Rally to be capped at 5-10% from current level: Religare MF

The week gone by saw Indian equities surging past resistance levels to end on a high note. However, chief investment officer at Religare Mutual Fund, Vetri Subramaniam expects this rally to be capped at 5-10% higher from current levels. Global factors off late have been conducive for a rally, but domestic macro continues to be a significant concern, he explains in an interview to CNBC-TV18.

Subramanium goes on to say that he expects the market to remain volatile within a trading range. Therefore, avoid sectoral calls and focus on stock picking, he said, adding that companies with a high return on equity (RoE) will trade at a premium.

He further adds that poor domestic environment could lead to a cut in earnings estimates for FY13.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee.

Q: Do you think what we are witnessing right now is a technical rally or have fundamentals changed around to justify higher prices?

A: It’s always hard to separate the factors because a little bit of everything goes in for the market at this point of time. A little bit of optimism coming in from the way global markets and risk assets have performed and some good economic data or I would say not very bad economic data out of the US, so global factors have been conducive for a rally.

The earnings picture locally has been reasonable too, nothing very dramatic. There have been a few surprises on the negative side, but equally we have seen few companies do quite well. So the earnings season has played out reasonably okay so far. So all of that put together, the market had a big of headroom in terms of valuations to put in a bit of rally and that’s what we have seen.

Q: Does the combination amount to an extension of the rally or would you say this is about it?

A: I think purely from a valuation standpoint at one point we had gone down to almost about 18-20% below our historical trading multiples so there still may be about 7-8% below historical trading multiple averages of about 17 times odd. So there may be a bit more room to the upside. But where I would start to worry is the fact that as far as the domestic economy is concerned things are looking quite poor at this point of time and the risk is that we actually see further slackening of GDP growth in FY13.

Q: You were saying that growth might slow down in FY13, so where do you think that market gets capped given the outlook on domestic macro?

A: I would say another 5-10% from here. I think the adverse domestic macro will come back to haunt us and I would split with the camp which seems to attribute all the problems that the Indian market has had this year with global events. I think our biggest challenge is our domestic issues; the global issues are only clouding the domestic picture. The investment cycle has pretty much stalled at this point of time and I worry that unless we see a significant pick up in investments, it is pretty much a given that growth will come in below 7% in FY13.

So I think it really is the domestic factors which are front and center as far as we are concerned. The global issues obviously create a lot of volatility, but it is the domestic factors that I would worry about.

Q: In the immediate term do you feel that this rally has the power to surprise on the upside because of how cramped the market has been through all of this year. Can we go much further than people expect?

A: You cannot rule it out because at the margin there has been a lot of money sloshing around, not just in India but all over the world, which is risk on-risk off. We are seeing money gushing through all sort of financial markets and asset classes and in that environment it’s interesting that markets like India are now the low beta market around the world. It’s the newest market and markets of Europe which are the high beta markets and that’s visible in the way those markets have behaved during the course of this year.

So we are in some senses strangely a low beta play in the global environment right now, but we will catch a little bit of the tailwind if it continues to remain supportive in Europe and US. But eventually, our fate will be determined more by local factors. We keep talking about the global slowdown but at the same time we focus a lot more on the domestic growth story and it is that domestic growth story which is starting to creek at this point.

Q: So what is your best case prognosis for the next few quarters? Do you think the market will grind in a bit of a range with occasional bouts of volatility or do you see a more constructive uptrend starting next year?

A: It all depends on when the uptrend will come but I think in this kind of an environment the scope for a further de-rating of the markets is certainly there. There will be pressure on equity prices coming from the fact that earnings estimate for 2013 definitely need to be cut. I am seeing consensus numbers in the region of 20% earnings growth for FY13 and I don’t think those are going to come through when you got GDP growth slowing down to below 7%. I think there is a lot of earnings cuts which will come through.

Secondly, as far as PE multiples are concerned, the risk to derating is going to come both through the fact that our growth is slowing and secondly from the fact that you have got 10 year bond yield now pushing close to 9%. So both these things put together clearly make for the case that equities will continue to de-rate. So you will see 10-12% earnings growth but some of that will get offset by the fact that PE multiples will de-rate.

Q: In that case, do you think the downside is protected around those 4,700 Nifty kind of levels where we seem to be bouncing off every time in terms of valuations as we get forward in time or do you think those levels could be at risk as well next year?

