‘We are underweight on companies with high leverage'

Earnings downgrades in select sectors may not be very worrying for the equity market as valuations are attractive for markets as a whole.

Ms Swati Kulkarni, Vice-President and Fund Manager for UTI Mutual Fund, says that rising interest rates and policy issues have slowed the investment cycle, even as the big picture doesn't look too gloomy.

Excerpts from an interview:

Downgrades to Sensex earnings estimates have been a concern for the markets for some time now. Do you see further downgrades happening now, with the rate increases? What does that spell for markets?

The downgrade concerns are mainly coming from the margin pressure due to high raw material prices, wage inflation and top-line concerns arising from limited pricing power in a phase of slowing economic growth. Commodity prices have softened a bit from the peak levels.

If the commodity correction persists due to slowing global growth, Indian companies will experience margin and earnings expansion.

Earnings downgrades in select sectors may not be very worrying for the equity market as valuations are attractive for markets as a whole. They are also below historical average multiples.

The market appears to be much more concerned about growth than value today. So many stocks and sectors available at low price-earnings multiples (PEs) are declining even further. Do you agree?

From a relative perspective, among the global equities, India has always remained a growth market.

The valuation premium over the developed market is justified with relatively higher expected growth.

Having said that, there could be certain stocks and sectors at any given point of time that may remain at lower valuations on account of certain concerns on earnings visibility or uncertain competitive scenario or simply because of excessive pessimism.

If we find that the concerns are priced in to a large extent, there could be an opportunity to gain from these value picks.

Is the premium the market is paying for consumption stocks justified? Much of the recent move in the markets has been driven by the consumption theme, with infra stocks completely out of favour. Do you see this trend reversing?

The preference for consumer stocks is clearly coming out of the strong demand visibility for the coming few years, backed by the rising income levels in urban and rural areas and demographic advantage — 50 per cent of the population in the working class for the next 20 years.

The premium valuation may sustain till we see initial signs of a pick-up in the investment cycle.

For that we may have to look for evidence that the rate hikes are done with and also increased activity in infrastructure ordering.

Will an erratic monsoon cloud the prospects on earnings?

Cumulative monsoon till date is only 3-4 per cent below normal. The risk is reducing as the monsoon advances.

Hypothetically, if we see a poor monsoon from here on, it may adversely affect consumer demand and worsen the inflation fears.

Recent macro indicators all signal a slowdown in the manufacturing side of the economy. What is triggering this slowdown? Is corporate India running up against capacity constraints?

The Index of Industrial Production has been very volatile in the past. There is a high base effect of last year coupled with the effect of monetary tightening.

Projects are being put on hold in certain sectors for clarity on policies, environmental clearances and fuel linkages.

Rising interest rates are another important factor in postponing of investment decisions. I hope that the slowdown does not result in worsening the supply-side issues, with their adverse structural impact on inflation in the system.

The Reserve Bank of India has been more aggressive than expected in hiking interest rates. How do you see companies coping with debt and interest costs?

Companies that are highly leveraged get affected on account of rising borrowing costs and also due to the limited ability to restructure capital in a not so benign capital market.

Added to these, the order intake is slowing, clients are postponing deliveries — choking off the cash flows for these companies.

We avoid or stay underweight on such companies in a rising interest scenario.

Many managers have been betting on mid-cap outperformance for quite some time now, but it somehow doesn't play out at all. Why and when do you see a catch up in mid-cap valuations?

Investors need to pick good companies which have the ability to withstand a challenging business environment especially during times of macro headwinds. One has to be stock specific here.

The mid-cap companies with competitive positioning, pricing power, product strength and financial strengths continue to outperform relatively, despite the tough environment.

For example, our own mid-cap dominant funds such as UTI Master Value Fund and UTI Mid-Cap Fund have posted 6 per cent and 10 per cent returns respectively in the last six months, when large-cap indices such as the BSE Sensex and S&P CNX Nifty have struggled to post positive returns.

Source: http://www.thehindubusinessline.com/features/investment-world/article2331162.ece

'US debt crisis to benefit Indian market'

The US debt crisis triggering deep cuts in the stock markets across the globe is likely to benefit India in due course, said a senior official associated with the market regulator Securities and Exchange Board of India (Sebi).

“The downward movement in the Indian market is a very short-term knee-jerk reaction,” the official said, adding once the situation stabilised, Indian markets would be very lucrative for FIIs.

“With the US credit rating getting downgraded by the Standard & Poor’s and most of the markets falling more than India, FIIs are set to move here as, at worst, the growth rate in the current financial year would be 7.5 per cent.”

