Economy and Realty at glance- June 2012

GDP at a nine year low of 6.5%, high inflation at 7.55%. Ironically, in the fight between taming inflation and propelling growth, we are losing out on both

- Revenues of top-25 realty companies declined 9.30% in Q4FY12, mainly on account of low sales off-take due to higher prices and higher mortgage rates.

- The Realty Index on Bombay Stock Exchange (BSE) has dropped by more than 26% during the last one year compared to a 10% fall in the Sensex during the last fiscal year. In order to bring back the enthusiasm of the investor community into the sector, real estate companies will have to focus on factors such as improving cash flow position, lowering inventory, reducing debt and increasing profit margins

- RBI in its mid quarter review of monetary policy in June reaffirms that cheap interest rate is a far-fetched expectation in the wake of high inflation rate

- During the March 2012 quarter, interest cost as a percentage to sales stood at 15% compared to only 8% reported during the March 2010 quarter

- Although international crude oil price has declined by 20% since the beginning of the last fiscal year, the price of domestic fuel has gone up because the depreciation in Indian currency against USD by 25% during the same period has made import of crude oil expensive

- The Indian Rupee has depreciated by 18%, 8% and 32% against the British Pound, Euro and Yen respectively. Hence, a stubbornly high inflation rate will defer a lower interest rate regime

Why Rupee is falling Down?

The rupee slide continued against the dollar and hit a new record low of 56.70  today on as oil importing companies’ demand for dollars and and gold importers, as well the broad risk-off sentiment.
Globally investors are fleeing risky assets fearing a growth slowdown. “The broad risk aversion is hurting. There were bids from oil firms as oil prices are also lower while goldies also bought,” said Vikas Babu Chittiprolu, a forex dealer with Andhra Bank.

Oil companies are the largest buyers of dollars in the domestic currency market as India imports nearly two-thirds of its oil needs. Brent crude was hovering around $90 a barrel, up slightly from an 18-month low hit on Thursday.

Andrew Middleton/Flickr
Traders have not spot intervention from the Reserve Bank of India so far, but most expect the central bank to step up dollar sales if the rupee crosses the 57 mark.
The RBI was suspected to have sold dollars on Thursday, though the actions were described by traders as “mild.”

“The USD is strong across the board. I think at the higher levels exporters are unwinding their positions partially,”  Uday Bhatt, a forex dealer with state-run UCO Bank told Reuters.
The partially convertible rupee was at 56.96/97 per dollar, after hitting a record low of 56.97, and down nearly 1.2 percent from its Thursday’s close of 56.30/31.

The past couple of sessions have resembled developments in May, when the rupee tumbled to a string of record lows, as renewed global risk aversion exposed India’s fiscal and economic challenges.

But why is the currency jumping off a cliff right now? To be sure, nothing has really changed in the past few weeks for the rupee to take such a deep dive. The usual reasons cited — India’s high current account deficit, high fiscal deficit, slowing economy, rising inflation— are facts we’ve been aware of for some time now. Fears of Greece also can’t explain why the currency has been one of the worst performing ones in the Asian region.

Indeed, if we were to assume that the Indian economy’s shaky fundamentals are to blame for the rupee’s troubles, how is it that the US dollar, which has an even shakier economy behind it, is gaining against several major currencies?

Consider these facts: The sluggish US economy is expected to grow just a little over 2 percent in 2012. However, in the absence of Congress action, automatic spending cuts and the end of Bush-era tax cuts in 2013 could tip the economy back into recession, according to some experts.

The government is also far from putting its fiscal house in order. Its outstanding public debt currently is just slightly above 100 percent of GDP, while its federal deficit (the gap between government revenues and expenditure) for fiscal 2012 totalled $1.2 trillion — equivalent to 8.7 percent of GDP.

Its current account deficit — the combined balances on trade in goods and services, income and net unilateral current transfers  – hit $473 billion in 2011, equivalent to 3.2 percent of GDP.

In comparison, India’s GDP is expected to grow by around 6-6.5 percent, while its public debt -to-GDP ratio was a far lower 66 percent in 2010-2011. The combined fiscal deficit (states and Centre) has also remained around 8-9 percent over the past few years.
Given that India’s economic metrics are relatively better than those of the US, why is the dollar galloping against the rupee?

