Creating a new normal…

The Indian markets have been scaling new highs with NIFTY remaining above 10,000 for over a month. The current rally in Indian market is fuelled by strong liquidity from domestic investors. As strong inflows continue into domestic mutual funds reforms initiated by the Modi-led government reaffirm the faith of foreign investors ( as evident from a rating upgrade from Moody’s) in the India growth story which could well stay for another 7 years.

Domestic mutual funds continue to attract flows from investors with assets under management (AUM) of the industry increasing by Rs.51,148 cr in October to touch a new high of Rs.21.41 lakh cr. As per data from the Association of Mutual funds of India (AMFI), equity-oriented mutual funds (including arbitrage funds), balanced funds and equity linked savings scheme (ELSS) funds saw net inflows of Rs. 21,900 cr in October. In September, these funds saw inflows of Rs.27,077 cr. For the first seven months of the current financial year, cumulative inflows into these funds have tripled to Rs.1.51 lakh cr as compared to Rs.46,840 cr in the same period of the previous year.

Foreign institutional investors (FIIs) who took a break from buying Indian shares in August and September are returning after recent government announcements such as the Rs.2.11 lakh cr PSU bank recapitalization plan. Over October and November so far, FIIs have invested a net of $1.9 bn in Indian equities. US-based Moody’s on 17th November upgraded India’s sovereign credit rating by a notch to ‘Baa2’ with a stable outlook citing improved growth prospects driven by economic and institutional reforms. This is expected to further boost FII investments into India. For the year to date, they are buyers to the tune of $7.4 bn.

September quarter results for most companies have already been declared & results have largely been in line with expectations. After its muted performance in the June quarter due to the transition to GST, India Inc is getting back on track going by the September quarter results. Post GST implementation GDP growth numbers, IIP & PMI index have all taken a hit, how they recover over the next few months will also be closely monitored. With real estate and gold giving subdued returns, investors have been looking at equities as an investment avenue. Thus in spite of the markets reaching all-time highs & rich valuations, strong cash inflows into the equity markets should continue for some time.

The markets seem to be consolidating above the 10000 NIFTY mark. Corporate performance & economic data which comes in H2FY18 will be critical. Last year post de-monetization Q3 & Q4 numbers for most companies & the economy were impacted. Thus the general expectation is that H2FY18 numbers should be significantly better y-o-y. Any correction in quality stocks is a good opportunity for investors to enter or re-enter the stock markets at lower prices if they had missed out previously. Given that the markets are at all-time highs one needs to tread with caution at current levels. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

