Sunday, 18 July 2021

Financial markets @ July 2021

 

The Economy Scenario and equity debt markets behavior going forward …

We all will appreciate that economies world over are supporting their respective debt market in these unprecedented times and many including America are printing currencies. Thankfully India is not printing money but has ways out to manage and support economy through wide variety of innovative financing measures available to raise money for projects and also monetization. MOU’s open market operation is one of these.

Most countries like India are also facing inflationary pressure (which is actually due to short supply & not demand push inflation hence unproductive) which is expected to ease going forward. Higher crude prices, is one of the reasons for inflation. However, OPEC has recently announced to increase crude oil production (which they had reduced with the start of pandemic to maintain the oil prices even in the low demand scenario) and reduce the prices by 4$ per barrel. This will certainly ease out some pressure on the Central Bank while having check on interest rates.

Going forward, lower interest rates scenario looks imminent or in other words soft considering the Govt. scope of even stretching itself in terms of fiscal deficit (which is 6.80% as defined in budget) and as rightly being suggested by prominent economist including Mr. K.V. Kamath (veteran Banker). Mr. Kamath is also of the opinion that benign interest rates of 8%  and abundant liquidity were also necessary to seize what he called as a 25 year growth runaway opportunity awaiting the country.

Considering the outcome of above scenario, interest rates will be on lower side and funds will be easily available making private player interested in projects and its executions. On the other side being lesser interest offered on the Bank Fixed deposits and availability of ample liquidity will help in sustaining the equity momentum for at least six to eight months.

Sunday, 28 February 2021

An assessment about Indian economy pre and post COVID times…

Last year was unfortunate year especially low income group people were in deep pain worldwide.

Ø  Pain to the economy and market was also there but temporary in nature. The economy recovered pretty strong due to: (a) Lower interest rate (b) higher fiscal deficit (c) Govt. stimulus and (d) pent up demand (purchase which was on hold for 6 t0 9 month).

Ø  Outlook for Indian economy has improved significantly over a period of time with third quarter GDP reporting at .4% (positive territory –a big gain)

Ø  The Fuel consumptions, power demand and GST collections all have gone up in last one year; hence we can say that Outlook for our economy is better now than before Covid times.

Ø  Long term structural drivers of favorable demographic low penetration of consumer goods and vast unmet needs of infra were there and are there to help economy for longer time.

Ø  What India needs most from abroad is long term capital and cost is low as never before, a big positive.

Ø  Likely shift in global manufacturing from China to India - as global players are going at least for china plus one country because of Covid… (Disruption in supply chain and increase in wages in china).Trade war between US and china also worked multinationals to think beyond China.

Ø  Big advantage is size of India … if we use that for encouraging multinational… to set up manufacturing units it will be in their benefits…India has scaled up in ease of doing business from 140 to 60 this year to further pitch itself for destination next for multinationals.

Ø  India has reduced dependence on import from china due to stand off … and atmanirbhar in making and pushing and creating space for in house manufacturing base.

Ø  PIL scheme Production linked Incentive schemes has been initiated by Govt. to Manufacturers

Ø  India is leader in export of services …in world and now shift in its focus to manufacturing has improved the GDP outlook in Toto.

Ø  In response to covid interest rates dropped sharply and real estate prices also falls significantly

Ø  Developed economies are running into High fiscal deficit …And emerging economies is net exporter the potential of further exports to developed economies will be more fruitful…

Ø  Year 2020 has been Year of reform, land & labour and also remarkable budget as defined in following points:

Ø  Strong focus on Atmanirbhar manufacturing

Ø  Reduction in Defence imports to production almost 101 items.

Ø  Biggest highlight of the budget was privatizations, a very bold step. It will significantly defines good implication of finances for the govt. Govt. will have presences only in four strategic sectors and shall be diluting stake in all other sectors…It will good for all stakeholder…And good for Govt. financials

Ø  A very strong message govt. has given in budget that as it cares for poor it also respects the wealth creators.

Ø  Another good thing about the budget is Continuity in taxation… no change in tax rates which is good developments for savers as well as business stakeholders…

Ø  Good positive budget and the reaction to same have seen in capital market. As economy recovered market has also recovered

Ø  One key take away… market reversal. Investments made in difficult times yields better returns

Ø  Equity investments – It is Simple assets class …but not an easy asset class. When in pain the market are low but investment is not easy as the headlines are scary…

Concern of many - Disconnect between economy and market

1-      Market forward looking… economy was in pain last year but market was looking for next one two or three year. Next year GDP growth looks like delivering double digit growth.

2-      Equities – fare value of share is the discounted value of future cash flow

3-      Let assume for one year there is no profit… we must understand fare value of business still  is at 5%

4-      The cost of capital has come down sharply both external & internal

5-      In these period smaller business can’t reach out to customer… larger business has gain market share and capital market valuation goes by larger business

6-      Profit growth surprised all… cost went down challenge was supply, the profit margin enhanced to great extent.

Where are we today and going forward

·       At current year, market levels … last 10 / 15 yr return is 11%...

