‘Good time for NRIs to invest in India'

If investors do not want to take risk of price volatility, then fixed maturity plans are also good options as the tenures of these plans are matched with the underlying instruments. 

Mr Vishal Kapoor, Head — Wealth Management, Standard Chartered Bank

Should you allocate high sums to equity SIPs? What should you do when the last of the fixed-return options — the small savings schemes — have an interest rate that swings every year? These are some of the questions we asked Mr Vishal Kapoor, Head Wealth Management, Standard Chartered Bank. He provides some solutions to these, along with investment ideas for 2012.

We see many mutual fund investors now allocating a larger portion of their surplus or their salaries to SIPs? Is it a good strategy to allocate such high sums? 

If the SIP value is in line with the strategic allocation planned for that person, then I would not be too concerned. For example, if a person in his 20s is building a retirement nest, and the targeted allocation for this person is 75 per cent equities, then for this person to have about three-fourth of his monthly savings going in to a set of good funds through SIPs may not be a bad idea.

This said, it is very important to try and diversify across a few fund managers. It is also very important to choose funds carefully and stay with consistent performers and with strategies that fit your requirement.

 However, your point is right when it comes to senior people. Taking high exposure to equity SIPs may certainly not be right for somebody close to retirement.

Increasing large-value SIPs are also a validation that a lot of people have benefited from SIPs. In the past, investors were experimenting with a small proportion of their assets. For instance, when the fund industry was relatively nascent, a large-value SIP used to be Rs 20,000-25,000 a month and the average was around Rs 5,000-8,000.

Nowadays, with income, savings and conviction in SIPs going up, SIPs aggregating Rs 1 lakh a month are not uncommon. Many of them are the same customers who in the past were toe-dipping with Rs 20,000-25,000 a month, knowing fully well that their savings potential is much higher.

After having gone through a cycle they have now realised that they actually did relatively well and SIPs did make sense. So they have become more serious now and have increased their contribution.  

With small savings options too being linked to interest rate cycles, returns can also go down. What strategy should debt investors adopt?

 Besides bank deposits, investors can explore the wide array of fixed income products available through the fund route. In addition to regular returns, this space can also offer the additional opportunity of capital appreciation, especially in times when interest rates peak and are expected to come off.

If investors do not want to take risk of price volatility, then fixed maturity plans are also good options as the tenures of these plans are matched with the underlying instruments.

They are also efficient on a tax-adjusted basis. Then there are also fixed income instruments offered by non-banks. These may be deposits, debentures or bonds, with some of them offering tax advantages as well.   

But aren't the risk associated with corporate debt products also high?

The fundamental rule when you invest in any product — equity or debt — is that you need to understand the product you are buying. Debt is no exception. You need to know and understand how the instrument promises to give you a better return.  

In general, one should be wary of instruments without a credit rating. Yet another simple rule is to avoid a scheme that looks too good to be true. Also, stick to names and companies that you have some understanding of.

We do a full-fledged due diligence on the products we recommend. And yes, appetite for risk varies across customers. We may offer only a triple-A rated product or a government security to one, while another investor may be comfortable with an AA- .

It does not mean that a AA- is a bad product. But it may not be suitable for someone who does not understand the difference in the risk levels. So matching risk is important. 

Would you advocate buying gold?

It has been a part of our asset allocation strategy for customers to take a 5-10 per cent exposure to gold. But we have not yet changed our medium-term recommendation on the asset class. Our house view on gold in dollar terms is still 14-15 per cent higher than where we are today.

Why are we bullish? Gold continues to be a safe haven, given current global uncertainties. Second, both India and China have real demand for gold. It is not just a hedge or an investment. That will continue to drive prices. Three, many Central Banks will continue to buy gold as reserves, with their own currencies going through volatility. So that means more institutional demand.  

It is also a hedge against negative interest rate. That situation continues with potentially high inflation and low interest rates across the world. Gold then becomes a store of value by choice. We prefer a financial asset based route to investing in gold, since it avoids the many disadvantages of buying physical metal.  

What are your investment ideas for 2012?

 We think gold equities are a good opportunity, if you believe gold is a sound asset class now. Traditionally, gold equity has a high correlation with gold prices. It has the additional benefit of operating leverage on top of the increase in commodity price. Gold equities have not caught up with gold commodity rally. We see opportunity when gold equities catch up.

