Valuations may be high, but India growth story is secure, feel FIIs

Indian markets are looking expensive and the continued inflows are being driven more by a desire to avoid underperformance rather than conviction in the fundamental story, say some of the leading foreign institutional investors (FIIs) invested in the India equities market.
After having net sold shares worth $8 billion in 2008, foreign investors have mopped up close to $12 billion worth of equities so far in 2009.
“Valuations are expensive (18 times FY10 earnings), relative to the rest of the world. But India’s growth story is more secure than many other countries. And there is a lot of liquidity in the world chasing growth. As such, institutional investors believe that the earnings growth and GDP are strong enough to sustain these valuations,” says Jyotivardhan Jaipuria, MD and Head-Research of BoA Merrill Lynch.
India has long been touted as being at an advantage, given that its growth is less co-related to that of the global economy. And with central banks around the world pumping in liquidity to kick-start their respective economies, the stock of money in the system has shot up drastically. With no return on deposits in any part of the world, there is a lot of money chasing the few growth economies.
But there are those who believe that this in itself calls for investors to exercise caution. “There is an element of risk in that if the newsflow is not as good as expected, the market may react adversely. The market needs pause to allow valuations to catch up with earnings growth. In the long term, this is good for markets,” added Mr Jaipuria. Sandeep Kothari, portfolio manager at Fidelity Mutual Fund is positive on the market but like most of his peers, is concerned about valuations.
“The economic cycle is turning and the business is strengthening. The question is how much markets have run up and what is in the price and what is not. One is worried you could see a last phase of frenzy like you saw in 2007. We are yet to see that kind of retail participation,” he added.
FIIs maintain that flows are unlikely to slow down till such time central banks start pulling back the stimulus money. There is a perception that markets are likely to surrender some of their recent gains before long. However, the general perception is that it is likely to be a gradual decline.
Whatever the case maybe, the recent upsurge has seen the Sensex overshoot most of the fair value targets set by foreign brokerage houses. While Citi had set a 15400 target for the Sensex, Deutsche Equities target was over 16000. “Our fair value Sensex target for the year is 16500. However, liquidity and high levels of risk appetite could lead the market to overshoot our fair value target in the short term. India remains a highly attractive market from a long-term perspective, offering a structural growth story,” said Abhay Laijawala, head of research, Deutsche Equities India.

Source: http://economictimes.indiatimes.com/news/economy/indicators/Valuations-may-be-high-but-India-growth-story-is-secure-feel-FIIs/articleshow/5074163.cms

Lessons from the world financial crisis

(D. H. Pai Panandiker is President of RPG Foundation. The views expressed in this column are his own)
By D. H. Pai Panandiker
The collapse of Lehman triggered the world financial crisis this time last year. Stock markets crashed; credit was frozen and banks were scurrying for cash; crude oil prices dipped and gold prices shot up; investment shrank.
Finally, the financial crisis translated into recession with severe loss of employment and income. With the inter-linking of economies no country escaped these drastic consequences.
India was hit badly but avoided recession. Nevertheless growth dropped and is yet to recover. FIIs repatriated more than $13 billion and deepened the fall in stock prices.
Sensex plunged 62 per cent, much more than Dow Jones. The RBI had to draw down reserves. The rupee fell 20 per cent, industrial production declined and exports slumped.
Indian banks, except probably two, did not have exposure to sub-prime debt since they did not have much international business. Besides, the regulations of RBI did not permit excessive debt:equity ratio. Hence Indian banks were largely unaffected.
The international crisis prompted the Indian Government to act. That was more to avert recession than to back up the financial system.
Stimulus packages were introduced mainly aimed at increasing demand by reducing excise duties and increasing investment in infrastructure. The RBI did pump in liquidity with cuts in CRR, SLR, and the repo and reverse repo rates. Recovery has started but progress is slow.
There are lessons to learn from the crisis and new initiative to be taken.
First, with large infusion of cash by Federal Reserve, it is likely that the dollar will weaken in future against other currencies. RBI has a large part of its foreign exchange reserves in dollars and should therefore change the composition of reserves in favour of the euro and gold.
Second, although most banks are owned by Government, they should be financially sound on their own. Therefore the capital base of banks has to be sound and conform to the new Basel standards. Banks should be modernized and to attain economic size through mergers.
Third, financial supervision has to be strong. That also requires that there should be coordination among the concerned agencies like the RBI, fiscal authorities, Sebi, etc.
Fourth, regulation should go hand in hand with innovation of financial instruments. The financial crisis was to a large extent spurred by financial instruments like Collateralized debt obligations (CDO).
Fifth, RBI should keep constant watch on liquidity requirements. The financial system in the U.S. would have collapsed but for the timely release of cash by Federal Reserve. The measures taken by RBI were a little too late.
Sixth, Government should curb fiscal deficit to ease pressure on the market and continue to take steps to open up the economy, whether in respect of trade, convertibility of the rupee, external commercial borrowing and foreign investment, since the benefits would be much more than the safety of a closed system.
It appears that the worst is now over and the salvage operations are complete. It is time to reform the system to enable it function smoothly and efficiently under good supervision.

Source: http://in.reuters.com/article/economicNews/idINIndia-42327820090909?sp=true

Mr. Anand Shah, Head-Equities, Canara Robeco Mutual Fund

Canara Robeco is a JV between Canara Bank, a 100-year old premier bank in India and Robeco, an 80-year old Rabobank entity and an asset management specialist. It is one of the fastest Growing Asset Managers in India, clocking 94% growth year-on-year in AU M (June 2009 over June 2008). It is the Lipper’s Bond Fund House of the Year for 2008 in India. Canara Robeco has an experienced fund management team with over 75 years of experience amongst them in Equities and Fixed Income.
Mr. Anand Shah, Head-Equities, Canara Robeco Mutual Fund joined the firm in 2008. He has done his MBA from IIM-Lucknow. Prior to this, he has worked as a Fund Manager with Kotak Mutual Fund for more than 6 years. He also worked as a co Head-Equities with ICICI Prudential Mutual Fund.
Speaking with Yash Ved of India Infoline, Anand Shah says “Liquidity has taken the markets up so far, but we are not comfortable with the valuations right now.”

What is your view on the Indian stock market at this point of time? Where do you see the Sensex by March?
In the short term, we are cautious on the stock market. According to us, the market has factored in a lot of recovery in the economy, domestic & overseas. We don’t see a rosy picture for the global markets next year. The large fiscal stimulus that has supported the markets across the globe will be rolled back partly or completely depending upon the recovery. We see little bit of caution in the markets given the current valuations and fundamentals. Valuations are neither low nor very high. Liquidity has taken the markets up so far, but we are not comfortable with the valuations right now.

What is your view on the Indian economy?
The Indian economy is more resilient than several other global economies. India will continue to grow at a decent rate. India’s FY10 GDP could hit 7%, though we see monsoon affecting the GDP growth rate by 100-150 basis points.
In terms of global markets, whatever green shoots we are talking about is nothing but stabilization of the economic deceleration. The emergency stimulus measures taken by governments around the world will get rolled back next year. As a result, the global economy could actually see another dip in growth compared to this year.
That is where we see an impact on global equity markets which in turn will have some impact on the Indian markets as well.
The global markets have already revived. It is the liquidity that is driving the markets. Otherwise, actually, the markets should be in a correction mode.

What impact do you see from govt borrowing?
The Government has to increase tax revenues and reduce expenditure to keep the bond market stable.

What is your AUM?
Our AUM is Rs84bn. Out of this, around 10% - 12% is equity and rest is debt.

How do you see inflation and interest rates?
We see inflation going up to 6-7% by March 2010, if food inflation deteriorates further.

What is your view on the rupee? What kind of flows do you expect from FIIs?
In the short term, the rupee would depreciate and the dollar will appreciate, and in the long term, the rupee will appreciate vis–a-vis the dollar
India has always been one of the top receivers of global funds and will continue to get money from the foreign investors. There will be bouts of risk aversion which may lead to some outflows. It depends upon fiscal policies pursued by the Government and the status of recovers in the global economy.

Which are the sectors you are bullish and bearish on?
We are bullish on sectors that are linked to the domestic consumption. We are bullish on Telecom, Banking, Power and Pharma and Gas Utilities.
We are bearish on Global Commodities and Metals – sectors that are dependent on global demand.

Any NFO(s) in the near term?
Currently there are some products in pipeline and we would launch our funds as and when we see an opportunity.

What are your plans on the distribution side?
We have done well since 1-2 years of its existence. We have tie ups with most of the banks and also we see huge potential in our Canara Bank distribution.

What is your view on the bond market?
We already have the yield on the benchmark 10-year government bond at around 7.3%. Inflation is also inching up and is likely to be at 6-7% by March. So, our view is that by March, the benchmark 10-year yield could touch the 8% mark.