SAMVAT 2074 … Festivities continue for markets

The Year in retrospect…
  • SAMVAT 2073 was a good year for the markets at it touched all-time highs & NIFTY was higher by ~18 % y-o-y crossing the 10k mark for the first time.
  • Markets were largely driven by domestic liquidity due to strong monthly inflows into equity mutual funds. Net inflows into equity MF in last 12 months were to the tune of Rs.1,15,000 cr.
  • FII inflows largely remained subdued with net inflows of Rs.5000 cr in the last 12 months.
  • The government on 8th November 2016 de-monetized all Rs.500 & Rs.1000 denomination notes & introduced new Rs.2000 & Rs.500 denomination notes.
  • GST was finally implemented from 1st July 2017. This is likely to boost the economy going ahead though there has been some slowdown initially.
  • Monsoons have been marginally below (5% below normal as per IMD) normal & what impact it has needs to be seen.
  • On the macro front WPI & CPI are at comfortable levels below the RBI guidance of 4%. IIP remained low, an ongoing concern.
  • Indian foreign exchange reserves crossed the $400 bn mark to touch a high of $402,246 bn as on 22nd September as per RBI, the highest ever that India’s central bank has amassed.
  • Departing from the tradition of presenting the Union Budget on the last working day of February, the budget was presented on 1st February. This was done so that the legislative approval for annual spending plans and tax proposals could be completed before the beginning of the new financial year on 1st April. The Cabinet also did away with the practice of having a separate Railway Budget, merging it with the Union Budget.
  • There has been 30 IPOs since last Diwali garnering over Rs.45,000 cr of which Rs.14,000 cr was raised this month only. Six stocks Avenue Supermarts, Shankara Building Products, Salasar Techno Engineering, CDSL, Apex Frozen Foods and Sheela Foam delivered multi bagger returns.
  • Interest rates over the last year have largely been stable with a downward bias as there was only one Repo rate cut of 25bps (from 6.25% to 6% currently) in the last 12 months. Bank interest rates though have been reduced by a larger margin due to excess liquidity in banks post demonetization & lower credit off take.
The Year ahead…
  • Going ahead in SAMVAT 2074 geo-political tension between North Korea & USA lingers.
  • Gold prices have been inching up due to geo-political tensions. Global crude oil (Brent) prices are expected to be range bound between $50-$60 through the year. Other commodities such as copper & steel are expected to inch up with a positive bias through the year.
  • The Indian banking system continues to be burdened by high NPAs, but we believe that we have seen the worst of it & with new measures like the Insolvency & Bankruptcy Code, improved profitability, economic growth & latest corporate restructuring, things should gradually improve.
  • Post GST implementation GDP growth numbers, IIP & PMI index have all taken a hit, how they recover in H2FY18 will be closely monitored. With low bank fixed deposit rates, subdued real estate market (with high transaction cost) and stagnating gold prices, equities seems to be the most viable domestic investment avenue for investors. Thus in spite of the markets reaching all-time highs & rich valuations, strong cash inflows into the equity markets should continue for some time.
  • Markets are currently at all-time highs largely driven by liquidity rather than macro-economic data or corporate performance. Valuations are on the higher side (SENSEX PE – 24X, NIFTY PE- 26X) and to an extent unjustified by past performance. Thus company performance & economic data which comes in over the next few months will be critical. Last year post de-monetization Q3 & Q4 numbers for most companies & the economy were impacted. Thus H2FY18 numbers should be significantly better y-o-y. Any correction in quality stocks is a good opportunity for investors to enter or re-enter the stock markets at lower prices if they had missed out previously. Given that the markets are at all-time highs one needs to tread with caution at current levels. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years. 

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Market Outlook- September

The Indian markets have been range bound over the last month with NIFTY consolidating between 9700-10200. The current rally in Indian market is fuelled by strong liquidity from domestic investors. As strong inflows continue into domestic mutual funds reforms initiated by the Modi-led government reaffirm the faith of foreign investors in the India growth story which could well stay for another 7 years. Though there was some geo-political tension between India-China & especially USA-North Korea, things seem to have just cooled down. Now with most of the worries out of the way, the stage is set for the index to touch fresh highs.
The markets are at all-time highs largely driven by liquidity especially from domestic institutional investors. GST has been implemented and the first few months of the transition has largely been event free though some rates are still being re-aligned. Post GST implementation GDP growth numbers, IIP & PMI index have all taken a hit, how they recover over the next few months will be closely monitored. With low bank fixed deposit rates, subdued real estate market (with high transaction cost) and stagnating gold prices, equities seems to be the most viable domestic investment avenue for investors. Thus in spite of the markets reaching all-time highs & rich valuations, strong cash inflows into the equity markets should continue for some time. With monsoons being below normal what impact it has on the agri-economy also needs to be seen.
Market movement over the last few months has largely been driven by liquidity rather than macro-economic data or corporate performance; valuations are on the higher side and to an extent unjustified by past performance. Thus company performance & economic data which comes in over the next few months will be critical. Last year post de-monetization Q3 & Q4 numbers for most companies & the economy were impacted. Thus the general expectation is that H2FY18 numbers should be significantly better y-o-y. Any correction in quality stocks is a good opportunity for investors to enter or re-enter the stock markets at lower prices if they had missed out previously. Given that the markets are at all-time highs one needs to tread with caution at current levels. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

