Fundamentals Vs Market Sentiments

Last week you could have noticed market fell over 580 points in a day because it was expecting a stimulus and rightly so, it has been denied. On Friday, there were rumours about Govt rolling back the super-rich tax and not surprisingly there was a bounce back.  After the FM announced the SOPS including the tax invocation after market hours the market might bounce back today.

When you look at market behaviour from outside it makes you wonder whether fundamentals rule the market or only sentiments. Yesterday all the talk about growth faltering, unemployment, gloom and doom was all that we could see and read and today, suddenly, everything just vanished in a whisk as news of the FIIs tax getting exemption started making the rounds.

Thus the way the market functions today is - give me something, give me all the attention, spoil me, pander to my needs or else i will crash!!

In Aug FII sold to the extent of 10,656 crores and DII were net buyers of 14,599 crores. In July FII were net sellers to the extent of 16,870 crores and DII were net buyers of 20,394 crores.

When DII are net buyers, they are buying more than what the FII are selling, yet the markets fall. Does not this mean the DII, despite the growing money power have no sway over the market? They help mitigate the selling impact of the FII to some extent but despite buying more than the FII, they enjoy no or little clout.  DII certainly do not have the kind of influence which the FIIs have; Do you think that consistent DIIs selling will force the govt to rollback any tax imposed on mutual funds? Or for that matter, with DIIs being net buyers, will they get benefits or can the govt take a stand and say what the FIIs think does not matter ?

Well, as we know the answer is a big NO to all the questions. FIIs continue to hold the market and the govt enthralled and what they need and want matters more than anything else.

Will DIIs ever be able to replace this clout of the FIIs? Thats a day we all should eagerly wait and it will take a long while. Though DII's are pumping huge money into the domestic equities, still they cannot absorb the foreign inflows. When more and more household savings go into equities instead of physical assets the influence of DII will go up.

Its a generational change we are talking about but it will happen. Till then we have no option and FII will drive the markets.

Nifty Returns - Part 2

In the earlier post, we saw when Nifty Index moved from 6000 to 12000 the annualized returns was 6% and a debt instrument like PPF would have given a 8% annualized return which is exempted from Tax.

So, If Nifty gives a 6% returns can we expect the well managed funds to give a return of 12-15%.
I took Aditya Birla SL Frontline equity, HDFC Top 100, Franklin india Blue chip. These three funds were hot selling funds and many MF investors have in their portfolio. So what is the annualized returns of these when you invested on 1st Jan 2008.

AB SL Front line Equity - 8.57%
HDFC Top 100 - 9.04%
Franklin India Bluechip - 7.06%

So for a 12 year long period holding it in well managed funds like the above gives you just one percent extra return than your debt instrument like PPF. Remember today we have LTCG at 10% as well.

Bottom line once again: Bottom line : MF investments are good for your financial life but you need to do these by being more aware of it as compared to before. The old method of deciding the sip amount and letting it to be in auto mode may not work anymore.

Nifty returns

In Jan 2008, Nifty first touched 6000 and with current value of nifty let us assume nifty regains 12000 by Jan 2020. Nifty index doubled in 12 years with annualised return of around 6 percent. For a 12 year long period index returns gets doubled in 12 years.. Does it help beat inflation...

PPF is EEE category and would have fetched annualised returns of roughly 8 percent in debt instrument..

If you would have invested for a 15 year goal in 2008.. don't you think you will be well short of your goal. If nifty is giving you 6 percent annualised return for 12years.. how many of well managed funds going to give 12 to 15 percent returns for the same period..

Bottom line : MF investments are good for your financial life but you need to do these by being more aware of it as compared to before. The old method of deciding the sip amount and letting it to be in auto mode may not work anymore.

When PAT rises can ROE keep falling...

Return on Equity is the ratio of net income to equity or net assets (i.e assets - liabilities)

ROE = Net income /(Total Assets - Total liabilities)

If the denominator (Assets) rises at a higher rate than the numerator (PAT), ROE will fall, despite rise in profits.

If a company having rising profits and debts starts to reduce its high debt burden by paying off the debt at a fast pace, the liabilities of the company will start reducing and this will be mostly by the excess cash profits generated by the rising PAT levels. This indicates that the assets may still remain high and the denominator inturn will increase. This situation will lead to falling ROE even when profit increases.

