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From the CEO’s Desk: Indian Markets cheer the Fed’s dovish stance
The Sensex has surged over 300 points today as the US Fed left the interest rates unchanged. It did not give any major hints about the future trajectory of interest rates and more importantly, on the timing of the first rate hike. These slightly dovish comments came in along the expected lines. The Fed said, the economy is expanding moderately. It also hinted, it will wait for further improvement in the labor market and for higher confidence that inflation would rise, before making any decision on hiking the rates.
The Fed also downplayed the importance given to the first rate hike and advised looking at the longer term trajectory of hikes in the future. It seemed to indicate, the first rate hike does not mean consistent rate hikes in future quarters. There is a possibility of a pause in rate hikes. For India, this is positive, primarily from the perspective of fund flows. A gradual rate hike is already discounted by the markets, except for a temporary impact at the time of the first hike. At the same time, a very strong pickup in the first pulse of monsoon augurs well for the economic growth as well for the disinflationary trend in the economy.
Key triggers for the Indian markets
The Greece issue and progress of monsoons will be the trigger in the immediate term. A strong pickup in the first pulse of monsoon augurs well for the economic growth as well for the disinflationary trend in the economy. We also expect Greece and its creditors to find a solution to the current impasse. Over the medium term, markets will look out for Government’s efforts on kick-starting stalled infrastructure projects and new project awards. Passage of the Constitutional Amendment Bill for GST as well as further progress on Land Acquisition Bill would also be key triggers for the markets over this period. Markets will also take cues from management comments regarding ground level impact of all initiatives taken by the Government over the past few quarters.
Indian rupee to be on the guard
Indian Rupee is expected to continue to trade a narrow range, thanks to active intervention of the central bank on both sides of the market. The RBI is eager to accumulate more foreign exchanges, as an insurance against large foreign currency investments and obligation and also at the same time, not allow Rupee to become too strong that it hurts export competitiveness. Hence, we may continue to see the central bank intervene to keep the US Dollar supported between 63.00/63.30 levels on spot. At the same time, depreciation beyond 64.50/70 is appears unlikely, as the central bank has emphasized on the need for stability. However, if the Greek scenario blows out of control, then Rupee can decline much beyond 65.00, possibly towards 66.00 levels, but we then also expect RBI to intervene to bring prices within its preferred band.
What’s in store for the investors?
Even as the markets is weathering the monsoon, Greece crisis and the fine print of the US Fed policy now, the medium to long term growth story is still intact. Because of government’s continued focus on reforms, we continue to maintain a positive stance on the markets from a medium term perspective.
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Rupee continues to remain in a no trend phase, with 61:00 and lower acting as a strong resistance on the local unit due to alleged strong defense from RBI and at the same time, a broad global rally in USD also tempers bullishness in the Rupee. However, depreciation beyond 61:80/62:00 is not happening now as exporters, FIIs and carry traders are comfortable selling the Greenback. On a peer to peer comparison Rupee continues to appreciate.
Value of one fiat currency against the other is largely determined by the relative attractiveness. Net demand and net supply is what determines whether one currency appreciates or depreciates against the other. For the Indian Rupee, last 12 months have been a game changer. A mix of internal and external factors, which were acting as headwinds till last year, has now reversed polarity, and is now offering sizable positive momentum. Interest rates in the country, after adjusting for inflation is now positive by a decent margin and is expected to remain so over the short to medium term. A positive real rate is considered deflationary for the economy and hence improves the relative attraction of the Rupee. At the same time, GOI has shown remarkable political will in restraining fiscal expenditure and hence the deficit. Once the economy picks there will be tax buoyancy, in which case, the fiscal deficit can shrink further over the medium to long term. Fiscal prudence is once again deflationary and also thereby adds to the positive pressure on the domestic currency.