Simple. The greenback continues to be perceived as a safe haven. The only safe haven, in fact, for investors right now in the currently highly troubled economic environment. The other traditional safe haven, gold, has fallen 12 percent since February.

Given the deepening eurozone crisis, there’s growing speculation about what the future of the Europe’s common currency will be. And that has led investors to dump ‘riskier’ emerging market assets in favour of safe havens like the dollar.

That’s strange, really. Because it’s possible to argue that the economic risks are currently much higher in the developed world. In fact, the two biggest risks to the global economy over the past five years — the credit crisis of 2008 and the ongoing eurozone sovereign debt crisis — have both sprung from developed economies.

The only thing that really shows the US economy in far better light that India’s is its dynamic pro-business environment. Maybe, this is what the Indian government needs to fix. Even so, while there are a host of reasons that can justify the rupee’s gradual decline, there are none to justify a 7 percent fall in one month. Given that financial markets have a tendency to overshoot when they move either up or down, it’s likely the rupee’s recent correction is a bit overdone. Is it time for a rebound?

Indian economy: Is there a silver lining?

As the storm clouds gather over the economy, is there a silver lining? Yes -- more than one. To see them, we have to stop looking in the rear-view mirror at all the accumulated problems and negative trends, and focus on current trends.

Take oil prices, which have fallen more sharply than the rupee has dipped; Brent crude is now below $100 per barrel, down from a March peak of $126 -- a 20 per cent drop in 10 weeks.

Other than a brief point in October, the last time oil was this low was in early 2011. In all but three months in the last financial year, oil was ruling at more than $110.

The benefit of the oil price drop won't show for domestic buyers because of the rupee's sudden dip, and because diesel and cooking gas were already underpriced in the retail market. But the macroeconomic impact on the New Year’s trade deficit will be substantial.

The same goes for commodities in general; the CRB commodities index (which includes oil) has dipped by a sharp 22 per cent, from 352 a year ago to 273 now. Since India is a net commodity importer, this too will help reduce the import bill in dollars, though once again domestic prices won't see much of a change because of the rupee's fall.

The second silver lining is provided by the rupee's depreciation. This is portrayed in much of the media as a huge negative development -- a view seemingly endorsed by the finance minister, who called it a "grave" problem.

It is, of course, problematic in that it prevents the global price fall from being reflected in domestic price trends, and it will cause headaches to companies that have borrowed overseas and not hedged their positions.

But any price movement creates winners and losers, and the dominant economic effect here is that it will help import substitution, which will give a boost to domestic manufacture, and boost export competitiveness.

An uptick in manufacturing will be the single biggest positive development to look forward to, given the stagnation in this vital segment of the economy over the past half-year.

The third positive development (missed by most people in the noise over poor GDP numbers) is that gross fixed capital investment – which includes everything from highways and airports to schools and hospitals, and of course plant and machinery – has moved up a small notch in the latest quarter.

This could point to the hoped-for revival of investment, and may continue to improve since the general expectation is that interest rates will fall even if slowly. The fourth silver lining is that some special factors that operated last year will not do so now.

The drop in mining in the first three quarters of 2011-12, for instance, was on account of the sharp drop in gas production by Reliance, and mismanagement of the coal sector. That fall has already been reversed in the fourth quarter, so a downward-pull factor is out of the way.

Meanwhile, there are also reasons why the clouds won't go away quickly. The monsoons look iffy, and could hurt both growth and inflation.

The world economy is slowing down, so export markets will be slack. International money is fleeing to the safety of places like Germany and the US, so there could be capital outflow, which could put pressure on the rupee.

If we had a government that was not in denial and not paralysed, and which had the capacity to focus on problems and deliver solutions, the positive factors could have been exploited. We are paying the price for keeping a dysfunctional and seemingly clueless government in office.

