5 Reasons Why Sensex Fell Over 550 Points

Indian stock markets fell sharply on Tuesday, with the BSE Sensex plunging 506 points to 27,000. The broader Nifty slipped 134 points and the rupee corrected over 0.5 per cent to 64.24. The decline in stock markets comes after two days of gains which saw the Sensex gaining over 900 points.

Here are the latest developments:

1) The Sensex, which rose 908 points in the last two trading sessions, succumbed to profit-booking. Analysts say the gains seen in the last two trading sessions were a mere technical pullback. Technical analyst Anil Manghnani told NDTV that the Nifty has stiff resistance around 8,300-8,310 levels.

2) The crucial bills such as Goods and Service Tax amendment bill and the land acquisition bill, which were supposed to be passed in the ongoing session of Parliament, got stuck in the Rajya Sabha. A K Prabhakar, an independent market analyst, said that it seems the government is compromising on these bills by referring them to the Select Committee of Parliament, and hence delaying the much talked about economic reforms as promised by the NDA government.

3) Correction in other Asian markets is also having its toll on the Indian markets. On Tuesday, most of the stock markets in Asia were trading with a negative bias and overnight, the Wall Street also edged lower as investors fretted about Greece's precarious financial condition and slowing growth in China while energy stocks fell on weaker oil prices.

4) The rupee, which rose to a high of 63.85 against US dollar on Monday, again slipped back to a low of 64.27, taking it closer to its yearly low of 64.28 hence raising worries that foreign portfolio outflows may create a vicious cycle between rupee and domestic shares, fund managers said.

5) FIIs or foreign institutional investors being net sellers: Despite gains in the equity markets in the last two trading sessions, FIIs were net sellers in the equity markets to the tune of Rs 270 crore in the last two trading sessions. And in the last 17 trading sessions, they have sold shares worth over $2 billion or nearly Rs 14,000 crore.

Source: http://profit.ndtv.com/news/market/article-5-reasons-why-sensex-fell-over-550-points-762409

Returns of mutual fund equity schemes turn negative

In the past 1 month, as key indices lost 5%, equity schemes' NAV fell 5-10%

The performance of several equity mutual funds (MF) has taken a severe beating. Most equity scheme categories have witnessed a fall anywhere between five and 10 per cent in their net asset values (NAVs) in the past two months.

These schemes have been among the top losers this year, under-performing other asset classes such as gold, liquid, debt and arbitrage funds. Thematic funds — pharma, technology, infrastructure and FMCG — are the worst performers, as NAV of these categories have nose-dived 6-10 per cent. Amid these categories, there are several individual funds, which have under-performed the category average returns.

For instance, the average return in technology funds for the last one month stood in the negative territory at 7.56 per cent; however, SBI IT Fund gave a negative return of 8.21 per cent. Similarly, in infrastructure fund category, the average negative return is 6.66 per cent; NAVs of funds like SBI Infrastructure and HDFC Infrastructure funds are down over eight per cent.

Rajiv Shastri, CEO & MD of Peerless Mutual Fund, says, “Since the underlying asset class, in this case stock markets, had a tough time; it is natural for equity schemes to see dip in NAVs. Markets have been quite volatile and are trading around 8-10 per cent down against recent peaks. It should not be taken as a deterrent by investors, they should keep investing.” S Naren, CIO, ICICI Prudential AMC, said, “We continue to believe that correction is an opportunity to invest. This phase does not affect the long-term compelling case for Indian equities with a moderated return expectation. 2015 is the year for investing in equities with a horizon of three years and more.”

As on 30 April, there are over 400 equity related schemes offered by the mutual fund industry managing an asset of Rs 3.45 lakh crore.

Source: http://www.business-standard.com/article/markets/returns-of-mutual-fund-equity-schemes-turn-negative-115051201046_1.html

International funds will gain from weak rupee

While they are a good hedge for expenses like children's education on foreign soil, limit your exposure

Investors of international equity funds, especially those that invest in US equity markets, have seen an increase in returns over the past few months, due to the weakness in the rupee. According to data from Value Research, in the past three months, the category average returns of international funds has been 7.96 per cent – the top performer.