A sharp decline in global petroleum prices has become a major boon for an oil importer like India. Lower petroleum prices shrinks current account deficit and also lowers fiscal deficit. At the same time, lower oil prices leads to a down ward shift in the cost curve of all goods and services and hence increases the disposable income of households. India consumes around USD 1.25 billion barrels of crude oil every year, hence a drop in oil prices by 20/25 dollars a barrels leads to a cost saving of around USD 20/25 billion in a year. Higher disposable income boosts aggregate demand in the economy, which can be precursor to pick-up in the investment demand. As a result, the economy enters a virtuous cycle of higher growth and lower inflation.
Indian government has recently relaxed the norms for foreign investment in the construction sector. India needs to be build world class infrastructure at an affordable cost of funds and this can be achieved by allowing greater participation of foreign capital. GOI now needs to focus on the key areas like land acquisition, labour laws, tax regime, power sector, privatisation of PSUs, bankruptcy laws, deepening of financial markets and last but not the least, effective regulation and power to banks to deal with NPAs. There is hope that government remains committed to above mentioned reforms and hence we see considerable support for the currency over the medium to long term.
Over the near term, we need to keep an eye on the developments surrounding the 'black money" proceedings. India is yet to ratify two major global treaties on sharing of information on illicit money. India needs to ratify the FACTA accord, Foreign Account Tax Compliance Act by the end of 2014. Under the law, Indian firms dealing with US nationals or having business in US, will have to disclose information to US tax authorities. Similarly, US alongwith other signatories of the FACTA will share information with India on its citizens financial activity in those countries. However, under FACTA, Indian government would have to maintain secrecy of whatever information it receives from the member countries. Incase India fails to ratify the accord then its businesses and financial institutions can face penal tax of 30% on inflows from the members countries. The apex court in India is expected to pronounce its verdict around the first week of December. We have to keep a eye on the proceedings as incase the Supreme court prohibits GOI from ratifying FACTA on grounds of embedded confidentiality clause, then it can have significant adverse effect on the Rupee.
We have seen a U-turn in the global financial markets, where, a mix of financial intervention and verbal intervention, from the BOJ, US Fed and ECB, has triggered a massive risk on play. Indian equities and debt have benefited from the same. BOJ announced fresh measures to ease monetary policy. Bank of Japan will now expand its monetary base at the rate of 80 trillion yen annually, from 70 trillion yen previously. At the same time, the domestic pension fund, GPIF is expected to announce doubling its allocation of funds to domestic equities and foreign equities, at 25% each now. All in all, global liquidity gets another shot in the arm. We expect the Yen carry flows to rise in the coming weeks and months on account of the above policy shifts. India will remain a major beneficiary of the same and hence Yen and EM equities will become further tightly negatively correlated.
Globally central banks are in no mood to allow any kind of structural damage to the manufactured bull market in risk assets that they have successfully engineered since 2009. However, trying to micro manage financial markets is akin to playing with fire, as years of forced stability can breed greater and significant instability down the road. Therefore, it is much better to heed the caution from saner voices of the likes of Dr. Rajan, who has openly criticised on the overindulgence on QE.
Global economic data over this week was mixed with Germany reporting poor business sentiment data for the month of October (IFO). Euro zone credit contracted further in September but at a slower pace. US durable goods orders had contracted in September. US GDP rose at 3.5% in Q3 after rising 4.6% over the previous quarter. A sharp rise in government spending drove the economic growth upwards. Inflation data from Euro zone members continued to point towards low inflation to deflationary scenario in the currency union. In Japan, household spending declined by more than forecast in September. Inflation in Japan came in lower than forecast in October. ECB's just concluded stress test of the Euro zone financial institutions failed to inspire confidence, as the central bank failed to account for deflation in the worst case scenario. Modelling a euro wide deflation would have led to a sizable increase in bad loans under the worst case scenarios.
