Bond traders see sell-off if borrowing not cut

Indian bond traders are bracing for a sell-off if the government sticks to its planned 1.7-trillion-rupee ($37.2 billion) borrowing plan for the second half despite a sharp rise in federal revenues. Six out of 10 market participants in a Reuters survey expected no change in the borrowing when the October-March schedule is announced on Thursday, traders said.

Four participants saw a possibility of 100 billion to 150 billion rupees reduction in the borrowing. "The market will react negatively if there is no cut in borrowing and the 10-year yield could rise by about 5 basis points and the 5-year OIS rate could rise by 2-3 basis points," said Anindya Das Gupta, head of treasury at Barclays Capital.

The government had planned to borrow a gross 4.57 trillion rupees in 2010/11. Of the budgeted 2.87 trillion rupees to be raised in April-September, it has borrowed 2.73 trillion so far. Government revenues have been boosted by an auction of 3G and wireless broadband spectrum that raised 1.06 trillion rupees, about three times more than expected, thanks to aggressive bidding by firms in the world's fastest growing mobile market.

Tax receipts have also been buoyant on the back of a rebounding economy. April-August net direct tax receipts rose 13.9 percent to 1 trillion rupees from a year ago. The benchmark 10-year bond yield could rise to 7.98 percent if the government does not reduce the borrowing, traders said.

The bond was trading at 7.94 percent by 0626 GMT, steady from its previous close. Traders said a token reduction in borrowing was unlikely to spur a rally in bonds, with some hoping the government may await divestment proceeds from state companies in the coming quarter before deciding on a cut. State-owned Coal India Ltd, the world's largest coal miner, is set to launch an initial public offer in October to raise up to $3 billion, with the government selling a 10 percent holding.

"Divestment proceeds remain a surprise factor and they (the government) could look to mop up more than budgeted," said Dwijendra Srivastava, head of fixed income at Sundaram BNP Paribas Mutual Fund. "They may not look to borrow much in the months of Feb-March." In early August, the government had approved an additional expenditure worth about 550 billion rupees, which could absorb revenues.

Source: http://economictimes.indiatimes.com/Bonds/articleshow/6612101.cms

Presently, short term funds are more suitable: Mahhendra Jajoo

Mahhendra Jajoo, Executive Director & CIO - Fixed Income, Pramerica AMC in an exclusive interview with Harsha Jethmalani of Myiris.com spoke about their newly launched fund and products in pipeline, his views on the FII inflows in the Indian markets, etc.

Mahhendra Jajoo has over 19 years of experience in financial services and capital markets. Prior to joining Pramerica AMC he was working with Tata Asset Management as Head - Fixed Income and Structured Products managing Fixed Income investment/portfolio from June 2008 to Dec.2009. Mahhendra Jajoo has completed his B.Com, ACA, ACS, CFA ( from CFA Institute, USA).

>What is your investment philosophy for debt schemes? Could you throw some light on the structure of your research team?

Our investment philosophy focuses on constructing a diversified portfolio of highly rated instruments with the objective of generating competitive returns within the scheme investment objectives and constraints.

>Pramerica Liquid Fund collected Rs 6.65 billion; what kind of response are you expecting for recently launched Ultra Short-Term Bond Fund? How are you going to target potential investors for the same?

We have seen our AUM increase over the last month as more and more investors consider Pramerica Liquid Fund to meet their investment needs. With further increase in interest rates by the RBI, debt is becoming more attractive. Pramerica Ultra Short Term Fund offers better tax efficiency to investors therefore, we expect many new investors to invest in this fund.

>Can we expect more new product and innovative products from your AMC this year?

Pramerica Mutual Fund aspires to provide innovative products that will help the investors to create wealth. We will launch new as well as innovative products from time to time reaching to retail investors and bringing to them solutions rather than just products. We will also help our investors to bridge the gap between their aspirations and their current financial positions.

We are already managing the Pramerica Liquid Fund and we recently launched our Ultra Short Term Bond on the Sep. 16, 2010. Two other products are lined to be launched in October, although the exact dates have yet to be finalized.

>What is outlook for Rupee, home loans and deposit rates after RBI has raised benchmark interest rates?

Given the strength of Indian economy and continued inflow of foreign investors, we expect rupee to trade with a strengthening bias. Home loan and deposit rates may go up a bit more given the RBI`s current stance of tightening rates.

In the current market scenario, what investment strategy an investor can follow while investing in different kinds of debt/income based funds? If an investor only prefers to invest in debt funds what can be his right portfolio mix.

Presently, short term funds are more suitable as interest rates are still going up and liquidity is tight. Once a clear trend for lower inflation emerges, longer tenor funds may become attractive.

>Where do you see the yields on g-sec heading in the short term?

Given the offsetting factors of likely improved fiscal deficit and higher inflation, we expect g-sec to trade sideways in a narrow range.

