26 November 2011

PANTALOON RETAIL Deteriorating fundamentals ::Edelweiss

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Pantaloon Retail’s (PRIL) core retail disappointed in Q1FY12 due to
slowdown in same store sales growth across segments (3.64% in value
retail, 6.53% in lifestyle, 1.26% in home retail) vis‐à‐vis Shoppers Stop,
which posted robust growth (11% in departmental, 8% in HyperCity).
Interest costs gobbled ~75% of its EBIT and jumped 40% YoY. Surge in
working capital has been one key reason behind the spurt in debt. The
company’s inventory days increased from 93 in FY10 to 110 in FY11 (much
higher than 32 for Shoppers stop). Slowdown in sales for two consecutive
quarters, mounting debt, delay in sale of non‐core assets, rising inventory
and unlikely allowance of FDI in multi brand retail are likely to impact
PRIL’s future growth plans. Hence, we downgrade the stock to ‘HOLD’.
Higher interest expense dents PAT
PRIL’s net sales surged ~13% YoY to INR29.1bn in Q1FY12. Growth was slow due to
muted consumer sentiments amidst high inflation. Sales were impacted by close down
of stores for a total of 12 days in Hyderabad due to the Telangana issue. PAT declined
23% YoY to INR330mn following higher interest expense (up 40% YoY) despite 420bps
YoY dip in tax rate to 29.5% from ~34.0%; net profit margin dipped 52bps YoY.
Margin improves as COGS pressure eases; expansion on track
EBITDA rose 18.6% YoY to INR2.5bn for the quarter. Gross margin improved due to
check on COGS (down 46bps YoY); EBITDA margin also improved (43bps YoY) to 8.7%.
Benefit of softening in cotton prices is evident from lessening of COGS pressure as per
our expectation. 0.44mn sq ft of retail space was added during the quarter to 15.68mn
sq ft (slightly below earlier run rate 0.5mn sq ft per quarter).
Outlook and valuations: Gloomy; downgrade to ‘HOLD’
Although we like PRIL’s diversified mix of retail business and its size, burgeoning debt
and higher inventory days remain key concerns which we have been highlighting
repeatedly; both these parameters continue to worsen. Due to upcoming elections in
major states, FDI in multi-brand retail looks unlikely. Hence, we are downgrading our
recommendation to ‘HOLD’ from ‘BUY’; maintain ‘Sector Underperformer’ rating. At
CMP, the stock is trading at 19.2x FY12E and 14.7x FY13E EPS.

PANTALOON RETAIL Deteriorating fundamentals ::Edelweiss

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Pantaloon Retail’s (PRIL) core retail disappointed in Q1FY12 due to
slowdown in same store sales growth across segments (3.64% in value
retail, 6.53% in lifestyle, 1.26% in home retail) vis‐à‐vis Shoppers Stop,
which posted robust growth (11% in departmental, 8% in HyperCity).
Interest costs gobbled ~75% of its EBIT and jumped 40% YoY. Surge in
working capital has been one key reason behind the spurt in debt. The
company’s inventory days increased from 93 in FY10 to 110 in FY11 (much
higher than 32 for Shoppers stop). Slowdown in sales for two consecutive
quarters, mounting debt, delay in sale of non‐core assets, rising inventory
and unlikely allowance of FDI in multi brand retail are likely to impact
PRIL’s future growth plans. Hence, we downgrade the stock to ‘HOLD’.
Higher interest expense dents PAT
PRIL’s net sales surged ~13% YoY to INR29.1bn in Q1FY12. Growth was slow due to
muted consumer sentiments amidst high inflation. Sales were impacted by close down
of stores for a total of 12 days in Hyderabad due to the Telangana issue. PAT declined
23% YoY to INR330mn following higher interest expense (up 40% YoY) despite 420bps
YoY dip in tax rate to 29.5% from ~34.0%; net profit margin dipped 52bps YoY.
Margin improves as COGS pressure eases; expansion on track
EBITDA rose 18.6% YoY to INR2.5bn for the quarter. Gross margin improved due to
check on COGS (down 46bps YoY); EBITDA margin also improved (43bps YoY) to 8.7%.
Benefit of softening in cotton prices is evident from lessening of COGS pressure as per
our expectation. 0.44mn sq ft of retail space was added during the quarter to 15.68mn
sq ft (slightly below earlier run rate 0.5mn sq ft per quarter).
Outlook and valuations: Gloomy; downgrade to ‘HOLD’
Although we like PRIL’s diversified mix of retail business and its size, burgeoning debt
and higher inventory days remain key concerns which we have been highlighting
repeatedly; both these parameters continue to worsen. Due to upcoming elections in
major states, FDI in multi-brand retail looks unlikely. Hence, we are downgrading our
recommendation to ‘HOLD’ from ‘BUY’; maintain ‘Sector Underperformer’ rating. At
CMP, the stock is trading at 19.2x FY12E and 14.7x FY13E EPS.

