Monday, May 9, 2011

Indian shares unlikely to see major downside

A dramatic fall in global commodity prices and reasonable valuations are likely to rescue Indian shares, battered by hefty rate increases, from a major downside.

The Reuters-Jefferies CRB index tracks 19 major commodities, including crude oil, gold, silver, copper and aluminum. It ended last week with a nine per cent drop, its biggest weekly decline since December 2008.

Prices of crude oil tumbled by a little over $16 a barrel last week, while those of base metals like copper came off 5.4 per cent. This sharp correction in crude and commodity prices will reduce the pressure on the Reserve Bank of India (RBI), which raised its key interest rates by 50 basis points, to tackle inflation of near nine per cent.

India imports 70 per cent of its crude oil requirement. A reduction in crude prices lowers the government’s subsidy burden and eases inflationary pressure. “A US dollar index rally or a slowdown in developed market growth will likely trigger a correction in global commodity and energy quotes, the key source of inflation pressure in India,” said Ridham Desai, managing director and head of India research at Morgan Stanley, in a note to clients.

The US Dollar Index, or DXY, is a futures index which represents the relationship between the dollar and six major currencies. A rise in the dollar makes dollar-denominated commodities expensive for other currency holders and lowers demand.

Given the macro scenario, Desai believes, the 50-stock Nifty is likely to remain in the range of 5,300 to 6,300. The benchmark index of the National Stock Exchange (NSE), which closed at 5,551.45 on Friday, has lost about five per cent in the past two weeks.

In the short term, market experts believe the Nifty is likely to consolidate in a range of 5,400 to 5,700. The present valuations of Indian shares are reasonable and reduce risk of a major downside, they say.

“At current valuation of around 15 times, the markets are at a reasonable valuation. My guess is that from here onwards, markets can give a return of over 10 per cent over the next one year, taking into consideration a 15 per cent growth in corporate earnings,” said N Sethuram, chief investment officer at Daiwa Mutual Fund.

There are others who believe that a five to 10 per cent correction in the Sensex from its present levels of 18,518 will be a good opportunity to buy for investors. “If the market falls another five per cent from here on, that will be a good opportunity to buy,” said Sampath Reddy, chief investment officer – equity, Bajaj Allianz Life Insurance.

Reddy, who manages equity assets worth Rs 28,000 crore, expects 10-15 per cent upside for the Sensex by year-end.

Vijay Gaba, equity strategist at Bank of America Merrill Lynch, feels the correction that began in April-end may likely extend further and provide a good buying opportunity for traders as well as investors. “We have been arguing since the beginning of this year that around the 18,000 Sensex level, the market would likely price in the economic and earnings concern and any substantial correction below this level would provide sufficient cushion for any shock event,” he said in a note to clients.


Source: http://www.business-standard.com/india/news/indian-shares-unlikely-to-see-major-downside/434928/

FDs are hot, but stay with equities; Sebi, don't bring back loads

With commercial banks increasing their fixed deposit (FD) rates to double digits, a lot of citizens are moving towards this investment vehicle. And why not? The alternatives today are not confidence inspiring — markets have fallen by 15% in the past six months, gold and silver have moved into bubble territory, and land has taken its 20-35% leap over the past year.

On the other side, inflation is eating into the purchasing power of money, pushing Reserve Bank of India (RBI) to increase India's policy rates nine times in 13 months, the last one being a 50-basis-point increase in the repo rate (rate at which RBI lends to commercial banks) to 7.25% last Tuesday.

That effort seems to be in vain, however — all that RBI and the government have been able to transmit are promises of lower inflation, but no real action. As a result, while borrowers are feeling the pinch of higher rates on their home loans, lenders are gradually rediscovering an old investment flame: fixed deposits (FDs). At more than 10%, FDs could give senior citizens the higher returns they're seeking at virtually zero risk. In the short term, say, for the next three years or so, that is probably a good idea.

But in the longer term — and many senior citizens in their early 70s will live well into their 90s — fixed deposits may not be quite the place to park all that money. To protect their money from inflation, they must keep 25% or more in equities. For the young, it should be 75% and more.

An economy that grows at a 'slower' rate of 8% that makes India the world's second-fastest growing economy after China means the earnings of the underlying organised sector companies that are listed will, on an average, grow by 20% or more. To miss this biggest-ever ride of Indian equities would be an investment error. The trouble is that investors confuse getting an 'equity exposure' with 'buying stocks'. The latter is best left to experts, brokers, fund managers. But as far as equity exposure is concerned, India today has the world's cheapest product — mutual funds — that investors must buy into.

At an annual cost of less than 2% or less, you can get access to some of the best-performing mutual funds that deliver 20-50% returns every year. But unlike FDs, these returns are not consistent — they may fall in some bad years, could double or treble in very good years. But at the end of 20 years, you can expect a return of 15-20% — meaning you can multiply your money 30-fold.

From the noises I am hearing in newspapers through select leaks, however, it looks as if Securities and Exchange Board of India (Sebi) under its new chairman UK Sinha is planning to reintroduce 'loads' — the price that an investor must pay while buying into an equity fund. Knowing the investor-friendly DNA of Sinha, I don't think he will succumb to the pressure of distributors to fatten their bottomlines.

Load was a burden previous Sebi chairman CB Bhave had ended, making mutual funds even better for investors. Following this, the equity assets of the industry fell by a statistically-insignificant 2%.

In fact, over the past 12 months, a new wave of investors, armed with systematic investment plans(a small amount, say R5,000 every month) have invested in mutual funds with a never-befre-seen enthusiasm. It is this set of investors that Sebi needs to keep in mind and serve as its primary constituency.

Globally, this is where the markets are moving — UK plans to end entry loads on all financial products by 2012; other countries are going to follow. At a speech to financial planners from 23 countries I made last year in Taipei, I argued for two points. One, the world must learn from India and end all entry loads on financial products. And two, while financial planners must charge for the advice they give, they must be regulated. Instead of reintroducing loads, Sinha would do well to work towards regulating advisors

Source: http://www.hindustantimes.com/FDs-are-hot-but-stay-with-equities-Sebi-don-t-bring-back-loads/Article1-695077.aspx

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