My Comment in Business Standard

Monday, Aug 11, 2008

Industrial production likely to improve in June: Analysts
Bs Reporter / New Delhi August 11, 2008, 0:10 IST

Production output from factories in June is likely to improve with annual growth seen at 5-7 per cent as against 8.91 per cent in the same month last year, according to economists. The June data for the Index of Industrial Production (IIP) is to be released on Tuesday.
In May, the IIP grew 3.8 per cent due to dismal performance by the manufacturing sector.
“IIP growth is likely to be close to 5 per cent in June, which is an improvement from the previous month. However, the overall IIP growth is likely to remain subdued,” said Shubhada Rao, chief economist, Yes Bank.

Rao said the production growth in core industrial sectors like electricity remained subdued in June while that of crude oil declined. Moreover, due to a high growth of around 23 per cent in the capital goods sector in June 2007, growth in the sector is likely to soften this June.
According to an analysis by Saugata Bhattacharya, vice-president, Axis Bank, IIP growth in June is likely to be 5-7 per cent. However, the bank’s CLI (Consolidated Leading Indicators) suggests that industrial growth is likely to fall in July.

“Bank credit growth, for instance, has been increasing significantly since April, although a significant part of this is likely to have been short-term credit to oil-marketing companies (which seems to have been corroborated by the RBI data up to May),” said Bhattacharya.
“Although there is no clear idea of the relative contribution of this short-term credit on the growth rate, the overall effect of credit growth on the CLI level is clearly overstated. There was also an uptake in cement dispatches, which probably resulted in more railway freight movement in June, which is taken as a signal of logistics support. Currency with the public, an indicator of purchasing power, has also been increasing since April,” he added.

Comment
anjalir on 11-AUG-08
No doubt based on the above discussion the IIP may rise but the rising interest rates and high cost of inputs cannot be ignored. In a rising interest rates scenario, where easy money gets wiped out (thanks to equities turning unattractive), banks also turn stringent while lending to companies. continue...
anjalir on 11-AUG-08

For now, the fact that the prime lending rates (PLR), at which companies typically borrow from banks, have shot up and currently hover at about 15-17% as against the 12-13% 3 years back is a matter of concern. this increases the cost of production which leads to higher selling prices thus low demand and finally low production as there is no or very less demand. Also the rising interest rate reduces purchasing power and thus low demand n resultant low production.
anjalir on 11-AUG-08

Anchoring inflation at the cost of growth?

The first quarter review of Annual Monetary policy for the year 2008-09 came above the market expectation. The market expected a rise of 25 basis point in repo rate, which was hiked by 50 bps to 9.0% with immediate effect. This short-term rate at which the RBI lends cash to banks was last raised on June 24 by 50 basis points to 8.5%. The move is directed at cooling inflation that is running above 11.80% on an annual basis by containing demand.

The central bank has also raised the CRR (percentage of banks' deposits which they must keep with the central bank) by 25 basis points from the existing 8.75%. This will come into effect from August 30.

The reverse repo rate (the short-term rate at which the central bank absorbs cash from the market) remains unchanged at 6%. It has also held the Bank Rate (rates used to price long-term loans to firms and individuals) steady at 6.0%.

The RBI has maintained hawkish stance and given high priority to price stability, anchoring inflation expectations and orderly conditions in financial markets. This while sustaining the growth momentum.

The fresh hikes in rates have come at a time when previous hikes started showing their impact with inflation slightly moderating to 11.89% for the week ended 12 July 2008 above the previous week's annual rise of 11.91%. The twin hikes follows RBI’s assessment that inflation will remain high for some more time given the high global food and crude oil prices.


The rates hike will tighten liquidity in the system, making bond yields to rise. The investors’ fret of liquidity will part ways from Government securities making them unattractive investments. The prices of government securities remained bullish on 28 July since the market discounted a 25 basis point hike in the repo rate and unchanged cash reserve ratio in the monetary policy to be announced by the central bank. This led to buying demand, especially in the benchmark ten-year paper.

The bullish sentiment was further reinforced with the macroeconomic review of the Reserve Bank of India on the eve of its monetary policy review. In its review, the RBI has brought down its growth forecast to 7.9% from the earlier 8.1%. Since the growth forecast is moderate, the market assumed that credit offtake will be modest and in turn investments in government securities will grow. The prices of ten year benchmark 8.24% 2018 rose by 20-30 paise and therefore the yields fell from 9.17% last week to 9.07% on 28 July.