Under pressure from the fears of a double-dip recession in the US and financial problems in Europe, stock markets worldwide including that of India, witnessed a substantial fall last week.

There is an apprehension of the situation worsening further on Monday with credit rating agency Standard & Poor on Saturday lowering the US credit rating from AAA to AA.

The official said in the immediate run, FIIs might sell in the Indian markets but while taking fresh positions, they will find the markets very attractively placed “Markets like India, which are well-regulated with good economic growth prospects and large number of companies, will certainly be preferred by the FIIs.”

The official said as far as retail investors were concerned, they would take time to come back to the markets. Sebi had recently announced a number of steps to bring back small investors to the stock markets.

As the markets are being driven by global cues, it is expected that the measures announced by the regulator to simplify processes would be beneficial in broadening the market base in the medium- and long-term, said the official.

The proposal to bring in Uniform KYC (know your customer) norms will have a major bearing in this regard, along with the steps announced to support mutual fund distribution and simplification of the IPO process, he said.

The simplification of Forms associated with investment in the financial market is also likely to help investors.

Source: http://www.business-standard.com/india/news/us-debt-crisis-to-benefit-indian-market/445047/

Invest in equities when markets dip

The recent fall in equity markets over the last few weeks has forced a lot of investors to worry about its impact on their equity portfolio.

It has also left them clueless about their future course of action — whether they should pull out money at this stage from equity markets before a much sharper fall erodes this value further.

We, however, believe that this weakness in the Indian equity market provides good opportunity for long-term equity investors to generate superior returns on their portfolios over the next 5-10 years.

In the shorter term, equity markets always tend to be very unpredictable and are prone to sharp movements — both upward and downward.

However, over a longer time frame of five years and above, the predictability of stock market returns increase.

This is contrary to what a large number of investors believe, that the short-term in equity markets is predictable but the long-term is not.

Thus, there is a tendency to give more importance to short-term trends like an unexpected interest rate increase or a bad results from a company for a quarter than the long-term trend like young population with significant saving potential or the strength of the Indian economy, which has a very small component of its GDP coming from exports.

Empirically it has been found that over long period, the returns from equity markets tend to closely track earning growth rates of companies, though in the short-term the correlations are not so strong.
Let’s see how you should go about building your equity portfolio.

Keep it simple: Trying to do too many things on an equity portfolio tends to add complexity to the portfolio without necessarily adding higher returns.

For example, we come across portfolios with a stock portfolio running into a number of pages and small investments in a few dozen mutual funds.

Most investors would do well to have only a handful of fundamentally strong stocks and a combination of three-to-five index and actively managed mutual funds with different styles and good track records.

Buy only what would make you comfortable: This comfort differs from individual to individual. Some investors are very comfortable holding stocks of large companies that they deal with in their day-to-day life such as the bank that they have close to their residence or the company that owns the coffee brand that they have every morning.

It is critical that investors are comfortable with the products that they own, whether it is a stock or a mutual fund, so that they do not overreact when it corrects sharply.

Be disciplined with your investments: Over the last few years, Systematic Investment Plans (SIPs) in mutual funds have become very popular with investors.

While these are excellent tools to build long-term wealth, there is no guarantee that returns over short periods of time will be positive.

There is a tendency to stop SIPs when equity markets turn negative, which beats the very purpose of an SIP.

In fact, investors should be looking at enhancing exposure to topups through SIPs during negative equity markets, so that they can enhance the overall portfolio rate of return, if they have the liquidity. And last but not the least, be patient and give your investments time to grow. Remember Rome was not built in a day.

Source: http://www.asianage.com/business/invest-equities-when-markets-dip-864

Franklin India Index Tax Fund to be merged into Franklin India Index Fund - NSE Nifty Plan

Franklin Templeton Mutual Fund has announced that Franklin India Index Tax Fund (FITF) would be merged into Franklin India Index Fund - NSE Nifty Plan (FIIF - Nifty) as on 9 September 2011. Consequently, from the date of merger i.e., effective 9 September 2011, the investors of FITF would become investors of the growth option in FIIF - Nifty.

In terms of prevailing regulatory requirements, investors in FITF are given an option to exit at the prevailing Net Asset Value without any exit load, in case they do not wish to approve the merger. The period of this no load exit offer is valid from 8 August 2011 to 9 September 2011.