A: I think if you look at the risk that could cause us to go down even below that in retrospect might then create a good buying opportunity. But if you have the ten year bond yield going north of 9%, which would be largely a function of fiscal profligacy in Delhi and not so much of a function of RBI rate action, then there is a risk of this market eventually breaking down below what has been fairly critical shelf of support that we have seen through this year.

I think that would be driven both by the slowdown in GDP growth that I am talking about as well as by spike up in the ten year bond yield. If those two factors come about then there is risk that the market will trade lower and will trade through that support.

Q: Going into next year is there a case for the tact to be turned around in terms of what the approach should be for defensives and high beta?

A: It has been a very interesting environment from our perspective. There have been some sectors which have been less affected by the macro headwinds and some which have been more adversely affected. But when we drill it down, what we are finding is that there is a lot more value addition that is coming to the portfolio by way of alpha creation from stock selection rather than just focusing purely on the sector selection. Really the call that we have to take as portfolio managers at this point of time and the way at least we are approaching it is to be driven a lot more by the credentials of the companies rather than just getting blindly attached to certain sectors or avoiding certain sectors.

In sectors that tailwinds are favorable or at least the scene has been in some cases perhaps defensive, valuations already captured or factor in a lot of the attractiveness of those companies. Where as in other areas where the macro headwinds are adverse, there are companies where there could be continued to be short term issues but the valuations are favorable if you are willing to stay the course with them over a period of time and wait for the environment to turn more conducive.

I would really say this is an environment where you need to focus a lot more on the stock picking bit. Yes, sector selection is important but the stock picking is going to be far more important, both in terms of limiting your downsides and preparing yourself for some kind of cyclical upside which might play out sometime in 2012. So if you want to position yourself in both of these, I think stock selection is going to be far more important that the sector selection.

Source: http://www.moneycontrol.com/news/mf-interview/rally-to-be-capped-at-5-10current-level-religare-mf_607673.html

NRIs returning to India: Avail the benefits given under tax laws

It is praise worthy weakness of a man to love the places where he played in his childhood, where he was educated, where he dwelt and call back to the mind his childhood pleasure. The recent fears of recession in the west compounded by the growth story in India, as well as the lure of returning to one's own motherland may change the minds of many Indians who have settled abroad to return to India permanently.

This may mean that they could be looking at resettling in India by selling their property abroad which they would have acquired whilst being there. This decision may not be just an emotional one but would have to factor other perspectives like taxation, exchange control regulations etc, which may significantly impact the decision of shifting back to India and its timing.

Subin, a person of Indian origin, was employed in the US for the past several years. He wants to return to India permanently. He owns several assets in the US such as a residential property, a car, and investment in shares in US based companies. He has also invested in mutual funds there. He is pondering on whether to sell his property in US before he returns to India permanently, but wants to get his car to India and if permitted, retain his investments in the US.

While discussing his idea of coming back to India permanently with a friend, he found out that there were certain advantages that he could derive in case he qualifies as a Non-Resident (NR) in India under the Indian tax laws. He also found out that the simplest way to qualify as a NR in India is to spend less than 60 days in India in any particular tax year, which runs from April 01 to March 31 of the subsequent calendar year. Accordingly, Subin has planned his return in such a way that he qualifies as a NR in India in the year in which he returns to India.

His decision to return to India would have both direct and indirect tax implications, such as income tax, wealth tax and customs duty. He would also need to take note of implications from an exchange control regulations perspective.

The implications under each of the above mentioned laws need to be understood distinctly. As per the Indian income-tax laws, NRs are taxable in India only on income which accrues in India or is received in India. In the case of an NR, once an income is earned and received outside India and it is brought to India at a later date, it would not be taxable in India.

This would mean that Subin could sell his residential property in US, while he is an NR or a Not Ordinarily Resident (NOR) in India, and he would not be taxable in India on the gain that he makes from the sale. Similarly, he would not be taxable in India on the income earned and received by him in the US from his investments till he qualifies as a NR or NOR in India. Once Subin loses the status of a NR or NOR and qualifies as an Ordinary Resident in India, he would be taxable in India on his global income.

This would typically happen in the third or fourth year from the time Subin shifts to India (depending on how extensively he has stayed in India prior to shifting to India permanently). However, in case Subin is paying taxes on any income in the US which is taxable in India as well, he may be able to avail relief under the Double Taxation Avoidance Agreement which India has entered into with the US, for avoiding double taxation of the same income in both the countries.

