With markets falling, it’s a good time to invest

(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)

The Sensex tested the 16,000 mark last week after 15 months.

I believe the following three quotes which made headlines on different days, tell us a lot when we put them together.

World Bank chief Robert Zoellick said “what we have seen is that confidence is a fragile element of how the market economy works. The convergence of events in the U.S. & Europe had rattled investors in countries already struggling to cap sovereign debt issues and unemployment”.

Sir Martin Sorrell, head of WPP (global leader in advertising) said “Brand India is far stronger than Brand UK and Brand US”.

Lastly, the Indian finance minister said “FII flows will eventually lead into Indian markets which look comparatively better”.

It is therefore, surprising that India’s Sensex lost 16 pct since Jan 2011 and about 7 pct since S&P’s U.S. downgrade, less than Germany’s DAX ( fall of 22 pct and 12 pct respectively) which is into the thick of the danger zone.

Attributing the fall even in part to the current political situation is merely a canard because the Hazare movement is more an indication of how strongly rooted India’s democracy is. After all, not many emerging countries can take credit for such movements conducted in a peaceful manner with the government attempting to resolve it within the framework of our Constitution.

Surely this cannot be worse than the riot-torn streets of the UK and political brinkmanship indulged in the U.S. with complete disregard for national reputation and credit standing.

While the Indian economy cannot remain unaffected, it is certainly not as exposed.

Firstly, exports are only about 20 pct of GDP. FDI in the first half of 2011 at $18 bln was robustly up about 60 pct year on year. The RBI has been very proactive with policy rates which should cool the economy and help in achieving a more stable growth rate thereby giving time for infrastructure to catch up and provide the structural changes required to tackle the supply side inflationary aggravations.

The Indian government is well seized of the need to promote investment to take it back to the 35 pct plus of GDP levels by thawing the policy freeze. This could be supported by the expectation that the RBI may well be near the end of its interest hiking cycle, especially considering the sobering impact of declining oil prices on inflation.

The global scenario may take a while to stabilise while U.S. politicians reach a consensus which I fear may get increasingly difficult as they inch closer to elections. On the other hand, it may be very difficult for the Germans and French to accept paying the bill for the fiscal profligacy of their poorer Euro partners.

Will Germany exit the Euro or will the PIGS opt out? How will the recent electricity crises in Cyprus play out for its over exposure to Greek banks? Is Italy with a $250 bln debt coming up for rollover soon, the first G8 disaster waiting to happen?

It’s not as though concerns around the euro debt crisis and U.S. economy have newly surfaced to push the global markets off a cliff which is why one would reasonably expect global markets to have by now discounted for the worst, due to the evident cracks in their economies. But a momentary shock on the finale may not be unavoidable.

While India does have its own share of challenges, this time around I strongly believe that the cause for so large a Sensex slide is therefore more the deteriorating economic environment outside India and particularly in the euro zone and the U.S.

Therefore, more than the S&P downgrade, it was the political squabbling in the U.S. and the inability of Germany and France to conclude a concrete action plan to resolve the euro debt issues which led to this lack of confidence making the world’s investing community scamper for cover.

Ironically, money which left the emerging markets in hordes went into U.S. Treasuries which once again were looked upon as a safe haven. It is this sense of helplessness which seems to have resulted in the prevailing gloom and confusion leading to market volatility.

In the meanwhile, the meetings of U.S. senators and euro zone premiers will continue to be closely watched with market expectations raised and dashed many times resulting in continuing volatility over the next 3 to 6 months.

India’s markets which have of late been driven by FIIs have obviously suffered the most and have ended up mirroring the worst between U.S. and euro indices.

The situation is very different from 2008 simply because the global economy has enough liquidity. The U.S. may well come up with a QE3. Having learned from the last crisis, the RBI is prepared to keep both liquidity and credit flowing to keep the wheels of trade from any abrupt seizure.

Finally, investment flows will depend on the comparative strength of the alternatives presented before those making allocations and investment decisions.

I believe India even with a 7 pct GDP real growth will continue to remain one of the better macroeconomic stories in the global investment scenario and irrespective of what happens in the short-term, FII inflows can be reasonably expected to revive sooner than later leading the Sensex to a recovery in Q4 2011.

What happens in the immediate term is for anyone to guess.

However, at 16,142 the Sensex is about PE13 a year forward and if the past was to serve as any indication, it seems a very good time to invest. Retail investors in mutual funds should remain invested and diligently continue their SIPs.

Source: http://blogs.reuters.com/india-expertzone/2011/08/22/with-markets-falling-its-a-good-time-to-invest/

All about tax implications of overseas investments

When the RBI liberalised global investment norms, it literally opened up a world of choices for wealthy Indians. They could invest in immoveable property, shares, bonds, debentures, mutual funds, listed and unlisted debt securities, and other financial instruments outside India. The new norms and the urge for geographical diversification have led many Indians to invest in foreign markets.

