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| August 14, 2015 |
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| Weekly Facts | | | Close | Change | %Change | | S&P BSE Sensex* | 28067.31 | -178.49
| -0.63% | | Re/US $ | 65.11 | -1.34
| -2.10% | | Gold Rs/10g | 26,000.00 | 1150.00 | 4.63% | | Crude ($/barrel) | 49.38 | -0.52 | -1.04% | | F.D. Rates (1-Yr) | 6.25% - 8.20% | Weekly changes as on August 13, 2015
*BSE Sensex as on August 14, 2015 |
Impact 
Irrespective of what how much you pay for buying fruits and vegetables at a local mandi, Consumer Food Price Index (CFPI) suggests that, food inflation has noticeably come down to 2.15% in July 2015. Furthermore, general inflation at retail level measured by the movement of Consumer Price Index (CPI) came in surprisingly lower at 3.78% in July. You might be wondering while there is no cut in your household expenses; how dependable are the claims of cooling inflation. What amazes more is that the data reveals that prices of vegetables are actually falling. This comes at a time when Onions are costing around Rs 40-Rs 50 per kg.
On the other hand, while it's raining discounts on cloths and footwear, CPI data suggests that prices in the clothing and footwear segment have gone up 5.88%. Of course, you can't challenge the credibility of data as it comes from official Government records, but how effective are they remains the question. Also, whether data points are effective in gauging the true state of economic activities is an even bigger question.
Are macroeconomic indicators improving?
Data as on August 12,2015
(Source: MOSPI, PersonalFN Research)
Similarly, growth in industrial output, as measured by the movement of Index of Industrial Production (IIP) stabilised at 3.8% in June, hitting 4-month high. It has been 8 consecutive months since growth has remained in green. Impressive growth in manufacturing (4.6%) compensated for the mediocre performance of mining and electricity sectors, which grew at -0.3% and 1.3% respectively in July 2015. Consumer durables showed a mammoth growth of 16%; but this is largely on account of low base effect. As far as performance of capital goods sector is concerned, growth fell to -3.6%, suggesting that capex still remains weak.
PersonalFN is of the view that, although the inflation has surprised on the downside, upside pressures still remain. Inflation data may remain benign for another month or so, but as the favourable base effect begins to wane, an upward move could be noticed.
On the other hand, growth in industrial production, although in positive, it seems to depict a see-saw movement when observed month-on-month. One needs to read the core sector growth (which has a weightage of 37.9% on IIP) to assess how industrial activity takes shape. The policy logjam in the Parliament may impede implementation of reforms and thus clocking higher growth from here onwards would be a challenge. It also remains to be seen how long consumer sentiment remains strong.
How RBI will read these numbers…
RBI may like to analyse growth and inflation numbers after making suitable adjustments to eliminate the impact of base effect, which remains momentary and could possibly be distortive.
RBI has already clarified that several factors could have a significant mitigating influence on inflation. These include the sharp fall in crude prices since June and the likelihood of this softness persisting in view of the global supply glut and expanding production by Iran; the welcome increase in planting of pulses and oilseeds and prospects of rainfall in August and September according to some forecasters; the effects of the Government's current pro-active supply management to contain shocks to food prices, especially of vegetables, alongside its decision to keep increases in minimum support prices moderate.
Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions. As the Reserve Bank awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation.
How have markets reacted?
Markets remained cautiously optimistic about inflation and IIP data. Having said this, investors are more concerned with some international factors such as devaluation of Renminbi and are equally watchful to progress of the Indian Government on reform Agenda. Notably, washout monsoon session in Parliament may put pressure on the Government to get some key bills through in a special session; or else the country may have to wait until winter session to see what success Government achieves in implementing legislative reforms.
What investors should do?
PersonalFN is of the view that, you need to stop about speculating on monetary policy rates, inflation numbers and growth rates. If you invest money in markets for the short term based on your projections of these variables, you are likely to do more harm than good to your portfolio. Instead, you should invest for the long term by prudently drawing up an asset allocation plan and invest regularly to meet your financial goals.
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Impact 
Historically, mutual fund houses have found it difficult to garner business from smaller cities and thus depended mostly on top 15 cities. However, the efforts of mutual fund houses to penetrate deeper in Indian markets seems to reap the fruits now as the situation is changing.
While traditional centres such as Mumbai are showing slower growth, mutual funds are witnessing fastest growth in their Assets under Management (AUM) from smaller cities. As reported by Business Standard, out of total inflows in equity oriented mutual funds in July, only 27% have come from top 15 cities. Out of total AUM from smaller cities, nearly 50% is in equity oriented funds. This suggests that people living in rural areas have evenly spread their investments across various asset classes such as debt, equity and gold among others.
How fund houses will benefit?
Growing share of smaller cities in AUM would make fund houses less dependent on top 15 cities for future growth. Besides this, there are some other benefits too.