Demonetization a success or failure; time will tell

As per the RBI, an estimated Rs.15.28 lakh crore has been deposited as on June 30, 2017 as compared to Rs 15.44 lakh crore in circulation. PM Narendra Modi’s decision to cancel the tender of 85% of currency in circulation on 8th November 2016 was greeted with delight in some quarters and anger in others but the overwhelming feeling was one of bewilderment. But we must keep in mind that the Modi government has taken a number of initiatives to root out black money & demonetisation was just one of them. The others are the drive against benami property, GST, the push towards a less-cash economy. One can’t analyse or fully appreciate the black money crackdown by only focusing on demonetisation. It is a major move all right but one of the many aimed at rooting out black money.
Critics of demonetization say that that it did not root out black money and the move has failed since all the money has come back. There is one major counter argument to this. The important aspect of demonetisation is not the amount of money that has come back into the banking system. Bear in mind that money doesn’t become white just because it is deposited in banks. The money leaves an address, a trail. The depositors become known to bankers and the income tax department. Suppose businessman A had Rs.one crore of illegal money stashed away in his house. He was forced to deposit it in his account but this does not mean he has escaped scrutiny. The tax department can now go after him and unearth his income and financial transactions for the year and demand appropriate tax. Not only that, they can also question his income of previous years’ income and demand tax on that. They can go after any benami property he has. There is no escape once you become known as a tax evader.
Thus demonetisation has achieved an important purpose in putting a name tag to every rupee in the banking system. It is up to the individual to match his deposits with his income sources, and he will have to maintain the income flow within reasonable limits in future. Any sudden drop in future incomes would again show up on the income tax radar and the account would be suspected as being used for diverting funds. Bear in mind even if the money is transferred from one entity to other (say purchase of gold at a premium) converting black money into white would require at least one entity to bear the burden of taxes, which is the entity that is depositing the money. In such a case the entity usually pays indirect taxes – excise or service tax — to show revenue received.
Tax revenue by the central government rose by 18% in FY17 & central excise shot up by 33.9% and service tax collection was up by 20.2% at a time when the economy had come to a virtual standstill.
One more observation is that domestic institutions have ben flushed with funds ever since demonetization was announced and even till date the latest rally in equity markets is purely driven by excess liquidity. It maybe a mere co-incidence but it could also be possible that the notes that were previously hoarded in homes & not in circulation is flowing into the equity markets after being deposited into banks.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

How currency denominations are determined- The Renard Series

The RBI recently announced the introduction of the Rs.200 currency note and said that it would simplify getting change for larger-denomination notes.
So the question arises, why was it so important to have a 200-rupee note and how is currency denominations determined in the first place.
In order to determine currency denominations, various central banks globally follow variations of the Renard Series, a variation also called the 1-2-5 series, in which a ‘decade’ or a 1:10 ratio is covered in 3 steps. The first number in the series would be 1, the second would be 2, and the third would be 5. When extended, it would read 1,2,5,10,20,50,100,200,500,1000,…etc.
Thus the numbers in the 1-2-5 series are very conveniently arranged to simplify transacting with minimum amount of permutations & combinations. So if a person has a 10-rupee note and wishes to buy something worth Rs 3, he would be able to get his change in the form of a 5-rupee note or coin and a 2-rupee coin, instead of getting seven 1-rupee coins or three 2-rupee coins and a 1-rupee coin if the currency had not been denominated that way.
Among all available denominations, the Rs.200 note was the missing link in the Renard Series, a series of preferred numbers first proposed by French army engineer Charles Renard. Since India already had 1-rupee, 2-rupee, 5-rupee, 10-rupee, 20-rupee, 50-rupee, 100-rupee, and 500-rupee denominations, the 200-rupee note was added to complete the 100-200-500 part of the series.
Incidentally, India is not the only country that follows the 1-2-5 series to denominate currency. The Euro and the British pound are two of the most notable currencies that are denominated in the 1-2-5 series.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

How do you lose your Capital?