The fortunes of these funds have turned around in the recent depreciation of the rupee by 1.5 per cent against the dollar since the beginning of December. And with the US Federal Reserve likely to increase interest rates, it is expected that foreign investors will sell investments in emerging markets, including India. This outflow of funds, if it happens, will put further pressure on the rupee.

According to Vidya Bala, head of Mutual Research at FundsIndia.com, the decision to invest in international equity funds should not be based on currency movement. It should be based on the need to diversify your portfolio and hedge your portfolio by investing in markets that have low co-relation with Indian markets. “Investors look to gain from currency movements by investing in international funds. But that involves high risk. The right way is to bet on currency itself, and not the market. Because, by doing so, you may end up taking a wrong call on both the market and currency,” she says.

Raghavendra Nath, managing director, Ladderup Wealth Management, also says that currency depreciation is not a reason to invest in international funds at all. That is only a myopic view. “International funds will reduce the risk of your portfolio and improve the predictability of your returns. One should look at international funds purely from risk diversification perspective. Depreciation will only add to returns,” he says.

The US market is currently doing well and will definitely give better returns in the near term, as it will not be as volatile as the Indian equity market. But over a longer term, Indian equities will give better returns. So, one can look at international funds, provided they have sufficient exposure to Indian equities.

Indian equity markets are relatively more volatile, even though they offer higher returns. As a hedge against the volatility, it is advisable to invest a part of your portfolio in markets that have low volatility and low risk, even if prospects of returns are lesser than Indian equities.

“Developed markets like the US and Europe offer this hedge as they demonstrate different risk characteristics from India. Investing in these markets will give your portfolio the required diversification,” says Supreet Bhan, executive director, head (retail sales) at J P Morgan Asset Management.

European equities look positive because earnings have gone up and companies have created efficiencies by cutting costs. Besides, with the European Central Bank starting its quantitative easing, liquidity will continue to be comfortable, which will support equities, Bhan adds.

International funds also allow investors to invest in dollar assets. So, if you have goals such as children's higher studies or foreign trip, you can hedge against currency depreciation by investing in international funds.

Source: http://www.business-standard.com/article/pf/international-funds-will-gain-from-weak-rupee-115051200197_1.html

Should you worry about the market's current volatility?

The stock market has been volatile. Should one follow the dictum: Sell in May and go away?

Indices tumbled during the week but picked up on Friday. In the midst of such volatility, investors tend to question whether or not it is the right time to get into the market or out of it. But frankly, they are asking the wrong question.

Such questions are based on the presumption that they can enter the market and exit at the right time. Let’s get this straight, this is much easier said than done. Look back at your own track record. You may be boasting about the fact that you did not invest in 2007 when the market was on a roll. But did you enter the market a couple of years before that when it was at a low? Did you buy stocks immediately after the dot com crash? In 2008, when stocks were available at dirt cheap valuations, did you buy?

That’s the double-edged sword of market timing – it’s not just about skipping the market highs; should you miss a crash, you miss riding the recovery that follows.

Not too long ago, in October 2014, volatility hit the Indian market begging an answer to the same questions raised today. The reason at that time was more global - a likely recession is Europe, compounded by slow economic growth in the U.S., fear over the spread of Ebola, and geopolitical hazards. VIX (Chicago Board Options Exchange’s index of volatility) hit its highest level since late 2011 and the India VIX Index also jumped. But we got through that phase.

Don’t forget the hit that stock markets across the globe took in 2011. Financial Times reported that global stock market capitalisation dropped 12% that year. The Indian market did not escape unscathed. The Sensex ended the year at 15,454. By April 2, 2012 it moved to 17,478 only to drop to 16,546 by May 8, 2012. Yet the annualised 3-year Sensex returns (as on May 8, 2015) are 17.88%

The point is that if you ignore market upheavals and stay the course, you end up making money.

If you want to be successful in the stock market, stick to your guns and don’t deviate from your investment plan. A successful investor is not one who accurately predicts the direction of the markets. To do so you would have to either be an astrologer with a very high success rate or God; chances are that you are neither. Stick to basics, which means you need to ignore the distractions and the desire to give way to your emotions and behave rationally.

I had started off by saying that investors are asking the wrong questions. What are the right ones?

