26 August 2013

NSEL: Anatomy of a trade gone sour (BS)

NSEL: Anatomy of a trade gone sour

Like many small investors, P Dharnidharka, 54, invested in the commodity trades on the National Spot Exchange Ltd.  Dharnidharka was promised hefty returns by his broker at a time when stockmarket was volatile and fixed deposit returns were not very attractive.
 
It looked too good to be true. Thousands of investors like Dharnidharka were lured into trading what looked like exotic derivative contracts on the National Spot Exchange Ltd (NSEL) that promised an assured return of anywhere between 15 and 18% per annum. Every trade would result in earnings of 1-2% in a month or so - guaranteed. 
 
Dharnidharka was delighted at the prospect of earning business income from trading in commodities. No trade could go wrong. Investors and brokers flocked in droves to a well-crafted commodities-trading strategy that was simple to execute and immensely profitable. In the end, it turned out too good to be true. 
 
Nobody asked crucial questions. How can commodities traded on an exchange always turn a profit for investors? How did the trade work? Who were the commodity traders? Where were the warehouses? Nobody knew that one day the music will stop. And it did.
 
Looking back, when the NSEL commenced operations in October 2008, it started as an exchange to facilitate commodity producers to find buyers for their products. Spot exchanges normally offer T+2 or T+3 delivery. Any buy or sell transaction should be settled within a few days. If you purchased on the exchange, you paid your dues in two or three days and took delivery the next day of whatever you had bought whether castorseed or wool. 

Retirement savings: Start early, despite the risk! :: Business Line

We often come across young executives who do not appreciate the need to start early on their retirement savings. In a world of consumerism, this is not surprising. After all, why think about retirement when you are young? As you will see, there are obvious benefits to starting early on your retirement portfolio. But doing so can also expose you to higher risk compared to a person who starts late! In this article, we discuss the benefits and the risk of starting early and suggest a process that you can adopt to moderate the associated investment risk.
Benefits
The obvious benefit of starting early is the time factor. Suppose you set aside Rs 5,000 from age 25 till your retirement at 55. You would have accumulated Rs 1.25 crore in your portfolio and, perhaps, more if you increase your contribution after 40. On the other hand, you will have to save approximately Rs 29,000 every month to accumulate Rs 1.25 crore if you start at 40. In both cases, we have assumed a return of 10.5 per cent on your portfolio. The difference in your contribution arises due to the compounding of returns over a period of time.
Another benefit of starting early is that you do not have to be too concerned if you suffer losses on your retirement portfolio during the initial years of your career. Why? For one, your losses will be small as your portfolio will be small in the initial years. And two, you will have a long career ahead. This gives you the opportunity to contribute additional capital to bridge losses and accumulate the required wealth in your portfolio.
You do not have this luxury if you start late. The impact on your portfolio will be significant if you suffer capital losses immediately after you start saving at 40, as your initial contributions will be higher. Besides, recovering losses will be difficult, as the time to retirement is shorter.
Flip side
There is flip side to starting early! Suffice it is to know that compounding can hurt your equity portfolio value because of negative returns, especially in the later years.
Suppose you have accumulated Rs 1.25 crore in your retirement account. A 30 per cent decline in value will bring down your retirement portfolio to Rs 88 lakh. To recover the lost value, the assets in your portfolio will have to increase by 43 per cent! That is, the percentage price-change required to wipe out the unrealised gains in your portfolio is lower than the percentage change required to recover losses! This effect has a significant impact on your portfolio when you start early. Why?
Compounding of returns over a longer period means that a significant proportion of your portfolio value in the later years will be driven by returns, not by your contributions. In the above example, your monthly capital contribution of Rs 5,000 for 30 years would total to about 15 per cent of the portfolio value of Rs 1.25 crore! As you are relying more on market returns to achieve your objective, you are likely to fall short of accumulating your required wealth even if actual returns are positive, but lower than required returns. The effect of lower returns on your portfolio will be less significant if you start late because your capital contributions will be higher.
Conclusion
You can moderate returns-compounding risk by continually reducing your equity investments after 45 and buying bonds that mature at retirement; returns-compounding on bonds is positive if held till maturity. This positive feature of bonds is useful as you can apply the rule of 72 (72 ÷ return is approximate years to double your investment) to achieve your objective, especially in the 10 years leading to your retirement. So, start your retirement savings early!

