FII Fund Flow - Half Yearly report

FII Flows on a half yearly basis discussed here for broader perspective

FII ownership jumps sharply as investor risk appetite recovers; The latest data of BSE 500 stocks indicates that institutional shareholding of Indian markets has increased as the decline in domestic institutional investor (DII) ownership has been more-than-compensated by a sharp increase in foreign institutional investor (FII) ownership.

As of end-September 2010, FIIs owned 15.3% of Indian markets (compared to 14.4% in June 2010 and 14.6% in March 2010), while DIIs owned 10.9% (compared to 11.1% in June 2010 and 11.0% in March 2010). We believe the sharp jump in FII ownership is a consequence of an increase in risk appetite as investors priced in QE2 & QE3 numbers. However, it may reverse in subsequent quarters on account of India’s overvaluation and re-emergence of policy overhang in China and Europe. Another major dampener could be the increased confidence on US stocks ebbing the flow of FII’s.  

Over the past 2-3 quarters, FIIs have continuously increased their stakes in banks. Notably, this quarter, FIIs have increased stakes in telecom and staples – formerly ‘unloved’ sectors. In reality, while FII bought almost all sectors, their stakes in autos, engineering and construction (E&C), IT and metals declined owing to the relative underperformance of these sectors. A bulk of the FII inflow was concentrated in financials, consumer staples and telecom. The ownership and FII flow data confirms the India consumption story and shows how enamored FII’s are about the great Indian Middle Class.

In any emerging economy and where consumption is on the rise the Banking sector records one of the fastest growths. From an FII point of view he knows that the financial sector can give the maximum returns in an economy; In India the financial sector is fully regulated and the plus point is not exposed to the global credit market what more can you ask for.

DIIs behaved differently; DIIs have sold almost all sectors but more heavily in financials, E&C and capital goods and consumer staples. The sale of DII’s could probably be due to the mass scale redemptions by the retail segment coupled with a very myopic view of the markets.  

FIIs have bought almost all sectors but the inflows have predominantly (about 85%) gone into financials, engineering and capital goods, consumer staples and telecom. DIIs have sold almost all sectors but, interestingly, the selling has predominantly been in financials, engineering and capital goods and consumer staples. Both DIIs and FIIs have bought telecom, reflecting improved investor perceptions of the sectors fundamentals.

FII Flows for December have not been included here…

Fixed Deposit are back with a bang...

A brief on Fixed deposits and other Fixed tenure plans

Rising interest rates are always associated with expensive loans and an overburdened borrower. But this is just one side of the coin. The other side of the coin reflects the rising deposit rates, which have added some zing to this safe investment product of the common man.

 
The bank fixed deposit rates (FDs) have increased from the lowly 6.75% to the current 8.50%. So the fact is rates are up inflation is up there in double digits as an investor of FD’s what you should be doing.

There is no single answer to this question. Investors should consider the time left before the date of maturity of their FDs before breaking the FD. For instance, if the FD is nearing maturity, it may not be a prudent decision to opt for a premature withdrawal. You will lose some interest income on that deposit, since the interest rate is calculated on an annualised basis.

Again as an inquisitive investor my suggestion would be to start evaluating between the loos on closing the FD and the extra gains on the New FD. Sometimes the loss in the interest income may offset the gain you earn from higher deposit rates. 

If you had invested Rs 100,000 around four months back for one year FD at 7.00% and the rate for one-year deposits has gone up to 8.25%, then on breaking the previous one, the rate applicable for four months technically should be [ 100,000 * 7/100*4/12] Rs.2333. which you can again reinvest at 8.25%. Not that simple you underestimate one of the biggest cons in the money market the BANKS.

A bank can charge you a pre closure charge and not allow you the entire interest accrued on your FD. A bank could technically charge anywhere between 1-2% on you FD as pre-closure charge. So instead of allowing you to calculate 7% he could take away about 2% from your agreed interest and make you a payment of only [ 100,000 * 5/100*4/12] Rs.1666.

   
But certain banks have a defined list of emergencies under which a customer can be spared from the premature withdrawal penalty. Like unexpected financial emergencies such as illness, death of a family member etc. But this waiver happens on a case-to-case basis and the customer has to convince the bank about the nature of his emergency.