The second theme we like are long-term gilts. That is based out of our research view that interest rates should start coming off next year.  This is, however, only appropriate for the more sophisticated customers who are willing to live with the volatility that gilts have.

The third theme that we think might be interesting is international equities, in markets such as China or North-east Asia, as valuations, after correction, look more attractive. Of course, international equities can only be diversifiers to holding Indian equities. 

Are you seeing more interest from NRI investors?

NRIs have always been very keen to invest back home. If you look at the current environment, it now looks even more attractive for them to invest. This is because you have a rupee that has sharply depreciated.

If you are an NRI holding a relatively strong foreign currency, then you have a big conversion-rate benefit to start off with. Two, interest rates differentials are huge between India and developed countries. When you have triple-A rated bonds with tax-free status and eight per cent plus rates, then it becomes very attractive for NRIs.

Source: http://www.thehindubusinessline.com/features/investment-world/market-strategy/article2744840.ece

No V-shaped recovery in markets this time

After removal of some FMCG, IT stocks from benchmark index, one can see that markets are much lower than they appear

With money printing in the US and days of monetary and fiscal stimulus behind us, one can only expect a slow recovery in the markets this time around, unlike the quick rebound in 2009, says Mr Anand Shah, Chief Investment Officer, BNP Paribas Mutual Fund. In an interview with Business Line, Mr Shah also discusses on what drives gold prices now why gold as an asset class is not comparable to equity.

Excerpts:

There is a general view now that markets have factored in negatives and valuations have reversed to the mean. But then does the earnings concerns now make it less comparable with historic data?

Markets have corrected significantly and rightly so because we are going through abnormal times because of the political stalemate for a long time now, since the 2G scam broke out. And at the same time what we are seeing in the European world, is also not something that we come across every decade.

While we have all been saying that markets have reversed significantly and valuations have become cheap, we also have to keep in mind that in 2011, even as markets corrected, quite a few stocks and sectors have run up and become expensive.

To that extent the dispersion in stock performance has been very high in the last one year in particular. If you remove some of the FMCG, IT and telecom stocks from the index, then you will see that markets are much lower than they appear. To that extent they do offer value.

Can markets correct more? Yes it can - if not for local fundamentals, it can, because of the Euro zone issues.

And remember, markets factoring negatives does not automatically mean that markets will not fall more. In other words, it does not mean that the price earnings ratio cannot shrink. In every bear market, valuations have gone much lower than the fair value.

I clearly believe the recovery from here will be very unlike 2008, when it was a V-shaped recovery. Money printing happened in the US and there was fiscal and monetary stimulus. But I think those days are behind us and even the incremental benefits of money printing are not coming through. So to this extent, I see a very slow recovery, more similar to the post-2000 period than the one seen in 2008.

Do you believe that issues such as huge repayment of foreign currency loans in 2012 could lead to financial instability?

One point that we should remember is that not all of the foreign currency borrowings would be required to be rolled over or refinanced. Quite a bit would be buyer credit and the same would be converted into rupee loans once they get the supplies. Yes, it is definitely a cause for worry that $80-90 billion worth of loans to be repaid. But to believe that all of these will have to refinanced by borrowing locally in rupee is taking an extreme view. Companies do have some reserves. Even if we do have to refinance, there are a different set of consequences. There will be a further liquidity tightening in the rupee and 10-year yields will go up once again and so on. But all this will not mean that we will become financially unstable.

If the RBI has not intervened in the foreign currency market so far and allowed the rupee to float, then they are aware of these consequences and may well be making sure that the resources are available at that point in time if it is required. So to that extent, I am not worried that such a scenario will lead to financial instability but I am worried that it will once again lead to interest rates going up, just as we are beginning to expect it to come down.

Crisis like the one in Europe now, may affect financial markets and not necessarily our economy. Our economy is not too export-oriented.

Gold has become a favourite asset class for investors. It has also outperformed equities even over a five-year period now. Can this out performance continue?

Gold is a potential investment and should form part of your portfolio but can simply not be compared with equity performance. This said, the exceptional circumstances in the world economies have led to gold being an out performer. That simply means that it is a one-off performance. Also, there is hardly any active fund management in gold because it has very little intrinsic fundamentals. Equity funds on the other hand have active fund management.

