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| September 02, 2016 |
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Impact 
A pessimist will say the glass is half empty, and an optimist will state the glass is half full. However, the fact is neither of them can deny the argument that contrasts their position. It really depends on what glasses you wear.
Now take an example of the progress of the Indian economy. If you wear the hat of an optimist, you would say India still remains the fastest growing economy in the world, even at a time when the GDP growth has fallen to a six-quarter low in Q1, FY 2016-17. While a pessimist might worry about the fact that, at 7.1% in April-June quarter, India's GDP growth came significantly lower than 7.5% recorded during Q1 of FY 2015-16
However, as an investor you need to be more realistic and hence you should delve deeper into numbers before you arrive at any conclusion on the direction of the economy. The average GDP growth as per the survey of 40 economists conducted by Reuters, was expected to be 7.6% in the quarter ended June 30, 2016. On this backdrop, the number of 7.1% looks disappointing.
Private consumption, the backbone of the Indian economy, shrank a bit in June quarter. This coupled with a reduction in investment demand, denoted by a fall in Gross Fixed Capital Formation, dragged Indian's GDP growth in Q1. Under such as scenario, higher Government consumption proved to be a saviour. Although, the net export position has improved in Q1, FY 2016-17, rather than higher exports, fall in imports has made a big difference.
Is Indian economy struggling to grow at a higher pace? | | Rate (%) | | Components of GDP | Q1, FY 2015-16 | Q1, FY 2016-17
| | Private Final Consumption Expenditure (PFCE) | 55.2 | 55.0
| | Government Final Consumption Expenditure (GFCE) | 10.8 | 12.0 | | Gross Fixed Capital Formation (GFCF) | 32.7 | 29.6
| | Change in Stocks | 1.9 | 1.9 | | Valuables | 1.6 | 0.8 | | Net exports (Exports-Imports) | -2.2 | -0.1 | | Discrepancies | 0.0 | 0.9 |
Quarterly estimates of expenditures of GDP at 2011-2012 prices
(Source: CSO)
Interestingly, Gross Value Added (GVA), another indicator of India's economic progress, recorded 7.3% growth as against the GDP growth of 7.1%. In Q1, FY 2015-16, the GVA at basic prices was 7.2%. This suggests that the economy is not in bad shape although it's struggling to grow rapidly. At the same time, it suggests that the Government has paid higher subsidies this year. The relationship is better explained by the equation given below.
GDP= GVA + Taxes on goods and services-subsidies
Higher subsidies do not always translate automatically into higher fiscal deficit. More subsidies in productive sectors such as exports may actually help the economy. Therefore, not only the subsidy number but quality of spending also matters. The Government has reiterated its commitment to curbing fiscal deficit to 3.5% of GDP in FY 2016-17
A closer look at GVA points at an apparent uptick in economic activities. As against 7.3% in Q1, FY 2015-16, manufacturing growth appears robust at 9.1% in Q1, FY 2016-17. The performance of electricity, gas, water supply, and other utility services has been impressive as well. The growth of 9.4% in June quarter of FY 2016-17 vis-à-vis 4.0% in Q1, FY 2015-16 has put GVA on firm footing. Public administration, defence and other services also saw a healthy growth. However, the poor performance of construction, trade, hotel, transportation and communication & services related to broadcasting hit a rough patch. Financial services, and real estate and professional services witnessed stagnation.
Where is the economy headed?
India started well by recording 7.5% growth in Q1, last fiscal. However, economic growth couldn't accelerate after that. One of the weakest monsoons experienced in last many years was a major setback. Shrinking rural demand and the reluctance of banks in passing on the benefits of policy rate cuts held back corporates from investing in capacity additions. As a result, the full-year growth stood at 7.6% in FY 2015-16.
However, it seems the situation might change this year. Favourable monsoon, stimulus in the form of 7th pay commission, One Rank One Pension (OROP), and higher Government expenditure would provide tailwinds to the economic growth. If the banks decide to share the benefits of rate cuts with borrowers generously, it would be an added positive for the economy. Shaktikanta Das, Economic Affairs Secretary, recently expressed a possibility of India achieving 8.0% growth in the current financial year.
To sum up, the Indian economy has been definitely seeing some green shoots, but it is unlikely to yield results anytime soon, even after considering the benefits of wage hikes and a good monsoon. The RBI has suggested that a recovery in corporate investments is likely to be elusive because of capacity excesses.
What investors should do?
Capital markets remain optimistic about India's economic progress, and the slosh of liquidity has been driving the prices of securities up. PersonalFN believes, it would pay off if you avoid being on either of the extremes at this juncture.
As the great economist, John Maynard Keynes said, "The market can stay irrational longer than you can stay solvent."
Keep this valuable advice in mind and avoid speculating on economic events. Rather, you should focus only on your financial goals and should invest as per your personalised asset allocation that considers a whole host of factors including your risk appetite and investment preferences.
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Impact
Reliance Mutual Fund acquired the India business of Goldman Sachs' Mutual Fund in October 2015 by paying Rs 243 Crore. Ten months later, it is now merging schemes of Goldman Sachs' with its own existing schemes. Goldman Sachs CNX 500 Fund would be merged with Reliance Index Fund while Goldman Sachs India Equity Fund should get integrated with Reliance Equity Opportunities Fund. As far as some other schemes are concerned, Reliance Mutual Fund will only change their names.
The deal in a nutshell…
The exiting fund house has a predominant product portfolio of Exchange Traded Funds (ETFs) with 10 schemes on the offer in the class, of which 7 are domestic equity oriented, and one each in the categories namely international equity, liquid, and gold. There are just two open-ended schemes.
