We are pleased to present “NRI Espresso”, a
handy newsletter just for our esteemed NRI
investors for the month of April 2011.
It is our constant endeavour to serve your
growing information, investment and servicing
needs and the newsletter is created just for
this purpose. This newsletter will be a collection of relevant articles of special
interest to you. These include latest news,
events, regulatory changes, and information
on product offerings. 'NRI Corner', an
exclusive section has also been created on our website for your mutual fund information and investment needs.
1. Economy News
FII investment cap in infra bonds up 5 fold
In line with the budget 2011-12 announcements, the Securities & Exchange Board of India (Sebi) has announced that foreign institutional investors (FIIs) will be allowed to invest US$ 25 billion a year in bonds issued by infrastructure companies as against existing US$ 5 billion.
New FDI policy spells relief for private equity industry
Companies will now have the option of prescribing a conversion formula, instead of specifying the price of convertible instruments, according to a circular on foreign direct investment (FDI) released by the Department of Industrial Policy and Promotion (DIPP).
Regional Rural banks revamp in line with Chakrabarty report
The Central Government has decided to recapitalise almost half of the 82 regional rural banks (RRBs) with the infusion of Rs 2,200 crore (US$ 495.44 million) in two stages by the end of 2011-12.
Indirect tax collection rises 39% in FY11
The indirect tax collection for the fiscal year ending March 31, 2011 (provisional) has been Rs 3,40,000 crore (US$ 76.51 billion) as against the revised Budget estimates of Rs 3,38,463 crore (US$ 76.16 billion), registering a growth of 39 per cent in 2010-11 over the previous year.
Bank loans grow 21.4% in 2010-11, deposits rise 15.8%
Bank loans registered a growth of 21.38 per cent in 2010-11, while deposit growth stood at 15.84 per cent, according to data released by the Reserve Bank of India (RBI). While credit growth was higher than RBI’s projection of 20 per cent in 2010-11, deposit growth fell short of the 18 per cent projection. Deposit growth for 2009-10 was 17 per cent, while the growth in credit was 16 per cent.
2. Mutual Fund & NRI News
Regulatory Developments – Indian Mutual Fund
• SEBI asked mutual funds to maintain two separate load accounts for paying its marketing and distribution expenses, one detailing those before entry load was banned in August 2009 and one after.
• SEBI said that fund houses will not be able to use more than one-third of the load balance (money collected through entry and exit loads) as on July 31, 2009 in any financial year, while accretions since August 2009 would be fully used for paying marketing and distributor's commission in a single financial year.
• SEBI started working on finalising guidelines for foreign investors to invest in local mutual funds; the move comes in the wake of the FM’s announcement in the Budget that foreign investors would be able to invest in mutual funds in India.
• SEBI planned to introduce a new set of regulations to curb mis-selling of mutual fund schemes by distributors.
• SEBI asked AMCs (asset management companies) to keep a tab on the sales practices of their distributors.
• CDSL (Central Depository Services (India) Limited) told AMCs and designated KYC (Know your customer) application centres that it is mandatory to issue KYC acknowledgement letters to investors submitting completed KYC forms, after conducting due preliminary checks.
• State Bank of India (SBI) has announced increase in deposit rates for NRI deposits for different maturities from April 5, 2011.
o For a deposit having tenor of 4 years to less than 5 years, the interest will be 3.9% in Euros as against 3.64% earlier.
o Deposits in INR have however experienced a dip by as much as 3 bps for maturity upto 5 years.
• State Bank of Travancore raised interest rates of NRE deposits from March 2, 2011.
o Deposits having tenor of 1 year to less than 2 years will have interest of 2.54% while those of 2 years to less than 3 years will be 2.66% and 3 years to 5 years will be 3.19%.
o In case of FCNR deposits in US Dollars, the interest will be 1.79% for deposits of 1 year to less than 2 years, 1.91% for 2 years to less than 3 years.
o Deposits of tenor 3 years to less than 4 years will fetch interest of 2.44% while it will be 2.94% for 4 years to less than 5 years deposits and 3.36% for 5 years deposit.
o The corresponding rates for deposits in euro will be 2.70 %, 3.11 %, 3.41 %, 3.64 % and 3.83% while that in pound sterling will be 2.58%, 2.89 %, 3.34 per cent; 3.70 %and 3.98 %.
