Wednesday, May 15, 2013


The Indian rupee has been weakening over the last 2 years. The question is that with the huge current account deficit, recovery may not be any time soon. A weak rupee, however, can help you make money – if you own International funds. These funds have given about 5% returns just with the rupee depreciation. Further it gives you geographical diversification too and the top 10 global funds available in India have given an average return of 22%, whereas Indian equities have been flat.

In the last 10 years in Asia, India has been the best performing county in 2007 and 2009. However, the year in between India was the worst performing country and our crash had been overdone, which resulted in a spike up the following year.

This year till date, the best performing funds are Japan and the US. Although, currently we have no way to invest in Japan, but there are currently 3 funds which have US dedicated investments, two of which started in the last one year. Hence in the last 6 months, the US funds have given the following returns:
  1. FT India Feeder Franklin US Opportunities Fund                  21.21%
  2. ICICI Prudential US Blue Chip Fund                                    18.25%
  3. DSP BR Flexible Equity Fund                                              17.23%

However, the standout global fund has been JP Morgan ASEAN Equity Offshore Fund, which has given a return of 23.54% over the last 6 months and 36% over the last one year. The major trading partners for ASEAN countries are other ASEAN countries and trading with Europe is just 1% of the GDP. ASEAN region is one of the few regions around the world where domestic demand is holding up well in a weak economic growth environment. The ASEAN region will continue to attract foreign investment seeking to take advantage of the consumption story. Indonesia and Thailand are in a strong investment led growth phase.

JP Morgan Greater China Equity Offshore also gave 21.75% during the last one year. This is inspite of the fact that the economic indicators coming out of China continue to be uninspiring. This is mainly because China has been underperforming in 2010 and 2011. China’s Price to book is currently at 1.6 times, which is at the lowest end of the valuations of the last 10 years.

Brazil is a commodity rich country and with the global economy not doing too well. HSBC Brazil fund gave just 5% return in the last one year. The HSBC Brazil fund price has not yet reached its launch price in April 2011.

There are other commodity stocks available – but these should be avoided until there are clear indications of a global recovery.

There is one thing to note – International funds are taxed like debt funds i.e. capital gains are payable.

In conclusion:
About 20% of your equity allocation should be in global funds to give you geographical allocation and also booster in returns due to rupee weakening. Hence I recommend half the amount be invested in US funds and most of the balance in the JP Morgan ASEAN fund and the rest in JP Morgan China fund. 

Thursday, March 14, 2013


Overview of the Economy

1.     The slowdown in the Indian economy is seen in the context of a global slowdown. Only China and Indonesia has grown faster than India. Growth has therefore fallen to 5%. Getting back to the potential growth rate of 8% is going to be a challenge. GDP growth this year is expected to be between 6.1% - 6.7%.

2.     WPI inflation is at 7% and core inflation has gone down to 4.2%. Food inflation is a worry, but steps are taken to increase supply side.

3.     Fiscal deficit will be at the planned level of 5.2% in the current year, and will go down to 4.8% next fiscal. The FM has pledged to reduce the fiscal deficit to 3% by 2016-17.

4.     Net market borrowing has been pegged at Rs. 484,000 crores. This is higher than what was expected. Gross borrowing is at Rs. 629,000 crores out of which Rs. 50,000 crores will be borrowed to buy back bonds maturing later, to smooth out the maturity profile. Hence gross borrowing is at Rs. 579,000 crores against Rs. 558,000 crores in the current year.

5.     Expenditure is expected to grow at 16.7% YOY, up from 9.7% in FY 13

6.     Gross Tax Revenues are budgeted to grow at 19.1% in FY14, up from 16.7% this year. This could disappoint unless growth picks up.  Total estimated receipts are up 23% from this year, which could be a stretch.

7.     Disinvestment target of Rs. 40,000 crores targeted.

Key Focus Area of the Budget

1.     Women: to stand in solidarity with the girl children and women. Pledge to do everything possible to empower them and to keep them safe and secure.
2.     Youth: to be motivated to voluntarily join skill development programmes.
3.     Poor: to benefit from the direct transfer scheme: this will be rolled out throughout the country.