LIC HOUSING FINANCE Provisioning dents earnings; NIMs dip further ::Edelweiss

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LIC Housing Finance’s (LICHFL) Q2FY12 PAT of INR984mn (down 58% YoY)
was primarily dented by provisioning of INR2bn (due to revised norms
mandated by NHB in August). Even after adjusting for one‐time
provisioning, PAT was below consensus estimate as NIMs dipped 34bps
(as against expectation of 10‐15bps). On the positive side, individual
disbursement growth was sustained; traction was gained in developer
loans; NPLs came off QoQ. We maintain ‘HOLD’ with a TP of INR275.
NIMs came off 34bps to 2.45%; close to bottoming out
NIMs have come off 100bps in the past two quarters to 2.45%, largely unwinding
previous six quarters’ benefit. Despite having raised lending rates by 25bps each in
April and July 2011, yields improved only marginally (by 8bps) since Q4FY11 as special
scheme loans constituted ~40% (not due for repricing due to fixed rate nature),
coupled with slow build up in developer loans. On the other hand, funding cost
increased 125bps as INR50bn of liabilities matured in H1FY12. The company has raised
lending rates by 40‐50bps since October 2011 and we expect NIMs to bottom out.
Revised provisioning norms dent earnings
In August 2011, NHB mandated standard asset provisioning of 40bps alongwith higher
provisioning for non‐standard loans. In this respect, LICHFL provided INR2bn in
Q2FY12. Management indicated that it has not utilized excess provisioning of
INR1.12bn (contrary to its earlier guidance). Out of INR2.05bn, we believe ~INR1.6bn
was provided towards standard assets (of ~INR400bn excluding INR120bn Fix‐O‐Floaty
loans and INR40bn developer loans) and INR450mn towards revised provisioning on
INR3.0‐3.3bn of substandard/doubtful loans. Management stated that “Advantage 5”
loans (INR100bn) are not yet categorized as teaser loans. We are increasing our credit
cost estimate to factor in 40bps standard asset provisioning (against 25bps earlier).
Outlook and valuations: NIMs bottoming out; maintain ‘HOLD’
Though margins have come off 100bps in the past two quarters, we believe they are
close to bottoming out (40‐50bps increase in lending rates in October to offset cost
pressures). Growth trajectory is expected to sustain in individual as well as corporate
segments. It is evaluating raising equity in H2FY12 (can act as a trigger being book
value accretive). The stock is currently trading at 1.9x FY13E book and 8.6x FY13E
earnings. We maintain ‘HOLD/ Sector Performer’ recommendation/rating.