·       Before we went into covid we were having moderate returns for same period

·       GDP of India on long term basis  …will be on advantageous position due to low cost of capital

·       Pe multiple very high but at fiscal 2023 the PE is at 18… which is reasonable keeping low cost of the capital

·       Banks were not making money. Earning recoveries which was missing for so many years is taking place… Largest bank in country were not reporting right picture. Profit outlook has increased due low cost of acquisition and possibly higher spread in lending in year to follow.

·       Credit growth next yr to be in double digit… faster credit growth … rising interest rate is positive for bank. Along with lower provisioning cost banks looks strong

·       IT sector – has been accelerated.. And to credit of Indian IT sector people working from home lower cost… yet delivering services on time ..Outlook for growth looks decent.

Current year is about

ü  Outlook for Capex sector - infra structure looks good… lower interest rate PIL schemes

ü  Utilities and FMCG are study business

ü  Commodities prices have gone up sharply only automobile sector margin has come down from high to normal

ü  Telecom pricing has not improved… customer moving from 2g to 4g spectrum improving their top line

ü  Outlook for profit growth looks good in this year that’s why market looks good.

ü  Not much divergence, cap wise, small mid or large, growth in all segments is seen this year and expected same down the line.

Friday, 31 July 2020

Financial Markets @ July 2020

Market is scaling every day. Investors are after Reliance. On the other side of the coin i.e. apart from 15/16 stocks there is no significant movement about other nifty stocks, forget about Mid Cap and Small Cap.
There is lesson to be learnt from history here…, in 1990s, the Imperial Palace in Tokyo of the Japanese Emperor was worth more than all combined real estate in California. It told you that Japanese real estate was extremely overvalued. Similarly, in 1999, Infosys NSE 0.47 % was worth more than the entire market cap of the cement and steel sector in 1999. Wipro NSE -1.11 % was worth more than the market cap of the entire cement and steel sector. In 2007, DLF was worth more than the market cap of the entire pharma sector. Today, for example, FANGMAN stocks (Facebook, Apple, Google, NVIDIA, Microsoft, Amazon and Netflix) are worth more than the GDP of different countries, put together. We all know what happened next. Markets would be behaving in unexpected way going forward for at least another two quarters.
Asset allocation should be the mantra including debt and Gold. The gap between the yield to maturity of credit funds and the repo, reverse repo rate of the Indian market is at its highest. This indicates that credit risk funds are at their lowest valuation making it one of the most interesting categories to invest in lump sum for the long term.

The generic SIP is all season investment vehicle should be pursued very strongly segregating between different class of asset depending upon the investment horizon and risk appetite.

Happy Investing!

Tuesday, 30 June 2020

Financial Market @ June 2020


“What is the price related to what value we are getting in the market?
Assuming there are no further big shocks and we return to normalcy in the year, then I think the price we are paying is a very good one for the value we are getting.
And why do I say this? It is true that FY21, the current fiscal Indian economy is likely to contract. But, I think we will recover equally fast in Fiscal ’22, because most of the negative growth in the current year is a result of the loss of economic activity for the period of lockdown and assuming normalcy returns that should not be there.
I think interest rates globally and in India are extremely low. Low oil prices work to our advantage. And, we have seen in the past that good reforms or many reforms are carried out in such situations when you are pushed against the wall.
We do expect some more reforms. And, I think the long term drivers of growth in India are intact. And, bear in mind that one year of disruption in the economy or to a profitable business, it does very little damage. The damage could be may be five odd percent damage to the intrinsic value of a business.
If we look at India's current market-cap to GDP or price to book value, it is now near all-time lows. And, what we have experienced in the past whenever India's market cap to GDP has fallen below 60%, which is where we are roughly at current levels. The next three five year returns have been extremely strong.
What has also been experienced is the best entry points in Indian markets have been provided around periods where FIIs were large sellers.
In fact, on every such occasion or whenever over a three month period FII selling was large, just around those times your returns were quite decent.
That is also an interesting data point because we have seen very high levels of for selling by foreigners in the last few months, so net-net, I feel the risk-reward that the market offers at this stage is actually quite favorable.”
Above is what Mr. Prashant Jain (ED & CIO) has to answer so summaries all the questions in our mind in the prevailing market and geopolitical scenario…

A Guiding Force - going forward…

Friday, 29 May 2020

Financial Markets @ May 2020


In last two months global market were impacted by the news flow around Coronavirus as cases spread beyond China to other parts of the world.
The Global market seems to be witnessing some sense of stability following the massive liquidity infusion by govt. and central banks in the global economies.
The Economic implications of the virus are expected to be significant. It can be safely assumed that several countries will face a deep and long recession. The Euro zone is expected to be severely impacted, followed by US. Asia will also be impacted; however the data from China is not so negative.
The standoff between the major oil producing nations, Russia & Saudi Arabia has resulted in Oil prices crashing to multi years low, however a tentative agreement has been recently reached.
The World GDP growth likely is negative in 2020. IMF expects the world GDP to shrink by 3% in 2020 with advance economies expected to shrink by 6.1%.
Sectors such as airlines travel and tourism, Hotels, retails and Automobiles are amongst the sector likely to be most impacted.
The Banking system is expected to see a rise and stress on their portfolios – both retail and corporate (especially MSME). Over the medium term, lower Oil and Commodities Prices, and low interest rates are a positive for an Indian Economy.
In the current volatility, valuation of many companies (across the market cap spectrum) has become reasons making equity more attractive.