Source: http://www.adityabirlamoney.com/news/496626/10/22,24/Mutual-Funds-Reports/Franklin-India-Index-Tax-Fund-to-be-merged-into-Franklin-India-Index-Fund-NSE-Nifty-Plan

Franklin FMCG Fund & Franklin Pharma Fund to be merged into Franklin India Prima Plus

Franklin Templeton Mutual Fund has announced that Franklin FMCG Fund (FFF) and Franklin Pharma Fund (FPF) would be merged into Franklin India Prima Plus (FIPP) as on 9 September 2011. Consequently, from the date of merger i.e., effective 9 September 2011, the investors of FFF and FPF would become investors of FIPP in the respective plans / options.

In terms of prevailing regulatory requirements, investors in FFF and FPF are given an option to exit at the prevailing Net Asset Value without any exit load, in case they do not wish to approve the merger. The period of this no load exit offer is valid from 8 August 2011 to 9 September 2011.

Source: http://www.adityabirlamoney.com/news/496635/10/22,24/Mutual-Funds-Reports/Franklin-FMCG-Fund-Franklin-Pharma-Fund-to-be-merged-into-Franklin-India-Prima-Plus

U.S., Europe Crisis to Boost Flows to India, Reliance Asset Says

Sunil Singhania, head of equities at Reliance Capital Asset Management Ltd., India’s biggest money manager, comments on the outlook for the nation’s stocks. He spoke in an interview with Bloomberg UTV. Reliance Capital’s mutual fund unit manages $23 billion in assets.

Reliance Growth Fund, managed by Singhania, has risen 37 percent annually in the past 10 years, the most among active funds focused on Indian equities with a record going back a decade, according to data compiled by Bloomberg.

On U.S., Europe Debt Problems:

“If you spend more than what you earn for a prolonged period of time, there’s going to be a time when you have to bear the pain of it. That is what most of the countries in Europe, as well as the U.S., are undergoing. We feel the problem is not insurmountable. Though challenges would be there, it’s not something which is going to cause too much of a concern in the near term. The good thing is that the countries are realizing that they need to cut expenses.

‘‘If there’s going to be some catastrophe in Europe or the U.S. then in the near term all the global markets are going to get hit. Even now more than 85 percent of global equity money is invested in developed markets and only 15 percent is in emerging markets. The problems in Europe and the U.S. will probably hasten the move and make allocation from global guys a little more balanced. This would favor emerging countries, of which India would be an important part.”

On the outlook for interest rates:

“A few global gurus have been of the opinion that it makes sense to tighten up to sacrifice growth to some extent. At the same time, if too many shocks like this come then sentiment can take a beating. That is something which India cannot afford. Already we are seeing new project announcements being deferred. The predominant reason would be interest rates. India can’t afford its entrepreneurs becoming more careful in their expansion plans.”

The Reserve Bank of India has raised rates 11 times since the start of 2010, the most aggressive tightening among major economies in Asia.

On outlook for economic growth:

“There is no doubt in our mind that India is going to continuously keep growing on an annual basis. There will be periods where you might see growth slow. Too many shocks have come at the same time, which are leading to a perception and a view that probably if things don’t improve then the next two quarters can be really tough.

‘‘Hopefully by October-November we should again start to see some revival in activities, led by interest rates coming off to a certain extent, or at least peaking, and some policy decisions from the government that can kick-start the economy.

‘‘The market is discounting a lot of things, unless there are more shocks. The entrepreneurship spirit is alive. It is upon the government to ensure that it is kept alive and kicking.’’

Earnings reported by eight out of 19, or 42 percent, of Sensex companies have lagged behind analyst estimates for the quarter ended June. That compares with 33 percent that missed forecasts in the previous quarter, according to Bloomberg data.

On Holding Cash:

‘‘The reason why we have not taken a cash call is that we don’t feel there’s a strong reason for the market to correct significantly. There will be short-term movements. If things start to move a bit more positively, and as not too many people expect too much positiveness, the impact on the upside could be much larger than what it has been on the downside.

‘‘It took 60 years to become a $1 trillion-$1.5 trillion economy. Probably in the next 10 years we will be a $5 trillion to $6 trillion economy. Three times the wealth created in the last six decades is going to be created in the next 10 to 12 years. The direction is very clear.’’

Reliance has cut cash holdings in its biggest stock fund to 3.6 percent, the lowest level since at least the collapse of Lehman Brothers Holdings Inc. in September 2008.

On financial-services stocks:

‘‘Financials is one of the largest sectors in the economy. The combined size of the balance sheet will double in four to five years. Profit should also double in four to five years. Banks are now much stronger than what they were 10 to 15 years ago. The systems are very strong and we are an under-banked country. It is both a consumption and a growth theme.’’

Lenders and finance companies accounted for 20 percent of Reliance Growth Fund’s 70-billion rupee assets on June 30, data compiled by Bloomberg show.

