FM’s thoughts on Oil & Loan Waiver

Jaitley’s talk at the ET awards, “Users should pay for oil… else fiscal deficit will rise and add to the current account deficit. It will push up inflation, weaken rupee. Tax on fuel prices should come down not by creating fiscal deficit, but through an increase in the non-oil tax to GDP ratio, which is on the rise since last few years. We must create a sense of maturity among people” Very nice thought, if we contribute by way of higher compliance, it will help in getting other benefits.

It felt like, we have only been asking without contributing. When we talk about this to people, they get agitated about paying taxes. It is because, for generations we have been on the receiving end.

Want farm loan waiver, how can that happen? Vice president Venkaiah Naidu said, “Loan waiver can happen only if there is a deposit waiver’. We did not want FRDI to come because we stated poor man’s money in the banks should not get used for the bank’s non-competence. All the deposit holders should be given highest safety on their investments. At the same time banks should waive off loans. This can happen only from the profits that banks make.

And unfortunately our banks don’t have that edge too, because of people running the banks who don’t have big vision.

Happened to hear a banker say that, “De-Mon was good and GST was good, while it was wrongly timed and not executed well. Government should have planned well to avoid the problems that it came across in implementing both these great reforms.”

We are the world’s biggest democracy having diversity of Africa to Europe in our mindset. When it comes to paying taxes we are like Africa, the most corrupt. There could not have been an opportunity to learn from some others mistake before bringing these two reforms. We should only learn from our own experiences. That is how it can be…..

There is an urgent need to move out of the comfort zone of protectionist mindset to accept reality & face the world as it is. It will strengthen us as a country and prepare us to have more luxuries.

 

Mutual Funds load on ICICI Bank shares

Mutual funds have loaded up on ICICI Bank shares when the bank went through a slew of bad news with its CEO Chanda Kochar in the limelight on the Videocon loan default and kickbacks received by her husband Deepak Kochar in the form of loans which further got converted into Equity to his company Nu Power. Money got routed through Mauritius.

Funds have taken a technical bet, where there is an expectation of a bounce back from the bottom which will provide an opportunity for short term gains. In such a situation, there is not much that can come from ICICI Bank as there was an article in the ET stating that, ICICI Bank is one of the lowest performing banks among its private counterparts. Its NPA’s are seriously high, though not to the extent of their PSU counterparts.

Banking sector on the whole has gone into underperformance haunted by increasing NPA’s and managements which was so far the PSU’s, now even the private sector has shown poor governance. These developments have made the Banking Sector not a favourable investor’s choice. In such a scenario, taking exposure to a stock that is fundamentally weak is not a good sign. It feels to think that, even fund managers have begun to behave like immature investors.

There is a potential for short term gains as ICICI Bank’s asset quality is not so deteriorated like that of the PSU’s, which will help the stock to make a rebound. For those who take investments based on this development, need to be pretty clear on their exits. Once the stock begins to show weakness on its price, it is time to exit those funds.

Investing in a beaten down sector when it is about to turn around is a very good investment strategy, while that should be done in the right sector. For example in 2016 when metals turned around, those funds that had high exposure to metals sector were the biggest gainers in the 2016-17 rally. The next such opportunity is likely to come in the Pharma sector sometime in the near future. It is not going to be frontline Pharma companies that will lead the rally. At this time it is too early to spot the leaders, while when there is one, leaders will show up bright.

At that time take exposure to mutual fund schemes that have higher exposure to those strong leaders in Pharma and your investment will beat all the benchmarks and give your saving a bumper profit.

Lower inflation will cap income from debt investments

India’s developments have become visible in all areas of economic activity. For a very long time, I remember in my school days, teachers used to say that, inflation in our country is high which posses a big challenge to save money. Slowly this challenge is becoming a myth, we have successfully brought down the inflation rates to below 4% levels.

