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| August 28, 2014 |
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| Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 26,638.11 | 218.56 | 0.83% | | Re/US$ | 60.45 | 0.23 | 0.38% | | Gold Rs/10g | 28,000.00 | -50 | -0.18% | | Crude ($/barrel) | 100.68 | 0.34 | 0.34% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on August 27, 2014
*BSE Sensex as on August 28, 2014 |
Impact 
The Indian banking system has been in the news of late, as scams stories unfold. The fraud of misappropriation of Fixed Deposits (FDs) money at Dena Bank and Oriental Bank of Commerce, belie the perception that bank FDs are safe. Moreover, the expose of top officials of banks being involved for accepting bribes while sanctioning loans, depicts a murky picture and is possibly inflicting a systemic risk for the Indian banking system.
However, if you think it is only banking system that is surrounded by thugs and fraudsters, you are probably undermining the spread of wrong practices in the financial services industry. Nature of a malpractice may vary and the modus operandi of a perpetrator may also be different from that of another, but misdeeds remain misdeeds. What is worrisome is that the pillars which are supposed to shoulder a tremendous burden of the whole financial system are shaking.
In the past investors trusted their mutual fund advisors they also cheated on gullible investors...and the story of insurance agents isn't any different. Like thieves' they (insurance agents) fleeced investors with their hard earned money. And are you getting one thing common here? All of them are expected to work in the interest of their customers first. Their entire business is based on TRUST, but its grim reality that trust is breached brutally!
Wait. The list cannot end here, especially without having a mention of independent credit rating agencies. You see, as 'rating shopping' is quite common it compels you to question the credibility of credit rating agencies.
Consider this recent example...
Bhushan Steel, a leading steelmaker has been giving sleepless nights to its bankers. It owes a mammoth Rs 40,000 crore to 51 banks, most of which are public sector banks; as the company is now finding it difficult to service such huge loans. The state of affairs have been rather chronic as the company has sunk in deep debts. It has a debt-to-equity ratio of about 3.5, which is quite high and indicates that for every rupee of shareholders' money there is a debt of Rs 3.5. It is reporting huge quarter-on-quarter losses for last several quarters. But despite this, it enjoyed a credit rating as high as 'A' until the beginning of this year. Thereafter the rating was slashed directly to 'BB'. So, this brings in the big question - "what about investors who invested money on credit rating conferred at the beginning of the year?" While it is quite an edgy feeling now for investors, it induces one to ponder on questions such as...
- Did fundamentals of the company deteriorate overnight?
- Did the company admit any under-reporting of loans taken prior or over reported reserves?
- Did the outlook for the industry in which the company operates turn totally negative in short span?
Well, PersonalFN is of the view that, it is difficult to believe that credit rating agencies were caught unaware. They slashed rating several notches all of a sudden. It may be possible that, the assumptions of rating agencies went wrong. But this too is questionable. Where was prudence in evaluating the widening debt-to-equity ratio, the ability of the company to service such debt and operating profits while assigning rating when history had tale to narrate. In case of Bhushan Steel, debt didn't jump overnight; profit didn't come under pressure overnight. So how should a creditor, be satisfied with any such lame defence now? PersonalFN believes no matter how comprehensive the quantitative matrix is, the qualitative aspect have to weigh more in credit analysis.
The trouble is competition is intensifying even among rating agencies. They are independent for the name sake as the company which seeks a rating from them, is the one that compensates them. This gives rise to conflict of interest. Therefore it's an eye opener for retail investors who rely solely on ratings given by independent rating agencies and invest their hard earned money in fixed deposits and debentures issued by corporates.
PersonalFN is of the view that, it is perfectly fine if you trust your bank or a financial service provider and the advisor. However, blindly trusting anyone is can be a disaster
PersonalFN is proud to be one of the rare companies that works solely in the interest of its investors. Through its various investor education initiatives, independent and unbiased advice, PersonalFN has always guided investors to be prudent and responsible in their path to wealth creation.
Do you think independent credit raters are really independent? Share your views
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Impact 
Your loss can be someone else's gain. This is proving to be true for oil exporting nations at the moment. Until few months ago, oil prices were expected to mount as geopolitical tensions threatened to disrupt oil supply from the Middle East region. However, oil supply remained uninterrupted, and now that tensions in Iraq and Ukraine are easing a bit, oil prices have started falling sharply. Even when there were possibilities of situation getting exacerbated in Iraq and Libya, oil production in these countries was not as affected as anticipated. Saudi Arabia raised its output in July 2014 and thus this acted as dampener for oil prices. Oil prices have corrected by about 10%-15% across geographies. Falling crude oil prices are a bane for oil exporters, but it gives importers a reason to smile.
Falling oil prices and Indian economy...