On infrastructure stocks:

‘‘We’re positive on infrastructure, but too many headwinds have hit the sector at the same time. Land acquisitions and environmental clearances are issues, interest rates have shot up and equity raising has been difficult. If we intend to be a $6 trillion economy, we cannot just eat pizzas, see movies and hope to reach there. We need infrastructure and that is where the opportunity lies.’’

Source: http://www.bloomberg.com/news/2011-08-05/u-s-europe-crisis-to-boost-flows-to-india-reliance-asset-says.html

Investors stay away from 91-day t-bill derivatives

The 91-day treasury bill (t-bill) futures contract, launched a month before, appears to be losing favour with investors. The volumes are down to a pittance as major institutional entities, including banks, are still shying away from the segment. The current market condition is also not conducive for taking a directional call on the interest rates, say experts.

The National Stock Exchange (NSE) launched 91-day t-bill futures contracts on July 4 and the first day saw turnover in excess of Rs 730 crore. The next couple of days also saw the volumes staying above the Rs 300-crore mark. The past few days, however, have seen the volume dropping to one-tenth of the initial days.

On August 1, the volume was a paltry Rs 14.70 crore — the lowest since launch. On most days in the recent past, the volumes have been in the range of Rs 20-40 crore. The underlying market, meanwhile, saw a volume of Rs 740 crore and Rs 175 crore on August 2 and August 3, respectively, according to data available with Clearing Corporation of India.

Corporate houses, which deal in floating rate bonds, are expected to use this instrument to hedge against interest rate volatility. Even the mutual fund industry, which has a lot of debt funds, can use futures on 91-day t-bill for hedging purposes. Banks, however, are expected to be the biggest user as they invest significantly in t-bill as part of their treasury operations. Experts, interestingly, say while the product does not suffer from any inherent flaw, the market condition currently is not ripe for taking a directional call on interest rates.

“Trading has not picked up in the current interest rate environment as the yields have only moved up and players are unable to take call on future. For trading momentum two way quotes are necessary,” says T S Srinivasan, general manager and head of treasury, Indian Overseas Bank. Another head of treasury with a medium-sized private bank said future contracts offer hedge against rate risk. “Players will be inclined take a cover only when there is substantial upheaval in the interest rate. At present, the expectation is of steady upward rise in yields so less reason to buy future on 91-day bill. Also, if one takes cover, the upside gain is limited.” he explained.

The stock exchange, meanwhile, is firing all cylinders to convince more and more players to trade in the instrument, which was seen as a probable game-changer for the interest-rate futures (IRF) segment. NSE has plans to organise awareness seminars across the country in the near future.

“The product will become liquid only when the members are told how to use this product or how to trade in it,” said a senior NSE official. “What is lacking is market development and knowledge. We will conduct seminars to educate our members,” he added.

The IRF segment was launched in 2009 with futures on 10-year government bonds. The contracts were allowed to be settled with delivery of government securities with a tenor between nine and 12 years. The segment, however, failed to enthuse market participants with the biggest fear being that of dumping of illiquid bonds. Market players want the entire segment to be moved to cash-settlement basis, a demand that the Securities and Exchange Board of India is looking into.

Source: http://www.business-standard.com/india/news/investors-stay-away91-day-t-bill-derivatives/444766/

Edelweiss MF launches 'Edelweiss Select Midcap Fund'

The scheme seeks to invest 80% to 100% of the net assets in equity and equity related securities of companies ranked between 101 to 300

Edelweiss Mutual Fund has launched Edelweiss Select Midcap Fund, an open-ended equity scheme, with an objective to generate long term capital appreciation from a portfolio predominantly comprising of equity and equity related securities of mid cap companies.

"The quant model of the fund will help to capture the market trend by analyzing the factors that are currently driving stock performance. It will also make the fund process oriented, adaptive in nature and will result in consistent performance across time periods," said Vikaas M Sachdeva, chief executive of Edelweiss Asset Management Co, in a release.

The scheme seeks to invest 80% to 100% of the net assets in equity and equity related securities of companies falling in Top 101 to 300 companies by market capitalization listed in India, up to 20% of the net assets in equity and equity related securities of other companies listed in India and up to 20% of the net assets in debt and money market instruments. It will not invest in securitized debt.

The new fund offer (NFO) of the scheme opens on 4th August and will close on 18th August. The minimum application amount is Rs5,000. Investors will have the choice of two options growth and dividend. Further, the dividend option offers dividend reinvestment, payout and sweep facilities.

Source: http://www.moneylife.in/article/edelweiss-mf-launches-edelweiss-select-midcap-fund/18630.html