All is not lost rates are at a favorable peak my suggestion would be to talk to your banker discuss how he could renew the rate for you. Some banks offer renewal of FD’s without charging a high pre closure charge. Though the rates received in this case would not be the highest offered by the bank but still it could be better by about a percent or two.

Most of the company FDs still offers a higher interest rate compared to that of bank FDs but one should also consider the financial soundness of the company. The safety and return on company deposits depend on the rating. Usually higher the rating, lower is the return Rs "Typically the return on an AAA-rated company comes very close to that of a bank deposit as the investor is assured of the company's financial soundness.

For example, the rate offered by LIC Housing Finance on a one-year deposit is 7.6%. It is rated FAAA by Crisil, which indicates the highest degree of safety regarding payment of interest and principal. For the same period, SBI is offering 7.75%. Now this rate is comparable because the company has been given a safe rating. Also, in most of the cases, it takes a longer time to get the credit in case you want to break your company FD before its due maturity.

Another sound fixed tenure interest generating scheme is an FMP also known as FTP. Fixed maturity plans and fixed tenure plans are schemes launched by mutual funds. They more or less offer the same tenure as a bank FD. Varying terms commonly offered are 91 days, 180 Days, 370Days and 520 days.

Given that the interest income on bank deposits is fully taxable, the net yield is much lower. If a person is in the highest tax bracket, then the actual return after tax of 30.9% is just 6.3% on a 9% FD. An FMP here is a better tax efficient product as Mutual funds offer dividends instead of interest payouts and dividends are charged only a 14%. If the FMP has a tenure of more than 1 year then the taxation becomes even more attractive as income can be categorized as capital gain and we need to pay only10% without or 20% with indexation which in most cases due to our high inflation is always at a loss.

Before investing in FMP’s my suggestion would be to speak to a certified investment advisor as he will explain to you how exactly the product works and why it gives a higher return when compared to a bank FD. In buying FMP my suggestion is to always understand what will be the portfolio of the FMP as an FMP will technically hold a combination of CD’s and CP’s.  CD are usually offered by banks and CP’s are offered by rated companies.

My suggestion would be to start picking your favorite fixed income product as the rates are at all time high and I urge investors to not miss this opportunity to book into some long term Fixed deposit plans.

International Funds are they a true Diversifier ???

Investing in other countries is a good thing especially while considering the greater picture of Diversification. The bigger a portfolio gets greater the need for diversification. All the big wealth management houses will be making sales pitches regarding the importance of diversification and why we need exposures to other countries.

Diversification is important and in this post I am not criticizing the need for diversification, I just want to dig a bit deeper in elucidating that just because you invest in some other country does not mean you are diversifying your portfolio.

Let’s drill down a bit deeper into understanding what diversification is and why do wealth managers advice not to put all your eggs in one basket. The rationale behind diversification technique is that a portfolio of different kinds of investments will, on average, yield higher returns (research done by Fidelity international) and pose a lower risk than any individual investment found within the portfolio. Typical case would be when stock markets underperform people do shift their focus to bond funds or real estate to protect their wealth. The pioneer in the theory of portfolio diversification is Markowitz, his theory of portfolio diversification proves that combining an asset that has negative or low correlation with other assets in a portfolio provides superior risk-adjusted returns.

Diversification actually tries to even out a portfolios return or to that effect reduce the impact of any unexpected risk events that could derail the investment theme. In a well diversified portfolio positive performance of some investments will neutralize the negative performance of others. This can be achieved only if the Investments are negatively correlated. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated. Example gold investment exposure in a portfolio would have reduced the losses incurred in the equity portfolio during 2008-2009.

For the Inquisitive Investor

When DSP Blackrock Mutual Fund went about thumping its chest about the DSP Blackrock World Gold fund, all and sundry investment advisors went behind them stating that the fund is a perfect insulation from an underperforming equity market. The actual case was exactly the opposite.

When the stock markets collapsed the fund also hit its bottom. The fund was exposed to GOLD (Gold has a negative correlation with stock market performance) but the scheme had investments in stocks of gold mining companies and hence even though the fundamentals of the companies looked good during the recession and the price of gold went up, the stock market collapse took down the shares of the gold mining companies along with it. This shows how careful we need to be in understanding the nuances of diversification. The fund lost 60% from its peak NAV during the recession.