>Foreign fund houses have invested over Rs 710 billion (USD 15.6 billion) so far this year and analysts believe that FII investment in stock markets will cross the last year`s record level. What is your take on this?

India is the second fastest growing economy at present. Structural factors will ensure that this trend is maintained in the foreseeable future. India is also, one of the few markets to reach a new high since the fiscal crisis. As global capital searches for high returns, India will remain attractive to FIIs for a long time to come.

Source: http://www.myiris.com/shares/company/ceo/showDetailInt.php?filer=20100923115620707&sec=fm

'There's no scope now for poor performance'

Nilesh Shah has tracked the Indian stock and bond markets for nearly two decades now. The deputy managing director of ICICI Prudential AMC points out that few markets have traded on a sustained basis at the kind of multiples that India trades at today and tells Shobhana Subramanian that there is now virtually no room for error.

Now that the Sensex has hit 20,000, where do you think the market is headed?

It’s a journey and yes, while 20,000 is an important psychological benchmark, it too will be forgotten like 10,000. It’s difficult to take a short-term call on where the market is headed but the positive that is supporting the market is flows, more from foreign institutional investors than locals. That’s probably because an Indian investor evaluates his investment opportunity by comparing it to the 8% risk-free return on the government benchmark whereas an American investor evaluates the Indian opportunity against the 3% government benchmark and a Japanese investor against a 1% return. So, the expected return for an Indian investor is very different from that for foreign investors. That possibly explains why they are bullish and are investing whereas we are becoming somewhat hesitant. But it’s the flows that are driving prices higher.

So, are valuations looking terribly expensive?

Yes, valuations do look expensive; they may not be outlandishly expensive like they were in 1991, 2000 or 2008 but they are not cheap like they were in 2009. And they are looking expensive both in absolute and relative terms. Historically, India has traded at an average multiple of 15 times one year forward earnings but today we are trading at 17.5 to 18 times one year forward earnings, so we are clearly at a premium. We are also more expensive compared to Russia, which is probably trading at 8-9 times or Brazil which is at 11-12 times or China which is at about 15 times. If I compare India to the developed world, which is probably not the right comparison, we are expensive. And even within BRICs, we are expensive.

But doesn’t India deserve the premium?

There’s no doubt that India deserves a premium, the question is how much of a premium. In the past we have seen that when the difference increases too much and too fast, then it starts cooling off. So, there’s no debate about whether India deserves a premium over Brazil or Russia because we have rule of law, better corporate governance standards, better entrepreneurs, we have democracy and all this reflects in the higher return on equity in India. But at the same time, how much higher can the premium be?

Where do you feel India should trade vis-à-vis peers like Korea or Taiwan?

It’s difficult to put an estimate on the premium today because it would depend on how Korea and India behave. Apart from fundamentals, there is also the issue of sentiment. All we can say is that today we are trading at reasonable premiums over our peer group and this is justified based on long-term fundamentals. But this means we have to deliver in line with expectations. And there is absolutely no scope for poor delivery or tardy delivery.

What is your reading of the June 2010 quarter numbers and do you feel that there are downside risks to earnings estimates?

The June quarter numbers were more or less in line with expectations in some segments like mid-cap tech, which turned in results below expectations. Is there a risk to downside earnings based on the June quarter numbers? The answer is no. But those were the earnings required when the market was at 16,500. But now that the market has crossed the 20,000 mark, obviously the earnings expectations have gone up and those enhanced earnings expectations will have to be met in the coming quarters. With the index having moved up, earnings expectations have gone up.

From what you’re seeing on the ground, do you feel companies will deliver?

That’s a million dollar question but I get the feeling that the market is expecting companies to deliver. My own feeling is that for the broad market to deliver the enhanced earnings expectations is going to be a tall order. We have to run faster and work much harder to meet those expectations. Certainly we have raised the bar for our companies and in a world where variables are changing virtually every day, it requires greater effort to get there. That doesn’t mean we won’t be able to do it. What you’re saying is that rather than the market trading at these high multiples, it’s earnings that need to grow faster now… How many markets have traded at 18 times one year forward on a sustained basis? Very few. So companies will have to grow and that won’t always be easy because our companies have also scaled up significantly so the base is no longer small. What I’m saying is that I don’t think valuations can remain at 18 times forward forever, they will change either way depending on how companies perform. So let’s not take this 18 times one year forward for granted.

What do you believe is a sustained multiple that India can command?

We are now priced for perfection. From 10 times forward in 2009, we have travelled to 18 times; in less than 24 months, we have shifted from all-disappointment to no-disappointment. There is a potential for a re-rating but it’s hard to say right now at how much of a higher multiple India can trade relative to the historical average. To take a call on earnings itself is difficult, to take on a call on earnings re-rating is adding to the complexity.

