the movie has been a hit, 2011 has indeed been a Dirty Picture for Corporate India, stock markets and the rupee.

At the start of the year the Sensex was at 20000 levels. There were fears around Greece and other European nations. The first half was expected to be tough but the second half was thought of a recovery phase. However the second half was even worse.

The Reserve Bank of India (RBI) continued to hike key policy rates (from 6.25% in Dec 2010 to 8.50% currently) in a bid to curb inflation. By doing so, it made the capital expensive, hitting industrial and overall economic growth. However, RBI kept its key policy rates unchanged during its December 2011 review.

The falling IIP along with rising cost of raw materials and a perception of policy paralysis among stakeholders made 2011 a year that India would like to put behind. The year witnessed BSE Sensex making new lows, gold at historic highs and INR falling to record lows.

In addition to rate hikes following is the overview of the top financial stories of the year.

IIP data into negative territory for the first time since 2009:

IIP nos kept falling through out the year, it nose-dived to negative 5.1% in October 2011 on the back of falling consumer demand and declining corporate investments.

INR at all-time low:

INR fell to a record low of 54.17 per USD breaching the 54 level first time in history on sustained foreign capital outflows and dollars gains against the euro and other rivals overseas. It has fallen by 16% since the beginning of the year, the worst performance among the Asian currency. A weakening INR is also eating into the gains of falling international commodity prices adding to inflationary pressure.
 

Sensex falls to 28 month low:

In a departure from big gains in the past two years, Sensex witnessed 23% fall till 29th Dec 2011 as risk aversion deepened globally coupled with absence of policy initiatives to revive slowing domestic growth. FIIs the main drivers of the market, turned negative on Indian equities this year after having injected a record USD 29.36 bn in 2010, pulled out USD 318 mn in 2011.

Gold price touches record high:

Continuing their record-breaking spree, gold and silver galloped to all time highs in 2011 (from USD 1400 levels in 2010 to USD 1900 levels in September 2011) on strong demand in times of economic turmoil and rising inflation. Nervous investors preferred to park their funds in gold as a safe investment instead of risky assets like equities. Internationally gold prices have seen correction from its all time  highs. However, falling INR has acted as a cushion for gold prices in India.

Downgrading of debt ratings:

Downgrading of debt ratings and the poor outlook of some European countries in May deepened investors concern. Later, an unprecedented downgrade of the US credit rating by S&P on 5th August led to turmoil in global markets, triggering fears of another recession in the world's biggest economy.

So what’s in store for 2012?

After making big moves over the past 18 months, RBI has decided to maintain a status quo for the time being in its December 2011 Monetary policy review meet. RBI has maintained the cash reserve ratio (CRR) at 6%. The repo rate (rate at which banks borrow from the RBI) was also kept unchanged at 8.5%. RBI however has clearly indicated that no further rate hikes are warranted. RBI also indicated that rate cuts would happen after an assessment of macroeconomic fundamentals.

The unresolved situation globally also hasn't helped matters much. A weak economy globally puts pressure on emerging market economies due to slowing export demand. In light of slower growth in these countries, central banks in Brazil, Indonesia, Thailand, etc have all cut interest rates. Being conservative as usual, the RBI has not followed its counterparts, opting instead for a mere pause in rate hikes.

On the fiscal ground, India being net importer country, the depreciation of the Indian Rupee (depreciated by around 18% since August 2011) is also posing a serious risk.

With so much uncertainty looming overhead, it's hard to predict what the next action step for the central bank will be. Inflation seems to be on a downward trajectory, but credit growth is seeing a slowdown. Downward pressure on the rupee is also making the situation difficult. If it persists, fuel inflation will be a bigger worry than just food inflation. We can cheer that RBI has conceded that slowing growth is a major concern, by pausing rates for the interim. Thus we can breathe easy for now, even if it is only for a short while. But, a formal assessment of inflation and growth numbers is still due in January 2012. We sure hope the New Year has good tidings for India Inc.