When Raghuram Rajan talked about this a couple of years back, media brushed aside saying that, it is not going to be easy. Now, as we have reached the goal and beyond, we are looking at a newer challenge. When inflation is low and bank rates are high, real return in the economy is also high. This brings the challenge of having to pay higher taxes on income earned from debt investments which qualify for indexation benefits as well as assets like Real Estate.

In 2014, the debt returns were at 8.7% and tax payable was NIL after indexation. In 2017, the returns is almost the same, where the taxable portion of the income has moved up to ₹15742. Which means more than 50% of the returns will be taxed at 20%, thereby bringing down the net returns by more than 10%.

It is interesting to note how new challenges are coming up in life. If inflation stays low and the bank rate does not come down, taxes on debt fund returns will go up making the net gains reasonably lower. Investors in debt funds will have to re-think their investments.

They will also look to Equity funds which is already getting over crowded. Presently running at about 6 lakh crores and with expectations that there is going to be big inflows due to poor FD returns. Fund managers will now have a bigger challenge on stock selection and allocation of funds.

As it is MF’s are holding cash to the maximum permissible limits, presently a scheme can hold 10% cash. When holding cash in anticipation of a correction, if the market keeps moving higher, all these funds or schemes will have under performance against the broad markets. To avoid investors wrath, fund managers will be forced to invest into stocks that are fundamentally poor, thereby attracting very high risk on the investments.

If markets change course, the retail money that has flocked the Indian Mutual Fund industry will begin to move out, again giving the next challenge of meeting redemption pressures.

As the returns from debt funds are going to become lower due to taxes, what can be the next best alternative. Arbitrage funds will be the next place where we will see high inflows. Arbitrage funds are giving returns that are about equal to the prevailing bank rates for Fixed maturities, the biggest advantage they have is the tax free status or Equity taxation status.

Whereas, Arbitrage cannot absorb big flows as the edge to get returns will move away with huge capital chasing the same instruments in the market, which will bring down returns. As every other door to big returns will get locked as an automatic process, investors will be facing a situation of having surplus liquidity and not knowing what to do with it.

Bank rates coming down or inflation moving up is a requirement to keep things as they are, even this condition will require that, the fund flows into the mutual fund market requires a slowdown. All of a sudden the whole country put all their savings into one asset class will for sure ensure that the asset collapses on its own weight. Beyond our inflows, foreign money is also chasing Indian markets big time. FPI limit of 51b$ has got exhausted as I write this article and RBI is thinking to open another 2b$ for FPI’s.

One more change that could come is the returns on debt funds will begin to decline, which is inevitable & get self adjusted.

Investors beware, quality of your investment needs to looked at on highest priority. Just going to a website and selecting the top ranked fund will no more give the best returns. People need to take help of advisers while doing their investments. soon, we will have analysts who will research and find good Mutual Fund Schemes for investments.

1.30 Trillion $ earning negative returns globally

There are about 1.30 trillion $ of money that is earning negative returns globally, in the bond markets, there are about 12 Trillion $ that have turned negative as demand surged for quality papers. This is a very good opportunity for countries like India as there are very few countries today with quality papers available, that are having high returns. Chances are that, a major part of these funds can find their way to India. If that happens, it will be a good advantage to stock investors too, as some of it will also move into Equities which will increase the valuations higher.

In countries like Japan, which is the second largest economy today by valuations, companies are sitting with huge cash reserves, not finding ways to deploy them in their country. In Japan these days, shareholders meetings more than 1000 shareholders turning up, which was earlier only in the higher 100’s in number. All because of the concern that, growth is not happening and their businesses are idling capital. These shareholders have now began to ask the managements on the plans for deploying the funds and they have become specific in asking how much is going to be allocated to India.

World over, pension funds have a certain percentage of their funds to be deployed in emerging markets. While among the Emerging markets, India is the leader both in current performance and potential, which is going to attract a major chunk of the allocations.