However, with the hike in key rates bond yields spiked up sharply to just short of seven-year highs. The yields are expected to remain firm and bond prices will move southward. The call rates may again zoom over 9%.

Also the rate hikes could lead to banks raising their deposit and lending rates again. However if the lending rates go up the credit demand may squeeze. The bank credit of all schedule commercial banks has witnessed acceleration in the month of June over last year (based on the week-on-week data) on above-normal demand from oil companies (as well as a degree of base effect). It will dent consumer sentiment, dampen housing demand, expansion plans of India Inc. and demand for inputs from cement to steel could slow growth more sharply when global environment is also uncertain. Growth has, in fact, already slowed down due to the tight monetary policy maintained by the RBI in the past year, as is borne out by the tempering GDP growth rate and IIP data. M3 yoy growth at 20.5% remains obstinately above the RBI’s comfort zone of 16.5-17%.

Thus overall the hike in rates by RBI can be seen impacting the economy in two ways. Firstly, reducing demand and thus anchoring demand driven inflation and secondly, impacting the economic growth which is already witnessing signs of moderation.

Exports up 35% in February 2008, FY08 goal can be achieved?

Merchandise exports registered a robust 35.25% growth to $14.23 billion during February 2008, as against $10.52 billion in the same month last year. This is the fastest export growth in the last four months and comes despite a strong rupee, which has risen over 10% against the US dollar in the last 12 months.

India’s export growth in the April-February 2007-08 period is pegged 22.9% higher than the comparable period in the previous fiscal. The modest performance in exports notwithstanding, exports from certain labour intensive sectors like textiles, handicrafts and some leather items are continuing to experience negative growth.

The buoyancy in exports, does not convey the real picture. Commerce ministry data show that the sectors with higher import content like petroleum products, gems and jewellery, engineering goods, pharmaceuticals, chemicals, and agriculture have provided the momentum for growth in exports, which have been hit by the appreciation of the rupee and infrastructure bottlenecks.

The real benefit to the economy is when sectors with less import content like textiles, handicrafts and leather show a higher export growth instead of petroleum products or gems and jewellery where the import content is high.

India’s imports during February 2008 are valued at $18.46 billion, representing an increase of 30.53% over imports valued at $14.14 billion in February 2007. Cumulative value of imports for the period April- February, 2008 was $210.89 billion against $161.95 billion exports in the comparable period of the previous year registering a growth of 30.21%.

Oil imports during February 2008, valued at $6.27 billion was 39.52% higher than oil imports worth $ 4.49 billion in the corresponding period last year. Oil imports during April-February 2008 were valued at $ 66.01 billion which was 26.81% higher than oil imports of $52.05 billion in the corresponding period last year.

Non-oil imports during February, 2008 were estimated at $ 12.19 billion which was 26.35% higher than non-oil imports of $ 9.65 billion in February 2007. Non-oil imports during April-February 2007-08 were valued at $ 144.88 billion which was 31.83% higher than the level of such imports valued at $ 109.902 billion in April-February 2007.

The country’s trade deficit for April-February 2007-08 was estimated at $ 72.46 billion which was higher than the deficit at $ 49.32 billion during April- February 2006-07.

Though the country has witnessed an impressive growth in exports in February 2008, narrowing the trade deficit, it looks a bit uncertain for the country to achieve its export target of $160 billion for FY 2007-08 (with only month remaining). Despite exports recording a surge of 35% in February 2008 to $14.23 billion, pulling the eleven months export figures to $138.4 billion, meeting the export target of $160 billion for FY 2007-08 is a tough call as it would require exports to touch $21 billion in March 2008.

Outlook

India’s monthly merchandise trade deficit narrowed during February. Although import demand remained robust in February, inbound shipments will likely moderate in the coming months as consumption by both households and businesses eases.

Nevertheless, India’s demand for imports will continue to remain firm on support from the country’s heavy dependence on imported energy and machinery and capital equipment to build domestic infrastructure.

FIIs focus on government debt market

On 31 January 2008, the Securities and Exchange Board of India (Sebi) increased the investment limit by foreign institutional investors (FIIs) or their sub-accounts in government securities (T-bills) to US$ 3.2 billion from US$ 2.6 billion.