 

On the same note there has always been a set of advisors pushing investors to invest in offshore funds or funds with exposures to other countries and not only in India. Diversification is good here it is not necessary that all countries will collapse at the same time and even if Europe collapses it is not necessary India will follow or for that matter Brazil, US, & China all seem to be safe haven for Investments. Emerging economies like India, Indonesia, and Malaysia are currently one of the most talked about markets from an Investment point of view.

In the US most Investment analyst and broking houses are advising clients to move anywhere between 10-50% of their portfolio’s to emerging market stocks.    

What did we learn there should be a perfect or at least a negative correlation for two different asset classes then only diversification will make sense.

This post is mainly to make you aware that investing into Asian economies will not serve the purpose of diversification. Time and again I keep reading articles in different finance journals and papers about the benefit of offshore investing, I am not condemning offshore investment the point is where the investments are… if you are going to invest in someplace where the market dynamics follow India then it doesn’t serve the purpose. The cost of investing outside the country is also much higher. The second point I want to stress is the current international funds on offer are not as diversified as you think and most of them have only an exposure of 30% to other countries. In this post I will also try to throw some light on International Funds floated by Indian Mutual fund Houses.

What are international funds?

International funds are funds that invest in global markets. An example would be Franklin Asian equity Fund, the Fund invest 30% of its portfolio to buy stocks from markets like china, Singapore, Korea and Taiwan.

What are the types of International Funds?

From an Indian Investor perspective you can classify them on the basis of Taxation

                Equity Taxation

                Debt Taxation

Funds with Equity taxation must have a minimum allocation of 65% to Indian Stocks, and the funds with debt taxation can invest even their entire amount in foreign stocks.

What are the Risk Involved in International Funds?

Country Risk – Obviously if tomorrow a Dubai kind of situation happens or Spain, Portugal, Greece kind of situation happens then yes you have lost your money and that can happen even in India.  So let’s not discuss that as these events are difficult to predict and it becomes very difficult in analyzing country balance sheets as there is a mass of hidden data. So assuming you made investments into china thinking why put all eggs in one basket and then tomorrow china stock market collapses due to a real estate bubble you have lost your money.  

Currency Risk – if the country you invest in assuming china suddenly devalues its currency and the rupee appreciates vis-à-vis ‘Yuan’. Then you capital will take a beating. So currency movements can positively and negatively hit your holdings…

                Example; you invested Rs 100,000 in ‘Mirae China Fund’ the fund buys china stocks hence your 1lak is converted into YUAN to invest in CHINA. Assuming 1 Yuan is 10Rs then you have 10,000 Yuan. The stock market goes up by 10% and hence your 10000 yuan becomes 11000. You decide to pull out the money for a foreign trip.

Now assume the Ruppe appreciated by 20% vis-à-vis Yuan then the currency rate becomes 1 yuan = 8Rs. When you convert your 11000 yuan you get only (11000*8) Rs.88,000 in your hand. Even if the investments are up, due to rupee appreciation the gain made is wiped out, the reverse is also true if the rupee had depreciated by 20%, then the net returns in the hand of the investor would have been…(11000*12) Rs132,000.

Global Capital Movement – most sites will talk about the above two risk mentioned but the major risk for me is global capital flows. In my analysis I have found that the correlation of stock market movement in Asian countries is much higher when compared to similar movements in European countries.

There are large fund holdings like ETF’s and hedge funds which move across counties creating asset bubbles across the world. They basically follow a herd mentality, when a famous US analyst puts out a buy recommendation on emerging countries money flows into Emerging market Index. This money in turn gets invested into the respective domestic stock exchanges. Which gives a relatively linear movement, this is against the diversification rule.

I find that Asian stock markets move in tandem with Indian stock market so the basic premise of Investing in International fund which predominantly holds Asian stocks is absurd. 

If you scan economic articles on Asian markets there are papers submitted by experts stating the coexistence of Asian markets. If you think I am pulling data from the air then I would suggest all inquisitive Investors to do a co-integration and error-correction method using closing price of various indices with volume movement to understand that the price indices of the five markets are co-integrated. The existence of a linear combination of the five indices forces these indices to have a long-term equilibrium relationship implies that the indices are perfectly correlated in the long run and diversification among these five equity markets cannot benefit international portfolio investors. However, there can be excess returns in the short run which could happen due to micro factors affecting the domestic market like higher IIP number or GDP growth rate, improved exports.

