SORRY BEARS - No new low for Indian markets

Over the last few months most market commentators have been focused on the fact that there is going to be a new low made in the Indian markets and that the markets have not bottomed out yet.
I remember going to the investors conference of a very large foreign brokerage with an Indian partner in the month of January 2009 and I found the mood to be extremely bearish. There were companies presenting in that conference that would be among the top ten corporates of India in whose presentations a year back more than 100 investors would have participated, however this time the number of investors attending the presentations were in the region of not more than ten. The consensus 100 upon 100 was that the markets will make a new low and there is unlikely to be a recovery soon. In my discussions with the participants in that conference i found that the mood was extremely bearish. That was the time i got convinced that there is going to be no new low at least for the Indian markets as history has shown us that consensus never turns out to be true.
The search for lower levels to invest in the markets is an ever going process. However there are both technical and fundamental factors that one has to evaluate before coming to a conclusion on any such event occurring. Like i commented in one of my earlier articles on the blog the technical factor that could have taken the markets to a new low was sheer momentum of the downside where rampant shorting and continuous redemption from offshore funds and hedge funds investing into Indian and other emerging markets could have taken the markets to a new low. However that momentum seems to have broken down now and is unlikely to restart in my view. The downward momentum has clearly been broken.

The movement in a number of emerging markets vis a vis markets in the West is very similar to what happened in the year 2002 after the markets made a panic bottom after the September 11 attacks in the USA. Most Western markets made a new low in 2002, however most emerging markets did not, and i believe the same is likely to repeat this time also. This time even the fundamental reasons are much more stronger as economies like India, China, Brazil etc are likely to take the hit from the the global economic slowdown much better that the developed world. As such we have seen a large number of developed country markets make a new low in February 2009, however most emerging markets have held on much better.
All key economic parameters like inflation, interest rates, input cost pressures for corporates are turning for the better. Demand pickup has started on the consumer side and is likely to pickup significantly post elections ( if there is no third front with a strong left, which is an unlikely scenario in my view ). Another important thing is that analysts have turned excessively pessimistic on the markets and are projecting either no growth or a very slow growth in earnings next year. However i believe that clearly economic growth is in the process of bottoming out in India and markets will bottom out much before growth bottoms out. There is excessive bearishness on economic growth which does not take into account the start of a large new refinery, gas production by Reliance Industries, increase in electricity production due to greater availability of both gas and coal, higher consumption due to lower interest rates and higher public sector employee salaries, increase in economic growth prospects due to greater government spending etc.
I have been amazed seeing the kind of views most global fund houses and analysts have been giving on various business channels over the last two months where everyone is so focused on the USA and the fact that unless USA recovers other economies will also not recover. I believe this reflects a superiority complex and is a vestige of the colonial past where these people still believe that the Western world is the centre of the universe. Most of these people forget that in the 1990's the USA and most of the other European markets had a secular bull market which lasted for more than a decade and in this period the Indian markets went nowhere. The Dow Jones index went from around 2500 in 1990 to 11750 in the year 2000 ( before the Internet bubble burst ). In the same time period the Sensex went up from around 2000 to 6000. China in this decade embarked on the process of rapid economic growth ( again with low inflation ) and the Chinese markets went up by 10x in the same time period i.e. a 1000% return. The reason was that that was the decade in which most Western economies grew rapidly with low inflation. The same decade is likely to occur in India from 2010 onwards.
I will discuss more on the long term prospects separately as i wanted to focus this time on the fact that i clearly believe that a NEW LOW in the markets is unlikely to occur due to a combination of fundamental and technical reasons. Also the one unique event for India which could have created the NEW LOW, the elections are also likely to get over by the middle of May.
The markets are likely to become stock specific from April onwards when the full year results for the current year come out and will provide an excellent opportunity to build up a long term portfolio.