India is becoming the next economic super power, giving best of returns potential both, from its debt markets as well as the Stock markets. With so much of funds likely to be routed to India, the Equity valuations are going to be far higher than what we have now. All these money are going to chase the same small number of quality stocks available in our country, which will push the PE multiples of those stocks. So, people can leave of the worries of high PE’s multiples and just stay invested in the quality businesses of India. It is boom time for Indian markets, capitalize on this greatest opportunity.

Budget is behind us, who is selling…..

 

Businessman against black bear balancing on cliff with sky treesFor those who had expectations that the Budget will bring some respite from the fall in the markets, now, it is a disappointment. Markets are bearish now and the Finance Minister took it to his advantage, realized that any good will not bear a positive impact, markets will only discount it and go down after adjusting the positives. So, better leave it as it is and look at what needs to be done, was the decision of the FM.

There were fears that Long Term Capital Gains will get extended to 3 years which did not happen and the tax on dividends which was another fear, has come through, while in a smaller manner. Only those who have above 10 lakhs as dividend income have to pay a 10% tax.

There was big expectations that the government will bring in a big time support to PSU Banks, which though happened, was at a lower level, market expectation was an above 55K Crore recap, while it came in at 25K crores. In the actual sense, there is no requirement for the government to give this support, because there is no guarantee that these banks will not repeat the same act again. It is best to leave them to tend the issue, which in fact will become a lesson for them and the pain will make them realize and help them become more responsible. Whereas, support will only mean that, “It was not my mistake, what I am doing is right. It is the government which made the mistake and they have taken care off of their mistake.” And he will continue with the same quality of work, may be generating another lakh plus crores in losses.

Actually, it is the government that is making a mistake, even now. They are not realizing that the people whom they have employed to manage this money are the culprits, unless there is a realization and action taken, no amount of recap will help clean the banking system.

So bear market is to continue for some more time. The confusion that budget had created in the markets will take time to resolve and expecting the markets to turn around soon will be defeated.

Last week there was a meeting of all the top fund managers of our country in Mumbai seaside. There, on a discussion between Equity fund managers and the Debt fund managers this was the talk.

Equity Fund manager: People will make money if they invest in our Equity Fund.

Debt Fund Manager: people maybe investing in your Equity Fund, but almost all the equity fund managers are investing their personal money in debt funds.

Equity: Arre boss! What are you saying? All of us are fully invested in Equities. We’re quite bullish.

Debt: Bullish or foolish, only time will tell.

Prashant Jain is bullish, S Naren is not selling, Nilesh Shah is not selling, Neelkanth Mishra is not advising his clients to sell, Ridham Desai is bullish and S Nagnath has a same view.

Toh maal bech kon raha hai? Who is selling?

Good question, but no answer!

 

For our Equity clients at BTT, we are fully sold off, and have parked funds into debt. So, it clearly shows, smart people follow the market differently.

Not in a hurry to turnaround……

Slow TurnaroundThe Indian stock markets which had an euphoric rally in 2014, turned down in 2015 and is looking to have another negative year in 2016. Price increase in stocks are always backed by earnings growth, and when earnings show a slowdown, price moves either get flat or decline based on the interests each individual stock has built in it.

In 2014, earnings growth was very good and it supported the price increase following which expectations got higher and it fuelled the valuations to get a little bit stretched. Once the reality set in to show that the expectations were wrong, rather it was in fact the other way around, a slowdown in the growth rates, investors were in for a surprise. All of a sudden all the buy orders became sell orders and hence the larger fall we have had in the markets post Chinese market crisis.