In the Chart you will see the returns on QoQ basis for the last 2 years the difference in performance is not that great an ordinary funds like HDFC top 200 has outperformed the international funds by a huge margin. The close contenders like ICICI Asia equity Fund & Templeton have 65% of their exposure to Indian markets.

International Funds – A brief

India has about 27 international funds this includes funds that have invested into commodities as well a detailed discussion on each one of them will follow thru at later post. Out of the 27 at least 23 have a track record in excess of 1 year which would make it easy to understand and analyze their performance.  

As of Nov we have about 22000Cr exposure to International funds but since most funds have an exposure of only 30% to foreign equities the actual investments is quite small. As percentage we have about Rs 2,20,000 Cr exposure to equities and our percentage exposure to foreign stocks is around 3%. My problem is not with foreign exposure but the countries we are choosing for our exposure.

Any way I am not going to comment on the individual schemes and I leave it to you to decide what is good or bad, I just wanted to throw some light on the coexistence or the linear movement of Asian markets. There are some schemes like Fidelity global assets & Templeton India Equity income fund which have delivered significant alpha. I have not done analysis on these or individually checked for their correlation but on risk return basis they are a doing well. 

If you ask me for a hedge against Indian Equity, I have strong feelings for China (stock specific), Commodities Investment and Europe & US.   

Yield & Interest - Relation

Yields and bonds 

Yield and bond price are inversely related. So, a rise in price will decrease the yield and a fall in the bond price will increase the yield. In fact, both inflation as well as the interest rate tends to have an impact on the value of a bond. Usually, there is an immediate and predictable effect on prices of bonds with every change in the level of interest rates. When the prevailing interest rates in the market rise, the prices of outstanding bonds will fall, to equate the yield of older bonds in line with higher-interest new issues.

This happens as there would be very few takers for the lower coupon bonds, resulting in a fall in their prices. The prices would fall to an extent where the same yield is obtained on the older bonds as is available for the newer bonds. 

In case the prevailing interest rates in the market fall, there is an opposite effect. The prices of outstanding bonds will rise, until the yield of older bonds is low enough to match the lower interest rate on the new bond issues. These fluctuations in bond prices contingent with changes in the interest rates tend to ensure that the value of a bond will never be the same throughout its life. A bond's value is likely to be higher or lower than its original face value, depending on the market interest rate, the time to maturity and its coupon rate.

RBI Credit Policy Dec 2010 - Implication & Way Forward

The RBI announced its Mid-Quarter Monetary Policy Review today. Key highlights were as follows:

•  Repo, reverse repo rate, and CRR kept unchanged
•  SLR cut by 1% to 24% of net demand and time liabilities (NDTL) of banks with effect from December 18, 2010
• RBI to conduct open market operation (OMO) auctions for purchase of government securities for an aggregate amount of INR 48,000 crores in next one month.

RBI’s Assessment

Global Growth

The western economies have shown better economic data lately. However, unemployment rate has increased in the US and financial stability concerns have resurfaced in Europe. 

Major emerging market economies (EMEs) continue to experience robust growth. However, the RBI notes that despite slow recovery in advanced economies, commodity prices have risen noticeably in recent week. Reflecting this and demand strength, inflation has started rising in most EMEs.

Domestic Growth

With regard to the domestic economy, the RBI observes recovery in agriculture and the recent strong print of IIP in October. Importantly, indicators of industrial and services activity are showing strong momentum.

Domestic Inflation

On inflation, while food price inflation has shown some moderation following a favorable monsoon, inflation for non-food primary articles has risen sharply. Also, non-food manufactured products inflation has risen to 5.4% in November 2010. Furthermore, the RBI notes that rising domestic input costs for the manufacturing sector combined with aggregate demand pressures imply that risk to its projection of 5.5% inflation by March 2011 is on the upside.

Liquidity

While overall liquidity deficit is consistent with policy stance, the RBI observes that the tightness has been beyond its comfort level. This is largely attributable to large government balances, accentuated by structural factors like rise in currency with public as well as relative divergence between credit and deposit growth rates. This huge liquidity deficit can constrain banks’ ability to expand their balance sheets commensurate with the productive needs of the economy. It emphasizes that the liquidity measures taken should be viewed as response to these concerns and not construed as a change in monetary policy stance since inflation continues to remain a major concern.