CESC: TP: INR474 Buy::Motilal Oswal

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 2QFY12 numbers in line with estimates: CESC 2QFY12 numbers were in-line with estimates. De-growth in PAT
was expected given FY12 tariff order revision is expected in 3QFY12 (v/s done in 2Q last year). Operating performance
was also strong with PLF of 92% (excluding New Cossipore).
 Spencer's performance remained strong: Performance at Spencer level has remained strong, driven by higher
revenue, consolidation, etc. Spencer closed 16 Daily/Express stores and despite this its area under operation
slightly looked-up led by addition of 4 Hyper store. As at Sept 2011, Spencer operated 195 Stores v/s 208 stores as
at 1QFY12 vs 208 stores as at 2QFY11. Sales for Spencer have seen an uptick and for 1HFY12 it stood at INR1066/
sq.ft/month up from INR940/sq.ft/month as on 1HFY11. Store level EBIDTA has seen slight moderation in 2QFY12 at
INR31/sq.ft/month, vs INR37/sq.ft/month in 1Q. This was due to lower concessionaire income, which generally gets
booked in 1Q and is not accounted for in 2Q.
 Steady progress in projects under construction: CESC is currently constructing 1.2GW of power projects (current
installed capacity of 1.2GW) and has obtained major clearances/placed equipment orders for the entire capacity.
Additionally, CESC is working on ~6GW of projects. It has consolidated its power business holdings through a
wholly-owned subsidiary, CESC Infrastructure, which in turn owns Haldia Energy (600MW coast-based project) and
Haldia Energy owns Dhariwal Infrastructure (600MW Chandrapur project in Maharashtra). This provides a platform to
induct a financial investor for meeting the funding requirements of the Power business.
 Funding requirement at ~INR40b: We estimate total funding requirement for the Power and Retail business over
the next four years at ~INR40b. This comprises of ~INR35b equity funding requirement (including INR7b already
invested) for 2.5GW of generation capacity addition and ~INR3b towards funding of Spencer's losses (INR1.7b in
FY11). CESC is exploring fund raising options both for its Power and Retail business and expected increase in the
FDI in multi brand retail to 51% could be positive.
 Valuation and view: We expect CESC to report standalone net profit of INR5b in FY12 (up 3%) and INR5.3b in
FY13 (up 4%). The stock quotes at 7x FY12E and 6.7x FY13E standalone EPS. Maintain Buy.

Media - Madras HC stays e-tax on DTH :: Edelweiss,

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In a move which will boost DTH operators in Tamil Nadu, the Madras High Court has stayed the entertainment tax (e-tax) levied on DTH services in the state. The Tamil Nadu government had passed a bill levying 30% tax on DTH operators effective September 27, 2011. Dish TV had filed a petition in the Tamil Nadu High Court challenging the decision. We perceive the stay as sentimentally positive for all DTH companies, especially Sun TV’s unlisted DTH arm, Sun Direct, which has a dominant presence in the state. However, since it is just a stay order, the situation needs to be monitored further. We remain positive on the DTH segment.

DTH players welcome stay on e-tax
In its petition, Dish TV had claimed that levying a tax only on the DTH industry violates Article 14 of the Constitution of India. Mr. Jawahar Goel, MD, Dish TV, has welcomed the stay and believes that e-tax is a burden on the common man for whom TV viewing is the cheapest form of entertainment and information. Mr. Harit Nagpal, MD, Tata Sky, too stated that the tax is discriminatory and denies a level-playing field for the cable and DTH industries. Tamil Nadu government had submitted a bill in the assembly to levy e-tax only on DTH service; thereby, excluding cable television operators and movie theatres from the tax burden. State governments have intermittently introduced e-tax on cable television operators and DTH service providers. Currently, ~18 states levy e-tax.

Stay could be potentially negative for Arasu
With the change in power in Tamil Nadu, the state-run Arasu Cable had been relaunched on September 2, 2011, to break the dominance of existing players.  With some major channels not being aired on Arasu, some cable subscribers had started shifting to DTH. However, the 30% e-tax levy on DTH service providers would have stifled their advantage. With the stay order, we expect momentum to be back for DTH operators in Tamil Nadu.