Indian economy depends heavily on imported crude oil. India imports about 80-85% of its requirements. Therefore, any fall in crude oil prices is a major positive for Indian economy. Indian benefits in four ways whenever oil prices fall globally:
- It directly saves import cost of crude thus saving foreign exchange;
- Lower import bill helps improve current account deficit position;
- Lowers the subsidy bill of the Government; and
- Helps lower inflationary pressures
To control the impact of any rise in crude oil prices, the Indian Government gives subsidy to oil marketing companies. In the current fiscal Indian Government is expected to provide subsidies worth Rs 2.6 lakh crore. Out of this, about 1/4th goes as oil subsidies. If demand for oil doesn't rise substantially in India now, falling crude oil prices would also help curb the inflation. Inflation has been one of the major reasons why RBI has been holding up interest rates high. Falling inflation and falling current account deficit would aid the Government in the process of restructuring of economy.
What to expect in future?
PersonalFN is of the view that, although crude prices have fallen mainly because of higher supply, there is another reason as well behind such a sharp fall in prices. As the U.S. monetary authorities have gone in the wind-up mode as far as monetary stimulus is concerned, speculative money might be exiting risk assets including commodities such as crude oil. So the possibility of further slide in crude oil prices can't be ruled out. However, there are some upside threats too, which are:
- Major oil producers cutting production target to suck out excess supply;
- On back of robust macro-economic data from U.S., demand from refiners likely to go up
- If geopolitical tensions re-emerge and supply comes under threat again, crude will command premium; and
- Movement of the Indian Rupee. (i.e. if the Indian rupee falls against dollar, fall in crude oil prices may get negated)
PersonalFN is of the view that, for now fall in crude oil prices is good news. This would give the Government more room for spending on developmental projects. Lesser subsidies would mean lesser fiscal deficit; falling inflation would be a boon for Indian economy as that will help lower interest rates and cost of borrowing would go down. Having said this, PersonalFN is of the view that, how future pans out is contingent upon a number of factors.
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Impact
Optimism has been driving the equity markets up in India. The retail investor, who was keeping a distance from equity, has started getting back to markets now. Equity oriented mutual funds received robust inflows in a past few months. This indicates that, the retail investor has regained some confidence in equity as an asset class. Although flow of foreign capital in Indian equities still remains positive, it has started cooling off, of late. At this juncture many of you like to know where the markets are headed here onwards.
Current market rally has happened mainly on the assumption that economy would gradually recover in coming years. So far economic indicators have been mixed but bad news pertaining to domestic economy has reduced considerably.
Nonetheless, constituting companies of S&P BSE Sensex are expected to record remarkable rise in earnings growth in coming years. As reported by Business Standard dated August 25, 2014, Bloomberg's consensus Earnings per Share (EPS) on Sensex for Financial Year (FY) 2014-15 is expected to grow at 16.6%. Moreover, FY 2015-16 is expected to register 19.4% growth. It is noteworthy that after the April- June quarter results for the current fiscal were out, EPS growth target for S&P BSE Sensex (for the Year 2015-16) was raised by 4.2%. Cyclical industries are expected to post sharp recovery in earnings.
To read more about this story, please click here.
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Impact
When markets were rising in pre-election times; the retail investors were keen on withdrawing money from equity mutual funds. Those who were sitting on losses for almost last 5-6 years saw their investments making at least some profit during the pre-election rally, or in some cases breaking even. The market upswing gave them an opportunity to exit. It has been observed that since the Modi-led-NDA has come to power, retail investors have been making a comeback to equity markets resting hopes on 'acche din'.
As per data published by the Securities and Exchange Board of India (SEBI), mutual fund houses have witnessed a steady inflow of roughly 1,500 folios every day in equity funds since the election results were announced mid-May. The rising equity market is acting as a confidence booster in effect of renewed market sentiments. Investors believe that the rally can be well- sustained. But is confidence high enough?
Steady rise in number of folios...
(Source: SEBI, PersonalFN Research)
In the chart above, between April and May of this year, about 3 lakh folios were closed. As against that, only about 93,000 folios have been added till end of July. Surprisingly, net investments by investors have been positive every month. Incremental monthly investments amounted approximately to Rs 45,850 crore between April and July. This suggests that, assets of mutual fund houses are growing with a narrow base of investors. You would be shocked to know that, number of folios were in excess by 4 crore back in March 2009.
To read more about this news and PersonalFN's views on it, please click here.
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- India has varied weather conditions. Some regions receive heavy rains while a few others get good amount of snowfall. Currency notes used across the country are same and their life is affected to a great extent by weather conditions and handling. Rough handling of cotton-fibre based paper currency notes lessens the life of a note. If notes often get wet they would tear easily. Moreover, the chances of issuance of counterfeit currency are greater when paper currency notes are in circulation.
To overcome all this, the RBI is mulling over the idea of issuing plastic currency. It is expected that, soon it will launch a pilot project to check the viability. Initially, about 100 crore notes of lower denomination would be issued in cities having different weather conditions. So be ready for using polymer-based currency notes.
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Debt/Equity Ratio: A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets".
(Source: Investopedia)
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Quote : "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble." - Warren Buffett
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