Source: http://sandipsabharwal.blogspot.com/2009/03/sorry-bears-no-new-low-for-indian.html

No monthly income from the monthly income plans

For eyes eagerly waiting for the monthly incomes from their mutual fund investments, the wait does not seem to end. Baring a handful of MIPs, most have kept a low key profile, as far as dividend payouts are concerned, for the financial year 2008-09. The monthly income plans (MIP) are fairly popular amongst investors, especially pensioners and are believed to be a source of regular income through periodic dividend payouts.

According to the mutual funds portal ICRA online, out of the 34 odd MIPs with a monthly dividend payout option, only five schemes have been consistent in paying dividends uniformly every month so far in the current financial year.

These include Birla Sun Life MIP – Savings 5, DBS Chola MIP, ICICI Prudential MIP, Principal MIP and Principal MIP Plus. Nilesh Shah, Deputy Managing Director, ICICI Prudential AMC, stated that, “While the accumulated profits of earlier years have partially helped us in paying out the dividends consistently, it is our dynamic management of the scheme that is reaping the dividends even in the current market scenario.” This MIP is also the first MIP to declare the 100th consecutive dividend in the month of Feb ’09 since its launch in Nov ’00, according to the fund house.

The other schemes, however, are still struggling to keep away the market blues. While most schemes have been pretty irregular in paying dividends, there are some who have not made a single dividend payout in 2008-09. These include, DSP Blackrock Savings Manager – Aggressive & Moderate, Fortis MIP, HDFC MIP Short Term Plan, LIC MIP and Sundaram BNP Paribas MIP.

“Lack of distributable surplus has constrained us from paying dividends”, says Ramkumar K, Head – Fixed Income, Sundaram BNP Paribas AMC. “Though this scheme has 85% in debt, the losses in equities far exceed our profits from debt papers. Also after a brief rally, now even the returns from debt instruments have entered the negative terrain”, he added.

The desperation of most MIPs in paying dividends is evident from the fact their NAVs are currently trailing even below Rs 10/- per unit which is the price at which an investor purchases a unit at the new fund offer (NFO) stage. As Mr. Ramkumar stated that, “We cannot think of paying dividends unless our NAVs are restored to at least Rs 10. Regulations demand that dividend can be paid only from surpluses and not from the capital investment”.

As such the fund houses are not obligated to pay the monthly income which is paid subject to the availability of distributable surplus. A disclaimer to this effect is always stated in the offer documents and never read by the investors.

Source: http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/MF_News/No_monthly_income_from_the_monthly_income_plans_/articleshow/4304887.cms

What's hot, what's not with mutual funds?

Mutual funds, MFs, bought auto ancillary stocks Exide Industries and telecom player Idea Cellular extensively, while diluted exposure to sugar stock Balrampur Chini. Power, construction, auto ancillary stocks dominated the top 50-buy list, while selling was seen in metal, banking, auto, sugar and telecom sectors. There was a mixed trend in engineering & capital goods and media sectors. Stocks were re-aligned in the capital goods and FMCG sectors. In terms of value, HDFC, L&T, Hero Honda Motors were the top purchases by MFs, while SBI, BHEL and Maruti Suzuki topped the sell list.
A study of the top ten mutual funds' equity portfolios as on February 28, which are Reliance, HDFC, Prudential ICICI, UTI, Templeton, Birla SunLife, Tata, Kotak, SBI and DSP reveals that four out of the ten funds bought Exide Industries. HDFC MF was the top buyer of the stock with over 96 lakh shares bought. ICICI Prudential, Franklin and Kotak were other funds who bought the stock while Tata and Birla SunLife MF sold some shares.