The right questions should pertain to your portfolio. Are there any funds whose volatility is giving you heartburn? Then you could consider eventually dropping them from your portfolio. Have you reached your goals? For instance, if you were saving in an equity fund towards the downpayment of a house and you need to make the purchase soon, it would make sense to move that money out of equity now. Or, is it that you have a better alternative investment in mind? Do you want to invest in some property that is available for a song? Then you could consider offloading your stocks to finance this investment. Base your decisions on your goals and capability for risk. Not on the volatility of the market.

On a lighter note, the entire saying is "Sell in May and go away, don't come back till St Ledger Day" and its origins are not Wall Street, but London. Summer sporting events were considered major events and the St. Leger Stakes was the oldest of England’s five horse racing classics and the last to be run in the year. The rick folk who traded were distracted with the social events and volumes would plummet in the summer months, leaving share prices flat, falling or at least volatile.

The reasons for volatility now are very different, though an abbreviated version of the phrase is still thrown around.

Source:http://www.morningstar.in/posts/33006/should-you-worry-about-the-markets-current-volatility.aspx

Equity Markets – Correcting… What should you do??

·        Oil Prices
Oil prices have risen about 35-40% from the low levels seen in the recent past. Currently at 65 Dollars per Barrel.
India has benefited disproportionately from the sharp fundamental fall in crude prices. Crude price has fallen from ~110 in the FY 14 to ~65 now. India's crude import bill for FY 14 was 165 Billion USD. The sharp fall has helped the economy save nearly 50 Billion USD. The budgeted subsidy bill for petroleum has been reduced by Rs. 30K Crs. Further, with the fuel reforms, the pressure on Government from increasing crude prices is far lower. India will be easily able to manage the current oil prices (or even a marginally higher levels from now). In addition, the fundamental outlook for crude is for the prices to remain muted. Therefore, the recent hike in the prices is not a major concern.

·        Rupee
Rupee has depreciated to 64 levels against the Dollar - lowest in 20 Months
However, despite the recent depreciation, Rupee is one of the Best among EM currencies. Rupee has lost just 1.86% in the current year, as against Turkish Lira or Brazilian Real, which have fallen by about 14%. Over the medium term, sustained economic growth will attract capital flows, and help Rupee.

·        Bond Yields

10 Year G-Sec Yields inching closer to 8%

The movement in gilt yields is in line with sharp sell-off in the global bonds. US 10 year Yield went up to 2.24% before retracing to 2.19%, a sharp increase in the recent past, perhaps on the fear that oil prices could go up further. Our view is that India is one of the few countries in the world, which could afford to cut interest rates meaningfully - Current over-night rates are 250 bps above CPI inflation. Rates across the yield curve far higher. The Central Bank is targeting a real rate of 1.5-2%, leaving enough headroom to cut rates. Continuing fiscal prudence, disinflationary trends and benign liquidity scenario are expected to result in lowering of interest rates.

·        Fund Flows

FII outflow in the recent past.

FIIs have pulled out nearly Rs. 4000 Crs in May so far. However, FIIs have been consistently investing into India over the longer term. Since 2009, they have invested 120 Billion USD, an average of 20 Bn USD per year. They have been net sellers only in 2008-2009 during the global crisis when they had sold 10.4 Bn USD. With the fundamental outlook for India remaining strong, we expect FII flows to be robust. In addition to FII flows, Domestic Flows will also help. Mutual Funds, for instance, invested 6.6 Bn USD in 2014.

·        Flows to other countries

Countries like China, Korea, Taiwan and Japan have been attracting inflows in the recent past
Most investors were heavily underweight in countries like China because their economy was systemically slowing down. However, cheap valuations have started attracting fund flows recently. For instance, since the beginning of August 2014, their markets have gone up by nearly 85%. Some of the recent IPOs have also attracted flows into China. However, over the medium to long term, investors are likely to be guided by fundamentals, and hence we believe India is well-placed to receive flows. In Dollar Terms, Indian equity markets are at the same level as in May 2014, around elections, making it particularly attractive for FIIs

·        Sharp run-up in markets

Indian equities had gone up by 55% since Sep 2013 (since Mr. Modi was announced as BJP candidate), before the current correction of 8-10%.
There may be a bit of fatigue and profit-booking in some stocks. However, valuations of Indian equities very attractive. At 19x trailing P/E on low cyclical earnings, and 15x 2 Yr Fwd PE on expectations of decent turnaround in earnings, the valuations are quite attractive. Market Cap / GDP at 75% low in absolute and relative terms.