The worry that still persists is the health of Euro-zone countries. It is perceived that Euro zone crisis may not stop with Greece and Italy, since Fitch downgraded Portugal's rating to 'BB+' (from 'BBB-') a non investment grade. Similarly, S&P downgraded Belgium to 'AA' (from 'AA+') it is making investors believe that contagion effect is indeed spreading across the Euro Zone that could prove a serious threat to world economy.

In coming times, the rating agencies – S&P, Moody and Fitch have warned that all 17 Euro zone nations could face a risk of rating downgrade, including those of France and Germany who have so far enjoyed the prime rating of 'AAA+'.

Considering all, let's take a look at each asset class and explore the opportunities and threats:

Equity:

Going forward we think that global economic news disseminating from the developed economies - especially the Euro zone would continue to drive the sentiments in the Indian equity markets. Looking at the global scenario and economic data, we believe in the short term, the equity market will be bearish.  Though the net sales by FIIs has been only approximately 1700 crores, the situation could get worse if selling intensifies.

Valuations today are much better for equity investments (however they could get better), investments made during such times will return abnormal returns in the next few years but one could see red in the short term.

Keep a guarded approach, going extremely slow in making one time investments in equity and invest primarily through SIPs and DIPs (one time investments on days when the market falls). This has been one of the best strategies to capitalize on the current market volatility.

On the positive side, interest rates should start coming down starting next financial year. Also, monsoon rains were 2% above average. A good monsoon season can typically boost rural farm incomes and have an impact on the wider economy through increased spending on consumer goods as well as reduced prices of food items. In addition, with developed world expected to slow down, we expect commodity prices to fall further in the next several months. These are all excellent triggers for the equity markets and at a certain point of time when Euro-zone worries slow down, these triggers will play a role in determining the direction of Indian equity markets.

Cash will be king in 2012 as a lot of asset classes could come under pressure in light of liquidity crunch and risk aversion.

Gold:

Gold prices have corrected from the record high of USD 1,924 an ounce in September 2011 to USD 1,570 an ounce on 14th December 2011 as investors sold to cover their losses elsewhere coupled with profit booking by fund managers near a year end. Since October 2011, gold has corrected by 15-20%, however the depreciation of Indian Rupee (depreciated by around 18% since August 2011) has helped the prices to remain firm in INR terms. We believe profit booking would still come in gold, however the depreciating Indian Rupee would act as a cushion to fall in prices globally.

Going forward gold prices would pave their path depending on how the global economic headwinds unfold. If downbeat global economic data is disseminated, along with inflation pressures persisting in the Emerging Market Economies, gold would continue its up-move. However, any intermediate positive newsflash may bring in a marginal correction in prices of gold. Hence, nothing has changed for gold and we believe it will continue to maintain its upward trend in the medium to long term. In fact, we believe that such corrective phases are opportune times to invest in gold and safeguard against global and domestic economic risk. But like paper money, gold is only worth what people believe it's worth. To sum up, investment in gold should be scaled up, to atleast 15% of the portfolio.

Real Estate:

The impact of slowdown has already been felt in the real estate market. Apart from demand slowdown, impact of rising cost of funds, increasing construction cost and delays in government approvals is worsening the already dismal condition of the sector. Like any other sector, the aforementioned factors clearly point towards a price correction in the real estate market. However, residential prices in most of the cities have either remained steady or increased marginally in the past few quarters. This implies that demand-supply conditions are not having any significant impact on the residential market prices in the short term and there are other factors at play which are having a greater influence on price.

Financial condition and holding capacity of real estate players are such factors which influence the price movement in the market to a great extent. To understand, we did quick numbers and found that since FY 08, revenues and profits have dropped by 19% and 70% respectively, despite property prices witnessing an increasing trend during the period. On the other hand, debt and interest outgo have increased by 1.5 and 2.3 times respectively, in the same period. The equity fund raising has almost dried up through stock markets. Further, over the last two years, developers have raised huge amount of debt and equity through private placements and other innovative manners, this option too now practically looks exhausted.

