UTI MF's Bhaskar says defensive stocks no longer defensive

Anoop Bhaskar keeps a close eye on the used car market. “It is a fairly good indicator of the liquidity in the system,” says the head-equities at UTI Asset Management. For now, that market is showing that there is ample liquidity, even as interest rates have been rising for some time now.

“I track the list of second hand cars that an auto supplement puts out every Friday, make a few enquiries with the dealers about some of the high-end models on that day, and then follow up on Sunday. More often than not, the best cars are already taken by then. And mind you, people buying these cars on loan have to pay a couple of 100 basis points more than what they would pay on a new car. That says a lot,” Bhaskar told moneycontrol.com

But with the Reserve Bank of India yet again raising key signalling rates—that at which it lends to and borrows from banks—interest rates are set to increase further. Economists say the rate hike cycle is still not over, and another 50-75 basis points hike in the coming quarters could weigh on GDP growth this fiscal. And that spells bad news for the stock market, as a slowdown in the economy will hurt corporate earnings.

Bhaskar has been cautious on the market for a while now, and the latest developments only strengthen his conviction.

“There are too many moving parts which are hard to call. You have high crude oil prices expanding the current account (the difference between a country’s exports and imports) deficit. This is happening at a time when foreign inflows (FDI as well as portfolio investments) are expected to be lower than what they were last year. This could weaken the rupee and in turn spark a vicious cycle of FII outflows and weakening currency. Inflation is showing no signs of easing despite repeated rate hikes by the RBI. Then there are macro-economic problems in Europe and US,” says Bhaskar.

He stops short of taking a bearish view on the market, but does not see why share prices should be rising anytime soon.

What is Bhaskar’s bet on a visible slowdown in the economy?

“In the past, SBI’s PLR (prime lending rate) crossing 13.25% has usually been an indicator of an impending slowdown. (It has already crossed that mark) When car loan rates hit 15% (they are 12-13% right now), a slowdown follows soon enough. So the signals are mixed, but the signs are there,” he says.

And if there is a systemic problem, stock selection offers little protection from a downtrend, cautions Bhaskar.

The other problem for fund managers is that there is hardly a sector immune to a downtrend because of the run up in valuations.

“There are no defensive plays available at reasonable valuations. Most of the recent best performing sectors like auto, IT and FMCG were laggards during the 2007-08 bull run. But today, they are either fully priced, and in some cases, over priced. That makes them as vulnerable to a sell-off like the growth stocks,” says Bhaskar.

“If one were to take a three year view, I would say the best bets today are capital goods and infrastructure stocks. While high interest rates could hurt these sectors for a while, the valuations are attractive enough for the stocks to be able to deliver decent returns over three years,” he says.

Market experts were expecting a deluge of earnings downgrades in the current season. Fourth quarter numbers of quite a few companies—including heavyweights like Infosys Technologies and Reliance Industries—have fallen short of analyst estimates. And while there have been scattered instances of earnings estimates being slashed, the downgrades have not been alarming, at least for now.

But Bhaskar feels there could a steady rise in the number of earnings downgrades over the next couple of quarters.

“We could see more earnings downgrades in the coming days. Initially, the consensus was that FY12 earnings would grow 25%. That has now been lowered to 18%. It is when that number further drops to 13-14% that the market could bottom out,” says Bhaskar.

He says that the market does not need a huge oil spike to damage corporate earnings.

“Crude staying at current level can be bad enough. If oil is steady around $120 (a barrel), it means commodity prices are unlikely to see any meaningful decline. Add to that high interest rates, and corporate margins for the third and fourth quarter could be under severe pressure,” Bhaskar says.

Source: http://www.moneycontrol.com/news/cnbc-tv18-analysis/uti-mf39s-bhaskar-says-defensive-stocks-no-longer-defensive_540494.html

Sundaram’s Rajesh Says India Rates Increases to Hurt Growth

Srividhya Rajesh, a fund manager at Sundaram Mutual, comments on the outlook for Indian stocks. Chennai-based Sundaram manages $3.3 billion in assets. She spoke in an interview in Mumbai today.

The Reserve Bank of India increased the benchmark repurchase rate by half a percentage point to 7.25 percent yesterday, the biggest move since July 2008, and Governor Duvvuri Subbarao forecast the economy may grow about 8 percent in the year through March from 8.6 percent in the previous year.