India Confronts the Impossible Trinity: Elara

Caught on the wrong side
Indian policymaking is struggling in the maze of
impossible trinity. The choice between pegged
exchange rate and an independent monetary
policy becomes important since the Indian
business cycles may not be fully aligned with that
of the US. Now that US yields have firmed up,
either INR can remain a float or pegged to the
USD, the later involving monetary tightening and a
loss of monetary independence. Central banking in
India is inclined towards the later for now while
keeping doors for former wide open. Clearly, the
choice to pursue the middle path may be
distortionary and would inherently include very
short-term patchwork policymaking.
CAD funding: the 21bn dollar question
Looming BoP crisis for India stems from the fact
that capital account, for all optimistic assumptions
may fail to fund the deficit of USDbn88.9 in FY14E.
Assuming more-than-expected long term flows in
(FDI+ Loans + NRI deposits); our estimates show
that there is excessive reliance on "hot money"
flows of around USDbn21 over FY14E. As the US
yields rise and narrow the gap between India and
US paper, the possibility of outflows in debt (early
indication seen in last three months) may be a
prolonged reality. Equity inflows, meanwhile could
suffer a vicious cycle of weakening INR and a
worsening outlook on overall business cycle.
Flows
ETF flow direction has seen an increased
concentration towards US, Japan and European
markets as investors look to avoid the volatility of
Emerging Markets and commodities in the short
term. Recent FII net outflows have significantly
countered the strong YTD start and is now
pushing Indian bourses into a delayed sell off as
hiding places become exposed.
Investment Strategy
The Model Portfolio has seen an outperformance
of 200 bps in the last 3 months. Our contrarian
picks have been working well for us. The structural
construct has remained unchanged and our
preferred investment categories are Oil & Gas,
Automobiles, Power and Consumption. Our
underweights in banks continue and we expect
the benchmark index to see another 10-15%
correction. We would like to highlight that under
recovery theme might reverse with the INR looking
to hold its levels in the current quarter. Notably, as
is the market we have only OWs and UWs and no
Neutral positions.

HDIL: Sell :: Business Line


Deutsche Bank :: India strategy, LIC Housing, Jain Irrigation, Tata Motors

India Rates - Worsening technicals [Arjun Shetty]
Bottomline: The authorities in India have made it clear that stabilization of the
rupee is their highest priority. Even as they struggle to achieve the same
through a classic textbook style inversion of the yield curve; the spill over into
bond market technicals means more scope for pain on long end rates. In
particular, we note that RBI itself as a key buyer of duration will likely have to
stay out of the market, worsening the demand picture for bonds. While
nominal level of yields might look attractive to a section of end investors after
the recent correction, we see the risks more skewed still toward bear
steepening in curves.

Identifying Over-Owned/ Under-Owned Stocks:: BofA Merrill Lynch

Identifying Over-Owned/
Under-Owned Stocks
„FII portfolio: O/W on Industrials & U/W on Consumer Staples
rise and O/W on Cement & U/W on Utilities fall
„ During 1QFY14, foreign institutional investors (FII) & LIC were net buyers
while domestic MFs were net sellers
„ FII holding in Sensex has gone up to the highest level in last 8 years whereas
the promoter shareholding is the lowest in last 8 years.
„ For the first time in 5 years, financials is not the most O/W sector for the FIIs.
Financials has been replaced by Consumer discretionary as the biggest O/W
sector for the FIIs. O/W for this sector is at the highest level since 2008 and 3
out of the top-10 over-owned stocks are from this sector.
„ Most defensive stocks in Pharma and consumers are currently close to their
all time high FII ownership, e.g., Lupin, ITC, Sun Pharma.
„ Heavy buying in Industrials led to a significant increase in its overweight.
Selling in consumer staples coupled with addition of GSK Consumers in
MSCI India led to an increase in its underweight. Changes in free float and
addition of 4 stocks (GSK Consumer, Oil India, Wockhardt, Apollo Hospital)
led to some changes in O/W or U/W in FII portfolio.
Key stocks bought: ICICI Bank, DLF, ADSEZ, Oracle Fin Serv and Dr Reddy
Key stocks sold: HUL, TCS, RIL, Infosys and SBI
Domestic MF portfolio: O/W on Utilities & U/W on Software
falls; O/W on Consumer Staples & U/W on Financials rise
„ Domestic mutual fund portfolio is in contrast with that of FIIs, with Financials
being major underweight sector, sector on which FIIs are heavily O/W. They
are also underweight Consumer discretionary where FIIs are O/W. Domestic
mutual fund portfolio is heavily overweight on Consumer Staples where FII
are underweight. However, on the similar lines of FIIs, domestic mutual funds
are also underweight Software, metals & mining sector and Energy sectors.
„ In contrast to FIIs, domestic mutual funds sold Pharma, Utilities, Financials.
On the other hand similar to FIIs, they sold Consumer, Energy.
LIC net buyer
„ On the similar lines of FII, LIC was a net buyer. LIC bought Software (Infosys,
Wipro, TCS), Metals & Mining (MMTC, Coal India), Energy (RIL, Cairn India).
LIC sold Pharma (Dr Reddy).