Budget proposals, which will directly affect the Investor

1.     There is no change on Slab rates for personal income tax. However:
(a)   Tax credit of Rs. 2000 to be provided to every person having an income upto Rs. 5 lakhs.
(b) Surcharge of 10% for individuals whose taxable income is over Rs. 1crore.

2.     Surcharge increased to 10% from 5% on companies with a taxable income of over Rs. 1 crore. (5% for foreign companies). This increase is for 1 year only.

3.     Surcharge on Dividend Distribution Tax raised to 10% from 5%

4.     Direct Tax Code to be introduced in Parliament the current parliamentary session.

5.     First housing loan of Rs 25 lacs (value of property Rs. 40 lacs) would get an additional deduction of interest upto Rs. 1 lakh. This deduction can be claimed for a maximum of 2 years.

6.     TDS at 1% payable on the value of transfer of immovable property where the consideration exceeds Rs. 50 lakhs.

7.     Securities Transaction Tax has reduced for Mutual funds, equities, ETFs and Futures. However there will be a Commodities Transaction Tax on non-agricultural commodities.

8.     Rajiv Gandhi Equity Saving Scheme to include mutual funds as well. Further it will be applicable to those first time investors having an income upto Rs. 12 lakhs and will be applicable for 3 years.

9.     Inflation Indexed Bonds will be launched.

10.            Tax free bonds allowed upto Rs. 50,000 crores in 2013-14 based strictly on the capacity to raise funds in the market.

11.            Biggest blow to the debt mutual funds is the Dividend Distribution Tax of 25% + surcharge which comes to a total of 28.325%. Hence holding investment for a year and paying capital gains, would be the tax efficient way to invest in debt funds going forward.
Impact on the Equity Markets

As there were such high expectations from the Budget, the initial impact was negative. There were no specific steps to spur growth in the economy. After years of high fiscal deficit, it has become inevitable that the economy would need to go through a phase of fiscal consolidation.

Going forward equity investors would have to focus on earnings growth, and the global news flow. Rate cuts and continued FII inflows would help spur on the equity market.

Impact on the Debt Markets

The RBI should be pleased with the measures in the budget as it makes the right moves to tackle the Current Account situation and also addresses inflationary pressures. Hopefully, it can undertake monetary easing with a greater degree of confidence.

As most of the borrowing programme is normally front loaded, Open Market Operations are likely to continue as a theme. Interest rate cuts to the tune of at least 75 bps are expected this year, and hence a duration call can continue. 

Sunday, February 3, 2013


2012 was a great year for both the equity and the debt investments.

The Sensex moved up 25.7% during the year to close at 15455.  During the same period, true to form as an outperformer in up-markets, the midcap index gave a return of 38.5% to end the year at 7113. This is however following year 2011, where the Sensex fell 24.2% and the Midcap index fell 33.4%. In fact the Midcap index is still not at the 31st December 2010 level of 7715.  India has been amongst the best performing markets in 2012.

Debt market also gave great returns. The year started with yield of between 9-10% for very short term funds, medium and long term funds. The yields tightened further by March 2012. RBI had already announced that they would be no more interest rate rises during the year. However the 50 bps rate cut in April 2012 was unexpected and very welcome. The short term debt funds yields immediately fell giving capital gains in that category. By December, the clamour for further rates cuts, even by the Government was strident, and yields fell drastically in December. The Open Market Operations undertaken by the RBI (where they were buying Government Securities) ensured the 10 year GSec rates fell by about 30 bps in one month. However, the RBI governor gave only 25 bps repo rate cut in January, 2013, the run up of which has already happened in December.

How much can this all be repeated in 2013?