What is Capital? Capital is our hard-earned money which we save over the years. The next question thus is- Why do we save? We save to meet our needs or goals in the future, or perhaps for contingency. Thus we invest the money we have with us instead of spending it, and wait for consumption for a later date.
Thus, the money that you earned today could have been spent today only but you chose to defer the consumption to a later date by investing the money. Thus the money that you saved has become your capital.
Now, suppose at a later date you intend to withdraw your money to buy something, the capital you had invested in the first place should have earned enough return so that you could have bought it in the first place. Basically, you are trying to protect the purchasing power of your money in the name of capital protection. What is the biggest risk to capital? It is the rise in prices or inflation. When we say protection of capital, in simple terms we mean that our capital should be able to grow higher than growth in our expenses. This is capital protection. If the rate of growth (returns) of the saved money (capital) is less than the increase in household expenses, then we are simply destroying the capital.
Therefore, the question that arises is: which investment option surely and certainly destroys our capital? The first choice of Indian investors is a financial asset called fixed deposits (FDs). Historically, net of taxes it has hardly ever beaten inflation. A person falling under the 30% tax bracket is surely to earn a post-tax return lower than inflation in the long run.
To cite a simple example, you want to take a holiday package for your family which costs Rs.1,00,000 today. But instead you decide to defer it & put the money in a FD at 7% p.a. After 3 years you will get Rs.1,22,500. After 3 years you decide to go on a holiday again but then it costs Rs.1,30,000. This is a simple example over a short period of time. Imagine what happens with your retirement savings over the next 20-30 years.
You may be saving 20-30% of your salary & suppose over your work life your savings earn say 6-7% post- tax returns p.a on an average (all your savings have been in options like FDs) while your expenses (read inflation) keep growing at 6-7% p.a. After that you have kids and you educate them and also marry them amongst other major expenses like buying a car or a house. When you retire, all you have is your ‘safe’ FDs. You have created some corpus but you may run out of capital by the age of 70. What will you do when you run out of capital at the age of 70? This is what bank FD does to your capital. There is no real growth in capital. Therefore, think beyond bank FDs they hardly beat inflation in the long run.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

Its Raining Moneys for the Markets…

The Indian markets have been inching up over the last few months with NIFTY/SENSEX hitting new highs of 9913/32109 on 14th July 2017. Equity mutual funds (ex ELSS) had a net inflow in June at Rs.7453 crs while balanced funds witnessed a net inflow of Rs.7458 crs. On the other hand income funds witnessed net outflow to the tune of Rs.20685 crs in June while liquid funds saw net outflow of Rs.12739 crs.
The markets are at all-time highs largely driven by liquidity especially from domestic institutional investors. Banks have initiated restructuring measures under the new IBC (The Insolvency and Bankruptcy Code) on 12 NPA accounts. Action against more such NPA accounts are likely to be initiated over the next few months. How the process pans out over the next year needs to be seen. GST has just been implemented from 1st July and we feel initial implementation bottlenecks will last for a few months. The extent to which GST will be beneficial will take some time to be visible. With low bank fixed deposit rates, subdued real estate market (with high transaction cost) and stagnating gold prices, equities seems to be the most viable domestic investment avenue for investors. Thus in spite of the markets reaching all-time highs & rich valuations there is very strong cash inflows into the equity markets especially through SIPs. With normal monsoons till date & low inflation numbers a rate cut cannot be ruled out as low IIP numbers still remain a concern.
Market movement over the last few months has largely been driven by liquidity rather than company performance; valuations are on the higher side and to an extent unjustified by past performance. June quarter results for all companies are expected to come out over the next month. Any results even marginally below expectations (not necessarily lower profits but lower growth) are likely to lead to a sharp correction in the stock price. GST implementation will be in focus & sectors such as logistics and FMCG which are major beneficiaries of GST should do well. Also with monsoons being in line with long term average rainfall, fertilizer & irrigation sectors should also do well though deflation in food prices over the last couple of months remain a worry as it could derail the rural growth story if vegetable & pulses prices are lower. Given that the markets are at all-time highs one needs to tread with caution at current levels as a minor correction cannot be ruled out if quarterly results are below expectations. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’