Petronet LNG: Buy :: Business Line


Kotak India Daily :: 26-AUG-2013 - Change in Reco - Reliance Industries; Updates - Bajaj Corp., Hexaware Technologies, Energy

Change in Reco
Reliance Industries: A nice INR hedge; upgrade to BUY from ADD
l
The recent correction offers an opportunity to accumulate the RIL stock
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Refining margins contract, led by a decline in gasoline cracks; diesel cracks remain strong
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Rupee to the rescue, even if margins disappoint
l
We raise estimates to factor in weaker Rupee forecasts
Company alerts
Bajaj Corp.: Marks a new beginning beyond hair oils
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Acquires NOMARKS anti-marks skin care brand from Ozone Ayurvedics for undisclosed sum
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Small brand now, but huge untapped potential
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Good deal (marginally dilutive in first year) - de-risked portfolio to aid valuations, retain BUY
Hexaware Technologies: A good opportunity to exit
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Barings Asia buys out promoters and General Atlantic Partners
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Acquisition price values the company at 10.5X CY2014E earnings
Sector alerts
Energy: Elevated crude price risks in the near term
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'Temporary' supply tightness to keep crude prices at elevated levels in the near term
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Problems compound for India led by Rupee depreciation
Economy
Economy: RBI Annual Report: Focus on macroeconomic stability
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Higher domestic interest income contributes to higher dividends for the Government
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Key issue #1: Currency risks and external sector vulnerability
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Key issue #2: Banking sector concerns
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Key issue #3: Need to address infrastructure bottlenecks to revive growth

India - The end game ::IIFL

India Inc’s debt has risen a t an unpre cedented pace in the past six
years and debt-servicing ability o f companies has weakened, as
re fle cted in falling interest coverage and dwindling cash flows.
Flagging growth outlook for the Indian e conom y, aggrava ted by
weakening INR and diminishing prospe cts of intere st ra te cuts in the
near term , intensify the pain of high debt. This pain is almost equally
shared be tween the borrowers and lenders. Government banks have
been showing stre ss signs for a while and priva te banks too are
unlikely to remain immune . ICICI, Axis, and Yes Bank are expe cted
to be the worst impacted among priva te banks.
The two extremes — drowning in debt or floating in cash: Ne t
debt for 749 companies in our universe (ex-banks and finance
companies) with combined marke t cap o f US$828bn, has risen 4.9x
over the past six years (FY07-FY13) to Rs14,918bn (US$244bn).
Average ne t debt-to-equity ra tio for the leveraged companies nearly
doubled to 0.98x. Further, interest coverage almost halved to 3.4x in
the past six years. ROE for this group dropped from 18.9% in FY07
to 8.1% in FY13, despite higher leverage.
Highly leveraged companies cast a shadow on banks: The 176
companies with ne t cash have combined marke t cap of US$409bn or
49% o f our universe . On the other hand, the 66 highly leveraged
companies with ne t debt-to-equity>1.5x and net debt of >Rs10bn
have marke t cap of only US$17bn or 2% o f our universe. Although
these companie s are small in terms o f marke t cap, they cast a
shadow on the country’s banking system with their combined ne t
debt of US$81bn.
NPLs and restructured loans to further rise: Buffe ted by sharp
slowdown in existing opera tions, delays in pro je ct exe cution, high
interest rate s, and INR depre cia tion, we expe ct many of the highly
leveraged companies to slip into NPL or restructured ca tegories over
the nex t two years. Asse t quality woes of banks are now assuming
systemic proportions, which will manifest in the form of banks
be coming increasingly risk averse and suffering from capital
shortfall. We downgrade our re commenda tion on the most
vulnerable priva te se ctor banks, ICICI, Axis and Yes, to REDUCE and
on other priva te banks, HDFC Bank , Kotak and IndusInd, to ADD.