E-tax would have had marginal impact on Dish TV
Out of a gross subscriber base of 11.7mn as at September 30, 2011, Dish TV has ~0.4mn subscribers in Tamil Nadu.  In FY11, e-tax for the company was ~3.6% of total revenue. Prior to the 30% tax imposed by the Tamil Nadu government, Dish TV was expecting its e-tax burden to be ~7% of total revenue in FY12. However, if the stay is revoked and e-tax levied, the impact on the company’s e-tax burden will increase by ~0.25%.

Top Picks
Dish TV, Zee Entertainment Enterprises.


Oberoi Realty :: Management Meet Note:: ICICI Securities

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Q u a l i t y   p l a y   o n   M u m b a i   r e a l t y…
We met the management of Oberoi Realty (ORL) to get an insight into the
company’s business model and its growth plans, going ahead. ORL is an
established brand name in the Mumbai real estate market with almost
entire land bank (~93%) of ~20 million sq ft in Mumbai, a key property
market. ORL also enjoys a debt-free balance sheet with cash balance of
~| 1400 crore. With the anticipated  project launches of 5 million sq ft
over the next six to 12 months (1.97 million sq ft already launched), we
expect Oberoi’s sales momentum to remain strong, going ahead.
ƒ Quality land bank in Mumbai
ORL is an established brand name in the Mumbai real estate market.
The  company  currently  has  a  land  bank  of ~20 million  sq  ft with ~93%
spread in Mumbai. In terms of verticals, residential accounts for 61%
followed by office space (20%) and others. The distinguishing factor for
ORL is its prudent strategy of acquiring quality land at reasonable rates.
For example, ORL had acquired 84 acres of land at Goregaon at a low
cost of~ | 107 crore.
ƒ Strong balance sheet
ORL has strong financials with a debt-free balance sheet. It is one of the
very few companies in the sector,  which enjoys a positive operating
cash flow (~| 200 crore in FY11) and has a strong cash balance of ~|
1400 crore. The strength in balance sheet guards ORL from any kind of
delays in execution on account of  financial stretch. Additionally, the
financial health would also enable it to acquire new land bank at better
valuation in case there is a slowdown in the sector.
ƒ New project launches to keep sales momentum strong
ORL has a strong pipeline of ongoing and planned projects, which are
launched/to be launched over the  next six to 12 months in the
residential segment. This would keep it sales momentum healthy. ORL
has/is likely to launch ~5 million sq ft over the next six to 12 months.
This includes Esquire (1.97 million sq ft, already launched and sold 0.27
million sq ft in Q4FY11); Oasis Residential (1.54 million sq ft) and Oberoi
Exotica I (1.61 million sq ft). These project launches would keep its sales
momentum strong over the next six to 12 months.
View
At the CMP, ORL is available at 2.4x FY11 P/BV. Oberoi with a strong
launch pipeline, excellent corporate governance and a comfortable debtfree balance sheet position and strong return ratios is set to command a
premium over its peers

Phoenix Mills - FDI in retail a significant positive :: Edelweiss

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Liberalised norms to spur investments in front-end retail
The Union Cabinet’s nod to open the retail sector’s doors comes at time when global players, facing headwinds in their home countries, are scouting for new markets while domestic players, strangulated by piling debt, had slow tracked their expansion plans. We expect this decision to spur investments in front-end retail as new entrants vie for a pie of the Indian organized retail sector.

New entrants to expand addressable market size of asset owners
Currently, most malls have similar brands, lending little differentiation to shoppers, and also curtailing the bargaining power of mall owners. An influx of new entrants in the sector will broaden the addressable market size for mall owners and impart enhanced bargaining power, which will reflect in higher rentals and capital values.

Outlook and valuations: Key beneficiary; maintain ‘BUY’
PML, with its pole position in the domestic retail asset sector, is expected to be the prime beneficiary of this development. PML will have ~5 msf of operational area (PML’s share at 2.8 msf) by FY12E (including BARE) with three large malls across India—one each at Pune, Bengaluru and Kurla—which have become operational in the past six months. We reiterate ‘BUY’ as the stock is trading at 24% discount to NAV of INR244/share.