However, there are no tax-free luxuries from such investments for these may invite tax both in India and abroad. In fact, the tax implications in some cases can be quite complex. In addition, tax implications in the foreign country where the investment is to be made should also be analysed.

TAX ON CAPITAL GAINS Under the Indian tax laws, a resident and ordinarily resident of India is taxed on his worldwide income. This includes capital gains, rental income and income from other sources. If the transaction involves sale of shares listed on the overseas stock exchanges or other assets (gold, property) outside India, the income is treated as capital gains.

These can be either short-term or long-term gains, depending on the period of holding.
If the asset is held for more than 12 months (in the case of shares or units) or 36 months (in any other case), the income is classified as a long-term capital gain. If the holding period is shorter, the gains are treated as short term.

While most types of incomes from foreign investments are treated in the same way as those from domestic investments, the crucial difference is in the way long-term capital gains from stocks and equity funds are taxed. If an investor holds domestic equities for over a year, there is no tax on the capital gains if the stocks were bought through a recognised stock exchange. However, there is no exemption on profits from foreign equities and an investor will have to pay 20.6% tax on the gains.

CARRYING FORWARD LOSSES The good part is that these long-term capital gains from foreign equities can be adjusted against long-term capital losses. There's a caveat here: long-term capital losses can be set off only against long-term capital gains. In case of short-term losses, they can be set off against both short-term and long-term gains.
If the loss cannot be completely set off, it can be carried forward.

The tax laws allow carrying forward of losses incurred in overseas investments, including long-term losses from equities, for up to eight consecutive years. What's more, the cost of acquisition can also be adjusted for indexation to account for inflation during the period of holding. The same rules of indexation that govern domestic assets are applicable to foreign investments.

SAVING CAPITAL GAINS TAX Global investments can also be a source of saving tax. Under Section 54, one can claim exemption from tax on capital gains earned from the sale of a residential property by reinvesting the proceeds in another house within a specified period. This can be a house in a foreign country as well.

Investors can deposit the proceeds in the capital gains account scheme before the due date of filing the income tax return for that year, provided the money is re-invested in another property within three years of the date of sale of the original property. Any money lying unutilised in the capital gains account at the end of three years would become taxable.

TAX ON RENTAL INCOME The rental income from overseas property gets the same treatment as that from domestic real estate. After a 30% standard deduction and municipal taxes paid for the property, the rental income is added to the income of the owner and taxed at the normal rate. Deduction can also be claimed for interest paid on housing loan during the financial year.

The rules don't change much when it comes to income from other sources as well. The dividends from mutual funds and stocks are also fully taxable, along with the interest income earned on bonds and deposits.

These tax provisions in India are set for a big change with the Direct Taxes Code (DTC) likely to be introduced from 1 April 2012. The DTC proposes to remove the distinction between long-term and short-term assets and change the way the holding period is calculated for indexation benefits. The standard deduction for rental income will also be reduced from the present 30% to 20%.

AVOIDING DOUBLE TAXATION The taxability of foreign investment also depends on the tax laws of that country. There is some relief for the investor if there is a tax agreement between India and the other country. In the case of double taxation, the investor can seek relief under the Double Taxation Avoidance Agreement (DTAA) between India and the country concerned.

However, this could vary and depends on the nature of income, tax laws in the overseas country and the provisions of the agreement between India and that country. India currently has DTAA with more than 80 countries, including the US, the UK, France, Greece, Brazil, Canada, Germany, Israel, Italy, Mauritius, Thailand, Spain, Malaysia, Russia, China, Bangladesh and Australia.

If one satisfies the conditions mentioned in the respective DTAA, credit can be claimed for the taxes paid overseas on such income against the Indian tax liability. The tax credits are calculated as being lower of the actual taxes paid overseas and the Indian tax liability, and should be claimed in the income tax return form under 'Relief under Section 90.'

Overseas investments also have wealth tax implications. There is a 1% wealth tax on the net wealth exceeding Rs 30 lakh. Currently, only a second property, jewellery and other unproductive assets are taken into account while calculating the wealth tax. However, after the DTC comes into force, the foreign shares in one's portfolio will also be included in the ambit of wealth tax.

Source: http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/all-about-tax-implications-of-overseas-investments/articleshow/9756753.cms?curpg=2

Decouple your investment decisions from global crisis

Resist the temptation to sell investments and stay away from gold.