Source: http://www.indiainfoline.com/news/showleader.asp?storyId=836&lmn=1

Sensex back at 16k, India best performer among Asian peers

A renewed burst of purchases by foreign funds pushed major stock indices to a 15-month high on Monday, leading to concerns that the market has run far ahead of itself.
The Sensex of the Bombay Stock Exchange and the National Stock Exchange’s Nifty rose by over 2% on Monday and have more than doubled in the past six months, causing market watchers to wonder if stock prices have discounted the economic recovery too quickly. Many fund managers privately voiced concerns that valuations are slowly expanding into a bubble, but added that strong liquidity and a positive mood in world markets could push stock prices higher for some more time.
“In the short term, we could see the market rising further because there is lot of cash on the sidelines, awaiting a correction,” said Nilesh Shah, chief investment officer and deputy MD, ICICI Prudential AMC. “But unless this cash is deployed in the market, we are unlikely to see any deep corrections.”
The 30-share Sensex closed at 16,016.32, or 2.1% higher, and the 50-share Nifty gained 2.2% to 4782.90. Provisional data showed foreign institutional investors net bought Rs 1,060 crore worth shares on Monday and domestic institutions Rs 150 crore.
The mood in world markets was upbeat following a statement over the weekend by the G-20 grouping of major economies that financial markets were stabilising and that the global economy was improving. India was the best performer in Asia while most European markets gained between 1% and 2%. “Possibility of earnings upgrades and hopes of incremental reforms could further strengthen liquidity,” said Navneet Munot, chief investment officer of SBI Mutual Fund, which managed about Rs 35,000 crore in assets.
Dealers said market operators took advantage of the holiday in US markets today to ramp up stock prices. Despite rising stock prices, turnover has remained on the lower side, underscoring the cautious mood among players. On Monday, traded turnover in the derivatives segment was about Rs 57,000 crore while in the cash market it was Rs 23,000 crore.
Investors continued to lap up second line shares, with gainers outnumbering losers nearly 4:1 on the BSE. “It is purely a liquidity-driven rally,” said Rashesh Shah, CMD, Edelweiss Capital. “Maybe, when the quarterly numbers start coming in next month, investors could get a bit more selective,” he added. Realty stocks were the star performers, with the BSE realty index gaining over 5%. Metal, banking and automobile stocks, too, witnessed good demand while investors shunned FMCG and IT shares.

Source: http://economictimes.indiatimes.com/Market-News/Sensex-back-at-16k-outperforms-Asia/articleshow/4984390.cms

IT will be closely watched in months to come

An average return of 105% over the past six months --that is what an average technology sector fund has given. During the same time period, an average diversified equity fund delivered 77% and the Sensex returned 77.48%.

After a lull of close to two years, things seem to be looking up for these funds. In part, this has also been due to the falling rupee, which in turn, has meant more bang for each buck these companies which essentially earn their revenues from overseas. Comparing the performance of the IT sector with others, we find that the sector has emerged the third-best performing since the beginning of this year. The top two best performing sectors were metal and auto. However, this is in stark contrast to the trend in 2007 and 2008, where the sector was among the worst performers.
The period between 2003 and 2007 was the longest and most profitable bull run in the history of the Indian economy; The Sensex moved up from 3390 points to 20286 points. In 2003, the IT sector specific mutual funds managed to deliver 71.43% returns, while in 2006 they delivered 45.57% return. These returns were outstanding compared with the returns clocked by BSE IT.
This bull phase was brought to an end by the sub-prime crisis. The sub-prime crisis reared its ugly head for the first time in mid-2007 and severely hampered the outlook for technology companies, most of which depended on revenues from the overseas clients.
During 2007, share prices of the giant IT companies such as TCS, Wipro and Infosys hit rock bottom as they dipped in the vicinity of 50%. In the initial months of 2007, the prices of TCS hovered around Rs 1,300, which dropped to approximately Rs 944 by November. A similar trend could be seen in the case of Wipro and Infosys. These scrips were among the most popular within the IT sector.
The scenario in the current year stands in stark contrast to the trend over the past two years. The performance from January 2009 till date, on an average, has been as high as 77.52%. The stock prices of companies like Wipro and Infosys have moved up, on an average, by more than 100%. The sector-specific mutual funds consequently increased their exposure in core technology companies to 74.35% in July from 61.97% in January 2009.
For more than a decade, the technology sector was aggressively courted by mutual fund schemes. In fact, paying little heed to principles of diversification, mutual fund schemes hoarded technology stocks. And then came the dismal dotcom bubble burst phase of 2000-01 and mutual funds in India learnt the lesson of diversification the hard way. While better diversification in portfolios emerged, technology stocks, however, continued to take the centrestage in the portfolios of diversified equity schemes.
The data reveals that up until March 2007, the allocation to technology scrips by the average diversified equity fund rarely dropped below 10%. As an average, across a wide range of diversified equity schemes, this number is large. However, the allocation to the sector almost halved during 2007. Since March this year, there has been a trend reversal of sorts with a discernible uptake in the positions taken in the IT sector. However, it remains to be seen whether the sector will win back patronage of diversified equity schemes.
A similar trend is evident in case of sector schemes. Sector schemes, by their nature, can at best stack money in cash, in case of absence of any lucrative opportunity in the sector. However, this hasn't been the case for technology sector funds. There was a discernible move towards allocating funds to alternate sectors such as telecom and entertainment. DSP BlackRock Technology.com was a trendsetter in this respect. The fund management had enough foresight to include a broader segment in its investment objective. In fact, it is only after DSP BlackRock Technology.Com tasted success with its investments outside core technology companies that other IT sector funds began to diversify their holdings. The only scheme that refrained from doing so was Franklin Infotech Fund, which consistently invested in core technology companies. At the same time, some fund houses like UTI and Kotak discontinued their technology schemes and merged these with other diversified equity schemes.
The key to sustaining this recent performance by the sector will hinge on the rate of recovery in the western economies. While domestic demand has enabled the sector to stay afloat, larger gains will come from businesses overseas. Whether the current scenario marks a trend reversal is yet to be clear, but we are certain that this sector will be closely watched over the coming months.

Source: http://www.dnaindia.com/money/report_it-will-be-closely-watched-in-months-to-come_1286454

See new high for mkt in 1-2 years, buy on dips: Reliance MF

Madhu Kela, Head of Equity Investments, Reliance Mutual Fund, sees the Nifty setting a new high in the next 12-24 months on account of higher fund flows and economic fundamentals starting to move up. He advises investors to buy midcap companies which will perform and create value going forward. "Over the next 12-24 months, investors will see a lot of opportunities if they buy and hold." He recommends investors to buy stocks on dips.
Speaking on whether the Nifty can retest its previous lows, Kela says he does not see the Nifty breching 3,800-4,000 levels. "The only thing which could take Nifty to that level is if something globally happens."
On the recent spate of initial public offerings, he believes India Inc should have priced those issues at least 10-15% cheaper than where they were priced. However, he was quick to add that they stll makes sense from a long-term perspective.

Here is a verbatim transcript of the exclusive interview with Madhu Kela on CNBC-TV18. Also see the accompanying video.

Q: Do you think we formed a base now for the Nifty, we should not look too much southward of 4,000?
A: Yes. Going by what is being presented as of now and going by the trend of last six months, I would argue that the 3,800-4,000 level must hold because in the crossing over, 3,800 was a very big resistance to cross over. In the fall also, 3,800-3,900 was a very big support. Market took that support many times before decisively going down.

Q: Do you see in the course of this summer globally that Nifty retesting 3,900-4,000 kind of levels and if yes what could get it there because it is not going there, it is just taking support at higher levels of 4,300?
A: Too many people are waiting, I am also one of them because we keep getting money and we definitely have some cash.

Q: A lot of cash or a lot of it has been deployed?
A: No, I don’t think there is a lot of cash now. We have deployed it. For the last three-four months, we are deploying it.
I think the only thing which could take Nifty to that level is if something globally happens. The last two-three weeks for the monsoon have been reasonably good. So, there is something which has to go wrong globally for the Nifty to go back to 3,800-3,900 levels.

Q: You think the monsoon has discounted that for the moment?
A: Yes, because most of the part of the country has quite well rains in the last two-three weeks. In the south, there is excess rain. In northeast, northwest there are rains. North remains a matter of concern. For the country as a whole if you have one-two more good weeks of monsoon, then this fear may have been discounted.

Q: June, July, August we have spent in this broad range of 4,000-4,700. Do you think we are ready to breakout now or would that be surprising to you?
A: For various people market means various things. For a day trader, it is very important to time it for the day. For investors, we look for a consistent period of outperformance. Whether 4,700 is taken out in the next two months or it is taken out next month that is less important to me than saying that are we really heading for a new high in the Nifty in next twelve to twenty-four months. I think we are heading for it.