The investment by FIIs in debt-oriented mutual funds (including the units of money market and liquid funds) will be hereafter considered as corporate debt investments and reckoned within the stipulated limit of $1.5 billion, which is earmarked for FII investments in corporate debt.

The capital market regulator has cancelled the individual limits on investment in debt allocated to FIIs.

In less than a week after the Sebi raised the limit for FII investment in government bonds, foreign institutional investors (FIIs) are now knocking on the doors of the markets regulator asking for a hike in their individual limits.

Yields in the government bond market have been on the rise in recent times. The interest rate differential is best computed between the 90-day secondary market rate on government bonds in the US and in India. On January 31, the 90-day rate in the US was 1.92%. The Indian 90-day rate is roughly 7.27%, yielding a massive differential of 5.35%. This, coupled with the rising rupee and lower borrowing rates in overseas markets, makes it lucrative for overseas investors to look at the gilt market.

SEBI has already been flooded with applications from FIIs, intending to invest in the gilt market on an incremental basis. There have been significant amounts of outflows due to the fact that SEBI has categorised all investments in liquid mutual funds as corporate debt investments.

Once approvals from SEBI come through, investments by FIIs in government bonds will see a huge spurt. In fact, the rise in investments could be so sharp, that it could even bring down the yields from their current levels. FIIs who ended up bidding aggressively for the Reliance Power public offer will now find the surplus bid amounts finding their way back to them, in the post-allotment phase.

Market sources said that these funds, which were initially channelised into the stock market, may now find an entry into the debt market rather than getting reinvested in forthcoming public offerings. Demand from overseas funds, subscribing to the IPO, totalled $100 billion. The public offer was oversubscribed by 73.04 times.

Typically, FIIs invest in government securities of a shorter tenure, when there is an uncertainty about where rates may head towards in the medium to longer run. These include bonds under the market stabilisation programme or treasury bills.

Bonds are likely to be in ample supply for the last quarter of the financial year, with an upsurge in issuances under the market stabilisation scheme (MSS). Bonds, which are issued under the MSS route, are mostly of a shorter tenure, too.

Now, the Reserve Bank of India (RBI) has been aggressively intervening in the foreign exchange market to curb the rupee from rising against the dollar. In this process, it does infuse rupee funds into the system, as it mops up surplus dollars flowing into the country. In order to absorb the rupee funds back, RBI sells bonds through the MSS route.

On the other hand, the corporate bond market has seen fresh issuances drying up substantially January 2008, and to some extent, even this month. Issuers were wary of coming out with bond issuances in January since most of them were anticipating that RBI would lower rates in its quarterly policy review. However, rates were left unchanged and the pipeline for corporate bond issues is still extremely thin.

This leaves very less room for foreign investors to look for investment options in the corporate bond segment, and in turn, makes gilts a more viable proposition. As of December 2007, the outstanding FII investment in government securities and treasury bills through the normal route was $326.64 million. The outstanding investment in corporate debt securities was $ 480.83 million.

FIIs have two routes to enter India. One is the 70:30 route for equity, for FIIs, who can invest a maximum 30% of the money in debt here. The second is the route for pure debt FIIs, where the foreign investor has to register with Sebi as an FII.

Time to sell your investments?

With the volatile markets, and the Sensex slipping below the 18000 level, the question running in everyone’s mind is whether to stay put or rush for the door.

Is it time to sell your investments?

Before you consider exiting your mutual fund investment/s, one of the important questions to ask yourself is the reason for buying this particular scheme. I am sure there might be several reasons but for most people it is “High (Highest) Returns”. This reason can easily fizzle out as it is very difficult if not impossible for schemes to consistently give high(est) returns. Some of the funds have performed consistently well in both up and down markets and have demonstrated their ability to be in the top quartile of funds, but there may be instances where these funds lag the market for various reasons.

Here are 6 such times when you should consider selling your mutual funds.

1. Poor Performance

The first and foremost reason for quitting any investment is that the fund has demonstrated poor performance. Infact this should be the last reason to consider quitting a scheme. First analyze the reasons for poor performance and the period over which the fund has demonstrated poor performance. Is it that the fund manager has taken some stock specific or sectoral calls that have gone wrong? Are some of the stocks out of favor currently? After all the reason that you have opted for a scheme is the track record of the fund manager in managing the scheme in good and bad times. So as long as there is no change in the fund manager you need to take stock whether underperformance for a few months warrants exit from the investment.