Stay Safe Stay Protective

Monday, 10 February 2020

Budget 2020

The Union Budget for 2020-21 had a difficult backdrop – slowing growth with both consumption and investments moderating, weak global trade growth adversely impacting exports, falling household savings, subdued returns of equities, rising remittances under LRS (Liberalised Remittance Scheme) and limited headroom with government to provide fiscal stimulus. Given this backdrop, in our opinion, government has done a remarkable job with FY21 budget.

Budget 2020 was more of Subjective values than that of Quantitative

The initial adverse reaction of equity markets was probably a result of heightened expectations, rather than anything negative in the budget.A careful study of the past budgets / policy actions / views expressed by various government leaders suggests 6 key themes / objectives that are being pursued by this government. These are:

1. Simplification & moderation of taxes and improvement in ease of doing business
2. A large scale up of Infrastructure spends facilitated by long term foreign capital
3. Promoting “Make in India” for employment generation and reducing current account deficit
4. Fiscal discipline
5. Social development covering health, education, sanitation etc.
6. Improving internal and external national security The Union Budget for 2020-21 fits in nicely with the aforesaid strategic themes.

Impact of Budget on Mutual Fund Investors…

1. New tax regime: A positive for mutual fund investments
Budget 2020 introduced a new tax system effective from FY20-21 wherein taxpayers can benefit from lower slab rates by forgoing a majority of tax-deduction benefits to lower their tax burden. Taxpayers will also have the option to continue with the existing tax system. However, the new tax regime would allow taxpayers to invest freely in instruments of their choice without having to worry about tax-saving pressures, and they can explore mutual fund products that don’t necessarily save taxes

2. TDS on mutual fund gains: A negative for mutual fund investments

Budget 2020 has proposed to introduce Tax Deduction at Source (TDS) at 10% on the dividend income above Rs 5000 before it is distributed to the investors. So, if the investor falls in higher tax slab, they would now adjust the TDS payment from their tax obligation while filing the tax returns, whereas if the investor falls in a lower tax slab, they may be required to claim the TDS refund by filing their tax returns, which is an inconvenience. Dividend-generating investments are normally suited to older investors.

3. DDT in the hand of mutual fund investors: A mixed impact

In the existing system, the dividend on equity mutual funds and debt funds is taxed at 11.65% and 29.12%, respectively, while distributing it to the shareholders. However, in Budget 2020, it has been proposed to levy DDT in the hands of the mutual fund investors as per their applicable tax rate. So, for example, if the investor falls in the 30% tax bracket, they will pay tax on the dividend at a 30% rate. So, when the DDT becomes applicable in the hands of investors, those in higher tax brackets will pay more in taxes.
Markets going Forward
As legendary investor Warren Buffet said “Interest rates are like gravity in valuation. If interest rates are nothing, values can be almost infinite. If interest rates are extremely high, that’s a huge gravitational pull on value”.
One characteristic of current market is the sharp polarisation in valuations across sectors. While near to medium term forecasting is challenging, past experience suggests that sectors with good returns in the past, mostly delivers moderate returns in the future and vice versa.
Happy Investing

Thursday, 2 January 2020

Financial Markets @ January 2020


India’s economy is expected to rebound in 2020 as per the Confederation of Indian Industry. CII further added that this is due to the measures taken by the Govt. of India and the RBI coupled with easing of global trade tensions. The fiscal policy will set a Central Govt. target for the deficit in the range of around 0.5 to .75%.
There are nascent sign of Indian Economy( on account of improved PMIs of manufacturing and services, jump in passenger air traffic, sharp moderation in decline of sale of passenger cars, e.t.c.) on better footage than what it was in the year gone by. With the proactive measures taken by Govt. in tandem with RBI will overcome the slowdown and a gradual recovery will be in place.
Though worse is yet not behind us, we may see some sharp decline in valuations at stock market within the last two months of this financial year.
Going forward:
Equity Market: While macroeconomic concerns weighed on equities for most part of the year, corporate tax reduction in September has helped equity funds give moderate returns in 2019. We may see some good revival of Portfolios with booking of profit in one segment and making cautious participation in other where huge value opportunities exist. The equity market is expected to adjust within next six months with a possibility of corrections to the tune of 5 to 6% in Feb-March 2020. Systematic approach of investment in either of the Equities segment will certainly bear fruits in time to come.
Debt Market: Investor anguish over multiple credit events is justified, RBI inventions and giving much desired stimulus to markets by reducing Repo rate by 135 basis points is commendable. Gilt funds were mostly benefitted out of this act at longer ends. The year 2020 can be safely defined as year of consolidation and those who have seen some drop of returns in their portfolio will see it iron out by years end.
The mantra for 2020 is stay invested and do participate as per your risk appetite, be equity be debt.
Happy New Year