Q: Twelve months or twenty-four months?
A: Twelve to twenty-four months. The direction is very important and the most important thing for forming that judgement is you see the amount of liquidity which is being thrown in the world, which is running into trillions of dollars. Now, you are starting to see the real economic fundamentals also start to move up. Every data point which we have been observing for the last three months in the West has surprised and is optimistic. It is better than what the world was expecting. So, if you have a slow but decisive fundamental recovery and money coming into emerging markets because of the dollar being weak, then we should definitely head towards a new high in the next twelve to twenty-four months.

Q: In that sense, where are we compared to the last bull market? If you look back and think about 2003, 2004 where have we reached if this is indeed a multi-year kind of a bull cycle which has begun again in your eyes?
A: I think markets have seen a very sharp rise. Let us accept that because in March we were at 2,500-2,600 and now we are at 4,500-4,600, so it is like 80-90% rise. I do not think that there is too much beta. Can the pace of the rise which has happened in the last six months continue? To me, the answer is no. But will you have opportunities? This is the most interesting phase of the market where you take those stock specific bets and market is very skeptical about the run and valuations have run up. So, people do not have conviction to buy. This is the time if you can get those ideas and create alpha for your portfolio, I am finding it to be very interesting place to be in.

Q: You are saying that the easy money on the Nifty might have been made?
A: Stock specific there are humongous opportunities. In my opinion, if one is right in predicting the bull run and predicting India, you could find even companies today which are in the vicinity of Rs 5,000-15,000 crore market cap, that could go up 3-5 times over the next few years.

Q: When will midcaps recover? We have had a big run in the Nifty but many midcaps or even non-index largecaps are trading at 20-30% of their peak value. If you are saying that in 12-24 months the Nifty will get back to a new high, when will these stocks outside the index get back to their old highs?
A: Market is narrowing, so now everything will participate. You need a sizeable company. A company which is having Rs 2,000 crore market cap was like a midcap. Now, that Rs 2000 crore has become RS 6,000 crore and Rs 8,000 crore for many midcap names. If you compare it from the peak obviously they have not recovered to that extent, but if you see the leadership, if you see companies which are able to perform and create wealth, those companies are getting narrowed. As the market matures, obviously they will get even narrower. I don’t think one should expect a big bang, full-fledged recovery in midcaps. I see a lot of midcaps performing. That is where the real challenge is that are you able to identify that real alpha in this market to make that extra buck which is to be made out of this market.

Q: There were a lot of risk associated with the kind of stocks that you are talking about in 2008, balance sheet risk etc. Do you think the time has come now for investors to say I will not hide in a cocoon because I have a fear of losing my money, I will go out and take a little bit of risk now and by these kind of stocks that you are talking about?
A: I think people by and large will resort to this because if you look at the world, it is such a big paradox because so much liquidity is being thrown. At one end, people are struggling to protect their capital. In America if your money is in dollars and in the bank, your money is getting lost. So, emerging markets have done 50-100%. Similarly, index stocks have gone up like 50-100-150% in large companies and now some of them look richly valued from 12-18 months perspective. People have no choice but to look at qualitative midcaps. Let me make a distinction here. Just because we made a lot of money identifying these small companies and they became multibaggers, not everything which is small will become a multi-bagger. So, these are characteristics of these companies. If you bet money there, some of them still have a lot of value.

Q: You have been deploying a lot of cash over the last two-three months, you have been buying midcaps yourself aggressively in your portfolio?
A: Yes, we have been buying companies which have growth characteristics. In our scheme of things, if I think that the Nifty goes to new high, can this particular company if I am buying it at 10-12 P/E multiple and has a 30-35% kind of earning visible growth over the next three-four years, can we buy those kind of companies which are still at a discount? Everyone is not able to raise money, you are getting these opportunities, promoter themselves are wanting to sell some of these companies to you because they need capital.

Q: We went through a phase when the first big rise in the market happened when a lot of fund managers including hedge fund managers underperformed the index because largecaps did so well. Do you think in the next year or two, it could be turned around, where people with good portfolios beat the index quite a bit?
A: Absolutely. That is my firm conviction that you will end up beating the broader market if you do the right stock picking and hold it with conviction. The backdrop of this rise is that we have seen such turmoil times in October and December-January that everyone is very scared. People are not participating with a full heart in that sense. If I buy thing at Rs 100 and it becomes Rs 120-130, I am very tempted to book profits. People have forgotten in one sense what a bull market is like. Because everyone has underperformed, everyone is trying to catch up, so let me make these 10-20%. For sometime these 20-30% trades will work, but after that once you buy a stock, you sell it and then it comes off. You think it will come off a little more but if you are not able to buy it and if it goes higher than what you sold then mentally you are closed. You cannot buy that stock.

Q: That is why I have asked you about 2003-2004 because this exact phenomenon played out, people traded for a while and they missed the big 4-5 times kind of moves which happened over the next couple of years. Do you think we have entered that phase where if you buy and hold today, you can actually make multiple returns not just trade these 20% moves?
A: Over the next 12-24 months you will see a lot of opportunities if you buy and hold. If you have conviction, ultimately all of us are operating that given these circumstances you are buying a particular set of stocks, if situation changes then we will stand to change. But as things stand, if people will build a portfolio for next 12-24 months, they will stand to gain.

Q: How did you think the last few initial public offerings (IPOs) were priced because that is one conduit where a lot of people start getting in when they have been out of the market for a year because of a bad fall? Do you think they have left adequately on the table?
A: No. It is a little unfortunate part of the corporate India story that ultimately people know what is good for them in the long run but they cannot resist the temptation of the short-term pricing. If they leave some on the table, it is very good for them as a group and also for the broader market because retail investor is just creeping in. He is a poor fellow who has been out, has lost so much money that for 12-18 months he has not crept in. Some of these IPOs were filled even at a retail level by two-three times, you allow him to make money then he will come in the next IPO. I would have loved these issues to be priced at least 10-15% cheaper than where they were priced.

Q: Did you participate or you just let it be?
A: We have institution compulsion. If I had a choice, I may have skipped some of them. But in our overall scheme of things, it still makes sense from a long-term perspective. We participated, but did we participate with vengeance that this is my idea and I want to put a lot of money to work? The answer is no.

Q: What about the qualified institutional placements (QIPs)? Are you letting a lot of them pass or are you participating?
A: No, I am letting a lot of them pass. We have been selective. The problem is that there are ten merchant bankers and everyone is advising the management on the best price one can get for the issue which is never good for investors because we don’t want to buy the best priced companies, we want to buy a risk return reward. We have participated in a few of them and we have made money. I wouldn’t say that we have a closed mind that I don’t want to participate in QIPs but we want to participate wherever we can see risk reward.

Q: You spoke about liquidity and a lot of money which is coming into emerging markets. If that is true, then commodities should also do well once again, are you backing commodity stocks?
A: Yes. By and large, we have a overweight position on commodity stocks.

Q: Across the board?
A: Yes, in a lot of portfolios.

Q: Not just metals, even sugar etc?
A: Yes. We have some bets in sugar. Let us say you take three-four countries which one is positive about ‑ China, India, Brazil and Indonesia. I don’t understand too much of Russia so I am keeping that aside. These four countries put together is like 50% of the world population and these countries like China is at USD 6,000 per capita income, India is at USD 2,800, Indonesia is at USD 3,900 and Russia is at similar levels. Over the next five years, you will see at least 30-50% rise in per capita income of these countries. On one hand, you have a subdued growth in these developed markets and on the other hand you have per capita income rising in these countries. With such a large domestic base, money will flow in bunch to these emerging markets. Within that, I think India will be a very big beneficiary because if you have a standalone story then to go and pitch to USD 500 billion pension funds becomes difficult. But if you are part of the bunch, then allocation of money to India will become much easier.

Q: What is the sense you get when you speak to fund managers globally now? Have they reinvested or are still short?
A: A lot of them are still skeptical, underweight, playing it very fearfully. I don’t think a lot of people are still yet to pay with high conviction. I bought X at Rs 40, I sold it at Rs 60, but I don’t think that is the real conviction is what I am able to see.

Q: Are they at least feeling that they have missed out or not?
A: Yes, 100%. We felt that because we were sitting on cash from November 2007 to February. So for 14 months we protected our funds. You get little carried away with your own success and so is the case with lot of people who have been right in predicting the last downfall.

Q: So, you are saying even you have not moved as swiftly as you wanted to?
A: I would have left more swiftly but at least we have an open mind. I think markets have made us much more humble in last 15 years to accept that yes we were wrong and have to carry on with life. So, we are carrying on with life, we are looking at opportunities on a daily basis and have taken large bets in the last four-five months in select companies. We have invested money wherever we like.