In FY 08, when the global economy was going through a recessionary period, the stress level of the sector was at its highest level and many developers were on the verge of defaulting on their debt payment. However, the Reserve Bank of India (RBI) had allowed banks to restructure the debts of these companies keeping in mind the recessionary condition of the economy and hence giving the much needed breather. But the possibility of this happening in the current scenario is very bleak and looking at the stress level of the industry, the road ahead for real estate industry looks bumpy.

Interestingly we have entered the phase where real estate companies are going to raise capital for project completion and debt repayment rather than for expansion plans.  However, some of them are launching new projects which are due in 2016-2018, so that money could be utilized for existing projects. We believe that till the time real estate players are able to raise additional long term funds in order to meet their short term obligations, residential prices will remain steady. However, there is always the possibility of some players who are not able to raise fresh funds easily will have to offer better deals to investors or will be forced to reduce prices in order to meet the short term cash flow requirement.

As mentioned in our last report, this could well turn out to be a great time for HNI's and Institutional investors to strike good deals with builders. Some of the institutional investors are striking debt deals with builders at a coupon of 20-24%.

Debt:

In spite of deregulation of saving bank interest rate, considering tight liquidity in the system, we continue to maintain that it is extremely important to keep short term money from saving and current account into liquid plus funds to earn higher post tax returns. Liquid plus funds are giving returns of around 7% (100-150% higher returns post tax than saving (currently 4-6%) and short term fixed deposits). If you are a fixed deposit investor, it makes sense to go with tax free bonds such as NHAI ,and PFC that are delivering a tax free return of 8.2-8.3%. However for shorter tenures ,good quality FMPs are a better option than FD's as they offer higher post tax returns. However, FMPs should be done for a period of 3 years as higher post-tax yields are locked in.  Short Term Bond Funds are excellent opportunities for a time horizon of 12 -18 months.

In short, the preferred debt investments are Liquid Plus funds for 3-6 months horizon, FMPs for 3 year horizon, and Short Term Income Funds for 12-18 months horizon.

Considering the recent pause by RBI, we believe interest rates are at elevated levels and almost nearing their peak makes longer tenor papers attractive. These are the excellent time for gradually taking exposure to long term government securities funds. As interest rates fall, investor gains capital appreciation on their investment along with the coupon payable by the issuer (In short there could be a 15-20%  return in such investments. However, there could be negative returns also because of interest rate volatility and hence suitable for aggressive investors). Investments in GILT funds, when yields on 10 year G-Sec are above 8.8-8.9%, could be a good investment option for 18-24 months (Since interest rate movements can be swift, we generally do not take GILT calls for trading gains).

In short 2012 can be a very interesting year to lock in deals in different asset classes.

Wish you and your family Merry Christmas & a very Happy, Healthy , Safe and Prosperous 2012.

Source: http://www.moneycontrol.com/news/mf-experts/whatsstore-forinvestorsthe-new-year_641850.html

2011, a year of down slide for investors

Industrial sector continues to witness slowdown in growth

The debt crisis in Europe, slowdown in the U.S. economy and domestic concerns such as high inflation, poor credit offtake, depreciation of the rupee against the dollar and other major currencies, had a disastrous impact on the Indian stock markets in the just concluded calendar year 2011.

The Sensex (benchmark index of the Bombay Stock Exchange) ended the year losing 5054.17 points (24.6 per cent) in one year to close at 15454.17 on December 30, 2011. The Nifty of the National Stock Exchange lost 1510.20 points (23.7 per cent) to close at 4624.30. Though investors hope that the market would revive in the beginning of 2012, brokers expect the downtrend to continue for some more time with a further fall in the key indices. They are concerned over the revival of the Indian economy in the near future

Foreign institutional investors (FIIs) turned heavy sellers in equities in 2011 with their net investment turning negative at Rs. 2,714.20 crore against the net inflow of Rs. 1,33,260 crore in 2010. On the debt side, net investment was Rs. 42,067 crore against Rs. 46,408 crore. In dollar terms, the net investment in both equity and debt stood at $8,297 million against $39,474 million.