Importance of a Rupee Symbol

In this fastest growing country where the growth rate has clocked over 7%-9% every year even after this huge downfall of the market, it is significant to live up to the standard and keep the pace constant. However, India remained an exception even during the worst two years of world economy in 2008-09. The growth rate didn’t slow down considerably and Indian remained a shining light in the gloom and doom scenario of recession. That reflects the strength of the Indian economy. Considering this, it was only recommended to have a unique Indian rupee symbol. 

The rupee symbol helps in differentiating with other currencies of Sri Lanka, Pakistan, Indonesia and Nepal. Worldwide, renowned economists have expressed their approval and delight at this new phenomenon. The new symbol will prove crucial in enhancing India’s growing financial clout. The rupee symbol reflects ever-increasing economic linkages between India and the world. 

Till now, Indian rupee was abbreviated as Rs, Re or INR. But soon we will have Indian rupee symbol in keyboards and other places. New symbol is a reflection of Indian ethos and culture. The symbol would be used across a wide range of technical applications including mobile phones, computer software, banners and web world. This will be definitely registered as a historic step in Indian economy that only reinforces the important role played by Indian economy in the global market. New Indian rupee symbol definitely gives all the Indians a reason to feel proud of our country.

Indian government cabinet gave approval to the new graphic symbol for the rupee on 15th July 2010. It is a well calculated move to project Indian currency as an icon of the growing importance of India in world’s economy. By giving its approval for new rupee symbol, India joined a very elite group of the USA, UK, Japan and European Union to have its own currency symbol. The new rupee symbol is a welcome addition to India’s influential role on the global stage. Considering the reputation of Indian financial markets, it was only fitting for Indian currency to have its own symbol.

Now, as the importance of the rupee symbol has grown, the amount of significance has to be at that level. Hence keeping the wealth safe and systematic is what Karvy Private Wealth believes in. For details join us on:

Facebook: http://www.facebook.com/KarvyWealth

Twitter handle: @KarvyWealth

How to use Mental Accounting to your advantage

Recently we witnessed a Kaun Banega Crorepati (KBC) episode where the participant who had won 1 crore went for the 5-crore question. He had a lifeline and had already become a crorepati, yet decided to go for the kill. Sadly, he got the answer wrong and went home with just 3.2 lakh. It is disappointing to see a person who made 1 crore losing it the next moment because of the decision that he took. Not just this gentleman, there are many others on the show who fell prey to the phenomenon of ‘mental accounting’.

Mental accounting is nothing but the way we decide to treat money differently because of its source.    Mental accounting can be good sometimes when we earmark a certain portion of our income towards savings or create a savings budget; but more often than not, it leads to self-destructive financial habits or poor financial decisions. According to traditional textbook theory of economics and finance, mental accounting should not exist as money is fungible, which means that a rupee in hand will have the same value and utility as that in a bank account. However, real life is different and our mind creates different mental buckets, where it’s difficult to pay off a loan with the money one plans to buy an LCD. Thus, mental accounting is a powerful phenomenon and must be worked to one’s advantage to gain from it and avoid costly mistakes. Here is how to do it.

Train your mind to believe that all money is equal and you will not treat money differently depending on its source. As soon as you receive money from a bonus or a windfall, do not make any financial decisions. Let two or three days pass and let the euphoria settle a little. Take stock of your overall balance sheet and think about your important financial needs. Once you have understood your requirements, do the numbers and take a decision. If you have the itch to spend, gamble or do anything else with that money, set aside 50% of it as savings and spend the rest.

Investors can use mental accounting to their advantage by deciding to set a savings budget every month, creating a goal-oriented asset allocation and reviewing it regularly like a semi-annual ritual.

Source : ET

Rupee gains on hopes of shares rise!

The Indian rupee gained early on Wednesday boosted by hopes for a rise in local shares which could help bring in more foreign funds but the dollar's moves versus major units ahead of the Fed meet outcome would be closely eyed.

The partially convertible rupee was at 44.31/32 per dollar , stronger than its close of 44.37/38 on Tuesday. The euro struggled on  to push higher above $1.4000 against the U.S. dollar, which remained on the back foot as the Federal Reserve looked set to provide more stimulus to spur a flagging recovery.