Goldman Sachs' had bought the business of Benchmark Mutual Fund for Rs. 120 crore in 2011. In other words, it made a profit of Rs 123 crores in just 5 years. At the time of announcing the deal with Reliance Mutual Fund, the asset base of Goldman Sachs' was Rs. 7,132 crore, which has reduced to Rs 6,500 crore as on June 30, 2016. At the time of acquisition, the Reliance Mutual Fund had hoped to gain half a percent market share through this deal. As on June 30, 2016, Reliance Mutual Fund had an asset base of Rs 1.67 lakh crore.
Suggestions for investors…
PersonalFN is of the view that, investors of Goldman Sachs' should assess the performance of the respective schemes of Reliance Mutual Funds which will merge the on-going schemes of the exiting fund house with them. Moreover, if you are an existing investor in other schemes, you should assess the performance of Reliance Mutual Fund across categories before taking any decision on your investments.
Need to educate investors...
PersonalFN believes, while selling a business can be a strategic decision for a fund house, however the urge of exiting briefly and the appetite of industry leaders to acquire smaller players suggests that, organic growth has become hard to come by. This is saddening especially in a country where 95% of the population is still untapped by the mutual fund industry.
The need to educate investors is highlighted when a fund house pays Rs 243 crore to increase their market share by just half a percent in a largely untouched market. PersonalFN has been working on various platforms to spread financial literacy and create awareness among investors.
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Impact
Easing inflation has provided RBI with some space to reduce policy rates over the last 18 months. As a result, cost of funds for banks and another financial institution is coming down. Interest rates on deposits offered by banks have come down substantially over the last year or so. Lower inflation allows investors to earn higher inflation-adjusted returns even if the nominal interest rates come off. Unfortunately, many depositors do not realise this and become reluctant to invest in bank FDs under a falling interest rate scenario, as they perceive the fall as a straight loss.
What is an even bigger worry is this—investors have started scouting for other options to generate superior returns without realising the risk involved in each proposition. As revealed by the annual report of RBI for the Financial Year (FY) 2015-16, net financial savings have steadily gone up between FY 2013-14 and FY 2015-16 from 7.4% to 7.7% of the Gross National Disposable Income (GNDI). Within that, the proportion of shares and debentures has climbed from 0.4% in FY 2013-14 to 0.7% in FY 2015-16. Over the same time period, the percentage of deposits in financial savings has dropped from 5.8% to 4.7%.
Record growth in mutual fund folios sheds more light on the emerging trend. While the industry had added approximately 59 lakh new folios in FY 2015-16; FY 2014-15 had witnessed an addition of 22 lakh folios. Moreover, Assets Under Management (AUM) of the mutual fund industry have reached an all-time high of Rs 15.2 lakh crore in July 2016, while the asset base was 13.81 lakh crore in June.
To read more about this story and Personal FN's views over it, please click here.
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Impact
More than 21 banks went live with their "new app" last week. The apps use the infrastructure of Unified Payments Interface (UPI), which was developed by National Payments Corporation of India (NPCI). UPI has been the invention of Dr Raghuram Rajan, the RBI governor and is likely to make the Indian spender a lot less cash-dependent. Speaking about the launches of the NPCI-enabled UPI apps of banks, the MD and CEO of NPCI said, "This is a success of enormous significance. Real-time sending and receiving money through a mobile application at such a scale on interoperable basis had not been attempted anywhere else in the world." Clearly, this is a significant milestone in the history and evolution of India's financial system.
What will change significantly with the emergence of UPI?
Technology is making our life simpler day-by-day. Until recently, Indians preferred to pay in cash for petty expenses. You couldn't imagine yourself drawing a cheque to buy anything worth Rs 500 at your nearest department store. Debit and credit cards brought the revolution. They discouraged the use of cash to an extent as they offered some benefits to the user. Apart from the convenience they brought in, the benefits included cashbacks and exclusive merchandised discounts. If the cash dominated the payment preferences of people for centuries; debit and credit cards remained popular for decades. However, with the emergence of e-commerce websites such as Amazon, Flipkart, Paytm, and Snapdeal among others, other payment options such as electronic wallets emerged. Payment options such as net banking and e-wallets let you transfer cash, but there are limitations.
The option of Cash On Delivery (COD) provided by the e-commerce websites again made cash pretty relevant. Indians preferred physical inspection of goods before purchasing them. By promoting the COD option, e-commerce sites tried to win over the trust of buyers aiming to earn their loyalty. To transform any economy from a developing to an advanced one, it's imperative to make maximum transactions traceable. A high frequency of tax evasion and generation of huge unaccounted money is capable of dragging any budding economy down.
To read more about this story and Personal FN's views over it, please click here.
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The Government has decided to release the fifth tranche of Sovereign Gold Bonds, which will be open for subscription on September 01, 2016 and September 09, 2016. The first four tranches have received a tremendous response from investors who bought approximately 8,064 kg of gold amounting to Rs 2,292 crores. The on-going issue has come at a time when gold prices have already run up more than 25 percent in the last 8 months. PersonalFN believes, instead of speculating over the future price trend, keep investing in a piecemeal mannerkeep investing in a piecemeal manner until gold constitutes about 10%-15% of your portfolio. An interest of 2.75% p.a. and exemption from tax if bonds held until maturity makes them attractive for investors.
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Deficit Spending: Deficit spending occurs whenever a government's expenditures exceed its revenues over a fiscal period, creating or enlarging a government debt balance. Traditionally, government deficits are financed through the sale of public securities, particularly government bonds. Many economists, especially in the Keynesian tradition, believe government deficits can be used as a tool of stimulative fiscal policy.
(Source: Investopedia)
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Quote : "The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bumInvesting is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market.!"- John Maynard Keynes
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