Over the next week, traders will keep a close eye on the flash PMIs from major European economies as well ISM PMIs from US. US economy is also scheduled to release its monthly non-farm employment numbers. At the same time, Chinese and UK PMI will offer a glimpse into the state of their respective economies. Both, central bank from UK and Euro zone are scheduled to announce its monetary policy. Indian economy is going to report the PMI data for the month of October. Indian Rupee is expected to trade within a band of 60:70/61:00 and 61:80/62:20 over the next couple of weeks. Large options OI at 61 strike put option and 62 strike call options on NSE confirms the above the range. Rupee can continue to appreciate against Yen and the Euro. Against the GBP, it can remain ranged.
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With the recent trend of volatility and fluctuations, the Indian markets continue their edge-of-the-seat performance. However, markets impressed investors by ending the previous week on a high, gaining up to 4% on benchmark Indexes.
The change of guard at the RBI (with Raghuram Rajan taking over from the erstwhile D Subbrao) and the reduced tensions on the Syrian conflict have been the important reasons, which have helped bolster the Indian markets.
The slew of initiatives announced by the incoming Governor have helped change sentiments, both in the currency and equity investment markets. The Rupee seems to be showing signs of appreciating. The initiatives are expected to bring in significant USD inflows and thereby, lend strength to the INR.
With the rupee on an upward trend, banking stocks gained significantly. Other rate sensitive sectors also rose handsomely. On the other hand, stocks in IT, Pharma and FMCG were relatively subdued.
The escalation of the Syrian issue had led to a spike in crude price and depreciation of rupee. With a possible de-escalation of the issue, the trends have reversed and that has also provided optimism to the markets.
It is important to note that, the RBI initiatives have just been announced and have not taken effect, as yet. We will need to wait and watch for these initiatives to yield results before taking a concrete call. The investment climate in the country needs to be made more lucrative and attractive and more initiatives and reforms will be needed to strengthen the rupee, which may take time to materialize.
Our advice –
Markets have gone up in recent past and may retrace some of the gains. Accumulate (buy at each decline) stocks with a long term perspective. Remain with the blue chip stocks and sector leaders. Diversify your portfolio by buying stocks in defensive sectors like IT/Pharma/FMCG and also some of the beaten down sectors like Capital Goods/Banking, etc. The important triggers in the near term are the policy meetings of the US Federal Reserve as well as RBI.
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During my childhood I was always fascinated by gold only because of its innate characteristic sheen, as I grew up I realised the monetary value it possessed.. When the global crisis hit the world in 2008, I realised why it is referred as a precious metal and the reason it commands a huge premium as compared to other metals.
On basis of the above facts and some real life experiences, I stepped into the world of investing in real gold. Soon I realized that investing in real gold had its own short comings, for instance where to store, how to keep it safe etc. When I started taking interest in the Gold markets, with a view that it's a great hedge against inflation and global crisis I found that my impact cost was very high whenever I entered any deals with my jeweler.
When I discussed these issues with a friend of mine, he shared that these are common problems that every investor in gold faces, but there is also a solution called Gold ETFs.
Here I got an answer to all my worries - investment in Gold ETF. What is Gold ETF; it is an instrument where the underlying precious metal is Gold.
How does investing in Gold ETF help - Gold ETF benefits in terms of
Fair value in price discovery as it does not include making charges and other charges.
Ease of Investment - buying and selling can be done from anywhere without physical presence and these days use of smart phones has been on rampant and companies too have developed software to buy/sell from the phone while one is on the go.
Saving in small denomination even a small denomination like ½ gram can also be bought with whatever surplus a person has.
Liquidity - investments can be liquidated at a press of button; entry and exit is smooth.
Hedge - Gold has been considered a good tool to hedge against inflation.
Safety - no need to disturb the night sleep as ETFs are in dematerialized format.
Accountability - government knows who holds the ETF and there is transparency in the same.
I am glad that I was introduced to Gold ETFs by my friend. All my doubts have been clarified and I am sure that awareness about Gold ETFs will help many people like me especially in a country like India, which is densely populated and where the savings rate is very high. The only missing link here is awareness, which I am sure with sound and efficient private banks stepping in can help a lot of people realize their dreams.