The heavy offloading by FIIs resulted in 12 of the 13 sectoral indices closing in the red, with some of them hitting 52-week lows during 2011. Only the FMCG (fast-moving consumer goods) sector finished the year with a moderate gain of 8 per cent. Realty stocks suffered the most with the CNX Realty index of the National Stock Exchange dropping by 49 per cent. The infrastructure index, CNX Infra, lost 38 per cent, bank Nifty 32 per cent and CNX IT 18 per cent.

According to Gagan Randev, CEO, Religare Securities, the pullout of funds by FIIs compared with record inflows in the previous year, rising current account deficit and sharp depreciation of the rupee — all teamed up to push investors on the back foot, resulting in losses in 2011. FMCG was the best performer and realty and metal indices were the worst hit, he said.

The FMCG sector could do well due to a rise in demand for the products in the rural markets.

The banking sector suffered due to reduced credit offtake impacting their core operations. Only the treasury and other non-banking operations, such as distribution of mutual fund and insurance products, helped some banks to report a better performance.

Domestic institutions

Domestic institutions are still cautious and mutual funds see redemption pressure especially from banks. With the Reserve Bank of India insisting banks to cap their investments in liquid funds at 10 per cent of their net worth, mutual funds witnessed large-scale redemption in the last quarter of the year.

It is felt that markets will recover from April with a pick-up in credit offtake and a downtrend in global crude oil prices.

Source: http://www.thehindu.com/business/Economy/article2761154.ece

Rate sensitive sectors offer good opportunity over mid-term: Venugopal M

``Over the longer term, we are quite positive on the consumption space in India,`` says Venugopal M, Co-Head - Equities, Tata Mutual Fund.

In an exclusive interview with Varsha Inamdar, Venugopal Manghat further said, ``We feel that the ability to do substantial fiscal or monetary easing to tackle the current downturn is limited at this juncture. Also, crude oil prices continue to be stubbornly high. Thus, recovery will be more gradual this time. In such a scenario, one needs to follow a much more stock specific approach than a sectoral approach.  There could be significant divergence in performance of companies in the same sector. We are thus looking for companies with steady sales, earnings growth with good return ratios and low debt, which we feel, would continue to do well. We are also keeping a close watch on company specific valuations, as such a scenario can present good companies at very good valuations.``

What is your investment strategy at current levels? How have you churned your portfolio in the last three months? What is the strategy for the next couple of quarters?
Our funds are fairly well invested across sectors and have cash levels of 5-10%. We continue to be more positive on the consumer non-durable and pharmaceutical sectors. We are under weight on the banking sector while remaining neutral to the automobile sector. Within the banking sector, we are more positive on the private banking space.  We were of the view that the domestic economy is slowing down (impacting earnings growth) and risk aversion would prevail. Hence, we had positioned the portfolios accordingly and have not churned them much in the last three months. We are incrementally more positive on interest rate sensitive sectors and would look to add to such sectors in the next few months at appropriate price levels. The portfolios continue to be under weight on commodities and real estate. We believe the right approach in this market would be to keep investing in good quality companies at good valuations as they come and remain patiently invested.

What is your market outlook for 2012? By the end of 2012, do you see markets higher than current levels, lower or at similar levels?
Macro factors, both global and domestic are currently not supportive for equity markets. The sluggishness in the Indian economic growth is likely to continue for some time with GDP growth now forecasted at close to 7% even for FY13. This is a result of weak global scenario as well as lag effect of higher interest rates in the economy, which apart from lack of policy initiatives have led to much lower investment growth in the economy. Private consumption especially in urban areas is showing signs of moderation and the investment cycle is yet to show signs of recovery. Also, worsening global economic conditions could lower export growth prospects going forward. Given these conditions we believe the next few quarters could be challenging.

Earnings growth forecasts for Sensex companies have been lowered at the end of almost every quarter for several quarters now. We believe that this cycle would continue into the next calendar year and earnings growth could remain muted in FY12 and FY13. However, the positives are that the year 2012 is starting with low valuation levels and inflation is likely to cool off. Interest rates should therefore start coming down some time in the next calendar year which would be good. Given these factors, the market could be more positive in the second half while being range bound and volatile, reacting to overseas news flow as well as economic data in the first half. From current levels of the index, over a longer time horizon, one could expect reasonable returns.   