In equities I have the opportunity to invest in hand-picked companies run by good managers and invest in the growing Indian middle class story. Companies such as Nestle or Jubilant Foodworks grow based on this story.

Gold can never outperform such growth stories. Gold may have outperformed overall markets but not any specific sector or theme that was in vogue in a particular market.

Source: http://www.thehindubusinessline.com/markets/stock-markets/article2735674.ece?ref=wl_markets

Q&A: Sandesh Kirkire, Kotak Mutual Fund

Kotak Mutual Fund chief executive Sandesh Kirkire tells Priya Kansara Pandya why the rupee’s depreciation could continue and shares his outlook for the Indian equity markets. Edited excerpts:

The rupee has been depreciating against the dollar. How sustainable is this and why?
It may remain at 52–55 levels against the dollar and I believe we are in for a reasonably long period of depreciating rupee environment, till portfolio flows come back or capital foreign direct investment starts improving.

The dollar is in shortage, as there has been a flow of capital into dollars (despite the US getting downgraded) due to the euro problem. Second, I do not believe oil prices will come down. In spite of low growth, oil prices have not budged. However, I do not believe the $130-140 range movement for crude oil prices witnessed in 2008 is coming back. Third, $30 billion of India’s current account deficit of $55-60 billion is on account of gold imports. Global investors are buying gold due to fear and there is also supply constraint. All these are putting pressure on our current account deficit and currency.

Do you think a seven per cent inflation by 2011-12-end is achievable?
On a point-to-point basis, inflation will come down. But it will rise in 2012-13. As long as the currency is under pressure, inflation will not be something which can be ignored.

Is a seven per cent gross domestic product growth also achievable?
Our linkages with international markets are strong and growth cooling there will obviously have an impact on India. However, domestic consumption has not collapsed and it’s far superior than in 2008. I believe 6.5-7 per cent growth is sustainable in the next few years. For us to move back to an over eight per cent level, it’s imperative to have reforms and the global situation improves.

Do you think the Sensex can slip to 12,000 or even go below that?
The markets are not going to drop drastically like they did during the Lehman event, a financial accident. Secondly, India and China are the only two countries growing at over five per cent. Global investors cannot ignore India. Reforms are necessary to bring them back.

Thirdly, I bel-ieve 2012 should be better for equity because significant corrections have happened and we are close to historical lows. The current 15,000-16,000 levels are significantly cheaper than the 16,000 seen in 2007. If the markets drop 10-15 per cent from here, the valuation would be similar to the 8,000 levels seen during the Lehman event.

Do you expect more pressure on sales in the third quarter than expected?
Till the September quarter, sales growth had been upwards of 16.5-17 per cent, including inflation. The real growth could be 8-10 per cent. I believe this is possible for the whole financial year.

However, the domestic investment space, dependent on the government’s support and interest rates, has not done well.
 

There is not sufficient policy initiative. New investments are just not happening. I do not see a continuation of business flows in the infrastructure sector. Thus, we have been underweight on the invest-ment/infrastructure related sector (high beta). Valuation-wise, the infrastructure sector continues to be cheap and it’s getting cheaper by the day because of lack of visibility. However, since we do not see interest rates going up, we are looking at the sector more closely. We want to see order inflow coming in. Both will lead to the sector’s re-rating, which will be phenomenal.

Source: http://business-standard.com/india/news/qa-sandesh-kirkire-kotak-mutual-fund/459181/

Is this the right time to invest in debt funds?

With interest rates likely to soften, bond yields have come down, which means there is benefit in debt funds.

With the Reserve Bank of India (RBI) freezing the interest rates for now in its mid-quarterly monetary policy announcement on 16 December, the yields on 10-year bonds have come down in anticipation of softening interest rates in the next quarter or so. On 19 December, yields on 10-year bonds came down to around 8.35% from 8.48% on 15 December, a day before the policy announcement. The drop is sharper from the beginning of the month, 1 December, when yields were around 8.70%.

RBI has maintained status quo on key policy rates, including repo rate or the rate at which RBI lends to banks and cash reserve ratio (CRR), the proportion of deposits which banks have to necessarily keep with the regulator.

Typically, fall in bond yields and the rise in bond prices augur well for debt mutual funds (MFs). So is it the right time to invest in debt funds?

The link between rates, bond prices and debt MFs

Bond prices are inversely related to interest rates. When interest rates rise, the yields of new bonds rise, but prices of existing bonds fall.