Addressing 3 investor questions post drop in markets :: BofA Merrill Lynch

Addressing 3 investor
questions post drop in markets
„3
rd Largest 1day market fall in 4 years: what now?
The market had its 3rd largest 1 day fall in 4 years falling 4% largely on fears that
India would impose capital controls on repatriation of money by FIIs. We think this
is unlikely since the policy makers realize the negative impact this would have on
flows into the country. So is this a buying opportunity? Tactically most of our
indicators show that it is better to wait for a further correction or some signs of
stability in the currency before buying India.
#1: Is India oversold? Not yet but approaching there
„ The market has fallen 4% on Friday. But a large part of it was reversal of the
gains of the previous few days. Overall, for the week the market fell only 1%.
„ Our analysis of past major falls indicates a mixed trend. Only in 54% of the
instances have markets given a positive return over next 1 month.
„ Based on our fund manager survey, sentiment on India is at a lower end of
last 12 month trend but not yet at extreme bearishness levels.
„ Technical indicators including RSI, 200 DMA are getting close to but are not
yet at over-sold levels.
#2: What will improve sentiment on India? The currency
„ The single biggest factor making investors nervous on India is the currency. A
stabilization of the currency would make us as well as investors more positive
on India. While the Govt has taken a series of steps to stabilize the currency,
it has not worked partly due to nervousness on the Fed tapering. Even after
the start of these measures, India is the 3rd worst performing currency
amongst EMs.
„ Based on past history, the markets give an average return of near 11% over
3 months once currency stabilizes. Given the negative sentiment in India
currently, we see a possibility of something similar this time too. An increase
in fx reserves by raising fx bonds accompanied by low trade deficit data could
help stabilize the currency over next few weeks.
#3: Do we continue to buy the high quality, outperformers?
„ While we are getting tempted to nibble at some of the under-performers in the
banking space, near term we continue to stick to stocks in the pharma, IT and
telecom space. Hero Honda is our non-consensus pick.
Top Buys: Lupin, Idea, Hero Honda, TCS

United Spirits on a short-term downtrend :: Business Line


MCX gold likely to hit new highs :: Business Line

The week began on a lacklustre note, but the spurt on Friday helped gold close at $1,397 an ounce, up 1.5 per cent for the week. Silver ended 3.7 per cent higher at $24.06/ounce. Friday’s rally was triggered by weaker than expected US home sales data. Sales of new homes in the US dropped 13.4 per cent to 3.94 lakh in July, the lowest in nine months. This revived hopes of the Fed continuing its bond buying programme.
Physical demand for gold inched up and the SPDR Gold Trust — the world’s largest gold backed ETF saw its first fortnightly inflows for the year. At 920.13 tonnes, the trust’s holding was up 4.8 tonnes last week.

NOT UPBEAT AT START

However, data releases in the initial part of the week were not that upbeat. The flash US Purchasing Managers Index rose to 53.9 in August, from 53.7 in July.
For the week ending August 17, the number of people filing for jobless claims stood at 3.36 lakh and the four-week moving average of unemployment claims moved to a six-year low.
In the domestic market, gold and silver made an upward stride with the rupee weakening to a record low of 65.4 against the US dollar.
MCX Gold gained 1 per cent and ended the week at Rs 31,905/10 gram. MCX Silver was up 5 per cent to Rs 53,469/kilogram.
With the Reserve Bank of India last week clarifying the operational aspects of the 80/20 rule, gold imports of the country will kick-off and see premium of the spot gold prices going down.
Spot gold prices in India have been at a premium for many weeks as imports of gold into the country have come to a halt after RBI’s July circular that put conditions on gold imports.

CUES FOR NEXT WEEK

The minutes of the FOMC’s (Federal Open Market Committee) July meeting that was released mid-last week had it that the stimulus rollback would start only with a clear signal of economic revival. Traders may now closely watch the US economic releases next week. The consumer confidence number on Tuesday and the labour market data and the second estimates of June quarter GDP on August 29, will also offer some cues. The advance estimate that came end-July had put the GDP growth at 1.7 per cent for the June quarter versus the 1.1 per cent growth for the March quarter. In the second estimates that will be released coming Thursday, analysts expect some positive news.

LEVELS FOR TRADERS

Gold has to cut a key resistance at $1400/ounce. Chances are that it will make gains in the coming week. MCX gold is close to its record high. In the coming days, the metal may record new highs if rupee too weakens from the 64/dollar levels. The first pause for the metal will be at Rs 32,400. If this level is cut, more gains can be seen. On the downside, the metal will find support at Rs 30,240 and then at Rs 29,220.
MCX silver moved in line with our expectation. The metal has rallied quite sharply in the last two weeks. We see the momentum continuing in the metal in the coming week with the first resistance at Rs 55,000/kg and the second at Rs 56,800/kg. On the downside, the support would be at Rs 50,400/kg and Rs 50,600/kg.