Q: You bought things in pharma which was considered a defensive sector, what attracts you in that theme?
A: That has been my biggest call and it has done very well. Even today, the opportunities are 3-4 fold. The penetration level in the pharma sector is very low. Insurance is picking up. You have people who are getting insurance, there are better medical facilities, so the consumption of medicines and medical-related services in the domestic market with this rising per capita income will go up sustainably higher over the next 5-7 years. There is opportunity in the contract research and manufacturing side. You can higher a PhD for Rs 50,000 do your work here. I see a big opportunity like USD 50-60 billion of spends on an annual basis. Can a substantial portion of that move to India? The answer is yes. In a multinational space, if you see, we have started to adhere to patent laws in 2005. It took one to one-and- a-half years for the multinational companies to be convinced that yes we are serious about it.
If you look at the multinational pharma companies, they are available at ridiculously low levels and at historic low valuations. Will it pay off in six months, I don’t know, but will it pay off. In my timeframe of 3-5 years, I am very convinced. Even now you can get into the pharma sector. A lot of these companies are listed at 10-12-13 times PE multiples with a growth rate which could be 20-30% over the next 3-5 years.

Q: Which one of these spaces are most attractive, because not all companies do all of these strong domestic formulations or contract research which you outlined?
A: It will be purely stock picking. Basically, there will be companies which will be in contract research and manufacturing and you have a great management and you buy it and there will be players who would be very strong in domestic side of business and there will be ones who are committed to a MNC. The only caveat which I would like to tell you is that all of them want to delist and want to own 100% of their companies. So, you have to be with the person who has clearly spoken that I am for minority shareholders.

Q: In delisting, candidates can give it back to parent, is it?
A: Yes, but at the price at which they want to buy this. They feel that if the price is Rs 250 and if I pay Rs 400 then I have done justice to the minority shareholders, but no one is near to paying what their long-term potential is.

Q: In the last bull market, the big money was created by infrastructure and bank. Do you think it’s a good chance that they deliver again in this run or you are not as bullish on these two?
A: I think it will be selective. We had a big bull run in technology between 1998 and 2001 where in a lot of people bought it and about 400 tech companies got created. After the burst, we saw that even Infosys or Satyam will die. So, they took some time for the dust to settle down but that list of 400 became actually 15-20 companies for the next bull run to take on. I see a similar kind of a thing happening at some point of time in infrastructure, though it is too early. We haven’t yet played out the full bull run of the infrastructure sector, so you will still have a lot of companies participating. What the Finance Minister has indicated, if you see 9% of our GDP going into Infrastructure, that’s a very large number even though it is 3-4 years down the line.

Q: When you say infrastructure, do you include real estate there or not quiet?
A: I would be still very skeptic on real estate because we really don’t understand them. They bought land 15-20 years ago and I am paying the current market price of that land in my spreadsheet. Within the real estate sector, you see some big winners. Our search is that can we really pinpoint those companies and can we buy at the right risk-reward and at the right price.

Q: Are you now saying that in every big dip in the market I just get more and more invested and I ride this for 2-3 years?
A: Yes, that is currently my motive. We are always open and examining what could go wrong. We are working on more things as to if A, B, C, D, scenario emerges, can it last for one month or three months or even more. One big concern which I have is on Europe where still the banks are leveraged 50-60 times. A country like Switzerland is leveraged 3-4 times as a country as a whole. So, will this fizzle out at some point of time in the market, yes it will. Am I able to see that today, I am not able to. So, we have a list of stocks which we want to get invested into and buy into every dip, but at the same time we are keeping our mind open that if the global worry plays out at some point of time, can we readjust our portfolio?

Q: What would the top 2-3 things you would watch for which would tell you that things are going wrong globally and you need to move a lot of money to cash again?
A: One will be Europe which I would be very carefully watching. Second is this whole thing about China. There are lots of tail winds right now. The loan growth is like seven trillion yen in the first half of the year. The big bet about China is that if the global market recovers and if the export side of this story recovers much better as compared to what it has been in the last 6-9 months and they continue to stimulate the domestic consumption, then we might be able to play off. But that still needs time to play out. We have to watch whether the Chinese exports which had hit an all-time low in October-December of last year can really pick up. In the meantime, can the Chinese economy be sustained on that one engine which is domestic?

Q: In the pit of your stomach, do you get that feeling that we are in a bull market again?
A: Yes. I had mentioned that earlier too. The good thing which I think which humbled me personally over the last 15-17 years is that you have always the right to go wrong in the stock markets. What is important is how early do you correct and how much more time you spend on your own hypothesis, disregarding the world as it is developing. We went wrong for 2-3 months and we could not invest in those months as we could have invested, but we took a note and I am very clear that every dip in this market is a big buying opportunity.

Source: http://www.moneycontrol.com/india/news/mf-interview/see-new-high-for-mkt1-2-years-buydips-reliance-mf/413329/3

Midcap, smallcap MFs zoom 130% since March

Midcap and smallcap mutual funds are zooming up on the returns chart, outperforming benchmark indices. The top performing funds have given 130% returns since March this year.

The midcap stocks and small cap stocks are buzzing and so are the midcap funds and small cap funds.
Srinivisan Iyer, Equity Fund Manager, SBI MF said, “When we talk about midcap as a group, we are talking about an index and within the index there will be standard deviation. As a group midcaps tend to outperform in a rising market, they tend to underperform in a falling mkt purely because the beta in a midcap is very high. So, your call on midcap is a function of what u think the market is going to do. If you catch the right stocks you can do pretty well compared to the benchmark or your peer set. We like the media space within consumer discretionary, we like specific sectors within consumer staples, we like midcap IT, we like midcap pharma.

Source: http://www.moneycontrol.com/india/news/mf-analysis/midcap-smallcap-mfs-zoom-130-since-march/413342

Time to cash out?

Though the stock markets continue to be volatile, they have recovered from the lows touched in March this year. The markets have posted a growth of around 93% (as on August 26, 2009) since March 8, 2009. Expectedly, many investors who have lost a huge chunk of their invested corpus in the stock market crash last year are now eager to recover whatever they can. Now the question is - is it the right time for you to cash out? While you would promptly say YES, we have a contrarian view on this.

Sensex: Rise of the fallen

Broadly, there could be two reasons for making investments. First, and the most ideal reason, is to invest for the purpose of meeting one or more of your future goals/objectives. Second, and unfortunately the most commonly practiced, is to make "quick bucks" by participating in market movements. The latter option amounts to timing the markets, something that many investors try to do, but rarely succeed. In our view, redeeming investments should not be a function of market movements, but rather a result of the following:

1. Redeem if you are sure that the fund in question has failed to meet its purpose in your financial plan. The reasons behind this could include poor performance or change in investment mandate of the fund, which makes it a misfit in your portfolio.
2. Redeem if you have to rebalance your asset allocation. Also,before you cash out, make sure that you have decided where to reinvest the redemtpion proceeds.
3. Redeem when you have achieved your investment objective.

Retirement schemes face tax on withdrawals

The draft Direct Taxes Code, released by the government on Wednesday, proposes to tax all
withdrawals from retirement schemes, but raises the exemption limit on savings to Rs 3 lakh from the present Rs 1 lakh.
However, contributions to short term investment schemes including insurance, mutual funds and fixed deposits will no longer get exemption if the code is accepted by the Parliament.
Under the existing norms, investments in certain instruments like public provident fund, employees provident fund and government provident fund are not taxable at all the three stages — at the time of investments, the amount is deducted from your taxable income, during the period of investment when interest accrues it is not taxed and at the time of withdrawal too no tax is payable.
This is what in tax jargon is called the exempt-exempt-exempt (EEE) treatment, which will now change to EET, meaning the last stage will be taxed.
There is an important caveat here. The tax exempt status currently available to withdrawals would continue to apply to amounts accumulated in post-retirement savings schemes like PPF and EPF up to March 31, 2011. In other words, only money that accrues after that date will be taxed on withdrawal.
For instance, if your PPF account has a balance of say Rs 10 lakh on March 31, 2011 and that grows to say Rs 25 lakh a few years, later thanks to your contributions and the interest adding up. When you withdraw this Rs 25 lakh, you will pay tax only on the Rs 15 lakh that has accumulated from April 2011.
This change in the treatment of savings means that post-retirement annuity schemes would become very attractive, since they do not involve lump-sum withdrawals after retirement.
The EET mode of taxation, the code said, would encourage long term savings by the people. All post-retirement savings, the code stipulates, would have to be in specified retirement accounts held with permitted savings intermediaries who would have to be approved by the Pension Fund Regulatory and Development Authority (PFRDA). On the face of it, this seems to pose a serious challenge for insurance firms.