Debt funds have outperformed equity funds in 2011. Do you think debt funds will continue to outperform in 2012?
The central bank has already given its view on the direction that interest rates would take going forward. In a falling interest rate environment, debt funds especially the longer duration ones could gain significantly. A falling inflation and interest rate environment would also be positive for equity markets. However, the impact on earnings growth would be visible over a period of time. 

According to you, which sectors will likely to outperform or underperform in 2012? 

We feel that the ability to do substantial fiscal or monetary easing to tackle the current downturn is limited at this juncture. Also, crude oil prices continue to be stubbornly high. Thus, recovery will be more gradual this time. In such a scenario, one needs to follow a much more stock specific approach than a sectoral approach.  There could be significant divergence in performance of companies in the same sector. We are thus looking for companies with steady sales, earnings growth with good return ratios and low debt, which we feel, would continue to do well. We are also keeping a close watch on company specific valuations; as such, a scenario can present good companies at very good valuations. At current valuations, the interest rate sensitive sectors offer a good opportunity over the medium term. Over the longer term, we are quite positive on the consumption space in India.

What do you expect from Q3 earnings season?
The current quarter is also likely to be a muted quarter due to the impact of global uncertainty, high interest rates, depreciation of the rupee and slow down in the domestic economy. Seasonally, it is a weak period for some large sectors like Information Technology. Infrastructure and engineering sectors continue to be hit by lower order flows, lower margins and higher working capital cycle. The FMCG space is expected to continue its good volume growth trend while seeing lower margins. The banking sector could witness lower credit off take and pressure on margins while gaining in their investment book. Asset quality concerns would continue to play out. It could be a mixed trend for the automobile space with the two-wheeler sector doing better. The pharmaceuticals sector could show reasonably good performance in the quarter. 

What is your advice to investors in current market scenario?
Our message to investors is that India`s long term potential remains intact despite the current problems. This coupled with much more reasonable valuation means that over time, investment in equity could earn reasonable returns. We would therefore advise investors to use Systematic Transfer plans (STPs) to increase exposure to equity markets gradually, taking advantage of the current volatility while at the same time continuing to earn decent returns in debt funds in the short term.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20111229175544715&dir=2011/12/29

Sebi to weigh ban on payment of upfront commissions in mutual fund schemes

Sebi is expected to take a close look at a suggestion made by CEOs of leading fund houses to ban payment of upfront commission to distributors of mutual fund schemes.

Battling redemptions, some MFs are luring distributors with high commission - a practice that breeds unfair competition and goes against the principle of the "no-entry load regime" that kicked off from April 2009.

The subject cropped up at a meeting between Sebi and heads of as many as 15 fund houses. Faced with a dismal market, MFs have also suggested that know-yourcustomer (KYC) norms be simplified and the period of exit load extended beyond a year to attract long-term investors.

"Sebi is keen to promote mutual funds as a 'savings' product as against an 'investment'. It will form a team to take up with the government to mandate retirement funds to invest in mutual funds.

This could be similar to 401K, the US retirement savings plan for employees," said a person present at the meeting. Such a move will push the growth of the mutual fund industry in a big way, said a Sebi source.

On the issue of upfront commission, an industry source said big fund houses, which introduced the practice, are now opposing it as they lose out to new funds. According to industry sources, fund houses are paying anywhere between 0.95% and 3% as upfront commission to distributors from their own pockets.

Between October and March, fund houses pay higher upfront commission to distributors to sell their tax-saver funds. During the two-hour meeting, the fund CEOs proposed that qualified foreign investors (QFIs) would be encouraged to put in money if KYC norms are streamlined. They also asked for introduction of share-class structure and valuation models of gold funds.

"Sebi wanted our views on key issues facing the industry. The regulator, it seems, is not happy about falling asset bases and investment outflows. We think Sebi will take quick decisions on KYC for QFIs, transaction charges and extension of exit load structure," said a CEO who attended the meeting.

According to sources, the regulator may take a decision not to make PAN (permanent account number) mandatory for QFIs who want to invest in Indian mutual funds. The regulator will look into rules laid down by overseas regulators for enabling individual foreign investors, particularly from countries with a strong regulatory framework, to put money in Indian MFs.