Interpretation for the Inquisitive Investor

System liquidity including the advance taxes numbers is a negative 45,000 crores. The RBI had already been cognizant of these concerns and had responded lately by infusing approximately INR 22,000 crores via open market purchases of government bonds. However, sections of the market were still anticipating further measures in light of the extreme liquidity deficit. Hence, a further liquidity measure is hardly surprising.

A significant swing can only happen if commodity prices fall by more than 10-15% from these levels especially oil, copper and Steel, thereby reducing inflation pressures and oil bond subsidies and fertilizer subsidies and allowing government to spend at least 80,000 Cr before Feb-march2011.  

Government securities have reacted very positively with yields down between 5 to 10 bps across the curve. Money market yields are down some 10 bps on the back of initial relief on liquidity.

• Going forward, market will look to take cues from the securities selected for the OMOs as well as from the cut-off yields awarded in the actual operations.
• Corporate bond yields are unlikely to fall given the pressure of supply.
• Money market rates are also unlikely to come-off significantly since overall liquidity deficit as well as pressure of issuances will continue into March. So liquid plus funds could continue delivering 6.8% annualized returns
• Short term bond funds could get hit as the rise in yields and spreads is a dampener on bond performance, but then if funds continue to flow into them like Templeton India Income Opportunities Fund they could go on a accrual phase and start giving returns in excess of 8% for the next two years.
• Macro environment does not seem to be very positive for duration bonds especially looking at a commodity price spike happening.
• Risk versus reward favors exposure to the front end of the curve, like 6 months to 18 months max. (FMP)
• On the whole I think the current phase is one of pause in an overall rising interest rate cycle.

Fund Flow From India Inc

We have always been discussing and following Fund flow especially when it is in relation to India Inc, recently I came across an article which talks about an increase in deposit size of Arab banks from India. When cross checked with data available from bank deposit growth in the UAE I was amazed to see the hyper growth of deposit size in UAE banks especially in the last few months of July to Nov 2010. 

In the past few months, there has been an unusual surge in deposits in many high-street banks in Dubai, Abu Dhabi and financial centres in the UAE. Where the money came from is a subject of speculation in the Gulf with the regulator yet to spell out the sources. 

But amid the buzz that much of it could be government money taken from reserves to help state-owned firms pay off debts next year, senior bankers and finance professionals have spotted an India angle to the fund flow. 

The rush of deposits began weeks after India and Switzerland signed a revised treaty on August 30 to exchange information on tax-evaders. The pact was perceived as the first step to obtain details on money stashed away in Swiss banks. India struck a similar agreement with Bermuda, a tax haven. 

Total bank deposits jumped more than 40 billion dirhams ($11 billion) in October, as per data compiled by the Central Bank of UAE , against an average monthly growth of 10 billion dirhams ($2.7 billion) since January. I don't think this is mere coincidence. It's a fact that money is moving out of Swiss banks and Dubai is an obvious choice for many Indians. 

Before October, the highest jump in monthly deposits was 14.6 billion dirhams ($3.9 billion) in June - less than two months after Indian tax authorities notified they had initiated information exchange agreements with nine jurisdictions, including British Virgin Islands, Isle of Man and Jersey, which has been a favourite tax haven. "Some of these pacts are yet to be notified, and data will be shared by a tax haven only after precise information is sought. But, such announcements push people to move their money.

Dubai is convenient because there is no tax and banks ask few questions if money deposited has no drug or terror trail. The whole transaction can be broken into a few simple steps. First, a firm is floated in the Dubai Free Trade Zone and then staffed with local directors, many of whom are Indians working in the Gulf. Secondly, a bank account is opened in the firm's name. The money is then wired from Switzerland or a tax haven to either a Dubai bank, or to the UAE arm of an MNC bank. Finally, it is transferred to a local Emirate bank. The cash received by the newly-formed company in Dubai is shown as trading income or consultancy fee from international clients. 

India Inc's unaccounted money is estimated to be around 40,00,000Cr out of this 20% is said to be in Tax heavens all around the world. India's Accounted GDP is projected to be around 4800000Cr. With the Black economy as big as the Accounted economy, we could be easily one of the largest economies in the world. 

I guess it is high time the government start thinking in lines of how to bring back this amount back into the system.