Source: http://timesofindia.indiatimes.com/news/business/india-business/Retirement-schemes-face-tax-on-withdrawals/articleshow/4887482.cms

The sharp contraction in the U.S. economy "seems to be ending"

The sharp contraction in the U.S. economy "seems to be ending" but recovery will be slow with risks still looming from the weak labor and housing markets, the International Monetary Fund said on Friday.
The IMF, in its annual report on the U.S. economy, stuck to earlier forecasts that gross domestic product will shrink by 2.6 percent in 2009 and then rise by 0.8 percent in 2010.
The report was prepared before U.S. data on Friday showed the economy contracted by a 1.0 percent annual rate in the second quarter.
"As a result of their increasingly strong and comprehensive policy measures, the sharp fall in economic output seems to be ending, and confidence in financial stability has strengthened," the IMF said in its report, which followed consultations with U.S. officials and institutions.
"Nevertheless, with financial strains still elevated, the recovery is likely to be gradual, and risks are tilted to the downside," it said.
The IMF said unwinding fiscal and monetary stimulus measures would have to wait until a sustainable recovery is underway. But they need to develop exit strategies from stimulus programs, strengthen financial regulation and in the medium term cut budget deficits.
Charles Kramer, head of the IMF's North American Division, said the United States may need more stimulus measures if economic and financial conditions worsen significantly.
Still, he said, policy-makers should be thinking about how to end the generous fiscal and monetary policy measures put in place over the last 10 months.
"We should emphasize that now is not the time to implement the exit, but it's a good time to be developing and communicating exit strategies to underpin confidence," Kramer told reporters on a conference call.
The IMF's North American division deputy, Marcello Estevao, said rising unemployment is the greatest threat to recovery efforts.
"The weakness in the labor market is going to reflect into the weakness in the housing market. When people lose jobs, wages don't grow as much, it's harder for people to pay their mortgage, Estevao said.
"There is substantial uncertainty exactly how this feedback would play out. And that is one of the reasons we have this very gradual recovery outlook for the U.S."
He said the IMF sees U.S. GDP growing "a little bit" in the second half, with a sustained recovery not starting until the second quarter of 2010.
The IMF's forecast for unemployment was unchanged, seeing 2009 unemployment averaging 9.3 percent and rising to 10.1 percent for 2010.
DIVERSE FED TOOLKIT
The IMF directors said the Federal Reserve would need to maintain a diverse set of tools to respond to evolving market conditions, and it recommended that assets it holds from bailed-out financial institutions, known as the Maiden Lane facilities, be transferred to the U.S. Treasury to protect the central bank from credit risk.
The value of assets that the Fed has taken over from American International Group (AIG.N), for example, have been reduced by several billion dollars in recent months.
The IMF welcomed the Obama administration's efforts to revamp the U.S. financial regulatory system, and said this should aim to discourage size and complexity among financial firms to limit potential systemic risks in the system.
The IMF also maintained its view that the U.S. dollar was "moderately overvalued," though Kramer noted the dollar has been volatile because of safe-haven flows into U.S. assets during the crisis and the subsequent unwinding of that as the crisis eased.

FUND VIEW-Shinsei sees 15-25 upside for Indian stx in 1 yr

* Correction possible but rules out return to March lows
* Valuations sustainable, sees corporate earning upgrades
* Expects boost in capex, pick-up in inventory levels

Indian shares may gain 15-25 percent in the next 12 months backed by earning upgrades, pick-up in the capex cycle and growing signs the global economy is on the mend, a top fund manager said. While a 10-15 percent correction was a possibility, stocks will not drop to 2009 lows hit in early March as every dip would attract investors sitting on the sidelines, David Pezarkar, head of equity at Shinsei'sIndian mutual fund unit said.
"Small corrections apart, I would say market continues in the upward trajectory," said Pezarkar, whose firm will launch its first equity fund in India next week.
"It doesn't look like we will see some shocking kind of changes happening. Plus, globally I think a lot of economic indicators will turn positive over the next six months and that will surprise a lot of people," he said.
The fund manager recommended investing in sectors such as auto, technology and metals, where he sees a bounce-back in the short-term, but prefers infrastructure as a long-term bet.
Indian shares .BSESN have staged one of the best comebacks in the world this year, rising more than 85 percent from a low hit on March 6. They now trade at nearly 17 times their forward 12 months earnings from close to nine times in March.

While a surge in valuations was making many investors wary, Pezarkar said they were sustainable and would get a boost as economic activity picks up going ahead, and could spark faster earning upgrades, mainly in 2010/11.
Fears companies might apply the brakes on their capex spending because of a fund crunch or lack of demand had subsided.
"Now it seems at least the announced capex, which was under threat of not happening, at least that, will happen," he said.
Pezarkar, who managed about $2 billion for insurer Bajaj Allianz before joining Shinsei in October last year, said the government's thrust on infrastructure and stimulus targeted at raising consumption will boost economic activity.
Output of India's infrastructure sector, which accounts for a little over a fourth of industrial output, grew 6.5 percent in June from a year earlier, higher than an unrevised 2.8 percent in May, government data showed on Thursday.
Stake sales in state-run firms should add strength to the rally in Indian shares, said Pezarkar. He forecast a pick-up in inventory levels, where the drop outstripped the fall in sales on fears the global economic woes would linger for 3-5 years.
"If things stabilise then companies will have to build their inventories," he said, adding production, exports and trade figures should also see a sharp bounce-back.

Source: http://in.reuters.com/article/domesticNews/idINBOM15762420090723?pageNumber=2&virtualBrandChannel=11584&sp=true

Bidding norms blocking road project investment

Bidding norms are blocking investment of at least Rs10,000 crore in roads and highways, according to representatives of some infrastructure firms.

The guidelines, issued in June, said that an application would be disqualified if an investor or its associates holds at least 5% in another company which is applying for the same project, directly or indirectly.

Earlier, this conflict of interest could have arisen if the stake was at least 1%.

“In the last few months, various institutions have set aside close to Rs10,000 crore for investments in roads and highways. This capital cannot be invested as the companies that intend to bid for road projects have investors who hold more than 5% in them,” said M.K. Sinha, president and chief executive officer of IDFC Project Equity Co. Ltd, which has put on hold plans to invest at least Rs1,000 crore in road projects because of this requirement.

Road and highway developers are scheduled to meet minister for road transport and highways Kamal Nath this week to seek relaxation in a number of regulations that they claim have been preventing deployment of funds.

“Due to stringent norms, funds could not be deployed for roads, and many projects have not taken off over the last few years. This time, the ministry is reasonably liberal and we hope that the investment norms will be relaxed to attract more private capital,” said Gokul Chaudhry, partner at BMR Advisors, who also estimated the quantum of money raised by funds for roads and highways to be Rs10,000 crore.

Though the ministry’s move to increase the shareholding limit to 5% was aimed at encouraging investments in road projects, financial institutions and developers say even this is not enough because there are a number of consortiums that have common investors with at least 5% equity share.

“To facilitate road sector investments and improve the bidding process, we feel that the stakeholding limit could either be removed or be raised to at least 26%. A 26% stake will also allow us to get veto powers over the management of the companies where we have invested,” added Sinha.

Other industry executives also said a relaxation of the stakeholding limit was imperative for such projects.

“The clause of conflict of interest should be made liberal. At least 26% shareholding could be set as the cap for investors in companies bidding for road projects. Even the tax and company laws recognize 26% as the limit to consider two companies as related parties,” said Chaudhry.

Agrees Arvind Mahajan, executive director at KPMG Advisory Services Pvt. Ltd. “The test should be not just equity holding but ability to control management.”

Private equity (PE) funds can invest indirectly in the road sector by buying stock in firms that bid for road projects. Infrastructure mutual funds can allocate capital in roads and highways projects by investing in special purpose vehicles (SPVs) created by road construction companies.

“Many financial institutions have raised infrastructure funds with a portion to be invested in road projects, but if such clauses are not relaxed to absorb the capital, they will eventually be deployed to other infrastructure projects,” cautioned Chaudhry.

Currently, Macquarie-SBI Infrastructure Fund (MSIF) and IDFC Project Equity Fund have about $1 billion (Rs4,870 crore) each dedicated to infrastructure projects in India, while 3i India Infrastructure Fund has at least $1.2 billion.

Some of the world’s biggest banks and PE funds have announced infrastructure funds with India as a priority. US-based Morgan Stanley in May 2008 closed its global Morgan Stanley Infrastructure Partners fund at $4 billion, and JPMorgan Chase and Co. has said it would invest at least $2 billion.

The government has announced plans to invest about $500 billion in improving the country’s infrastructure over the next five years, with one-third of the funding coming from the private sector.

Various mutual funds have been raising capital under infrastructure schemes that can invest in SPVs and equities of companies in the infrastructure industry. Reliance Mutual Fund recently raised Rs2,300 crore under its Reliance Infrastructure Fund. SBI Infrastructure Fund, UTI Infrastructure Fund, Tata Infrastructure Fund and ICICI Prudential Infrastructure Fund have their own infrastructure schemes.

“We can invest in SPVs if there is an opportunity. There are prospects of more money from mutual funds coming in for infrastructure projects. These will, however, be subject to regulatory approvals,” said Sundeep Sikka, chief executive officer of Reliance Capital Asset Management Ltd, a unit of Reliance Capital Ltd, which is promoted by the Reliance-Anil Dhirubhai Ambani Group.