On rate increase:

“We have seen a series of rate hikes and the impact of that will start hurting growth. The Reserve Bank of India had refrained from doing this in the past as they did not want to hurt growth. Given the global uncertainties, growth was a priority. We did not expect this kind of prolonged phase of high inflation. To that extent everyone has been surprised. The underlying growth momentum is still fine; it’s just that the near-term pressures are all staring at us at the same time.”

On inflation:

“Inflation should start trending down because a 50 basis point increase in rates is a pretty strong measure. Inflation should start cooling off in the next three to six months. If that happens, it will be a positive signal for the markets.”

On corporate earnings:

“Margins will be under pressure. In the near term there will be earnings downgrades. For the year ending in March 2012 we will see 17 percent to 18 percent earnings growth compared with the 20 percent to 22 percent estimated earlier.”

On investment strategy:

“We will have a relook at the consumer shares in our portfolio after three to six months. It will depend on inflation, government policy action, monsoon and the rural economic growth.”

Shares of lenders, fast-moving consumer goods, automakers and telecom companies form the biggest part of Rajesh’s portfolio. She declined to comment on specific shares.

Source: http://www.bloomberg.com/news/2011-05-04/sundaram-s-rajesh-says-india-rates-increases-to-hurt-growth.html

RBI cap on bank investments in MF schemes to hit industry hard

Indian mutual funds, which are reeling under the impact of a raft of measures including a ban on charging entry load imposed by the securities market regulator Sebi, now face the threat of an erosion in the assets they manage. On Tuesday, the banking regulator- the Reserve Bank of India (RBI) - dealt a body blow to the industry which manages assets of over Rs 7,00,000 crore by directing banks to cap their investments in the liquid schemes of mutual funds at 10% of the banks' net worth in six months.

The RBI directive will dampen the cosy relationship between banks and mutual funds, which has been a cause of concern for the central bank in recent months. Banks park their surplus money in liquid schemes, which invest in debt securities of duration less then a year, including banks' certificates of deposits, companies' commercial papers, treasury bills and the collateralised lending and borrowing obligation or CBLO market, for quick returns. These funds, in turn, lend to banks in the overnight CBLO market. Mutual funds are also among the major investors in banks' certificate of deposits.

Banks' investment in mutual funds aggregated Rs 1.11 lakh crore on April 6 against Rs 70,999 crore on January 14, according to RBI. Fund managers said over 80% of banks' money in mutual funds is in liquid schemes. The investment restriction will limit banks' surplus money coming into mutual fund schemes at Rs 30,000 crore. The total net worth of the banking system is around Rs 3.13 lakh crore as March 31, according to fund managers.

So, mutual funds can expect to face redemptions of almost Rs 60,000 crore over the next six months. "Such circular flow of funds between banks and DoMFs (debt-oriented mutual funds) could lead to systemic risk in times of stress or liquidity crunch. Thus, banks could potentially face a large liquidity risk," RBI said in the circular. The latest regulatory measure will reduce the dependence of mutual funds on banks and viceversa , said Ritesh Jain, head--investments , Canara Robeco Asset Management.

"This will end an era of easy money for mutual funds and banks, which will be forced to look more closely at the conventional route of raising money through retail fixed deposits," Jain said. "This once again emphasises the fact that going retail is the way to build mutual fund assets ," said A Balasubramanian, chief executive officer, Birla Sun Life Asset Management Company.

Fund managers said the restriction will result in short-term rates -- 3-12 months -- turning volatile , with lesser money flowing into such instruments . "Assuming that interest rates are expected to remain firm till October, the shortend of the curve will turn steeper because of lesser liquidity," said the chief investment officer of a bank-owned mutual fund.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/rbi-cap-on-bank-investments-in-mf-schemes-to-hit-industry-hard/articleshow/8157031.cms

LIC chairman denied extension, may head UTI MF

T S Vijayan, whose five-term as the chairman of government-owned Life Insurance Corporation of India (LIC) ended today, is likely to shift to UTI Mutual Fund as the new head.

Vijayan, who still has two years service left and has been denied extension as chairman, was today asked to serve as one of the three managing directors (MDs), a post he had held before becoming chairman in 2006.