At present, mutual funds are allowed to charge higher expense ratio to funds which see more than 30% of fresh inflows coming from smaller cities. Such incentive has been given to fund houses to ensure that, they are compensated adequately for bearing higher marketing costs in rural areas. Focus of the Government on growing the reach of financial services in rural areas is another reason of allowing higher expense ratio.
Will smaller cities contribute significantly, going forward?
PersonalFN believes, rather than awareness about equity and mutual fund investing, sustained rally in equities seems to be the primary factor behind increased share of smaller cities. As long as investors chase higher returns and ignore the risks involved; at some point in time share of smaller cities may drop as markets correct and investors from smaller cities begin to feel the heat. There are chances that they may put in redemption requests during such times.
PersonalFN is of the view that aggressive marketing campaigns may work in short term, but if mutual funds want to attract long term investors, they may have to stop being opportunistic. It has been repeatedly seen that fund houses launch New Fund Offers (NFOs) when markets are rallying thereby capitalising on the upbeat sentiments, while they don't buck up the courage and show the prudence to launch the fund when the markets are down.
For broad-based participation, mutual fund houses need to make investors aware about how role mutual funds as an investment avenue can play vital role in financial planning. For this investor education is a must, and PersonalFN has constantly engaged in endeavours for the financial wellbeing of investors.
Do you think smaller cities will outpace traditional investment centres in terms of growth, going forward? Share your views here.
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Impact
Retail investors are blamed for following the market momentum, ignoring fundamentals and falling in traps set for them by 'so called' expert investment advisors and portfolio managers. For all these reasons, they end up investing when it's time for Foreign Institutional Investors (FIIs) to exit. Also, retail investors exit when FIIs make investments in India based on some prognosis about prospects of India's economy. This phenomenon has been observed many times in the past.
Nevertheless, going by current numbers, one may feel that retail investors are showing some respect to market valuations. Although, inflows in mid and small cap oriented funds still remain strong; it has been experienced that, redemptions in equity oriented funds are rising steadily for last 3-4 months.
To know more about this and PersonalFN's views over it, please click here.
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Impact
Another wicket goes down...and this time, it's Deutsche Mutual Fund. After carrying out business for about 12 years in India, the fund house has decided to wind up its India operations and sell the business to Pramerica Mutual Fund for an undisclosed amount.
Assets Under Management (AUM) of Pramerica Mutual Fund in India are merely 1/10th of that of Deutsche Mutual Fund going by June 2015 data. After being in India for 5 years or so, Pramerica Mutual Fund has managed to garner less than Rs 2,500 crore. But this deal will help Pramerica Mutual Fund take a leap when it comes to AUM.
It's strange that Indian investors are bullish on Indian equities but a few foreign fund houses seem bearish about doing businesses in India. While retail participation in mutual funds has scaled a high, a consolidation phase has been witnessed in the mutual fund industry as well. Exit of Deutsche Mutual Fund brings forth another surprising fact that foreign fund houses are finding it difficult to operate here in India. Previously Fidelity Mutual Fund, ING Mutual Fund, Morgan Stanley Mutual Fund and PineBridge Mutual Fund have exited India for similar reasons.
To read more about this news and our views, please click here.
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- Those who want to convert their black money into white by manipulating stock prices may have tough time going ahead. Special Investigative Team (SIT) on black money has been exposing people who are evading taxes by taking advantages of loopholes and engaging in money laundering activities.
As reported by the Business Standard, the Securities and Exchange Board of India (SEBI) is in final stage of releasing an order against 50 entities for manipulating stocks and evading taxes. The order would be an interim one, with a reference being made to the enforcement directorate, income tax department and Financial Intelligence Unit, for investigating a probable money laundering scheme.
Misusing SME platform, rigging option trades and taking undue advantage of illiquidity in some stocks, a few entities (a list includes some renowned investors as well) helped promotors of small sized companies jack up stock prices and evade taxes. SEBI recently debarred 36 companies involved in irregular trades and also prohibited 900 entities.
PersonalFN is of the view that every investor has something to learn from such instances. Those who believe that following market momentum is the best way of making money in stock markets, should accept these orders with a pinch of salt.
PersonalFN believes your investment decision in stocks should be supported by the robust fundamentals and bright prospects of the company. Investing in stocks vide the indirect route i.e. through equity mutual funds should be considered for the host of benefits they carry along. But while you do pick mutual fund schemes adopt enough care and ensure that the fund house follows strong investment processes and systems and investment with long term investment horizon. |
Base Effect: "The consequence of abnormally high or low levels of inflation in a previous month distorting headline inflation numbers for the most recent month. A base effect can make it difficult to accurately assess inflation levels over time. It wears off over time if inflation levels are relatively constant."
(Source: Investopedia)
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Quote : "Stock price movements actually begin to reflect new developments before it is generally recognized that they have taken place." - Arthur Zeikel
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