Monday, March 31, 2014

Come into my parlour.... The lure of the stock markets--

The markets have rallied sharply over the last couple of months. Since the elections were announced, there is hardly a poor day in the market. However, if we dissect the rally, it is a rally that is fed more by hope than by underlying fundamentals.

Whichever government comes in to power is going to walk on thin ice. Whatever be the good intentions in a manifesto, the treasury is insufficient to make intentions possible. Unless of course, there is so much global euphoria that foreigners flood us with money through the FDI/FII route. Given the fact that the markets are anticipating a Modi led NDA government to assume power after this election, the most likeable change preferred by the market, is already in the price.

Issues that the new government will have to address include continuing high fiscal deficit, high Current Account Deficit, Weak Industrial Output, Environmental activism leading to log jam in mining and if the rupee strengthens, the problem of weakening export earnings. In addition, global economic recovery and the “tapering” by the US Federal Reserve also have a big say on global trade and money flows.

So no miracles are in the pipeline. Most informed segments of the markets expect a 10 to 12 percent earnings growth in FY 2014-15 and a fiscal deficit in excess of 5%. There cannot be any dramatic improvement in FY 2015-16. Thus, in a way, the markets that are now trading at close to 18 times current year earnings are not very cheap either. There is optimism priced in to the stocks already.

Whichever government comes in, has its work cut out. There are programmes like the Cash Transfer of Subsidies, NREGA etc that are already committed. More freebies have been promised by all the parties. The biggest challenge is to revive infrastructure development. And a new government cannot change the fortunes of industries like mining which are stuck in legal quagmire.

At the best, what can be expected is a stable policy environment, provided the new government comes with a clear majority and does not have to depend on too many props to stay in power. We have seen what happens in a situation like that. Should there be a government with a ‘walking stick’ mandate, then there cannot be stability in policies. The last five years could have been better if there was continuity and stability in policies. So, if there is a repeat (even if it is with Modi at the helm), expect a déjà vu as survival of full term becomes the theme.

Global economy is at a cross roads. A lot of liquidity has been pumped in over the last few years, to keep economies going. As those taps dry up, the issue is whether growth can resume without the liquidity prop.

Corporate India is also not too healthy. Debt levels are high and banks are saddled with extremely high levels of non-performing loans. For investment climate to resume quickly, we need corporate India to be healthier. So, corporate recovery cannot be immediate but will take a couple of years to take root, provided there is a stable government with visible stable policies.

So, the markets are walking a tightrope. FII inflows in to India have been good on the assumption of a new government that would give stable policies. If something negative were to happen, that money flow can halt, if not turn negative. And we all know that our markets are primarily driven by the FII moneys.

There are a lot of good things that have to happen at the same time, in order for the stock markets to keep going higher. Most of the good news seems to have been factored in. The risk reward for the broad markets seems to be in favour of keeping away from the market for now.

Monday, March 10, 2014

Climate change- Agriculture Outlook- Cause for worry?

Most parts of South India seems to have received insufficient rainfall. Crop yields bound to be lower. Across TN, where I have visited, the farmers are not happy.

Last few days, travelling around Goa and Maharashtra, many places have been struck with unseasonal rains, hailstorms and what not. The temperatures are down. How does this affect the standing crops? From what talks I have had with a few people, looks like many harvests are impacted negatively.

There is also write ups or news about El Nino impact having the impact of a highly reduced monsoon this year. If this happens, we are in deep trouble as far as agricultural output is concerned.

This means misery for the farmers, higher prices of food items due to shortages and overall reduced spending. A combination of all the negatives would lead to a stagnant GDP impact.

RBI will have a problem on its hands if inflation does not come down. And this year, with no budget, so as to speak of, there may not be any policy initiatives to stem the rot.

Combined with the political uncertainties (possibilities of a really hung parliament leading to unstable alliances), I pray to the rain Gods to deliver. Climate change is here. And not very good for us.

SEBI plans to reduce number of Mutual Fund Houses

R BALAKRISHNAN | 03/03/2014 11:05 AM |

Another new twist to mutual fund regulations—as regressive as the previous ones

The mutual fund industry is once again at the receiving end of regulatory manipulation. Every few months, the Securities and Exchange Board of India (SEBI) develops an urge to mess with the fund companies. This time, it has issued two new fatwas. One, SEBI wants the asset management companies (AMCs) to have a minimum net worth of Rs50 crore, as opposed to the present minimum of Rs10 crore. Two, it also wants the AMCs to invest at least 1% of the corpus of each scheme (up to a maximum of Rs50 lakh) to demonstrate their ‘skin in the game’. Does this, in any way, make things better for the mutual fund investor?

SEBI, to my mind, seems to be aligned with the interests of the big fund houses. There are at least 10 AMCs who will be short of the Rs50 crore equity base. If they cannot raise the fund, it is logical to presume that they would have to sell out or shut shop.

Nowhere in the world does such a comical regulation exist. It is not for SEBI to promote or decide on the business strategy for a fund house. Some fund houses may not want to go retail or serve every nook and cranny and so may need less of capital. Can SEBI decide what is right?

SEBI, anyway, micro-regulates fund houses on where they can invest. And an investor is only entitled to the NAV of his investment and nothing more. An increased capital does not mean he would get a better return. I recall that, in the early days, when the net worth was raised from Rs5 crore to Rs10 crore, one of the fund houses simply ‘bought’ the premises of the promoter company for Rs9 crore or so. All that the promoter did was to shift the ownership of a property from one to another. And did SEBI do anything? No. The net worth ‘criterion’ was met. This time, it is unlikely that professionally-run fund houses, like Quantum, can find this Rs50 crore very easily. And pray, what is the need for this? The SEBI press release justifies the hike with the following words of wisdom: “objective is to ensure that Mutual Funds achieve a reasonable size and play an important role in achieving the objective of financial inclusion while further enhancing the transparency,” so that investors can take informed decision.

A mutual fund will expand its business, if it sees a benefit in doing so. SEBI, or the government, cannot force it. And the second part of the sentence is incredible: “while further enhancing the transparency A higher capital base will enhance transparency?

What SEBI does not seem not to realise or understand is that the mutual fund industry’s expansion is a function of the per capita disposable incomes. If SEBI can regulate well, as they are supposed to, investors would be delighted.

Finally, what does this mean for the investor? I think this should not impact investors in any way. Either the fund house with a lower capital base will find the money or sell out the schemes or fold up the schemes. In any case, the NAV is not at any kind of risk. So, if you are happy with the performance of the scheme, do not rush to exit.

The ‘seed’ capital of the AMC investing 1% (subject to a maximum of Rs50 lakh) also means nothing to you. It does not give any increased confidence to anyone. Funds are managed by professionals who are not going to do any better or worse, simply because there is some money of the AMC invested in it. What impact will Rs50 lakh have on a Rs10,000 crore plus scheme like HDFC Top 200?

So, ignore this SEBI missive and carry on what you were doing. SEBI, run by an ex-IAS officer, possibly believes in financial inclusion, social justice, etc. But its actions are creating nightmares for fund houses especially the smaller ones.