“I agree that this norm needs to be relaxed. The industry is hopeful that the new ministry will look at this aspect favourably,” said Mahajan of KPMG Advisory Services. “Relaxation of this clause will move in the positive direction with regard to road projects. However, they are necessary but not sufficient. The ministry needs to do more on policy and even more so on execution to enable these projects to happen.”

Nath last week said the government plans to raise at least Rs1 trillion for construction of 12,000km of highways in the current financial year. Half of that, he said, would preferably be from foreign investors. The ministry has recently raised its target of constructing 2km a day to 20km.

Source: http://www.livemint.com/2009/07/12211006/Bidding-norms-blocking-road-pr.html?h=B

India can sustain 8 to 9 per cent growth rate

Prime Minister Dr. Manmohan Singh has said India should be able to sustain with little bit difficulty growth rate of 8 to 9 per cent notwithstanding difficulties on the international front.
Addressing a press conference onboard after attending the G8-G5 summit at L’Aquila in Italy, Dr. Singh said, “India’s saving is 35 per cent with normal capital output 4:1. I am confident that India will come out of this crisis stronger, but it will be a difficult road to travel.”
“Our exports have suffered, capital flows from abroad have declined, and international bank lending to the developing countries have declined. Therefore, challenge for us is to sustain and revive the growth which we have built up in last five years notwithstanding the deterioration,” he added.
The Prime Minister further said: “All available indicators of 2009 points to weakening of US and European economies and therefore one can say that the global environment for development of the countries of third world has undergone on sharp deterioration.”
Earlier, Dr. Singh expressed confidence that the country can achieve eight to nine per cent growth rate in the coming two to three years and the government will be working to achieve it.
The Prime Minister emphasized that though the fiscal deficit is high, there is a need to rapidly expand economy, create jobs and resources for spending on flagship programmes on education, health, rural development and scope for expansion in infrastructure development.

Source: http://blog.taragana.com/n/india-can-sustain-8-to-9-per-cent-growth-rate-106483/

Sebi needs to focus on investor protection: FM

Protecting investors in the backdrop of the global financial crisis, which eroded a significant market capitalisation in the stock markets, topped finance minister Pranab Mukherjee’s agenda at the meeting with market regulator Securities and Exchange Board of India (Sebi) board.
“We generally discussed some of the problems Sebi... We shall have to address and pay attention, particularly to the basic objective of Sebi to protect investors in this current financial crisis,” Mr Mukherjee told reporters after the meeting on Friday. This was Mr Mukherjee’s first meeting with the full board of Sebi after taking over as the finance minister.
The meeting was also attended by finance ministry officials including finance secretary Ashok Chawla. Mr Mukherjee said the problems faced by some industry players, such as mutual funds post-financial crisis, and measures taken to address them also figured in the discussions.
Enhancing the corpus of the investor protection fund and financial literacy in the country also figured at the customary post-budget meeting, an official, who attended the meeting said.
The finance minister will also meet the RBI board on Saturday and expected to discuss the issues concerning the banking sector and financial inclusion.
Mr Mukherjee said RBI and Sebi were two important institutions that the finance ministry constantly needs to be in touch with.
“Two important institutions that the finance minister meets after the presentation of the Budget are Sebi and RBI.
On Saturday, I will have a meeting with RBI, on Friday I had a meeting with Sebi,” he said.

Source: http://economictimes.indiatimes.com/Indices/Sebi-needs-to-focus-on-investor-protection-FM/articleshow/4764786.cms

We do see long-term potential and promise in India: Rahul Gupta

He’s the first Indian to break the proverbial glass ceiling of Japan’s fiercely nationalistic, even parochial, banking system. Rahul Gupta, who started out as a banker 26 years ago with Punjab & Sind Bank, is the first Indian to join the board of directors of any Japanese bank. Mr Gupta, Shinsei Bank’s senior managing executive officer and CFO, in an exclusive interview with George Cherian from ET NOW. Excerpts:

Do you think there has been a mindset change in Japan’s nationalistic banking setup?
We often refer to Shinsei Bank as the United Nations of talent. At Shinsei, we would welcome talent irrespective of gender, cast, creed, colour, nationality. I have felt very welcome there. I believe performance has been rewarded. Yes, there is a lot that can be done on the Japanese banking landscape but I see the first signs of openness to talent.

There is now a proposal to link executive pay to the price of bonds of that bank in the market. That way the banker becomes more accountable to the creditors, investors. Do you agree?
I would concur. But it’s not about just either equity or debt. Let me tell you the key imperatives of a financial institution globally. I call this ECL—earnings power, capital strength and liquidity. So bankers need to make sure they have earnings that are long term and sustainable, that they have the right asset quality, they have plentiful liquidity so that they fund their balance sheet well and they have adequate strength to withstand a crisis well.
These are the internal measures for ECL. There are external measures as well. There are rating agencies. Second is the entire gamut of market performance. There also has to be the right alignment between reward, performance and timing of the reward.

Have things become more difficult over the last 9-12 months ?
I would think in terms of retail banking, Japan is still challenging because it has a long way to go before it becomes the international best practice for retail banking. Shinsei Bank saw a wide space and an opportunity in that area in 2000. We launched a new retail bank that has been extremely successful. It’s an award-winning retail bank.

Japan’s population is projected to drop to 90 million by 2055 from 128 million today. What are you doing to make sure profitability remains stable?
Japan has a problem with demographics in terms of its declining population. In absolute numbers, we are small in the retail banking and consumer finance space. We think there is tremendous opportunity to grow from 2.3 million to 5 million and even 10 million. So within a declining market, we could rapidly take market share, which is very exciting. But overall, both in retail banking and consumer finance, there will be a decline in consumer space.

You plan to launch three mutual funds in India. What makes you believe you will succeed in this space?
I think the value proposition clearly as what we have proven in Japan, in terms of complete focus on the customer. We think there is an opportunity to bring that consumer experience to India, leveraged by our technology, which is really Indian technology we took to Japan.

Is commercial banking business in India an option you are looking at?
I would say not at this point in time. We have had three not-so-very-good years in Japan. So, we are looking at fiscal year 2009 as the transition year to break even or better. We do recognise the promise and the potentials of India in the medium- to long-term. So, at the appropriate time we will have an India strategy and play along with that strategy.

Source: http://economictimes.indiatimes.com/Interview/Rahul-Gupta-Senior-managing-executive-officer-CFO-Shinsei-Bank/articleshow/4764562.cms

Deficit hurts, but FIIs say they understand

The Budget may have been short of the big-bang policy moves that the market was hoping for. Still, it may be too early to question the government’s commitment to reforms, feel some of the FIIs that ET spoke to. The main concern among these players at the moment is the projected fiscal deficit of 6.8%, which is more than what the market had feared.
“I see no adverse impact on FII flows. In our view, the India story is on track for the next few years,” says Sam Mahtani, director, emerging markets of the London-based F&C Investments.
“One has to keep in mind that the government has five years to implement the reform programme. We need to have a long-term view, keeping in mind the government’s new fiscal responsibilities. We are currently overweight on India, and we like the infrastructure space,” added Mr Mahtani, who manages more than $2.5 billion in emerging markets. Most market watchers feel there could be a slowdown in FII inflows, if not an outright reversal. So far in 2009, FIIs have net invested $5.2 billion into Indian equities and have been the main drivers of the recent rally.
Ashu Suyash, MD and Country Head, Fidelity Mutual Fund, highlights the fact that not all policy announcements are made in the Budget. According to her, over the last year, the government has been responsive and made policy announcements as warranted by the prevailing environment. “One area where greater clarity would have been welcome is on specific steps that would be taken to bridge the deficit, which is at a worrying level. On balance, though, the government’s focus on continuing to stimulate economic growth is encouraging,” Ms Suyash said.
Yet, there are also fund managers who feel the government has missed out on an opportunity to instil confidence among investors. On Monday, FIIs net sold shares worth Rs 351 crore, and according to provisional data on BSE, they sold shares worth Rs 921 crore on Tuesday.
Samir Arora of Singapore-based Helios Capital is of the view that the big picture roadmap was missing from the Budget. “This could have provided confidence to investors about how we would go from A to B in a credible manner,” he added. And there are others who feel the market had set itself up for a disappointment.
“Given that we had a large stimulus programme going on last year — which has been sustained — the fact that there was no dramatic increase in direct/indirect taxes is in itself a relief,” says Pratik Gupta, MD-equities, Deutsche Equities, who believes that expectations going into the Budget were unrealistically high, partly raised by a rather bold Economic Survey.
“Nonetheless, the increase in fiscal deficit is a long-term worry. We would have liked bolder announcements on disinvestment. The post-Budget sell-off has taken away the near-term market momentum. However, the long-term growth potential remains intact and the Budget is not the only policy tool for the government,” said Mr Gupta. Echoing a similar view, Jyotivardhan Jaipuria, MD and head-research, BoA Merrill Lynch, says, many of the reforms might happen outside the Budget. “The market technically needs a breather. It has been slightly on the higher side,” added Mr Jaipuria.