1.  Global Scenario

        With what started as a Lehman crisis and housing crisis in the US, swiftly spread all over the globe, especially to Europe. However, the European Union has not broken up although Portugal, Greece and Spain are in a depression and the rest of Europe is in recession. US GDP has started growing, however last month there was a negative figure. Shale gas discover in the US will be a game changer for that country.  China’s Purchasing Managers Index has been increasing indicating that the country’s manufacturing activity is gaining some momentum after slowing last year. The final EMI report for 2012 stated that although economic activity rose during the year, it was at a rate weaker than the average shown over the 4 years since the economic crisis in 2008.

     2. Foreign Institutional Investor inflows

             During the year, FIIs invested Rs. 24 billion in our equity markets. As the Indian investors are absent in the market and as the Domestic Institutions have to sell at every rise in the markets, we are reliant on FIIs to push the markets further up. However, with China’s improved manufacturing data, there is going to be a competition to being the recipient of FII flows.

 3.  Political Reforms

           There was a flurry of reforms in the last quarter of 2012 with the FDI in retail and aviation being passed, cap on LPG subsidies, hike in diesel and petrol prices and cash transfers and this all has boosted the market sentiment. Passing of the Goods and Services Tax and the Land Reform bill, if done, will be a game changer. However, the Government will start to focus on 2014 elections, and there will be no desire to control expenditure.

4.  Gold

       Gold which has shone brightly over the last few years lost their sheen in 2012, giving a 10.5% returns. In dollar terms the return has fallen to just 7%. With this run up in equities, the Mutual fund industry witnessed an outflow, whereas gold purchases continue to remain positive.

5.   Oil

        Brent crude averaged 2012 at $ 111 per barrel. It gained just 3.5% in the year after rising 13.3% in 2011. However as India imports most of its oil requirement, we could not take advantage of this low growth because of the weakening rupee. However the oil market rose sharply in January to $ 117 per barrel, and this is going to put further stress on our deficit.  US shale discovery has the country less dependent on importing oil.  Last month, Australia too discovered huge reserves of oil.

6.   Valuations of the market

              At the end of 2011, the Price/Earnings of the Sensex were 16.41 times and the Price to Book Value was 3.13 times. At the end of 2012, after a 25% growth in the Sensex, the PE of the market is now 17.53 times but the price to book value has gone down to 2.97 times. The average PE of the market has been over 19 times, hence we are below average valuations. Further in the December quarter results many companies are beginning to show a bit of a turnaround and will be re-rated.  We are coming to the end of the earnings downgrade cycle. However revival of the investment cycle may take some time.

    7.  Interest rates.

                RBI governor had indicated at the end of 2011 that he was done with rising interest rates, which was hurting growth. So far the RBI governor has cut 75 bps repo rates. However, he did sound a note of caution that if inflation remains stubbornly high, interest rates might not fall as fast as expected.

All the above points only let us know what the current situation is and do not let us really know in which asset class we should invest.

There are a few simple rules which allow us to take the stress out of investing:

  1.  Decide on your asset allocation between debt, equity and even gold, if you wish, depending upon the amount of risk you are willing to take. However, understand that equity will give the best returns of the three over the long term. 
  2.  If your financial goal is less than 5 years, invest only in debt funds. However, do consider the effect of inflation on your wealth creation, and ensure that your debt investment post tax gives you a higher return than inflation. This would mean investing in debt mutual funds which are more tax efficient. 
  3. If your financial goal is more than 5 years, then invest in equity. However profits in equity should be booked as the valuation of the market goes up. 
  4. If your goal is wealth management, then invest as per your asset association. Your asset allocation should be maintained when the PE of the markets are between 16 and 19 times. For every 1 point below 16 times add 5% to equity and for every 1 point above 19 times reduce 5% from equity.

As Bruce Greenwald, who is recognised widely as a value investor expert, said,           “There are no bad days in the market. When the market is down, you’ve got a bargain, and it’s lovely to think what you are buying at low prices. When the market is up, the bargains have gone, but you’re rich.”

Hence do not agonise at what the market is doing now and likely to do going forward. Follow the rules, or better still work with a Certified Financial Planner, and you will not have to worry achieving your financial goals or creating wealth.