In order to remain competitive with new issues, existing bonds alter their prices. For instance, suppose a bond priced Rs. 100 pays 8%. If the interest rate in the economy rises and similar new issues start offering, say, 9%, the prices of existing bonds would go down for competition’s sake. In other words, the face value of Rs. 100 may reduce to around Rs. 94 for new customers to give the similar returns. Generally, for every 1 basis point change in yields, 10-year bond prices increase or decrease by 20 paise.

One basis point is one-hundredth of a percentage point.

On the contrary, when interest rates decline, the price of existing bonds increases and bonds are often sold at a premium to the face value to new customers.

Bond prices affect debt funds directly since debt funds largely invest in bonds. Here, when the bond prices go up (as interest rates outlook is weak and thereby bond yields are down), the net asset value of the fund would also increase.

Interest rate scenario

The Indian economy is under pressure owing to successive rate hikes during the last two years coupled with lack of reforms. In the last couple of months, the Index of Industrial Production (IIP) has been on a decline. In fact, in October, IIP contracted to -5.1%.

At the same time, though inflation is still above RBI’s estimates, it seems to be cooling off. The Wholesale Price Index-based inflation for November was 9.1% compared with 9.7% a month ago, the first moderation in headline inflation in over a year. Even food inflation has recorded a sharp decline; it fell to almost a four-year low of 4.35% for the week ended 3 December.

In view of the above factors, bankers feel that interest rates would now go down. “Considering the two factors, we believe that the first turn in the monetary cycle could come in the form of a CRR cut and may happen as soon as in the next quarter amid expectations of large additional borrowings,” said Abheek Barua, chief economist, HDFC Bank Ltd​, in the bank’s post-policy assessment report released on 16 December.

Agrees Melywn Rego, executive director, IDBI Bank Ltd: “I foresee the banking sector to cut interest rates only when RBI starts lowering the prevailing repo rates. It could probably happen during the first quarter of 2012.”

Even the regulator has indicated that rates may head downwards soon. “The guidance given in the second quarter review was that, based on the projected inflation trajectory, further rate hikes might not be warranted. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated. From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth,” according to the press release issued by RBI on its mid-quarter policy review.

Should you invest now?

Experts say this is the right time... “In the future, in a falling interest rate regime, debt funds are likely to provide decent returns, particularly long-term debt funds,” says Dhirendra Kumar, chief executive officer, Value Research, an MF-tracking firm.

While all kinds of debt schemes benefit in a softer interest regime, the benefit is virtually negligible in case of liquid funds and the highest in long-term debt funds, including gilt funds.

A look at MF returns in the last fortnight shows that medium gilt and long-term funds as a group have turned out to be the best performers among all MF categories. According to date from Value Research, the group has provided an absolute return of 1.86% in the last fortnight closely followed by income funds, whose category average return stands at 1.03% in the same period.

“There are views expressed in some quarters that it is better to wait for one more policy review as it would provide a much clearer picture. But in my view, customers should try to invest before the interest rate cycle starts heading downward as that would ensure customers benefit throughout the downward interest rate cycle and for that, this is right time as interest rates may start declining in January. Even if RBI maintains status quo the next time around, the softer interest rate regime would not be very far,” says Rajan Krishnan, chief executive officer, Baroda Pioneer Asset Management Co. Ltd.

Rajan too favours long-term debt funds over short-term funds for those who are willing to take higher risk.

...but beware of the risks: In fact, you need to keep the risks in mind. In view of the depreciating rupee, inflationary pressure may come back to haunt again. In that scenario, the expected pace of interest rate moderation would slacken. And RBI has indicated such a possibility. “It must be emphasized that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead,” RBI has said.

India is a net importer and with domestic currency depreciating sharply against the US dollar, the cost of import is on rise and that may lead to inflationary pressure domestically.

The other factor that can affect you adversely if you invest now is the level of government borrowings. While the news of the chances of the government borrowing exceeding its original projection (owing to not meeting the disinvestment target) is priced in the yields, the slowing economy will reduce government revenues, thereby increasing the fiscal deficit. The latter scenario would once again firm up the prevailing yields owing to tighter liquidity in the market. If yields rise, your investments made now may suffer.

Source: http://www.livemint.com/2011/12/20195201/Is-this-the-right-time-to-inve.html