Automobile companies which were leaders in 2014 began to slow down on their growth. Infrastructure restructuring which was expected to be big and to support the banking sector, has been taking more than the anticipated time to get on the roads. New sectors that began to show strength were NBFC’s and Pharma along with export based businesses. Each one went on to face its own challenges. As spending declined, which has been shown in the top line growth of the Indian businesses in their December financial results, with sales growth in the lower single digits and profits showing an increase which means, companies have resorted to controlling operations to increase profits, which is also a negative in a growth story. Controlling operations expenses cannot continue for a long period. Without sales growth, it will bring in more challenges. This facilitated the weakness in the NBFC sector. USFDA played the devil’s advocate to pharma companies, big names in the Pharma space began to fall like nine pins. Between 20-30% drop in prices of stocks like Dr. Reddy’s Cadila, Cipla etc.,

Exports sector went into a different challenge, external forces played against them, all of a sudden they become un-competitive to their markets following the devaluation of Chinese currency. Orders began to slow down and some of the prominent stocks have lost more than 50% from their peak price.

With big time damages done to the markets, Indices Nifty and SENSEX breached their near term supports and turned bearish. Within few months what was the world’s best economy became the opposite. Now, it will take a little longer than anyone could guess for the markets to turn around. Government through its next arsenal, “THE BUDGET” looks like not to give any big fillip, with just a couple of days for the budget, markets don’t show any kind of strength. Next triggers can come only from the Q4 results, which already shows weakness as banks like SBI have announced that, they are going to show more bad loans in their books.

The best way to approach the market at these troubled times is to wait on the side lines, ready with funds to take the next opportunity early on. In our portfolio for our clients, we have liquidated most of our holdings baring very few best performing stocks like Bajaj Finance, Pidilite etc., Being invested in short term debt will help our capital grow at nominal rates till the next opportunity arrives. In Equity investing, if we deploy this method of getting in when the markets are strong and out when it is weak, it is possible to outperform the benchmarks over a longer period. Hence, again it gets proved that, buy and hold will not be the best strategy in Equity investing. It can only give returns to the extent of that which is got from FD’s. Rarely one can find stocks that have given super normal returns on a continuous basis for decades.

Take a look at your portfolio and do a churn of holdings wherever required and be in cash to take the next opportunity.

Arbitrage funds are more attractive.

bankslockerRBI reduced interest rates, banks were forced to follow, and now, arbitrage funds have become more attractive for various reasons. At this period, there are other tax free bond issues which have hit the markets, another attractive investment competing against the bank deposits. And due to this banks have lost more than 41000 crores of deposits.

Now, this opens up some concerns. Banks have suddenly hit a vacuum. Today bank rates hover around 8% and all the income from bank FD is taxable at the hands of the investor, which brings down the real returns to a little above 5.50% after taxes for a person who is in the highest tax slab. Compare this with about 7.50-7.60% tax free returns from bond issues and about 7.41-7.50% returns from the arbitrage funds. Tax free bonds are locked in and are very much illiquid when someone wants to sell their holdings, whereas Arbitrage funds are tax free after 365 days and carry zero risk. So the choice of the investment community has changed for good to Arbitrage Funds.

The banks on the other hand are put to some more new challenges due to the interest rate change. Banks normally used to have about 4% spread between the deposit rate and disbursal rate. That is, they borrow at 8% and lend at 12%. Making a cool 50% gain for themselves, for an effort which most of us know about the quality of assets the banks hold. Banking sector was enjoying a grand lifestyle by doing nothing. Now, things have changed, they cannot continue to be lethargic, there is a need for value addition, be more accountable and face the competition.

Corporate bonds give about 9-11%, so when corporates want funding for their businesses, they will not go to the banks as they get funds at a cheaper rate through direct bond issues. For some time now banks had large funds and were finding it difficult to find borrowers to lend their funds and earn, now, very soon fund inflows will dry up and help them do away with the difficulty to find borrowers for their funds. To that extent, they are free of work now. And, who will now want funds from the banks? Small business people, where credibility is a far bigger concern and with the way our banks do due diligence, more defaults are guaranteed.

IMG_2672Arbitrage funds are the best choice; it is liquid and has the tax free status after 365 days from investment. Far less risky, when compared to bank deposits. And how is this now? Off late we have had very big defaults n bank lending, cases like Deccan Chronicle, Kingfisher Air were examples. Banks have lost big time, no doubt government will pay back depositors money, while how long can the government support mistakes made by the banks. Soon, there will be a norm that they have to defend themselves and with that banks have two choices, either perform and deliver or close down. This may take time to come through, until then, invest in a place where you earn more and also enjoy the pain the banking system will go through in the coming years.