Dealers, however, said some leftover refund of Coal India IPO oversubscription could limit sharp gains in the rupee. Almost $3.5 billion share sale was 15 times covered, with foreign investors being heavy buyers.

Source : ET

5 thumb rules to become a great investor

Generally savvy investors have certain traits in common which makes them a pro at handling markets in all their variety, here’s what you need to know to be a great investor:

Understanding the Risk:
Understanding risk is essential to developing an investment strategy that works and produces repeatable performance over time. As individuals, we need to be aware of the times we are irrational in our thinking about investing.
By clearly understanding the potential for loss, investors can allocate their funds among long-term, mid-term, and short-term investments.

Understanding how emotions influence investing decisions:
A good investor has a plan, which is disciplined, which does not get caught up in unnecessary assumptions. Good investors do not allow their decisions to be ruled by emotions. The field of behavioral finance gives us some good insights into the most common mistakes people make and how to avoid them.

Diversification across asset classes and industry sectors:
A well-diversified portfolio includes large-company, mid-size, and small-company stocks. Both value and growth styles are reflected, as well as domestic and foreign stocks. Generally, you will overweight large cap investments, as they tend to have lower-risks than do mid- or small-cap stocks.
Research shows quite clearly that an equal weighting between value and growth styles of investing produces better returns over a longer period than does each style alone.

Timely re-balancing your portfolio:
Once you have your diversification model set up, it is important to stay the course. There will be times when you will feel you've erred as one style (value or growth), or one asset class (large cap or small cap) outshines the other.
The temptation is to add funds to the outperforming investment, or at the very least to let your winners run and sell your losers. Rather than doing either of these, the strategy that produces the best returns is to rebalance your portfolio yearly.

The importance of staying invested:
Besides rebalancing, you'll want to stay invested.
It's difficult, if not impossible, to time the market. So whatever portion you decide to put into equities should stay unless something changes in your personal situation requiring that you have less volatility and more income

Source : Rediff

Word of the Day: Stocks

Explanation: A stock is simply a paper document or a certificate that shows, you own a small part or percentage of a particular company. These stocks are bought and sold through stock exchanges such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE).

The BSE and the NSE are the two main stock exchanges in India and most of the stock trading activity in the country happens through these two exchanges. Any company can raise capital by issuing stocks in the public domain. For a company to be able to issue stocks, they must be a publicly listed company, registered with any recognized stock exchange, besides other listing requirements.

A Man whose work speaks for itself!

Mr. Swapnil Pawar, (Head – HNI services) at Karvy Private Wealth was mentioned in the Business India Magazine under the prestigious column ‘Frontrunners’. Here’s a short introduction of a man whose work speaks for itself.

With a graduate degree in Aerospace Engineering from IIT Bombay and an MBA from IIM Ahmedabad, Swapnil Pawar’s work experience includes, the Boston Consulting Group, where he advised clients across the financial services, banking, engineering and technology sectors on business strategy and execution. Later, an entrepreneurial streak saw him co-found PARK Financial Advisors, a wealth management venture, which was later acquired by KARVY group.

Currently Swapnil holds the post of head, HNI services for Karvy Private Wealth. This includes developing teams in leading cities of India and setting up a robust and scalable process of providing central support to wealth advisor. He oversees the products platform and leads the definition of investment strategy of the company. In his free time he pursues subjects like macroeconomics, science fiction and cosmology.

Source: Business India Magazine

Popular Move by the US Treasury - Broke Back Mountain for the Indian IT!

The US Senate has raised a Bill which proposes to double the H1, L1 Visa Fees. It is been estimated by Nasscom that the move to hike visa fees will raise costs for Indian IT firms. The cost estimate is based on the assumption that the increase in fees is $4,500 (on top of the existing fee of $2,500 for H1 visas) and the fact that India uses approximately 50,000 H1 and L1 visas a year.

This move would significantly impact the India IT industry when there’s actually a need for the markets to open and make companies more competitive from a global perspective. One of the key impacts on this could also be on the stock market prices of the leading IT companies.

Source: Times of India
Photo : topnews.in

Word of the Day – Hedge

Explanation: Hedge or hedging simply means making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

Example: An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations.