E.g for a company

Let us assume PAT (a) increases from 20,00,000 to 30,00,000 from FY18 to FY19.
Total Assets (b) increases from 5,00,00,000 to 6,00,00,000 for the same period
Total liabilities (c) reduced from 3,00,00,000 to 2,75,00,000
Shareholders capital (d) = b - c ; increased from 2,00,00,000 to 3,25,00,000
ROE (a/d) decreased from 10% to 9.2%.

In the above example ROE has fallen despite the PAT rising because of the lower liabilities and higher assets in the balance sheet. Thus while analysing the company's ROE an investor should keep a watch on the assets and liabilties of the company to understand the accurate reason for change.

When PAT rises can EPS fall ?

PAT means Profit after tax or net profit or profit available for equity shareholders. A company having increasing profits/PAT can have lesser EPS than the last results due to increase in the number of shares issued by the company. Increase in number of shares are due to issue of bonus shares or share split or stock options being exercised or issue of new/fresh equity shares.

EPS (Earnings per share) is an important metric tracked by investors, shareholders and analysts. It is calculated by diving PAT by the number of shares. Since outstanding number of equity shares is in the denominator, any change in the same would inversely affect the EPS despite rise in numerator.

e.g A company having PAT of Rs 100 crores has 10 crore outstanding/issued equity shares in year 1. The EPS in this case is Rs 10. In Year 2, PAT increases to 120 crores. Also, in year 2 company issues a bonus share in the ratio of 1:1 which makes the outstanding shares to 20 crore. The EPS in this case is 120/20= Rs 6 for year 2. Thus we can see the increase in number of shares affects the EPS despite increase in PAT levels of the company.

Mutual Funds - Regular Plan Vs Direct Plan

If you are investing in Mutual funds look at in which plan you are investing whether its Regular or Direct. People who started 10-15 years ago would be in Regular plan. Even if you investing through the recommendations of IFA look at in which plan you are investing. Direct plan came into existence 6.5 years ago.

One aspect to look at direct plan is the expense ratio it will be atleast 1% less than Regular plan. When your corpus size grows 1% every year saving on expense ratio will be a big money.
Take Mirae asset Emerging blue chip for e.g expense ratio of Direct plan is 0.79% and for Regular plan is 1.99%. So prefer to chose Direct plan than regular plan.

But when will the expense ratio will be a fixed money and not %, no one knows its in regulators hands. From investors perspective it should be a fixed amount and not percentage.

Ground Reality - IIP Slumps

For Kashmir to Grow, the rest of India needs to grow first. IIP for June in at 2% vs 3.1% in May and it put forth what we knew all along - the economy is slowing down and slowing down fast. With the auto sector almost gutted, realty also down in the dumps, these numbers of industrial production, at least as of now seem merely symbolic. The sharp degrowth in capital goods and consumer durables shows the reality we experience. Manufacturing too at 1.2% shows sure signs of slowdown.

Internals of IIP:

Manufacturing 1.2% vs 2.5%
Capital goods  -6.5% vs 0.8%
Primary goods 0.8% vs 2.5%
Intermediate goods 12.4% vs 0.6%
Consumer durables  -5.5% vs -0.1%
Consumer non-durables 7.8% vs 7.7%
Electricity 8.2% vs 7.4%
Mining 1.6% vs 3.2%

RBI on Wednesday did what it could do the best and now the onus now lay on the Govt, a rate cut can only do so much beyond that, structural issues needs to be sorted out and smoothened by the Govt. Also there is a lot of uncertainity, especially on the global front and till that settles, growth will continue to struggle. At this junture, to say that RBI cutting rates will boost the sagging consumption story would be too far-fetched.

The markets are currently in the positive zone after days of consistent battering and this is on the hope that the FM will soon announce the clarification on the surcharge issued inadvertently on the FII/FPIs in the budget, and after that FII have turned aggresive sellers.

FM has assured that all the action will be taken "very soon" to boost the sagging economy. So once again the market and the indian industry will wait and watch. Hope the sense of nationalism now gives way to boost the sagging economy.

One more Successful IPO - Affle India

Affle India has its presence in the new age Tech and high growth industry had a fantastic listing today at 20-25% premium. Issue price was Rs 745 and got listed at 929 and rose to 958 levels and closed at Rs 875.

Affle India is based on Gurgoan and Singapore provides B2C digital advertising services in the mobile space, undertaking customer acquisition, engagement and transactions through mobile advertising. Being a data driven company, business model is asset light and scalable. Company have a 28% EBITDA margin.  It serves clients across e-commerce and traditional consumer industries. In the past 13 years of existence has accumulated 2 billion customer profiles and 300 billion data points. Company looks good in a high growth industry.