Offshore distributors, selling Indian MFs to QFI, may be entrusted with the responsibility of completing the KYC procedure. Industry representatives strongly backed the agenda on a possible extension of the exit load period from one year to two or three years.

This, they think, will arrest sudden outflows and distributor-induced fund portfolio churning. In order to make the marketing structure more flexible, the decision to charge a transaction fee should be left to the discretion of a distributor. At present, distributors recover a charge of Rs 150 from all investors, irrespective of the size of investment.

"This is not a good practice... If someone is investing Rs 1 lakh, the distributor should have the freedom not to levy a charge," said the head of another fund. The regulator may soon exempt independent financial advisors from disclosing their fees on the websites of fund houses, he felt.

Among other things, the regulator said it would also look into the valuation model of gold fund-of-funds which have gold prices as the benchmark but valued at closing net asset value (NAV). This, according to fund managers, is resulting in widen variance between performance of gold fund-of-funds and their NAVs.

The regulator, however, was also not comfortable with the idea of introducing differential share class in mutual funds. "Differential share class discriminates between investors and it cannot be implemented," the regulator told the MF executives.

Source: http://economictimes.indiatimes.com/markets/regulation/sebi-to-weigh-ban-on-payment-of-upfront-commissions-in-mutual-fund-schemes/articleshow/11285043.cms?curpg=2

Reliance MF eyes more unique plans.

Expects 100,000 ATM cards sales in Gujarat over one year.

With securities market regulator, Securities and Exchange Board of India (SEBI) giving clear indication to the mutual fund companies to offer new themes under new fund offers (NFOs), Reliance Mutual Fund has set its eyes on innovative investment plans.

The Anil Dhirubhai Ambani Group (ADAG)'s finance arm, Reliance Capital Asset Management Ltd is looking to generate more business from gold savings plans and its recently launched Reliance Any Time Money (ATM) Card.

According to company officials, Gujarat market would continue to contribute 14-15 per cent to the company's total assets under management. "Gujarat has been a promising market for us. Especially, for our new product, ATM card, we are hopeful to sell about 100,000 cards in Gujarat alone over the next one year," informed Himanshu Vyapak, deputy CEO, Reliance Capital Asset Management. Nationally, the company aims to sell 500,000 to 1 million ATM cards in a year's time.

While launching the ATM Card linked to mutual fund investments, Vyapak informed that latest regulatory compulsions would bring innovation in the financial products in the mutual fund space, while keeping the investors interested towards mutual funds.

"There have been high redemptions in past six months, but we, as a company, are hopeful for a better year ahead. Investors need to be made aware that mutual funds have multiple investment linkages other than merely equities. Hence, equity fluctuations need not hamper growth of mutual funds," said Vyapak.

Recently, SEBI made it clear that it was not encouraging mutual fund companies to float new schemes.

In Chennai recently, UK Sinha, chairman, SEBI had maintained, "We are asking them (mutual fund) companies to launch less and less new schemes and we are not encouraging them to float new schemes, unless it has new themes, which can be exploited in the new launches."

The regulator has also asked the mutual fund companies to merge the existing schemes, which have similar investment themes.

According to Vyapak, gold investments through mutual funds is attracting more attention from the first time investors. "We have received over 75,000 accounts from the first time investors for our gold savings fund. A total of over 500,000 people taken the advantage of this fund. The total assets under management of this fund is about Rs 2,500 crore," he added.

Giving details about the ATM card, he mentioned that Reliance ATM Card will be available to investors investing in Reliance Mutual Funds designated schemes through their online account with the asset management company.

The card will be linked to investments made in the designated funds and can be used to withdraw cash from any VISA authorised ATM or payments at Point of Sale (PoS) outlets. The card has no annual fees or transaction charges within India.

Reliance Mutual Fund has strong presence in Gujarat with over 1.05 million investors being served through 21 branches located across the state.

Source: http://www.business-standard.com/india/news/reliance-mf-eyes-more-unique-plans/459917/