The provisions for determining residency under the wealth tax laws are the same as that of the Income Tax laws. In the case of NRs and NORs, the current wealth tax provisions provide that any assets located outside India would be excluded from the ambit of wealth tax in India. Hence, Subin will not be required to pay wealth tax in India on the assets that are located outside India, as long as he qualifies as a NR or NOR in India.

If he intends to reside in India permanently, he would not be required to pay wealth tax on money and the other assets brought by him into India from the US, within one year immediately preceding the date of his return or later. This exemption is limited to seven successive years which immediately follow the year in which Subin returns to India.

Also, as per Baggage Rules, 1998, since, Subin had used his car in the US for personal purposes for more than a year and he is transferring residence to India now, he could bring his car with him but would be required to pay customs duty on the same. However, considering the quantum of custom duty liability likely to arise due to the import, it may be a better idea to buy a new car in India subsequent to shift of his residence. In addition to the car, he would be able to get certain specified used personal effects upto a specified threshold without payment of customs duty.

With regards to exchange control implications, Subin would be able to open a Resident Foreign Currency Bank (RFC) account. He could then transfer, through appropriate banking channels, the amount that he has in his US Bank account into such RFC account without any limit.

He can continue to hold his other investments in the US, since he had acquired these when he was a resident outside India. The dividend from the US companies and mutual funds and interest income from his US bank account which he receives from his investment that he continues to hold in the US can also be credited to the RFC account.

Also, he needs to watch out for the upcoming Direct Tax Code (DTC) which has certain significant proposed changes relating to wealth tax.

For Subin or any other NRI, the decision to return to India may not be just an emotional one, but also needs to be made taking into account the current regulatory environment and proposed changes being made to them. With a proper understanding, efficient planning and utilisation of the benefits provided under the tax laws in India, home-coming would not only feel good on the heart but also relatively easier on the pocket.

Source: http://articles.economictimes.indiatimes.com/2011-10-25/news/30320235_1_income-tax-tax-and-customs-duty-nr/3

Savings rate wall has fallen-- Yes Bank offers more, giants who feasted wait

The last frontier of interest rate regulation crumbled today when banks were granted the freedom to fix the savings bank rate.

The savings bank rate —currently capped at 4 per cent — has been the only rate in the retail banking industry that the RBI has set since October 1997 when bank deposit rates were fully deregulated.

The rate revolution was announced even as the RBI raised its benchmark interest rate — the repo — by 25 basis points to 8.5 per cent.

Reserve Bank governor Duvvuri Subbarao also signalled the 13th rate increase since March 2010, which was widely anticipated, could be the last in the current rate cycle even as he trimmed the growth forecast for the Indian economy to 7.6 per cent from 8 per cent earlier.

But the big buzz of the day was the speculation over the possible reconfiguration of the banking landscape that the saving bank rate deregulation could bring about.

While deregulating the interest rate, the RBI stipulated that each bank would have to offer a uniform rate of interest on savings bank deposits up to Rs 1 lakh. They could offer a higher rate if the average cash balances in these accounts stay above Rs 1 lakh.

“If there’s any rate war, it will be to attract depositors who park more than Rs 1 lakh in their savings bank account,” said Amitabha Guha, non-executive chairman of South Indian Bank. “High net worth individuals on an average keep Rs 5 lakh to Rs 10 lakh in their savings bank accounts. All banks will now vie for this pool of depositors.”

Privately-owned Yes Bank grabbed the opportunity to ignite a rate war by offering 6 per cent interest in an effort to wean away accounts from established players like the SBI and HDFC Bank that have built up vast troves of cheap cash that reside in savings bank accounts.

“This path-breaking regulation will enhance and protect savings returns from the brunt of persistent inflation,” said Rana Kapoor, founder and managing director of Yes Bank. “The alignment of savings rate to the market rates will accelerate greater financial inclusion of the unbanked and under-banked population.”

Savings bank accounts have been one of the cheapest source of cash for the big boys of banking. The big players have over 25 per cent of their total deposits in the form of cash balances in savings accounts. Yes Bank – the latest rate warrior – has only about 2 per cent of its deposits in the form of cash balances in savings bank accounts.

Until the savings bank rate was revised to 4 per cent in May, banks forked out just 3.5 per cent on savings bank accounts — a rate that remained unchanged for eight years since March 2003.

The decision to deregulate the savings bank rate — an idea that was floated early this year in a discussion paper floated by the banking regulator – creates a situation where the humble savings bank account can give liquid mutual funds a run for their money at a time when the stock market returns have tumbled by over 15 per cent from year-ago levels.