There are times when a star manager /fund management team will falter. You should not penalize the fund manager for sticking to the investment mandate of the fund. After all, this is what you would expect from him. However if he does not stick to the investment mandate of the fund but takes calls that he should not be taking, then one can look at moving out. For example someone who is mandated to be invested in equities at all times moves out when he takes the view that the markets are overvalued at 12,600. Since then the markets have delivered 20% and investors have lost on this opportunity. Well you can argue both ways that being in cash is a better strategy or not, a scheme that is mandated to be invested at all points should just do that.

For example Sundaram Select Mid Cap Fund has had consistently more than 22% in cash and this seems to have dented returns. One could attribute the high cash levels to a lack of conviction in the market or the belief that one can time the market. Both these reasons are detrimental to the future performance of a fund.

Keep an eye on the scheme whether it under performing continuously for a couple of quarters. If the fund doesn’t recover after several quarters of underperformance you can look at exiting the fund.

2. Follow the Manager

Fund houses often promote schemes that have done exceptionally well and the fund manager is accorded godly status. The scheme is then aggressively marketed and subsequently new schemes are launched using the star manager’s name. Then suddenly when the fund manager departs, the fund house is quick to do a volte-face and retort that we are a process oriented fund house. The fund house cannot have it both ways. So one needs to be careful of the statements a fund house makes.

When a fund manager departs, check whether a competent fund manager with a consistent track record has stepped in. Also check if the fund manager sticks to the investment strategy of the fund or deviates from it. Reading and a finer analysis of the fact sheet will give you a sense whether there has been a churn in the portfolio in terms of stocks , sectors , asset allocation or strategy.

If a team of fund managers manages the scheme, one exit will not disrupt the fund and hence you should stay put and evaluate the investment for two quarters. However if there is an experienced fund manager who comes in the picture, you can look at opting for better options.

3. Size of the Fund

Size of the fund could have impact on a scheme’s returns. Funds such as Reliance Growth, HDFC Equity continue to shine even with a corpus of 3900 and 4400 crore respectively just as they did when they were much smaller in size. However funds such as SBI Magnum Global and Sundaram BNP Paribas Select Midcap seem to have tapered down under the pressure of too much money. This is particularly true for small and mid cap funds as it is difficult to move in and out of such stocks quickly.

A look at Sundaram BNP Paribas Portfolio shows around 115 stocks. This shows that there are several marginal ideas besides some excellent ones. When the fund does not know what to do with the new money that comes in, it’s generally time to exit the investment and take it elsewhere. Whether it has 5 star rating or not is immaterial. A fund has got a 5 star rating because of its past performance and not because of its future performance. So 5 star or not, it’s time to look at the door.

4. Are your investments really diversified?

Having many funds does not mean you are diversified as funds often have similar kind of stocks in one’s portfolio. You can sell most of your funds if you find yourself in such a situation and keep only two funds with a good track record in each category diversified across fund managers, houses, type of stocks, sectors and style of investing. So take a hard look at whether a fund really complements your portfolio and exit where there is significant overlap between the funds.

5. Need Money for a Goal

This is one of the most important reasons to sell a fund. When you need money for a fund and you have achieved your targets, you can move partially 50% in debt or 100% depending on the market outlook. Since it is often difficult to time the markets, it is better to sell your fund and move into debt 6-12 months before you need money for a goal.

6. Rebalancing your portfolio / Moving into Cash or Debt

In today’s market, your equity allocation would have exceeded the figure that you like to have as a part of your portfolio. If this is the case, then you can either move some of your worst performing funds into debt / cash OR add additional funds to the debt part of your portfolio namely FMP’s. It’s best to undertake the asset allocation exercise as an annual ritual.

Finally before you select the sell button to click, take stock of the tax implications and exit loads if any. If you can save tax by being invested for a few days or months, it makes sense to wait and then sell on completion of 1 year. However sometimes it’s good to exit (at the cost of paying short term capital gains tax and exit loads) if you have made substantial profits in a very short period of time or if the scheme is in deep trouble.