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RBI has also indicated that, based on the current growth rates, inflation and CAD situation, there is little space for further monetary easing. Also, the RBI has indicated that, the risks to CAD, which stem from sharp reversals of inflows, may call for reversal (increases) in interest rates. We opine these statements will result in anchoring inflationary expectations.
We expect RBI to reduce rates further by 50 bps over the course of the year, contingent upon delivery on fiscal front by the government. Also, with the latest rate cut, policy rates are near pre-crisis level - we note that, pre-crisis period (2006-2008) witnessed an average CRR of 6.5%, while reverse repo and repo rates averaged at 6% and 7.5%. In fact, during last decade, 2001-2012, average policy repo rate was 7.3%. This indicates that, we have now entered in neutral interest rates (long-term average) band. From now on, significant diversion in policy rates would warrant significant change in economic scenario.
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- Insufficient knowledge and awareness
- Impatience
- Greed, fear, get-rich quick mentality
- Follow-the-crowd mentality (everyone’s buying, I am buying too or vice versa)
- Ignoring reality and going by gut feel
They need to use a scientific and systematic approach to stock trading rather than an ad hoc approach where people seldom understand what their investment goals and objectives are and indulge in speculative trading.
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It was largely anticipated that gold prices could hover in a range for some time. It was as if investors had a hunch that gold prices were at their peak. Yet, a sharp fall in international gold prices over the past few days took everyone by surprise. As India looks to attract more foreign capital flows, this fall in gold prices could just be the good news India needs to be an attractive investment destination.
Here are pointers that explain why falling gold prices could be good news for India:
- Indian gold imports high: Any fall in international gold prices brings down the value of overall imports. Between April to December 2012, India imported US$ 37.8bn worth of gold according to recent RBI data. This is not significantly lower than the US$ 41.7bn imported during the corresponding period in 2011. This is despite India imposing a hike in the import duty of gold. A sharp fall in the value of gold, assuming a similar quantity of imports, could mean a lower current account deficit. Gold imports contributed to nearly 30% of India's trade deficit (excess of imports over exports) during 2009-10 to 2011-12, which is significantly higher than the 20% during 2006-07 to 2008-09, a working committee of RBI observed in its report.
- RBI wants gold imports to go down: In a speech last month, RBI governor D Subbarao, called India's import of gold a 'deadweight burden'. India's current account deficit or CAD touched a record high of 6.7% to the gross domestic product or GDP. The current account deficit occurs when a country owes more in foreign currency to other countries than it receives. Rising gold imports widen the gap further. "Import of gold, largely as a hedge against in?ation, is a deadweight burden, especially at a time when the CAD is beyond the sustainable level," Subbarao said in his speech. RBI was not in favour of Indians buying gold for investment. As investors cut exposure to gold, India could import less gold.
- Falling gold prices indicates improved investor confidence: International investors are selling gold. They believe they have better avenues to deploy money than gold. This shows that the investor's appetite to take risks is higher than earlier. A large investment in gold indicates that investors are not willing to bet on any future growth. However, a sharp selloff in gold means investors are willing to deploy money into other investment avenues. This is music to Indian finance minister P Chidambaram's ears, as he sells the India story to foreign institutional investors in North America.
- What it means for India's stock market: A high current account deficit leads to a weak currency and high inflation in an economy. Gold imports, which widen India's current account deficit, could decline in value. This could in turn reduce the current account deficit. The rupee could remain stable or strengthen. FIIs do not like to aggressively buy in countries where the current account deficit or inflation is running high. India was losing favour amongst foreign investors as the other economies were doing a better job of reining in inflation and the current account deficit. The fall in gold prices could allow India to rein in the country's current account deficit to some extent.
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There are always two sides of a coin. Goals are common but the route to achieve them can vary. The compliance team came to us with a brief saying they wanted to promote the right way of doing things.