6 out of 11 top earners in our portfolio

11 earningBoosters

The second quarter results are likely to be subdued and will impact the markets in the coming weeks as results get announced. The list published in ET on 9th October 2015 shows some companies that have the potential to outperform the current quarter on the growth front. Among the 11 companies that are listed above, our portfolio have 6 of them.

As we can see in the list of expected top performers, the highest concentration is from the Pharma sector followed by the NBFC sector. In our portfolio too, we have increased exposure towards Pharma and NBFC segments a couple of months back & this happened as a dynamic process.

In 2014 our portfolio had more exposure into Auto Ancillary companies, as months passed the stock price movement of these stocks began to slow down, showing signs of tiredness. About 2 weeks before the Volkswagen issue came to light, almost all of our Auto segment exposure began to take exit. When Volkswagen issue got reported and the market collapsed, where most of the ancillary companies having presence in Germany took a big hit, out portfolio sustained lower damage. Just about that time the₹15000 Crores,  Amtek Auto default got reported, which shook the debt Mutual Fund market where JP Morgan fund had big exposure and they had to split the fund and bring controls on redemption. There are many PSU Banks which are likely to take a hit from this default.

Following our exits, the overall exposure in stocks got reduced to 75% of the capital, thus protecting the portfolio from the negative bias the markets had prior to RBI policy announcement reducing interest rates.

RBI decision came as a surprise, which Raguram Rajan has made us accustomed to since September 2013. Markets began to rally; mostly short covering, took the market to higher ups, while the strength seems to be waning now as the expectations from result season is tepid. Following results announcement, if there is going to be any weakness; our portfolio has got fairly protected due to our lower exposure and having investments into companies that are likely to give out good results. While the market began to gain strength, a couple of new stocks like BEML, Deep Industries, India Bulls housing have got added to our portfolio.

As the result season unfolds, there would be more clarity about which companies have greater strength in performance and those companies will automatically get added to our portfolio, from where, we will be prepared for our next big journey in the market rally. Being invested into the best businesses gives great confidence about the performance. In the last 3 years since we have been tracking the portfolio performance, we have achieved 68.50% gains, whereas in the same period the SENSEX has grown 38%. We have managed to achieve twice the return provided by the benchmark.

 

Debt Market: In for a spin.

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There have been 2 new developments in the debt market which has been doing rounds with more seriousness. Amtek Auto Group is staring at a ₹17500 Cr. Debt due to over leveraging and Jindal Steel & Power have got its debt papers under rated. Following these developments SEBI has summoned Mutual Fund Houses having big exposure in these Corporate Papers for evaluation. JM Mutual has gone into scrutiny, Franklin has been asked to give the data since it has exposure of more than ₹4500 Cr’s in Jindal.

Banks like Axis, Corporation Bank etc., have big exposure in the Amtek Auto lending. Any further negative development will bring shock waves into the market which is already reeling under pressure of Global consolidation.

The assets that could get affected are Fixed Maturity Plans of fund houses and to some extent all their short term schemes. If the confidence of the investors in these secure assets is shaken, the overall markets will move into a prolonged sideways consolidation.

Automobile sector which was the leader in 2014-15 market rallies has slowed down; Amtek has mentioned it and have been experiencing the same in their investments in buying out larger businesses across the globe.

With a couple of days left for the Fed Interest drama to pan out, this week is going to be a serious one at the markets. Fed decision making is planned to be done over two days, 16th and 17th September. Our markets are to be closed on 17th following Ganesh Chathurthi, which will add to more pressure.

As people pray to Lord Ganesh asking “GIVE ME MORE YA”, it has to be seen what will be more, pain or pleasure.