Given that there is going be abundant liquidity in economies overseas and that interest rates are going to remain low, do you see flows continuing?

In the longer term, chances of flows moving from developed markets to developing markets like India in search of growth are high. But it doesn’t mean that this can continue at every level of the market. At some point in time, the gap in the valuation of say India and China, Brazil or Russia could force the money towards those markets rather than ours, depending on which economy is doing well.

But it’s also a fact that India is underweight in many global funds…

That is true; we haven’t seen too much money from many of these big foreign funds. But at the end of the day, the money will come in depending on how we perform. There is possibly unlimited quantum money sloshing around in the system, globally. In the American money markets, funds have $3 trillion, virtually yielding less than 0.5%. Logically, they should shift all their money into Indian equities because these are expected to post better returns. But things don’t always work on logic. There is a balance of Rs 4 lakh crore in Indian banks yielding a 3.5% return; this should also have shifted.

But we’re talking only of equity funds...

Allocations are not made only on the basis of fundamentals, but also sentiment and valuations. It would be unfair to think that all global equity funds would have a 1% allocation at today’s valuations, which are priced for perfection; though I would love to get such a high allocation. They are expecting delivery in terms of growth, equilibrium of our macros in terms of interest rates, inflation, fiscal deficit and current account deficit. They’re expecting seamless growth in earnings. We are carrying the burden of too many expectations.

Once again, small investors have missed the rally…

We haven’t encouraged an institutional culture in equity investments. Our pension funds never invested in equities and our insurance companies came pretty late and while there was an LIC, the investments were tilted towards fixed income rather than equities. So, somewhere the institutional participation hasn’t been too high. Also, the relative performance of real estate and gold in recent times has attracted retail flows since investors are more comfortable with those assets.

Source: http://www.financialexpress.com/news/theres-no-scope-now-for-poor-performance/686238/0

Market voice: Prateek Agarwal, Bharti AXA Investment Managers

Prateek Agrawal, head, equity, Bharti AXA Investment Managers, tells Krishna Merchant that the current valuations are not worrisome, as they are at much more comfortable levels compared to the last time when the Sensex was trading at 21,000. Edited excerpts:

The markets have been on an upward spiral for the past few sessions, with a good number of stocks touching new highs. Do you expect this to continue?
The last time when the Sensex was higher than 21,000, PE ratios were significantly higher than the current levels. Since the last rally, earnings have expanded and there is much more valuation comfort now.

The markets are likely to move higher, and the up-move in terms of percentage will trail the rise in earnings. The markets did not move much for eight-nine months. It is only in the last one month that they have rallied and have undergone a serious amount of time correction.

Once this up-move is through, we expect to see a time correction again, rather than a price correction. We expect the index to move sideways. Over the time, earnings will catch up with valuations.

Is this a good time to book profits in the midcap and small cap stocks?
Market participants have been booking profits of late. If you look at the mutual fund (MF) data, it is clear that MF as a category has been experiencing strong outflows at higher levels in the market.

Considering that markets will rise further, what will be your best bets?
Banking will be one of the drivers. Metal and mining can also do well, besides infrastructure, as the economy is booming. At a later stage, once the confidence in the level of the market is restored, we may see the breadth of the rally expanding.

Source: http://www.business-standard.com/india/news/market-voice-prateek-agarwal-bharti-axa-investment-managers/408846/

MF NAVs make new highs, but selloff continues

More than a third of all equity schemes that are over five years old have already surpassed their previous net asset value (NAV) highs, reached in 2008. Despite this, mutual fund schemes continue to see redemptions.

Data from fund house tracker Value Research show out of 177 such equity schemes, 60 hit lifetime highs at the beginning of this week.

Anand Shah, equity head at Canara Robeco Mutual Fund, said, “Our schemes have already surpassed the previous peak of 2008. I see no reason why they will not be at lifetime highs. The same will be true for the industry.”

HDFC MF’s nine equity schemes have hit all-time highs. Seven schemes of Birla Sun Life MF and six each of Franklin Templeton, ICICI Prudential MF, Reliance MF and UTI MF have hit all-time highs.

There are 404 equity schemes. Of these, 227 are less than five years old. If one takes the entire lot, 173 schemes touched all-time high at the start of this week.

Navneet Munot, chief investment officer, SBI Mutual Fund, said, “I believe that in a high market situation, the money entring into mutual funds through systematic investment plans (SIPs) will not be impacted. The industry gets the major portion of inflows through the SIP route and not lump-sum amounts.’

Shah, in agreement with Munot, said investments through SIPs were quite robust and would continue despite the high NAVs.

As on August 31, the industry's total average assets under management rose 3.3 per cent to Rs 6.87 lakh crore from Rs 6.65 lakh crore last month.