·        Concerns on MAT

Uncertainty around MAT may also be playing on the minds of investors
It has been clarified in the Budget that MAT will not be applicable from Apr 1, 2015. However, the claim from past transactions and the uncertainty about the applicability has spooked the FIIs. The amount involved is expected to be small - the amount that is being mentioned are anywhere between Rs. 500 - Rs. 5000 Crs. Stay has been granted to Aberdeen, one of the largest FII investors. Government is also setting up a committee to resolve the issue at the earliest. We believe the issue will be addressed very soon.

·        Earning Growth

Subdued earnings growth

Corporate India’s growth was subdued because no meaningful investment was made in the past – average capex from 2012-2014 has been 1.75%. In addition, the persistently high-interest rate scenario resulted in subdued earnings, despite a reasonably good sales growth (16% CAGR between 2008-2014). We expect this to turn around, and corporate earnings to grow meaningfully on the back of operating leverage and financial leverage.

·        Policy Issues

Reforms being implemented

Government is firmly committed to bringing about key reforms and implementing them. GST has been passed in the Lok Sabha, diesel price has been deregulated, gas price revision, targeted subsidy, hiking FDI limit in critical sectors of Railways, Defence and Insurance, etc., to name a few. We are confident that more such reforms will get implemented, benefiting the economy.

Bottom line: India is extremely well-placed for long-term economic growth and to generate attractive equity returns. The current market correction should be used as a good opportunity to increase allocation to equities

Is the India-story intact? Should investors invest into equities now?

Yes, very much!

·        The Fundamental Story

o Building blocks in place. Rapid growth round the corner.
§ Financial Inclusion – with almost ~100% of eligible India under UIDAI (Unique Identification Authority of India) to lead to Direct Benefit Transfer (DBT) of all social sector schemes, Banking & Insurance penetration
§ Project Monitoring Group – clearing high impact projects. Almost ~$100bn worth till Dec.’14
§ Goods & Services Tax : The most awaited and ambitious indirect tax reform
§ Power sector reforms : Coal mine auctions, Increase transmission network & substantially reduce distribution losses
§ Railways reforms : Proposes to spend over $100bn over next 5 years to expand & upgrade
§ Large infrastructure projects : Dedicated Freight corridors, River Linking project, Metros
§ Road Sector reforms : Efforts to fast track & execute almost $60bn+ of road projects
§ Make-in-India Initiative : with emphasize on Defence & Electronics manufacturing
§ All-round Business-easy reforms : Establishing National Institution for Transforming India (NITI) , single window clearances, online approval systems, e-tenders – leading to substantial reduction in bureaucracy
§ Digital India : To spend over $15bn over next 5 years; e-governance services across spectrum, in addition to complete urban digitization - to connect over 2.5 lac villages
§ Agriculture reforms : Restructuring Food Corporation of India (FCI), Apicultural Product Market Committee (APMC) reforms, Soil health cards, Farmer insurance, proposal for National Irrigation scheme, Easing supply side bottle necks
§ Housing for all : Aims for housing for all by 2022, Affordable housing mission
§ Ambitious foreign trade policy : to grow exports from $466bn in FY14 to $900bn in 2020

o Subsidy savings and innovative revenues give Government financial muscle to spend on the economy.
§ Coal and spectrum auctions have been highly successful (Auction and allotment of 67 blocks has unlocked over $55bn ( 335k crs ) for states / Telecom spectrum auctions raised $17.6bn - Over 1 lac cr )
§ Disinvestments : CY15 targeting to raise Rs. 55k crs i.e $9bn (Several other big ticket disinvestments in pipeline – Hind. Zinc, Specified Undertaking of The Unit Trust of India (SUUTI), Coal India, ONGC etc with cumulative potential of $20bn+ )
§ Banks allowed to raise funding for infrastructure with minimum SLR / CRR requirement
§ Fuel Reforms has reduced the budgeted fuel subsidy bill by Rs. 30,000 Crs, a drop of 50%
§ Rationalized subsidies and trimmed wasteful expenditure like Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA). LPG subsidy through Direct Transfer. In the long-term (>3 years), subsidy rationalization could result in savings of $5 Bn+
§ GST implementation will result in improved tax collection, and is expected to add to the GDP growth