Pantaloon Retail - In the right place at the right time; upgrade to Buy ::Edelweiss

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Pantaloon Retail (PF IN, INR 201, upgrade to Buy)

Pantaloon Retail (PRIL) will be the biggest beneficiary of FDI in multi-brand retail. India’s largest organized retail chain’s (~15msf) diverse businesses (food, fashion, home, electronics, sports) are FDI ready. The Union Cabinet’s nod to 51% FDI in multi-brand retail will help trim debt and enable it to continue expansion (2.0-2.5msf per annum). The company has also tied up 9msf of space for future expansion which makes it even more alluring from foreign retail chains’ perspective. Further, on cards is monetisation of nonretail assets. In light of the above we are upgrading our recommendation on the stock to ‘BUY’.

Approval of FDI will prove to be the savior; expansion on track
PRIL’s balance sheet (INR45bn of core retail debt, 110 days of inventory in FY11) will be invigorated on account of infusion of funds and better systems due to tie up with a foreign retailer. As per the draft, the proposal will be effective in cities with 1 mn plus population (46 cities); these are PRIL’s primary revenue earners. Also, on cards is addition of 2.02.5 msf space annually and it has already tied up 9msf space.

Business realignment to rake in moolah for retail operation
The company plans to monetize its non retail assets over the next 1218 months and use the proceeds to repay and trim its core retail debt. PRIL has invested ~INR12,000mn in Future Capital, Future ECommerce, Future Supply Chain, real estate property and insurance businesses over the past 34 years and the expected valuation for these entities is ~INR30,00040,000mn.

Outlook and valuations: Cautious; upgrade to ‘BUY’
We like PRIL’s diversified mix of retail business and its size. However, operationally PRIL will continue to remain under pressure over the near term and burgeoning debt and higher inventory days remain key concerns. We believe FDI in multi-brand retail came at an opportune time and expect PRIL’s stock to re-rate further. At CMP, the stock is trading at 22.6x FY12E and 17.6x FY13E EPS. We upgrade our recommendation on the stock to ‘BUY’ from ‘HOLD’ and maintain ‘Sector Performer’ rating.

Indiabulls Real Estate :BUY Target 155 : Anand Rathi

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BUY Target 155
Investment Rationale
~ Ongoing projects – Key focus: Mumbai, Delhi, Chennai
~ Lower net debt / Lower leverage
~ Value unlocking after power business hived off
~ Q2 FY12 results surprise on revenue and operating level
~ Blip Industry scenario -- though -- Structural positive in
longer run
Company Description
Indiabulls Real Estate (IBREL) is one of the largest real estate
companies in India, with premium development projects of
commercial and office complexes, residences, mega-townships,
retailing, hotels and resorts, state-of-the-art special economic
zones, and infrastructure development. It has 31 projects covering
64 million square feet, 2,551 acres of SEZ development and a
further 580 acres.
The company has more than 90% of its portfolio in the Mumbai,
Delhi (NCR) and Chennai markets, with land worth $900 million
bought in government auctions.
Within four years of inception, IBREL has delivered a record 3.3
million sq. ft. of developed space, valued at $1.75 billion. This is
the fastest and largest delivery (by value) by any Indian realestate
developer within a similar time frame.
Based on its experience, the company plans to develop real
estate in the commercial and residential sectors beyond its
operating areas of Mumbai and Delhi. Also, it plans to focus on
developing mid to high-end residential projects in Tier 2 cities, as
well as opportunities to develop townships on the outskirts of
major cities.