Investors use this strategy when they are unsure of what the market will do. A perfect hedge reduces your risk to nothing (except for the cost of the hedge).

Word of the Day : Sensex

Full form: Sensitive Index

What does it mean basically: It is a value weighted index of the performance of 30 most actively traded stocks in the Bombay Stock Exchange (BSE).

Why is it so important: It is known as the pulse of the Indian stock market. The 30 companies included in the index comprise of around 50% of the market capitalisation at BSE (Bombay Stock Exchange). The companies included in the Sensex reflect the current market conditions.

As of 26th Feb, 2010, the lists of the companies included in the Sensex with respect to weightages are as follows:

- Reliance Industries – Oil and Gas
- Infosys – IT
- ICICI Bank – Finance
- Larsen and Toubro – Capital Goods
- HDFC – Finance
- HDFC Bank – Finance
- ITC Ltd – FMCG
- State Bank of India – Finance
- ONGC – Oil and Gas
- Tata Consultancy and Services – IT
- BHEL – Capital Goods
- Bharti Airtel – Telecom
- Tata Steel – Metal, Metal Products and Mining
- Sterlite Industries – Metal, Metal Products and Mining
- Hindustan Lever Ltd. – FMCG
- NIIT Technologies – IT
- NTPC - Power
- NIIT – IT
- Hindalco – Metals, Metal Products and Mining
- Mahindra & Mahindra Limited - Transport Equipments
- Maruti Suzuki – Transport Equipments
- Tata Motors - Transport Equipments
- Tata Power – Power
- Wipro – IT
- Grasim Industries – Diversified
- Hero Honda Motors Ltd. - Transport Equipments
- Jaiprakash Associates - Housing Related
- Reliance Infrastructure – Power
- Sun Pharmaceutical Industries - Healthcare
- DLF Universal Limited - Housing Related
- Reliance Communications – Telecom
- ACC - Housing Related

Source: BSE

RBI unveils norms for credit default swaps for corp bonds!

Shrugging off the worries raised by credit derivatives in the global financial crisis, the Reserve Bank of India (RBI) has announced the draft report on credit default swaps (CDS) stipulating that CDS should be allowed only for corporate bonds as “reference obligation” with strict entry norms for players — both market makers and users. During the 2008-09 financial crisis, the global CDS market was a big concern to regulators due to the lack of transparency in the trillion dollar market and the related systemic risk.

“While the reference entities are required to be rated, no minimum rating is stipulated. The participants in CDS market may be categorised as — Market-makers who are permitted to both buy and sell protection and users who are not permitted to sell protection but are permitted only to hedge the underlying risk by buying protection,” the report prepared by an Internal Group of the RBI said.

Source :Indian Express

Word of the Day:Arbitrage

Explanation: The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.

For example:
Shares of ABC Ltd. May be quoted at Rs.100 in the cash market, whereas it may be quoted at Rs.103 in the futures market. This deviation gives rise to an arbitrage opportunity, which traders tend to capitalize upon.

Wealth of the Nations: Adam Smith

It has been 234 years since a Scottish economist and rebel of his times, Adam Smith first published his master piece, the now iconic “Wealth of Nations”, the simple language and the mastery of a complicated subject has never been so relevant.

The backdrop for the treatise was the dawn of the industrial revolution. The book is often considered by the experts to have laid the basic groundwork for the Modern Economic Theory.
Revisiting the book, one cannot quote one of the main themes of the book, the now famous, ‘Invisible Hand’, a concept that naturally guides a society through self interest.

This book, when published in 1776 not only influenced economists and authors, but governments and organisations. Even stalwarts like Karl Marx and Sir Isaac Newton quoted and got inspired from the ‘Wealth of Nations’.


The book consists of the following parts:

• Book I: Of the Causes of Improvement...
• Book II: Of the Nature, Accumulation, and Employment of Stock
• Book III: Of the different Progress of Opulence in different Nations
• Book IV: Of Systems of political Economy
• Book V: Of the Revenue of the Sovereign or Commonwealth

We’d strongly suggest a revisit to the book; it sure would surprise you as ever.

Team Karvy Private Wealth