Yes Bank’s sudden move appeared to fly in the face of several banking mavens who have been suggesting for some time that the deregulation of the savings bank rate won’t have a great impact on the industry.

They didn’t seem to have changed their views after Yes Bank’s rapier thrust.

“We are not in a hurry to raise the savings bank rate from the current level of 4 per cent,” said SBI chairman, Pratip Chaudhuri. “We will see how it (deregulation) plays out. Unless there are other competing pressures, the savings bank rate at SBI will continue at 4 per cent.”

Chanda Kochhar, managing director and CEO of ICICI Bank, said: “Some banks will rejig their rates. But we would prefer to watch its implications on customer behaviour before taking our next step.”

However, Aditya Puri, managing director of HDFC Bank, seems to have subtly revised his stand after the announcement. Recently, he had said the savings bank rate could even dip from the current level of 4 per cent after deregulation.

On Tuesday, Puri came up with a cryptic comment: “If there is a one per cent increase in the savings bank rate, banks’ margins could take a maximum hit of 0.25 percentage point.”

But not everyone seemed to agree with the top bankers in the country. “I expect the savings rate to rise to 6 per cent going forward,” said R.K. Bansal, executive director of IDBI Bank.

B.A. Prabhakar, executive director of Bank of India, said the rate would go up to 4.75 to 5.52 per cent and stabilise around those levels after a while.

Much will depend on whether the rate war sparks a churn in savings bank deposits.

At the end of March, total savings deposits in the banking system stood at Rs 13,77,288 crore, or 26.5 per cent of total deposits. The household sector, which parks 13 per cent of its financial assets in savings bank accounts, is the largest contributor to the cheap source of funds for banks in the country.

Given the current rate (4 per cent calculated on a daily balance basis) prescribed by RBI, banks pay roughly Rs 48,000 crore a year as interest on savings bank deposits. In contrast, a one-year bank fixed deposit earns about 7 per cent interest.

Other bankers saw a flip side to the overture from the would-be rate warriors. They expected banks to offset some of the losses by asking customers to pay higher charges for banking facilities such as cheque books and money transfers. ATM withdrawals above a certain number of transactions could also invite charges.

“Service charges will go up as the cost of fund increases,” said Romesh Sobti, managing director and CEO of IndusInd Bank.

Source: http://telegraphindia.com/1111026/jsp/frontpage/story_14669880.jsp

Mutual Funds give Systematic Investment Plans the flexible edge to retain clients.

Systematic investment plans (SIPs), the cash cow for mutual fund companies, are witnessing a slew of features being added that provide flexibility to investors to time the market that prevents them from stopping subscriptions during bearish phases.

Edelweiss Mutual, ICICI Prudential MF, HDFC MF, Reliance Mutual and DSP Blackrock are others that have come out with flexible investment options in SIPs where they could choose various index levels at which their funds could be invested.

SIPs are mutual fund investment schemes where an investor contributes a regular sum of money every month like a recurring deposit of a bank. Since some investors stop adding to the corpus during times of downturn, asset management companies are evolving structures to keep investor interest alive.

Apart from trigger-based SIPs, DSP Blackrock, Axis Mutual Fund and ICICI Prudential have introduced 'SIP-by-debit card' facility which allow investors to pay online. DSP Blackrock MF has a 'Target value savings account', which allows investors to shift an equity fund investment into a relatively safer debt fund upon reaching a targeted value (or targeted portfolio return) in equity fund. ICICI Pru Mutual's Target Return Funds also work on a similar 'invest-redeem-invest' principle.

"Such options are encouraging people to invest more in equity funds,'' said Srikanth Meenakshi, director of Wealth India Financial Services. "Innovative features make fund investments more convenient, flexible and efficient."

Edelweiss Mutual Fund plans to launch its 'prepaid SIP' which will allow investors to time the market. Investors using this option will be initially required to invest from 25,000 to 2.5 lakh into Edelweiss MF's Absolute Return Fund, a balanced fund with a minimum equity exposure of 65%. The investor then chooses index triggers, say 1/2/3% correction in Nifty at which his funds could be invested.

Every time the index hits a pre-decided trigger level, 10% of the money invested in absolute return fund is released into select pure equity mutual funds.

Source: http://articles.economictimes.indiatimes.com/2011-10-22/news/30309872_1_systematic-investment-plans-equity-fund-edelweiss-mutual-fund