Inspiration came to us in the form of mythology and the Indian construct of ethics. Jay and Vijay - both mean victory but both have a different route to achieve it. Vijay wants to win and win at all cost. In Vijay's battle field, there are winners (of course Vijay himself) and then there are losers. And on Jay's battle field, there are no losers, there are only winners. He chooses to play the win-win situation. Hence while they mean the same, we always use the phrase Jai Ho to greet each other in our day to day life. This daily life ethic gave us the inspiration for the memorable Jay Vijay mailers. Of course none of this theory was explained explicitly in the mailers. Those were simple situations where Vijay wanted to win without thinking about the consequences but Jay won by doing the right thing. It was simply and aptly communicated and the employees got the message up front.
Then came another challenge from the same Compliance Team. For those who think that they are a bunch of constricting folks, I urge you to think again. They did show remarkable verve by challenging us to take the concept further.
This time we borrowed from film lore and where else to look than the Badshah of them all - Bollywood. Especially the Munna Bhai Series. Here we have two really sweet characters. They both want the job done. The focus on the goal is single minded and blinkered. They are lovable, caring, soft and in many ways true to themselves. They will achieve their goals but one is used to doing it without a consultation with his conscience and the other, elder, has seen his inner side. He has met the Mahatma and like no other soul, he has been touched by it. So the elder thug always tells the younger one to do the right thing while explaining the consequences. He knows that Circuit is not a bad guy. He just is sometimes tempted to cut corners, but a quick check with Munna will ensure he follows the right path.
Both, Jay Vijay and Munna Circuit, tell us the same thing in different ways. One seeks victory for all and the other urges you to look inside of you. They are two sides of the same coin. We have inside of us all these characters. In every action or interaction, we have a choice. It is up to us to choose a path that aligns our interest with the client ensuring a win-win; and to look inside when no one is looking and find the right answer. There are always two characters shown - also emphasizing the insight that ethics is community construct. We are what we are because we live in a community that ties us in a range of acceptable behavior. So sometimes in doubt - choose to chat with a Jay or a Munna around you. Most likely, if you have chosen your colleague well, you will also - choose the path well.
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As far as 1QFY13 results of large-cap companies are concerned, Infosys and Wipro continued to post lower-than-expected numbers, whereas TCS and HCLT continued to meet expectations. Cognizant has also met its quarterly guidance and has maintained its full-year guidance. While the economic slowdown has impacted overall growth rates, the difference in performance of different companies is likely due to company-specific issues like:
Exposure to troubled clients, especially in BFS, utilities, Telecom, etc.
Issues like management re-structuring, corporate strategy, etc.
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1. General Stock Market - Is the general market good? Are other companies reporting good earnings? If the answer is no then you should be more cautious and likely stay away from trading the earnings results. In a bad market, even good results may lead to a fall in stock price.
2. Stocks within the same sectors - Are other stocks in the same sector reporting good earnings? In the case of IT stocks, you will want to check how the whole IT sector is doing. There are companies that this company does business with or competitors that report earnings prior to the target company. If they are doing well, chances are that the target company will also do well.
3. How the stock is doing - You need to do research on the company itself and on the stock movement. Is the company beating earnings estimate over the past quarters or is it falling short? Is the company doing well relatively to the other companies in the sector? If yes, the probability of the company repeating the performance is relatively higher.
4. Stock Charts - You need to study the general trend of the stock. Is it in an uptrend? Is the chart bullish? If the chart is bullish, there is a good chance that it will continue.
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After a long wait, the Government has taken the first step (though a minor one) in a series of expected reform initiatives. The petrol prices have been increased by about 11%, wiping out the under-recoveries for that fuel at one go. This move is aimed at helping the Oil Marketing Companies as they were the only ones who were bearing the petrol under-recoveries. To that extent, there is no change in the subsidy burden of the Government,. This will lead to some increase in inflation, but it is not expected to be a major impact.
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