Sources said Vijayan’s appointment as UTI Mutual Fund chairman will be made in a month’s time. The post fell vacant after U K Sinha became chairman of the Securities and Exchange Board of India.

“The decision (to make him the MD of LIC) is a stop-gap arrangement. There is a real possibility that he would be appointed the next Chairman of UTI Mutual Fund,” sources close to the development told Business Standard, on condition of anonymity.

Vijayan could not be reached for comments. As an interim measure, Rakesh Singh, additional secretary, department of financial services in the Union ministry of finance, has been given additional charge of chairman of LIC for the next three months. A 1978-batch officer of the Indian Administrative Service, he is also holding additional charge as head of the National Bank for Agriculture and Rural Development.

Finance ministry officials have begun the process of appointing the next chairman of the largest life insurer in the country.

According to sources with direct knowledge, two of the existing MDs, D K Mehrotra and Thomas Mathew, are being interviewed by the selection panel for the LIC chief’s post. The panel is headed by finance secretary R Gopalan and financial services (banking) secretary Shashikant Sharma.

“Going by seniority, holds a slight edge over Thomas Mathew,” sources added. A K Dasgupta, the third MD, is apparently not in the running.

Mehrotra was also in the race for LIC’s top position in 2006. Vijayan and he both became MDs in 2005.

In February, UTI Mutual Fund hired an executive search firm to identify a suitable candidate to head the company. Currently it is run by a four-member committee of Jaideep Bhattacharya, chief marketing officer; I Rahman, chief finance officer; Anoop Bhaskar, head-equity and Amandeep Chopra, head of fixed income, said an official from there.

Source: http://www.business-standard.com/india/news/lic-chairman-denied-extension-
may-head-uti-mf/434422/

SAT's far-reaching relief to MF investors

A 16-page order from the Securities Appellate Tribunal (SAT) is bound to be keenly analysed by the mutual fund (MF) industry due to its potentially far-reaching repercussions.

A foreign fund house alleged to have changed the “fundamental attributes” of a scheme without informing the unitholders has been directed to compensate two investors.

Tuesday, the SAT pulled up HSBC Mutual Fund for not following the norms clearly laid down by the Securities and Exchange Board of India (Sebi). The asset management company has been directed to provide an exit option to two investors who filed an appeal with the tribunal.

SAT also rapped Sebi for not giving this relief on the original complaint, after having agreed the scheme’s fundamental attributes had indeed been changed.

HSBC MF has been directed to provide the two complainants

Subramanian R Venkat and his wife, Anuradha Venkatasubramanian, with an exit route based on the net asset value (NAV) as on the date of changing the “fundamental attributes” of the scheme. “This... does not mean that the appellants who have been agitating the matter can be deprived of their right to exit the scheme as on the date of the change at the then prevailing NAV,” says the order.

BACKGROUND
The case goes back to 2003, when HSBC MF launched HSBC Gilt Fund with two plans, short term and long term. The two investors put in a total of Rs 2.52 crore in the Short Term plan that, according to its offer document, would invest in gilts with an average maturity not exceeding seven years and modified duration not exceeding five years.

According to the two complainants, the monthly statement they received in February 2009 showed a sharp erosion in the value of their portfolio and the net asset value (NAV) fell nearly 10 per cent in three days.

On enquiring with the distributor, they were informed that the long term plan was wound up and the average maturity of gilts had changed for the short-term plan, too. From the earlier five to seven years, it was changed to not exceeding 15 years. The words ‘short term’ were also dropped from the name of the scheme and the benchmark index was changed.

The complainants alleged the fall in NAV was on account of the changes in the fundamental attributes of the scheme. This was done without informing the unitholders and without giving a reasonable opportunity for exiting the scheme. They further allege they were completely unaware of the changes until March 2009, when they did exit. After this SAT order, the complainants will be given an exit option based on the NAV as on January 5, 2009.

The tribunal has criticised Sebi’s whole-time member for the way the matter was dealt with. “We are really amazed that the whole-time member after recording a finding that... (the fund) changed the scheme which affected the interest of the unitholders without complying with Regulation 18(15A) of the Regulations, failed to issue directions... for complying with the provision. We are satisfied that the whole-time member grossly erred in not issuing the appropriate directions in this regard,” says the 16-page SAT order.

Source: http://www.business-standard.com/india/news/sats-far-reaching-relief-to-mf-investors-/434356/