Source: http://economictimes.indiatimes.com/Market-News/Deficit-hurts-but-FIIs-say-they-understand/articleshow/4750899.cms

MFs welcome budget 2009-10

Mutual Funds have welcomed budget 2009-10 saying the proposals were on expected lines. No mutual fund is in any mood to realign investment strategy based on the budget. Not being perturbed by any negative market sentiment, fund houses feel that it is time to look at stocks through its fundamentals. Moreover, fund houses are mostly over-weight on infrastructure sector.
The FM has declared that India Infrastructure Finance Corporation is expected to finance Rs 1,00,000 crore infrastructure projects. Fund managers now feel vindicated in view of taking exposure in infrastructure stocks in their equity funds.
Going forward, AMCs to anticipate some policy announcements on disinvestment front, which they think, FM has made enough reference in his budget proposal.
Budget Reactions from fund houses:
“The budget is positive. The market has over-reacted to it. MF strategy does not change on one budget. Those announcements like disinvestments that market expected will come in due course of time. There is nothing to be disappointed,” said Navneet Munot, CIO, SBI MF.
“The budget has kept the continuity of stimulus package through spending in sectors like infrastructure and agricultural sectors. Further, focus on delivery mechanism is also a welcome move. However, market reaction is a result of over expectation,” said A Balasubramanian, CIO, Birla Sunlife Mutual Fund, who feels, budget is good from medium to long term perspective.
“If there is no policy announcement, there are enough references to policy count like on fiscal prudence or disinvestment. In the next few weeks or months we would witness some real policy announcements based on those references. Consequently, we will be tweaking our investment strategy,” said Ved Prakash, Managing Director, TATA Asset Management, who feels, that market reacted emotionally to the budget out of over expectation and the budget truly reflects reality of current environment.
“The budget is very much on the lines of expectations. We are not realigning out investment strategy. The market disappointment basically come from the size of fiscal deficit that is now pegged at 6.8% for FY10 fiscal deficit of GDP as against the target of 5.5%,” said Sanjay Sinha DBS Cholamandalam.
“No policy announcement coupled with the size of fiscal deficit has led to a correction in the market. We have already realigned our investment strategy before budget expecting the possible outcome which is very much on line with the budget,” said Mohit Mirchandani, head-equity, Taurus Mutual Fund.

Source: http://economictimes.indiatimes.com/articleshow/4744568.cms

Budget Highlights

Highlights
Taxes
· Surcharge of 10% on personal income tax removed
· No change in Corporate taxes
· Increase exemption on personal income tax by Rs 15,000 to Rs 2,40,000 for senior citizens
· Increase exemption on personal income tax by Rs 10,000 to Rs 1,90,000 for women
· Increase in exemption on personal income tax by Rs 10,000 to Rs 1,60,000 for all others
· Surcharge of 10% on personal income tax removed
· Propose to phase out surcharge on Direct Taxes
· To remove Fringe Benefit Tax
· To remove Fringe Benefit Tax
· States agree on basic structure of Goods and Services Tax
· To raise Minimum Alternate Tax(MAT) TO 15 % of book profit
· MAT hiked from 10% to 15%
· Commodity Transaction Tax scrapped
· Carry Forward Tax credit on MAT to 10 year
· To exempt Pension trust from Securities Transaction Tax
· To create Alternate Tax disputes resolution mechanism for foreign companies
· Software Technology Parks of India (STPI) extended by a year
· GST to be a dual regime with Central and state terms
· No Securities Transaction Tax (STT) on sale/purchase of shares by NPT

Reforms, Tax reforms
· To work on Saral 2 form to make income tax procedure simple
· Tax reform system to be completed in 4 years
· Balanced approach to financial de-regulation in justified
· Review and aims of the budget
· It a mandate we accept with humility and will do all we can for the welfare of the nation
· Strong mandate for growth
· Sensitive to the challenges of a young India
· The govt has to sustain a growth of 9% create 12 mn jobs per year
· Reduce poverty levels by half by 2014 infrastructure investment to more than 9% by 2014
· Focus to sustaining momentum in exports
· Strengthen primary healthcare delivery
· Plan to strengthen primary health care
· Broaden inclusive growth agenda
· Our target of agricultural growth at 4%
· Signs of revival of domestic industry
· Fiscal deficit has widened from 2.7 % to 6.2% of GDP
· Institutional reforms to bring the fiscal deficit under control

Challenges
· To get the GDP growth to 9% at the earliest
· To deepen the process of inclusive development
· To reenergise govt, govt must provide service with accountability
· Growth driver in the last 5 yrs has been private investment
· Structure of Indian economy has changes in last 10 yrs
· Now services constitutes more than 50% of GDP
· Increase investment in infrastructure to 9% by 2014
· To focus on infrastructure development
· Growth co-operative effort of Centre and States
· Job growth rate hit by dip in GDP
· Integration of Indian economy with the world has opened up new opportunities and new challenges
· Aim to return to FRBM target at the earliest

For revival
· Govt provided three stimulus package
· RBI took monetary measures to meet the needs of productive sector
· This led to fiscal deficit to rise to 6.2% in 08-09
· We achieved a growth of 6.7% of GDP last fiscal
· Signal of recovery visible in the last few months
· Uncertainty about revival of global economy remains

Infrastructure
· We had set up IFFCL to provide financial assistance to infra companies
· IIFCL will be given greater flexibility
· IIFCL will refinance 60% of bank loans in critical sectors
· IIFCL will evolve a take-out financing schemes for incremental funding in infra
· Fiscal stimulus at 3.5% of GDP helped economy revive
· Sensitive to the needs of young India
· Endeavour to make Budget participatory and ensure continuity
· Significant increase in capital inflows needs
· PPP to be encouraged especially in infrastructure
· Need to improve and strengthen regulatory framework
· To speed up Golden Quadrilateral Project
· Total investment of 100000 CFR in infrastructure
· Need to remove bottlenecks for speedy implementation of infra projects
· Highways allocated 23% more than 08-09
· Rs 15800cr for Railways
· JNURM allocation increased by 80% to Rs 12887 cr
· Basic amenities for urban poor to get more than 3000 cr to make country slum free in 5 yrs
· Provision for housing urban poor at Rs 3973 cr
· Allocation to NHAI increased to 23& Y-O-Y
· Fiscal deficit has widened to 6.7% of GDP
· Target agriculture credit inflows ay Rs 3.25 lakh cr
· · Focus of NCC, Gammon for highway development
· JNNURM to get more than Rs 12000 cr up 87%
· Basic amenities for urban poor to get more than 3000 cr to make country slum free in 5 yrs.
· Provision for housing urban poor at Rs 3973 cr
· Allocation to NHAI increased to 23& Y-O-Y
· Fiscal deficit has widened to 6.7% of GDP
· Target agri credit inflows ay Rs 3.25 lakh cr
· Focus of NCC, Gammon for highway development
· Rural electrification allocation up 27%

Agriculture
· Interest subvention scheme for agriculture loans to continue
· 60% population depended on agri
· Sustained increased in plan allocation
· Target credit flow Rs 325000 cr
· Loans upto 3 lakh at 7% per annum
· Those who pay their loans in time will get loans at 6%
· Task force set up to look into farmer suicides in Maharashtra
· Rajiv Gandhi Krishi Vikas Yojana allocation up by 30%
· Fertilizer subsidy to go to farmers directly
· To move towards Nutrient based subsidy regime
· Additional allocation of Rs 1,000 crore for accelerated irrigation project
· Central assistance for storm-water drainage project increased to Rs 500 crore from Rs 200 crore in the interim Budget

Exports
· Market development assistance schemes allocation up by 180% to 124 cr
· Interest subvention extended to march 2010 for employment extensive export sector
· Special fund for small industries development bank of Rs 400 cr
· Focus to sustain momentum in exports
· 2% Interest subvention for exporters
· Extension of interest subvention scheme extended upto March 2010 to cover sectors like handicrafts and handlooms
· Allocation for market development assistance scheme enhanced by 148 per cent
· To set up handloom mega clusters in Rajasthan, West Bengal and Tamil Nadu
· Export Credit Guarantee scheme extended till March 2010

Oil and gas
· Domestic oil prices should be in sync with global crude
· National gas grid to be set up
· Outlay for Assam Gas Project increased
· Effective interest rate is 8% for farmers with foreclosures
· Expert group to be set up petro product pricing
· Domestic oil prices should be in syncy with global crude
· To develop National Gas Grid

PSUs, banks and Insurance
· To hike promoter shareholding in PSUs
· Encourage people participation in disinvestment
· Banks and insurance will remain in public sector and will get all support
· Banking network to be expanded
· One banking centre in every block planned
· 160% hike in ADPRP
· Capital in fusion in PSU banks to keep them competitive