Apart from Exide Industries in the auto ancillary space, funds have bought Apollo Tyres, Motherson Sumi Systems, Amara Raja Batteries and Amtek India.
Idea Cellular was bought by Franklin, UTI, SBI, Reliance, Kotak, HDFC and DSP ML MF with the top buyer being DSP ML MF which bought over 55 lakh shares of the stock. Among other telecom majors, Reliance Communication, Bharti Airtel, MTNL, Tata Teleservices (Maharashtra) and Tata Communication were sold.
Construction stock Noida Toll Bridge, the third top bought stock, was purchased by HDFC MF with over 83 lakh shares. In the cement and construction space, IRB Infrastructure, Nagarjuna Construction, India Cements were in the buy list while IVRCL Infrastructure was in the selling list.
Balrampur Chini was sold extensively by Reliance MF, while UTI and DSP ML MFs were the other two top sellers. Among other sugar stocks, Shree Renuka Sugars figured in MF's top sell list, while Triveni Engineering was among the top buys.
Fund houses sold metal and banking stocks. In the metal space, they sold Sterlite Industries, SAIL, Hindalco while bought Tata Steel. Reliance and ICICI Prudential MFs sold shares of Sterlite Industries in huge quantities; ICICI Prudential MF was the top seller of the stock with over 21 lakh shares sold. Reliance Industries was the top seller of SAIL with over 31 lakh shares sold. However, six out of top ten funds bought Tata Steel. In that, Reliance, Pre ICICI and Birla MF were top three buyers with over 7 lakh, 5 lakh and 6 lakh shares bought.

HDFC was the top value buy stock. Funds bought over 9.9 lakh shares worth Rs 127 crore. ICICI Prudential, UTI and Franklin funds were top three buyers in the stock. Meanwhile, nine out of top ten funds sold shares of SBI. ICICI Pru, Franklin and UTI MF were top sellers with over 26 lakh shares sold, while HDFC MF was the only buyer which bought over 10 lakh shares. Among other banking stocks, ICICI Bank, Yes Bank, South Indian Bank, Dena Bank, Bank of India and HDFC Bank too figured in the top 50 sells. Largest private sector bank ICICI Bank was sold by seven out of the top 10 funds with DSP ML MF being the top seller as it sold over 11 lakh shares of the stock.
In the power space, funds purchased Rural Electrification Corporation, GVK Power & Infrastructure, Gujarat Industries Power and Suzlon Energy while reduced exposure to Power Grid Corporation.
Funds slashed their investment in auto space, wherein they sold Maruti Suzuki, Tata Motors, Swaraj Mazda while they bought Ashok Leyland.
In the oil & gas space, GAIL India, HPCL and Reliance Petroleum were top bought stocks while Cairn India was top sell stock.
There were no stocks from the IT space in the top 50-buy & sell list barring Mphasis, which was the only bought stock.
Funds have bought Biocon, Ranbaxy Labs and Suven Life Sciences in the month of February while sold Sun Advanced Research. These stocks were in the top 50 list.

Source: http://www.moneycontrol.com/india/news/mf-analysis/whats-hot-whats-notmutual-funds/389412

MFs identify promising sectors for next recovery

Amidst the ongoing recession and the spectre of deflation, mutual fund houses are trying to identify potential sectors to invest in. Asset management companies are looking at sectors which can sustain growth momentum and emerge as key drivers in the next market recovery. These sectors include FMCG, banking, healthcare, pharmaceuticals, oil and gas, infrastructure, capital goods, cement and automobile.
“The boost to rural economy due to rise in food grain prices and higher disposable incomes in the hands of government employees (which has come through 6th Pay Commission) will trigger domestic consumption. This has made us overweight on FMCG and health care sectors for our equity schemes,” said Sankaran Naren, CIO, Equity, ICICI Prudential AMC.
The outlook on these two sectors is that both are cash flow generating with ability to fund there business requirements and also largely higher demand driven. On similar lines, the pharma is expected to gain from being a necessity driven sector. There is big opportunity for generic companies as drugs worth $70 billion are expected to go off patent between FY10 and FY12 and India offers low cost manufacturing base for generic.
Further, increase in domestic sales has also improved sentiment for the automobile industry too. Passenger cars sales rose 4.7% in February 2009 and commercial vehicles grew by 34% during the month.