Buy Reliance Industries -::Refining tracking below—on poorer product cracks and light heavy crude spreads:Credit Suisse,

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● Our RIL GRM tracker is down US$3/bbl QoQ QTD. Spot margins are
US$5.6/bbl lower than 2Q. This is worse than the Reuters Singapore
benchmark, or most other Asian refiners that have benefitted from
FO/middle distillate cracks (and are marginally down QTD).
● We estimate c.US$1.5/bbl of this decline is due to crude dynamics,
with light-heavy differentials falling (AL-AH down US$0.2/bbl and
Dubai-Maya down US$1.4/bbl QTD). RIL’s actual crude diet in 2Q
and its sourcing ability may affect this QoQ calculation though.
● Gasoline cracks have not sustained at the current low levels for long
for the past several years, and may improve near term. Diesel may
strengthen further as the winter demand plays out. RIL GRM may
end the quarter better than the current weak spot estimates. The
depreciation of the rupee should help segment EBIT as well.
● At 6.5x EV/EBITDA (Asian average), a US$8/bbl FY13E GRM would
imply a Rs175/share cut to our NAV estimate. Without including any
E&P upside, or valuations for shale and broadband, RIL could still be
worth Rs772/share. With low capacity additions in 2012E, it may be
premature to expect a sustained sharp correction in refining margins.
RIL refining margins in a weak spot
Our RIL refining margin tracker is down US$3/bbl QoQ QTD in 3Q FY12.
Spot margins are US$5.6/bbl below the 2Q average. Gasoline cracks
have fallen US$2.6/bbl QoQ (on seasonally weak demand and the
restart of regional refining capacity) while naphtha cracks have
deteriorated by another US$6.4/bbl (on weak petchem demand). Spot
diesel cracks are up US$3.4/bbl (seasonal strength on winter demand),
but are still flat on a QTD basis. RIL’s margin is so far tracking worse
than the Reuters’ Singapore complex benchmark and that for other
Asian refiners (down only marginally QoQ), which have benefitted from
higher Fuel Oil/Jet Kero cracks. FO cracks are up US$3.7/bbl QTD on
strong East Asian demand and supply constraints, although these have
come off a little recently. LPG cracks are US$2.6/bbl lower as well.

As much due to crude variances
Of the US$3/bbl QTD margin decline, about US$1.5/bbl is due to specific
crude price changes. The heavier crude grade benchmarks (Arab
Heavy/Maya, on which our tracker is based) have been stronger than the
lighter Dubai—which serves to reduce RIL’s complexity benefit. This
could also cloud near-term margin estimates, as it will be impacted by:
(1) RIL’s ability to source crude (which has previously been cited as a
company strength), and (2) the specific crude diet now, and in 2Q12.
RIL may also have (1) some (though not much) product flexibility and (2)
product price hedges—that can affect reported margins. 8% QTD QoQ
depreciation of the rupee should help refining segment EBIT as well.

Hoping for a bounce
Other than during the crisis, gasoline cracks have not sustained at the
current low levels for an extended period for the past eight years (cracks
were low before 2003—at lower oil price levels). Diesel margins may
strengthen on seasonal demand, helping RIL GRM near term.
At 6.5x EV/EBITDA (Asian refining average), a US$8/bbl FY13E GRM
would imply a Rs175/share cut to our RIL NAV estimate. Without
including any E&P upside, or valuations for US shale and broadband,
RIL could still be worth Rs772/share. Given low net capacity additions
in 2012E, it may be premature to call for a sustained sharp correction
in refining margins. We maintain our OUTPERFORM rating.