o Huge investments totaling Rs. 24 Lakh Crs envisaged
§ Railways to invest over ~600,000 crores over next 5years on expansion & up gradation
§ Digital India - ~1,13,000 crores (Over next 5 yrs)
§ Roads ~5,00,000 crores (Over next 5 yrs)
§ Healthcare (National Health Assurance Mission): ~1,60,000 Crore (Over next 4 yrs)
§ Swacch Bharat Mission : ~2,00,000 crore (Over next 4 yrs)
§ National Rural Housing Mission: ~3,45,000 crores (by 2022, next 7 yrs)
§ Solar ( Renewable Energy ) : ~6,00,000 crore ( In next 7 yrs for 100,000 MW )

These initiatives envisage about Rs. 24 lac crores ($400bn ) of investment, entailing both Govt. & Private , Domestic & Foreign Investors

o Combination of low interest rate and economic recovery will lead to higher profit growth for Indian companies

§ India is one of the few countries in the world, which could afford to cut interest rates meaningfully
· Current over-night rates are 250 bps above CPI inflation. Rates across the yield curve far higher. The Central Bank is targeting a real rate of 1.5-2%, leaving enough headroom to cut rates
· Continuing fiscal prudence, disinflationary trends and benign liquidity scenario are expected to result in lowering of interest rates
§ Corporate India’s growth was subdued because no meaningful investment was made in the past – average capex from 2012-1014 has been 1.75%. In addition, the persistently high-interest rate scenario resulted in subdued earnings, despite a reasonably good sales growth (16% CAGR between 2008-2014)
§ We expect this to turn around, and corporate earnings to grow meaningfully on the back of operating leverage and financial leverage
We believe equity markets would capture the growth in earnings, to provide reasonable returns over the medium to long term.

·        The Valuations story

·        Reasonable Valuations – The market has risen ~55% in ~18 months, before this short-term correction. Market is nowhere close to bubble valuations. At 19.5x, based on cyclical low past earnings and given our expectations of structural high RoE & enormous growth potential, it is very reasonable.
o India’s market cap / GDP is ~70%. During the peak of 2008, it was over 100%
o In the previous growth cycle, Earnings became ~3 times in less than 6 years….. Sensex grew 6 times.
o If EPS could grow by 15% till FY 2020, and if we were to assign similar PEs as now, then Sensex would be at 55,000 levels! (~2 times) by 2020
o If EPS actually grows by 20%, Sensex would be nearly at 70,000 levels by 2020!! (~3 times)

·        The Sentiment story

Brand India has never been more vibrant and appealing than now, which will augur very well in attracting foreign flows, both FIIs and FDI.
o A total of 16 foreign trips made by the PM (5 of these for multi-lateral meetings like BRICS, G-20, SAARC )
o Barack Obama & China supports India's bid for permanent UNSC seat
o $35bn investment by Japan over 5 years & expertise in high speed trains
o Australia for supplying Nuclear Power fuel - ~500 tns of uranium
o Canada – First visit in 40 years by sitting PM. Agrees to supply 3,000mt of uranium to power Indian atomic reactors
o CXO’s of global corporations for investment in India: Satya Nadella (Microsoft), Indra Nooyi (Pepsico), Mark Zuckerberg & Sheryl Sandberg (Facebook), Jeff Bezos (Amazon)
o $20 billion investment from China

Summary – what should you do??....….

Simple: Add more equities!!

o The India story is strong and intact.

§ Building blocks in place. Rapid growth round the corner.
§ Subsidy savings and innovative revenues give Government financial muscle to spend on the economy.
§ Huge investments totaling Rs. 24 Lakh Crs envisaged.
§ Combination of low interest rate and economic recovery will lead to higher profit growth for Indian companies.

o Valuations are reasonable.

§ 19x on trailing basis and 15x on 2 year fwd basis
§ Market Cap to GDP ~75% low

o Short-term volatility not-withstanding, Indian equities could generate enormous wealth for investors.
§ Even reasonable earnings growth could result in Sensex growing by 2-3 times from the current levels in the next 4 years

o Corrections such as that happening now should be used as opportunities to add more equities.
§ Do not get swayed by short term volatility, nor attempt to time the markets. On the other hand, look at the direction in which we are headed, take confidence from the fact that things are already happening, and invest for the long-term into equities!