Let us track the next one Spandana Sphoorty.

Companies that benefit when oil slump

In Capital markets, whether dollar goes up or oil goes up or the reverse happens you will always find beneficiaries. Basically any event will have some beneficiaries. 

Companies which will benefit directly from falling crude oil prices are mainly upstream oil companies like ONGC, Oil India and less OMC's. These are the obvious gainers. Other big gainers would be paint companies like Asian Paints, Kansai, Berger and Shalimar as 25% of the raw material cose if from crude derivative and when price reduces, margin improves. Analysts say, 10% fall in crude oil prices will boost margins by 200bps. 

Another gainer will be tyre companies which uses crude derivatives in its raw material - infact it has double advantages of falling rubber prices too. Companies making plastics will also be beneficiary as cost of its crude oil polymer to make plastics comes down. Packaging costs will come down as it also uses petroleum derivative. FMCG and airline companies will also do well as falling crude will help better their balance sheets - a 10% fall in crude will lead to 300bps rise in EBITDA margins.

Gold driven by Sentiments

When Equities are undergoing correction, oil is slumping every day, realty is down the only price that is going up is Gold. 24 carrot gold touched 3700 yesterday and today its at 3728 rupees. This is normal when everything else is down, it indicates an increase in uncertainity and that means gold becomes safe haven.  As per analysts 10gm of gold could hit 40k by Dec 2019. 

There is an indelible relationship between price of Gold and Oil. When oil falls, gold will rise and when oil rises, gold will fall. This is not just co-incidence; there is a logical reasoning to this correlation between these two. Gold is used as a hedge against inflation which is spurred by oil - wen oil prices rise, gold prices also rise. But the anamoly here is that when oil prices fall along with equity, there is a need for investors to run to something rock solid, which will give the cushion from the fall. So when oil slumps, the need to use of yellow metal as a hedge comes down but becomes a tool of safe haven - demand for gold is more out of a sense of security though demand as hedging tool falls.

There is another school of thought - if oil prices rises, gold prices also rises as rising oil indicates inflation, which inturn leads to increase in price of all commodities.  Yet this is again not really waterproof correlation as in 2014, even when oil was over $100/barrel, gold was down. Thus one cannot say that oil prices and gold always move either in tandem or inversely. 

Gold is one commodity which is driven purely by sentiments - the moment there is uncertainty, global turmoil, fear of economies hurting or slowing, gold immediately shoots up. Gold is always an anchor against stromy weather, the go-to metal when the risk is high.

Experts say, have 5-10% of the porfolio in gold.  The problem with gold when we buy as ornaments if we have to rebalance our portfolio based on the networth, say if gold becomes 15% of the networth will we ever go and sell it.. So when investing in gold look for ETF,bond funds or severeign bond schemes so that rebalancing your portfolio becomes easy.

Is Debt good or Bad ?

A Young couple married for 5 years had a 3 year old kid. They love to live life and do not think before borrowing to buy a car they can ill afford and a house which need not be so big or in a locality which is very expensive to begin with.  These two EMI's apart, they lead a liftestyle which has pubbing every weekend, 3-4 times a week using the food delivery app despite having a cook, driver, household helps, online shopping is rampant and a foreign trip once a year.

The younger generation wants a good life while the parents continue to live modestly. This is the story of young India. Most of them live beyond their means and the younger families are much deeper into debt than their parents, all because they want to stay or upgrade their status. Nothing wrong in aspiring for a better quality of life but if its coming at the cost of huge debts, are we living right ?

There is no doubt that the great Indian middle class is falling deeper into the debt trap to maintain a lifestyle. While the cost of cars, education, houses and medical care have become super expensive, income have largely remained stagnant. And filling this gap between earning and spending, there has been an explosion of finance into nearly every corner of the consumer economy.

The sucide of CCD founder, brings to the fore the dangers of debt. And he could not handle it despite being a billionare, having more assets than liabilities. Financial restriction can be the biggest killer, not just sucide but gives to other issues within the body and mind. Thus nothing holds more relavance today than living within our means.

Taking a debt for buying a house(considering housing loan is the cheapest) or for funding for a college degree is wise as it will boost earnings in the long run. But borrowing for everyday consumption or for liabilities like car that lose value makes it harder to save and invest in equities which is a real wealth creator in the long run.

Consumer borrowing widens the wealth gap. What was true for our parents and grandparents holds true even today - sacrifices are the key, it needs lot of patience but in the end it will pay.