“The year ahead, will be one for value investing. We will look at sector specific stocks based on three parameters: share price below book value, price to earnings ratio, and attractive dividend yields,” said Sanjay Sinha, chief executive officer, DBS Cholamandalam MF.
Sahara Mutual expects year on year growth of 6-8% in cement, 15-20% in power and related industries and 10-15% in engineering. “Order book position of the companies in these industries for the next 2.5 to 3.5 years is strong enough,” said N K Garg, CEO, Sahara Mutual Fund.
Cholamandalam’s Sinha said, “Economy is projected to grow by 6%. This implies a credit growth of 15-18%. Indian banking sector is strong and vibrant as it is not directly impacted by the global financial meltdown.”
Valuations are also at steep discount to book values in case of public sector banks and have significantly moderated for private banks. However, fund houses are currently reviewing their outlook on banking in view of the large increase in G-sec yields and NPA scenario.
In another development, Tata Mutual Fund, which plans to allocate 20 per cent weightage to growth sectors in the coming two three years, is mulling launch of an international fund to focus on promising sectors in emerging economies.
Said Ved Prakash Chaturvedi, managing director, Tata Asset Management, “We have plans to explore emerging markets like China. I expect the investment climate to improve in 2-3 years time. In between, we must tap the growing sectors to ensure substantial return.”

Source: http://economictimes.indiatimes.com/MFs-identify-potential-sectors-to-invest-in/articleshow/4309431.cms

Bank investment in MFs jumps over eight times

Banks are parking funds not just in securities qualifying for maintenance of statutory liquidity ratio (SLR), but also in mutual funds (MFs).

After the global credit crisis intensified in September 2008 following the collapse of Lehman Brothers, investment in instruments issued by mutual funds dropped to Rs 10,759 crore – nearly 73 per cent from the level in the corresponding period in the previous year (see table).
But after several measures were initiated by the government and the regulators to restore confidence in fixed maturity plans and liquid funds, bank investments in these instruments at the end of February was estimated at over Rs 90,000 crore. Of this, a bulk of the investments has flowed into liquid funds, bankers said.

The increased investments in instruments issued by mutual funds has raised eyebrows as banks are seen to be risk-averse and are, therefore, opting to park funds instead of lending. The risk-aversion has already prompted the government to convene a meeting of bankers since credit growth, on a year-on-year basis, has moderated from 29 per cent at the end of October 2008 to 18.3 per cent at the end of February 2009.
Banks had the option to deploy the surplus funds in overnight market, where they could earn around 4 per cent, or park the funds in liquid funds, which earned 6-6.5 per cent. A third option was to deploy the extra cash through the Reserve Bank of India’s reverse repo route and earn 3.5 per cent.
Besides, officials suspect that the banks are using the investment to get tax benefits and are seeking a review of the system so that it can only be restricted to individuals investing in mutual funds. But bankers said that investments in mutual funds attracted capital adequacy provisions and, therefore, banks would lower their investments in these instruments over the next 10 days.
“The process of liquidating a part of the investment in instruments issued by mutual funds has already begun and it will gather momentum in the remaining part of the week,” said the head of fixed income with a fund house. “This investment is not at the cost of genuine demand for credit. The funds are invested in mutual fund schemes after their lending needs are met,” added the head of treasury at a large public sector bank.

Source: http://www.business-standard.com/india/news/bank-investment-in-mfs-jumps-over-eight-times/352702/

MFs shift assets to short-term papers to meet redemptions

Over the last couple of months, a lot of debt mutual funds have shifted their assets into short-term money market instruments. The reason: they want to be ready to meet redemption pressures in the last quarter of this financial year.

As a result, their investments in collateralised lending and borrowing obligations (CBLOs) have risen from Rs 4,500 crore as of December to Rs 19,000 crore by February-end.
CBLOs are short-term (overnight to 90 days) securities where the borrower returns the money on a pre-decided future date or time. This is an instrument issued by the Clearing Corporation of India. Mutual funds usually invest in CBLOs that have an overnight tenure, or up to a fortnight.
The yields on these instruments are around 3.5 per cent per annum. Although other money market instruments, like certificates of deposit (CDs), earn higher returns at 7-8 per cent, they are of a longer tenure. CDs and commercial papers (CPs) form the largest portion of liquid funds’ and fixed maturity plans’ portfolios, but fears of a sudden redemption pressure are mostly mitigated by short-term instruments like CBLOs and repos, especially towards the close of a financial year.
“Usually, fund houses face redemption pressures in the January-March period. To meet them, fund managers prefer to park more money in short-term instruments which offer quick liquidity, if required,” said Amandeep Singh Chopra, head (fixed income), UTI Mutual Fund.
Liquid and liquid-plus schemes are the largest investors in CBLOs. The latter’s nomenclature has been changed from the month of February, according to recent Sebi guidelines. The industry has witnessed a rise of 25-30 per cent in incremental money flowing into CBLOs under liquid schemes.