Ever since Standard & Poor’s downgraded US sovereign debt, all hell seems to have broken loose in the world markets. As investors, we have two options – either succumb to this panic or take a step back and get things in the right perspective. Now, if history is anything to go by, the first lesson we have learnt is not to take what a rating agency says, as gospel truth. Isn’t it hardly three years since the sub-prime debacle? Weren’t all those mortgage backed securities that almost threatened to take down the global financial system also rated? And in any case, why do markets need a downgrade to be spelt out to start panicking? Isn’t $14 trillion of debt, in the first place, enough to get people worried? A 2011 fiscal deficit of $1.65 trillion with $2.46 trillion of the aforementioned mortgage and treasury securities sitting on the balance sheet of a country should have been enough to terrorise even the most optimistic of investors – it didn’t necessarily require an S&P endorsement.

Coming to India, it so happens that our stock market comprises two distinct sets of investors — the first set is the Foreign Institutional Investors (FIIs) who over the years have pumped in billions of dollars into our stock market. The second set consists of us, domestic investors. Ironically, it is we domestic investors who have traditionally shown far little conviction and confidence in our own markets than our foreign counterparts. When the foreigners invest their billions thereby driving prices up, we tend to jump on the bandwagon and enjoy the joyride. And when the foreigners liquidate their holdings (as they are doing now) thereby driving down stock prices, we stampede out trying to beat them to the exit.

This, in spite of the fact that India continues to grow between 7.5-8.5 per cent, depending upon whom you are listening to. Yes, there will be collateral damage in terms of tighter capital and trade flows and of course a significantly lower participation by FIIs in our stock market. However, why are FIIs selling in India when the problem lies elsewhere? One reason could be, that investors are booking profits here to cover up for their losses elsewhere.

Then there are those institutions that are healthy and remain relatively unaffected. However, looking at the carnage all around, these global money managers prefer holding on to their purse as tightly as they can. Compared to their developed counterparts, as an asset class, emerging markets are considered to be riskier. In the current situation, this is nothing but an irony. Despite ample evidence to the contrary, India exposure at this point is considered unsafe — another example of how common sense goes out the door when the fear psychosis hits

However, it’s not as if this is the end of the world. Right now, the wounds are being licked and in the course of time, these very investors will consolidate and regroup. And once that happens where do you think they will turn to? Of course, to the very markets that offered them a profit in the first place! It’s logical, almost intuitive. So it should not matter if the market falls to 15000 or sinks to 12000. But to be sure, once this storm blows over, things will be back to normal trot.

There is yet another reason for such faith – and that is the cold fact that the US has a symbiotic relationship with the rest of the world. Both thrive off each other. In other words, the Chinese manufacturer, the Indian service provider as indeed the Brazilian miner, all, require the American consumer to survive. The US, is simply too big to fail. Metaphorically and literally!

Also, the problem though complex is identifiable. The components of government spending or the main causes of the debt are of course, interest payments (on account of increasing debt), Medicare (free healthcare for those over 65), Social Security (contributions during the working life do not even come close to the annuity paid by the government upon retirement) and defense spending. The Tea (Taxed Enough Already) Party, if it has its way, will prevent any attempts to increase taxes to bridge the shortfall. So the focus has to be government spending, specially on Medicare and defense. In time, things will have to be worked out, partly curbing the welfare measures and partly by perhaps bringing in a sort of public-private partnership in other areas of expenditure. In the meanwhile, the world has no other option but to be patient and wait.

In the meanwhile, investors would do well to embrace a Buffetism - “Be greedy when others are fearful and be fearful when others are greedy”. This is something that Buffet has always maintained. And now, all one sees is fear. A fear that is bordering on terror. And to my mind, this represents a great opportunity for those investors who succeed in correctly analysing the anatomy of this terror.

Try to resist the instinct of selling investments. Let others make this mistake. At every fall, stock up on blue chips and qualify equity mutual funds (MFs). And then sit tight and let the market do its thing. Don’t buy gold at this point. Reason being, gold prices have gone through the roof on account of the safe haven syndrome. Yes, there is a tectonic shift taking place in the world order and over the long term the dollar will indeed lose value. It is for this very reason that, over the past four years, money, hitherto parked in dollar denominated securities is gradually moving into gold thereby driving up prices. But the current spike is more of a knee jerk reaction and already prices have started paring down. Its best to wait till the dust settles. Consequently, any portfolio allocations to gold are best done in a staggered gradual manner when things become a bit clearer.

Now, in the midst of all this turmoil, going ahead, one cannot expect our market to post new highs. However, this kind of a fall borders on sheer lunacy. When someone else has been inflicted with a disease, albeit serious, there is no reason why we should be rushing to admit ourselves to the intensive care unit.

The thing to do is to keep your mind when the world around you is losing theirs. Keep your eyes firmly on the fundamentals of the market that you operate in. It is possible that all the negativity around may drag the index down further. However, sentiment can only hold so long — sooner or later, the reality of the health of our economy will kick in. And when that happens, only those who were greedy when others were fearful will be smiling.

Source: http://www.business-standard.com/india/news/decouple-your-investment-decisionsglobal-crisis/447267/