However, equity schemes continued to see high redemptions in August. Overall net outflow from these during the current financial year is Rs 7,613 crore.

Source: http://www.business-standard.com/india/news/mf-navs-make-new-highsselloff-continues/408757/

IDFC MF to Revise Exit Load Structure for its Monthly Income Plan

IDFC Mutual Fund has decided to revise the exit load structure for its IDFC Monthly Income Plan. The changes will be effective from 01 October 2010.

Accordingly, the exit load would be 1.50% of the NAV for redemptions/switch outs anytime within 18 months from the date of subscription applying First In First Out Basis. No load shall be applicable for switches between options of the schemes.

Moreover, the exit load /CDSC of up to 1% of the redemption value charged to the unit holders by the fund on redemption of units shall be retained by each of the schemes in a separate account and will be utilized for payment of commissions to the ARN holder and to meet other marketing and selling expenses. Any amount in excess of 1% of the redemption value charged to the unit holder as exit load/ CDSC shall be credited to the respective scheme immediately.

IDFC Monthly Income Plan aims at generating regular returns primarily through investment in debt oriented mutual fund schemes and to generate long term capital appreciation by investing a portion of the schemes assts in equity oriented MF schemes.

Source: http://www.indiainfoline.com/Markets/News/IDFC-MF-to-Revise-Exit-Load-Structure-for-its-Monthly-Income-Plan/3302907454

Ahead of the fundamentals?

Not only is it riding an unprecedented inflow from foreign institutional investors (FIIs), the market cap has actually grown more than the size of the economy --- the only economy among leading nations where this is the case. The stronger GDP growth rate for India (IMF projects India’s growth at 9.4 per cent for 2010-2011, next only to China) may justify this kind of movement to an extent, but experts say the Indian markets have moved ahead of fundamentals.

“The companies are becoming expensive and the fundamentals are not justifying the current optimism,” said the head of a mutual fund who did not wish to be named.

The German economy is more than two-and-a-half times the size of India, but India’s market capitalisation is now ahead of the European giant.

Over the past one month, the Sensex has outperformed markets across all major developed and emerging economies, and has grown by 8.7 per cent on the back of the strong FII inflows. Germany’s DAX followed closely with a gain of 8.4 per cent in the period, while all other major economies grew 3-5 per cent.

This FII enthusiasm on the India growth story has now brought it into a territory that is even concerning the best of the fund managers to take fresh positions, and both broker and MF community is advising the retail investor to practice caution and not get carried away by the momentum.

http://www.hindustantimes.com/Ahead-of-the-fundamentals/Article1-603082.aspx

For mutual fund investing, online is the way to go

Good and bad times are going hand in hand for retail investors in mutual funds. While Sebi has stepped in with a slew of regulatory changes, bringing down the cost of investing significantly, incentives for the mutual fund distributor community has come down drastically as a consequence of these changes. This has left investors without the services of mutual fund agents. What will investors do? Help of financial advisors may be sought by high net-worth individuals. For others, other channels have to be explored.

There are two modes for retail investors to choose from – offline and online. The comparison between the two modes is easy. With the offline mode, the investor will be required to fill up forms and write cheques for every investment. Also, one will not get a consolidated view of investments. In the online mode, one can either go via demat/exchange route or via mutual fund websites that deal directly with mutual fund companies. Paperwork is one-time after which subsequent transactions can be made with a few mouse clicks.

Between the two online modes of investments, the comparison gets a little tricky. If an investor chooses to go via the exchange, he/she should have a demat account which comes with an account maintenance cost. The non-demat route, provided by some online service providers does not require an investor to have a demat account. However, it should be noted that mutual fund units are held in a digital (dematerialised) form regardless of the route chosen by an investor.

Consolidation services are available in both modes. However, in the demat mode, all the holdings of the investor (including stocks) are consolidated into one statement. This is beneficial, especially if an investor is an active stock trader too. Some non-demat service providers allow investors to maintain their separate demat account along with their mutual fund account, allowing a virtual consolidation. However, the two instruments (mutual fund units and shares) are maintained separately.

Many brokerages offer zero-cost trading for mutual fund units. Some non-demat service providers also provide zero-cost mutual fund transactions. However, brokerages are bound to charge for mutual fund transactions in the long run, just the way delivery-based share trading is charged.

The cost comparison can be better understood from a business perspective also. In the demat mode, there are five entities involved — broker, exchange, clearing agent, depository and registrar of mutual fund — apart from the investor and the mutual fund. In the non-demat mode, there are only two entities involved – the service provider and the registrar of mutual fund. The former will prove more expensive for an investor in the long run.

Hence, going online would be the best way. Between the two online modes, choose the demat mode if you are an active stock trader and would not mind the costs incurred in the long run.

Source: http://www.financialexpress.com/news/for-mutual-fund-investing-online-is-the-way-to-go/683163/0