Euro-zone Debt Crisis: Is It Spreading To Germany? ::UOB

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Euro-zone Debt Crisis: Is It Spreading To Germany?
Germany’s failure to find buyers for 35% of its EUR 6bn 10-year bunds sparked concerns that the sovereign debt contagion may be spreading to the strongest of euro zone’s core economies
Market reaction was naturally negative for the Euro and risky assets but very positive for the US dollar and US Treasuries
Ironically, the spread of contagion to Germany could be the last straw to “force” ECB assume the role as the savior for the Euro-zone debt crisis but there is a risk that ECB only moves into the role after a credit event has occur
The European sovereign debt situation continued to dominate headlines with Germany failing to get bids for 35% of its EUR 6bn of 10-year bunds being offered on 23 November. Is Germany next?
The sovereign debt market mayhem that began more than two years ago in Greece and infected Ireland, Portugal, Italy and Spain, is now threatening France and Belgium and risks spreading to Germany, the euro zone’s biggest economy and the widely regarded back-stop to the European debt crisis. German 10-year bond yield surged 22.9bps to 2.148% (the highest in nearly a month).
In addition, Bloomberg reported that Japanese investors bought US$19.9bn of U.K. gilts in 2011 through 30 September, more than any other sovereign debt and unloaded the most debt in Germany (about JPY 1.46trn), followed by sales in Italy and France as the Euro zone debt crisis continues without a resolution and risks further contagion. 10-year gilt yields is now pushed to the lowest in three months relative to German bunds and to levels not experienced in 20 years against Japanese government bonds last week. The ECB was again active in the markets buying Spanish and Italian debt to keep their respective 10Y yields from breaking above 7%.
Credit-default swaps traders are also speculating against German credit succumbing to Europe’s debt crisis. The net amount of German bonds covered by default swaps surged 40% to a record US$19.9bn in the last 12 months, according to the Depository Trust & Clearing Corp., and trading volumes are expected to overtake those on Italy for the first time soon.
Meanwhile, Belgium is experiencing increasing difficulty in its execution of the Dexia rescue plan and the Luxembourg Finance Minister Luc Frieden said that France “may have to take a larger slice of the losses.” French banks are already under huge pressure due to its significant exposure to the sovereign debt of the troubled euro-zone economies and a potentially greater burden of the Dexia losses will put significant strain on France’s heavily threatened triple A credit rating. Now all eyes will be on the Italian 6-month bill auction taking place on Friday (25 Nov).
Market Reaction Very Positive to US Treasuries and US Dollar,
But Negative For Risky Assets Like Euro, Equity and Commodities
US dollar appreciated broadly against the rest of the major currencies on Wednesday (23 Nov) and the euro was put under significant pressure as Germany, the economically strongest market within the euro zone, came under contagion risk. The EUR/USD pair plummeted lower to 1.3343 (from previous session close of 1.3505).

Creating investment portfolio for buying gold :: Business Line,

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An alternative to investing in physical gold is to buy gold ETFs; they are easier to transact and cheaper to store. Besides, they can act as a hedge and be sold when required to buy gold ornaments.
It is customary among Indian households for parents to gift gold to their daughters during their wedding. The demand for gold increased significantly in 2010, despite the sharp increase in price levels. This captures the relevance of gold in Indian society.
For those investing in gold with a time horizon of 5 years or more, buying gold jewellery at present for future consumption may not be ideal, as fashion and preferences change with time. The question is: Can an investment portfolio help such individuals better manage their goal of gifting gold?
This article shows why an investment portfolio can fulfil this goal better. It then discusses why such a portfolio should hold some other assets, besides physical gold and gold ETFs.

INVESTMENT FACTORS

Individuals typically invest in physical gold — either in its pure form or in the form of ornaments. Physical gold does not, however, satisfy two important attributes that an investment asset should possess.
One, the yellow metal does not generate income returns. Now, investment assets typically have two sources of return — income return and capital appreciation.
Depending on a single source exposes the investor to high risk. Of course, it can be argued that equity investment today is primarily dependent on capital appreciation, as dividend yields are negligible.
True, but an investor still has the choice of buying high dividend-yield stocks; that choice isn't available with physical gold investments. And two, gold isn't a liquid asset. By liquid, we mean investors cannot sell gold with the ease and convenience with which they can sell stocks.
Besides these issues, there is another practical problem. Storing gold is costly, compared with that of financial assets. All these ought to deter individuals from buying the yellow metal.
Yet, individuals buy gold because of a behavioural bias that refers to the good feeling that an individual experiences from buying gold. And this feeling moderates the risk associated with such investments.
Given the issues related to holding physical gold and the individuals' desire to eventually hold the yellow metal, we ask the question: Can an investment portfolio help individuals' reach their gold goal?