Inclusive development
· Creating entitlements backed by legal authority to provide basic facility to the aam aadmi
· NREGA gave employment to 4.4 cr household
· Reserve wage of RS 100 per day as an entitlement under NREGA
· Rs 39100 cr for 09-10 for NREGA an increase of 140%
· NREGA allocation increase at 144%
· New scheme PMAGY for integrated development of under developed villages

Pilot project this year
· Poverty eradication goal by 2014-15
· Interest subsidy to poor families for loans upto Rs 1 lakhs

Pension
· Substantially improve pension for armymen
· Pension benefit extended to war wounded being liberalised
· One Rank One Pension committee recommendations accepted

National Food Security
· BPL entitled by law for Rs 25 kg of rice/wheat at Rs 3 kilo
· Bharat Niraman allocation up 45%
· PM Gram Sadak Yojana allocation up to Rs 12000 cr
· Indira Gandhi Awas Yojana allocation up by 63%

Women and child development
· Focus on women self help groups
· 22 lakhs such groups of women active today, aim to link such self help groups to banks
· Corpus for such schemes to be raised to Rs 500 cr in this fiscal
· Aim to reduce female literacy by half in 3 years
· New scheme to give interest subsidy to poor students pursue any recognised course

Climate change
· Rs 562 cr for national river and lakes conservation

To build accountable institutions:
· RTI act an important step in ushering in accountability
· Unique ID project is major step in this regard: it also marks a beginning of the private involvement in projects of national importance

Police and security
· Rs 430 cr for police modernisation
· 1 lakh housing units for central paramilitary forces
· Borders: 2284 cr for strengthening of borders

Education
· Rs 50 crore for Chandigarh University
· Interest subsidy on loans for higher education
· Rs 2130 crore to set upto more IITs and IIMs
· Spending on higher education raised to Rs 2010 crore

Minorities
· Allocation hiked from Rs 1000 cr to 1700 cr in 09-10
· Scholarships for minorities
· AMU to get Rs 25 cr for each of its new campuses
· Rs 1740 crore outlay for minorities

Budget estimates
· Rs 1020838 cr total budget allocation for 09-10
· Out this more than Rs 6000 cr is planned expenditure while the rest is non-plan
· Increase in non-plan expenditure was due to pay commission and food subsidy
· Interest payment consists of 36% of non-plan expenditure
· Defence outlay up from Rs 105600 cr in 08-09 to 104703 cr in 09-10
· Total tax receipts expected at Rs 641079 cr
· Revenue deficit is estimated at 4.8% and 4.6 as per provisional account for 09-10
· Revenue deficit as percentage of GDP is pegged at 6.8%
· To spend Rs 10.20 lakh crore as total expenditure in 2009-10, crossing the Rs 10 lakh mark for the first time in history
· Increase in plan expenditure 34 %, non-plan at 37 %
· Revenue deficit projected at 4.8% in FY 10
· Fiscal deficit projected at 6.8 % in FY 10

Others
· DEPB scheme for print media extended
· Stimulus package for print media extended to Dec 31
· Hike in allocation for management of Mumbai Floods
· New project for modernisation of employment exchange
· A national web portal for the same
· New programme for rehabilitation of those effected by cylone Alia

'Risk aversion is decreasing'

Punita Kumar-Sinha, senior managing director at Blackstone Asia Advisors, is a person of many parts. An IIT graduate and a holder of a doctorate in finance from Wharton School, University of Pennsylvania, Punita has managed funds investing in Indian equities.

She has worked earlier with Oppenheimer Asset Management as a senior fund manager and her views on stock markets are sought by investors from all quarters. She told in an exclusive interview that risk aversion is decreasing and investors are redeploying some of their money into equities.

There is a thought expressed in the market that this is just a long bear market rally. Is that true?
Definitely. It is not a bull market rally because bull markets have some very strong fundamentals backing them and this one doesn’t have the strong fundamentals. But this is a rally obviously that has happened after a very strong correction in the markets.
So you could call it a bear market rally, but in India, in particular, if the Budget is good and the economy continues to grow, the fundamentals might start supporting this rally and at that point you wouldn’t really call it a bear market rally anymore.

What to your mind is driving liquidity? Do you think it is the fact that central banks are shifting money? Is that the real reason that liquidity is coming back?
Risk aversion was very high last year. After the crisis, people pulled money out of equities and went into treasuries and put it in money-market funds and these funds saw unprecedented amounts of inflows and even the mutual funds are sitting on cash. So a large part of it is just redeploying some of the cash that was in the equity funds as well as people taking some money out of money-market funds.
As risk aversion has come off, some people have pulled out a little bit of money out of treasuries and gone into commodities as well. So I think it is not that necessarily huge amount of new allocations have happened or new mandates have really caused money to be allocated to equities. I think it’s mostly money that was already there and that was taken out has come back in.

In terms of an allocation, have you changed anything regarding the weightage of the overall portfolio towards India? Have you reduced it or increased it?
We have increased our allocations to India. We were underweight versus China and now we have shifted some money back into India and at the moment, I think India and China are both probably slightly overweighed.

Let's understand your expectations from the Budget. What do you think is the importance of the Budget this time for the Indian market?
I think this time around the Budget is actually more important than its ever been because right now, the market has rallied very sharply in India based on the outcome of the general elections and a strong or stable government. So now, everyone is waiting to see what this government is able to deliver given that it is no longer much of a coalition government, but you know, it’s a stabler government than its ever been.
That’s why the Budget is important because it’s going to outline what this government is able to do and it is very important that the government takes some very strong measures to reassure both investors, domestic as well as foreign, that India can actually realise the promise that it holds.

Source: http://economictimes.indiatimes.com/articleshow/4735903.cms?flstry=1

In the best quarter in 68, active funds trail index

The past quarter has been the best in 17 years --- or 68 quarters --- for the Sensex during which the benchmark rallied nearly 50%.
Naturally, there was a case for investment in passively managed funds --- that which just buy the benchmark index.
But actively managed funds, which claim that through systems, processes and fund manager's abilities pick and choose stocks that outperform, have failed miserably. The 78 such schemes, which charge a fee for their outperformance, have not matched the 49.3% rise in the Sensex during the quarter ended June 30.
Of these, 26 schemes returned less than 40% and three below 30%. The others have returned between 40% and 49.1%
At the same time, five of seven index funds that track the Sensex have returned in excess of 50%.
The top-performing one, UTI Master Index (G) returned 50.96%, the Tata Index Sensex (G) 50.83%, the HDFC Index Sensex Plus(G) 50.82%, and funds from Franklin India and LIC Mutual 50.71% and 50.55%, respectively.
Remember, these funds charge less fees compared with active funds.
Clearly, fear was the key to underperformance as fundmen, burnt by the October meltdown and falling markets in the first quarter, took a cautious approach and stayed out of stocks.
At the end of March, over 15% of the equity diversified funds' assets were held in cash. Even after the substantial rally during April, funds continued to hold significant cash and shied away from investing in high-beta stocks such as infrastructure, real estate and midcaps.
"Both investors and the mutual fund industry missed out on the rally. Many were sitting on cash and deployed it only towards the latter half of the rally," said Vivek Pandey, equity fund manager at SBI Mutual Fund.
Funds which had stayed invested in so-called high growth sectors such as infrastructure and high-momentum midcap space were winners during the period.
What's interesting is four of top five best performing schemes come from one fund house. JM Financial's Core -11-1, Basic doubled investor money.
JM'sEmerging Leaders,and Small and Midcap Funds have given returns in excess of 85%. Other big gainers include mid cap funds of Principal, Magnum, Sahara and ING. Fund managers argue that looking at returns over such a short term is not advisable.
"Investors should not try and time the market. They should invest in a disciplined fashion with a horizon which is longer than 3-6 months. They should at least be looking at a period of 2-3 years, and the longer the better," said Harsha Upadhyaya, fund manager at UTI Mutual Fund.
Much of the rise in the markets has been attributed to foreign fund flows.
Foreign institutional investors (FIIs) have put in Rs 36,560 crore over the period of the rally. The outlook for the Indian markets is still strong over the long-term added experts although over the last two weeks they have been net sellers by Rs 2,889 crore.During the period, the Sensex has risen by 6,500 points.
"FIIs have come into India in 2009, except for the last two weeks.They were selling last year because of redemption pressure, but at some level FIIs would turn buyers," said Harsha Upadhyaya.
A better political scenario post the elections also bode well for the Indian markets says Pandey.
"Previously FIIs have pointed to the stable political authority in China as a reason for their preference of the country to India. Now our country has a stable and strong government which should be a positive for flows to the country," he said.

Source: http://www.dnaindia.com/money/report_in-the-best-quarter-in-68-active-funds-trail-index_1270264