Source: http://www.business-standard.com/india/news/mfs-shift-assets-to-short-termpapers-to-meet-redemptions/352696/

MFs make stock-specific additions in February

Not able to make your mind up on which stocks to buy and which not to? Well, when in doubt, try taking cues from the big guys.
Domestic mutual funds may have net sold equities worth Rs 1,495 crore in February, but insights into what they bought and sold can come in handy in your investment decisions, especially as these funds put together made a gross equity purchase of four times the net amount. So, wondering which stocks made it to the funds’ portfolio and which lost out? Here’s a look at what the funds did, based on end-February portfolios.

GVK Power & Infrastructure was among the most loved of all the stocks last month with more than 14 million shares of the company being accumulated by various fund houses. Idea Cellular, Exide Industries, Suzlon Energy and Chambal Fertilisers were among other stocks that found themselves in the MF buy radar.
GVK Power & Infra also topped the list of stocks that saw the highest number of funds adding it to their respective portfolios; a total of 8 fund houses added the stock. Glenmark Pharmaceuticals came in second with over four funds adding to the stock. Among other stocks that saw a good number of funds show interest were Crompton Greaves (three), Tata Chemicals (three), UltraTech Cement (three) and Allahabad Bank (two). And since these stocks are of varied sectors and market caps, it suggests that mutual fund purchases may have been driven more by the individual stock’s fundamentals and valuations than on anything else.
L&T, however, was the most sought after stock in terms of top additions (market value added) to the existing holdings of equity funds; Alstom Projects and ACC closely followed it. Among others that made it to this list were Reliance Infrastructure, Hindustan Zinc and Ranbaxy Laboratories.
But was there any new stock that got added to the funds’ portfolios? Bannari Amman Sugars, Golden Laminates, Goldstone Technologies and GTL Infrastructure marked their presence on this list.

Sugar stock Balrampur Chini found itself in a not-so-sweet spot; the stock was heavily offloaded by a handful of fund houses last month.
Much like fund purchases, the mutual funds’ selling was also oblivious of the sector and market cap preferences as even the large-cap banking major, State Bank of India, came in for selling.
Hindalco, Tube Investments, Mercator Lines and Tata Teleservices were among other stocks that were sold by the funds.
That said stocks such as Whirlpool of India, Swaraj Mazda and State Bank of Mysore suffered absolute desertion by the MF clan as funds made complete exits from them.

Source: http://www.thehindubusinessline.com/2009/03/24/stories/2009032450791000.htm

AMFI proposes to offer more choices in scheme & loads for investors

If a proposal by Association of Mutual Fund in India (AMFI) is accepted by market regulator Securities Exchange board of India (SEBI), Indian investors could see a mechanism where investors could chose between different classes of units and also the applicable expenses or load to be payable, reports Financial Express.

As per the proposal mutual funds would be segregated into different categories and investors can choose their preferred class and pay the applicable load or expense accordingly. Since each class has its own characteristics and differentiating factors of the classes would depend on the investment time horizon, amount of the investment, and investor`s personal preference. 

This comes after SEBI in January 2008 introduced a guideline directing mutual funds to not charge any entry load in case an investor approaches the fund directly and not through any broker. And later recommended another option that would involve creating separate section in the investment form which would be jointly filled by both the investor and the distributor. Here, both the investor and the distributor would decide on the quantum of commission (subject to a limit) to be paid and both the parties would sign off. The asset management company would then pay the mentioned commission.