INVESTMENT PORTFOLIO

An alternative to investing in physical gold is to buy gold ETFs; they are easier to transact and cheaper to store. Besides, gold ETFs can act as a hedge — individuals can systematically invest in such ETFs and sell them when required to buy gold ornaments.
We, however, believe that a portfolio containing equity, bonds besides physical gold, and gold ETFs would be ideal. Why? Individuals have multiple goals during their lifetime. The investment capital is, however, a constraint. This means that goals have to be prioritised. Sometimes, individuals sacrifice near-term goals because of the need to focus on the more important intermediate goals, only to find later that both goals could have been met!
Suppose an individual wants to have a vacation after three years but has to also meet his child's college tuition fees six years hence. Having to prioritise goals, the individual may forego the vacation and create a portfolio to pay for the tuition fees.
But six years hence, he may well be able to pay the fees from his then current income. While the investment portfolio created for the purpose can be used for another goal, the vacation was unnecessarily missed.
It is, therefore, useful to create target portfolios that can address at least two goals. Our suggestion to create a portfolio containing equity, bonds and gold should be viewed in this context.

CONCLUSION

A portfolio containing stocks, bonds, physical gold and gold ETFs forms an integral part of an individual's lifecycle needs — in this case, meeting intermediate goals, such as child's education and marriage.
Creating an investment portfolio custom-tailored to achieve multiple goals requires more effort, but moderates issues relating to goal prioritisation.
Holding physical gold feels good; buying gold ETFs provides excellent hedge. And including exposure to stocks and bonds along with physical gold and gold ETFs could be ideal within the context of lifecycle investment.

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Not sure which stock or mutual fund to pick? Well, how about buying the market as a whole? Enter investments in exchange traded funds (ETFs).
ETFs are good investment options simply because they faithfully track the index or asset they promise to.
They are also a sure-fire way to buy the market or a certain section of it, without selecting stocks, poring over balance sheets or complicated ratios.
ETFs are also a good way to own investments you cannot track on your own.

HOW THEY WORK

ETFs are closed-end mutual funds whose units are listed and traded on the stock exchanges like shares.
The objective of an ETF is neither to do better than the index or asset it tracks nor worse. Instead, it tries to minimise “tracking error”— the difference between the fund's returns and that of the index or asset.
The manager of an index ETF cannot make bets on stocks that will zoom ahead of the market.
They only replicate its index to the minutest detail. For instance, a Nifty ETF will own the basket of Nifty stocks in exactly the same proportion as the index itself.

SHADOWING THE INDEX

How do ETFs manage to shadow the index so closely, when many other equity funds don't? Primarily, by owning a portfolio that is a carbon copy of the index.
This ensures that every stock price move that affects the index also affects the ETF the same way. And if NSE decides to tweak the Nifty index by adding a few stocks and removing others, the managers of Nifty ETFs will do exactly the same to their portfolios.
Secondly, ETFs also have other inbuilt checks to ensure that their market price doesn't stray too far away from their underlying value.
Small investors can only buy ETF units on the stock exchanges. But large ones (read institutions) have the option of buying chunks of an ETF in the form of “creation units”, by tendering shares or the underlying asset, in kind. The constant barter of physical assets for an ETF's units ensures that the fund's price doesn't stray too far away from the asset it reflects.

WHY BUY

One, ETFs allow you to buy costly assets or an entire basket of stocks in bite-sized portions.
Two, among the various mutual fund options, ETFs are the cheapest to own. Open-end equity funds usually charge you about 2.25 per cent a year for managing and running the fund, which comes out of your own returns. An ETF comes at a much lower 0.50 per cent yearly charge (you would however incur brokerage on buying units). Besides, you also don't run the risk of your fund manager holding a lot of cash and missing the bus!
Three, ease of transaction. As ETFs can be bought through your online stock trading account, you needn't set up a separate account with a fund house or find a separate advisor to buy or sell ETF units. You can also buy or sell ETF units intra-day, not possible with open-end funds.