3. Market Overview
March turned out to be very volatile as series of negative news flow gripped the market at the start of the month, however, investors mounted the wall of worry and Sensex gained 9% at close. Natural disaster in Japan, continued unrest in middle-east and North Africa region (MENA) pushing crude oil prices higher and worries over domestic macro-economic and political situation kept the markets under pressure, however, the trend reversed in the second half the month. Foreign investors turned net buyers and poured over a billion dollar in last few sessions as risk aversion receded and valuation started looking attractive. The legendary investor, Warren Buffet made his first visit to India and his remarks over the long term prospects of Indian economy helped in reversing the negative sentiments prevailing here. As the market views were getting polarized towards a bearish trend and positions were light, large buying by foreign investors amidst thin liquidity led to a swift rally. Dramatic turnaround in the equity markets matched the performance of Indian cricket team in the ICC world cup 2011.
Geo-political situation in the middle-east remained fluid and crude oil prices climbed 10% during the month. We believe that monetary tightening in emerging world should put downward pressure on global commodities, however, a significant component of rise in crude oil price stems from the geo-political risk. This remains the single biggest cause of concern as higher crude oil prices will push up inflation and put pressure on current account as well as fiscal situation.
Higher energy and food prices have created a policy dilemma for the central bank. To check the risk of potential spillover from higher food and energy prices into more generalized inflation, RBI has been pursuing a tight policy with a combination of liquidity measures and interest rate increases. The underlying assumption was that economic recovery remained robust and policy actions had to focus on the goal of price stability. The economy is projected to grow at 8.6% for FY2010-11, there are signs that growth momentum is slowing down. There has been sharp decline in monthly Index of Industrial Production (IIP) data over the last few months. While the consumption component continues to show resilience, the slowdown in capital investment shows weakness in the investment climate. There has been an environment of uncertainty on the global as well as domestic front and a tighter policy with lagged effect could pose threat to the growth outlook going forward. The RBI Mid-quarter policy review in March continued to maintain the fine balancing act between the objectives of maintaining price stability by reining in demand side pressures while seeking to minimize downside risks to the growth momentum. RBI increased the policy rates by 25 bps and highlighted the risks emanating on both the policy objectives i.e. price stability and containing inflationary expectations and maintaining growth.
The medium term economic growth trajectory would be guided by the progress on the reforms front and the supply side responses on the agricultural sector. The union budget announcement on increasing the share of manufacturing to GDP to 25% from the current 16% and the rollout of the GST and Direct Taxes Code are also expected to provide a structural impetus to maintaining the growth momentum. The finance minister has announced that a spate of legislative reforms pertaining to financial sector would be undertaken in the near term. The government has indicated steps towards addressing the critical issue of fuel, fertilizers and food subsidies which would go a long way in ensuring fiscal consolidation. The need of the hour is to focus on giving a significant push towards building physical and social infrastructure to maintain the growth trajectory. While there are some dark clouds on the horizon, we believe that given the multiple growth drivers, structural factors and low base, Indian economy would continue to post one of the highest growth rates and throw several opportunities for patient long term investors.
Having witnessed a sharp rally in March, the equity market is likely to move in narrow range over the next few months and trend would depend on the cues from global markets, incremental economic data and corporate earnings. Given the backdrop of macro concerns, outlook on corporate earnings growth has weakened. Margins could be under pressure due to increase in raw material prices, wages and interest rates. Higher inflation, rising rates and tight liquidity could also impact discretionary spending. Market would also be watching the progress of Monsoon and outcome of several state elections due in this quarter. We have been recommending investors to take advantage of the downturn in equity market as long term outlook remained positive. It is always difficult to time the market and best way is to build exposure to equities through a systematic investment plan. The recent rally highlights the importance of maintaining discipline of asset allocation.
Short term rates have moved up over the last quarter as tight systemic liquidity coupled with large supply from banks resulted in money market rates moving up to near 10.20% in the 3 month segment towards the March-end. The one year CD rates remained supported near 10.15%-10.20% levels on account of demand from Mutual funds for Fixed maturity Plans. Market has witnessed tight liquidity since the beginning of June 2011 when 3G/ BWA auction payment outflows to the Government of India hit the banking system. The frictional source of liquidity deficit has been the large government balances being built up with the RBI. This has got accentuated during the times of Advance tax outflows. On a more structural side, the huge imbalance between the credit and deposit growth of the banking sector and the increased currency in circulation with the public has pressurized the banking system liquidity.
Going forward, the overall liquidity situation is expected to move close to the comfort level of the Reserve Bank at +/- 1% of NDTL as the frictional factor unwinds. Short term money market rates are expected to ease substantially going forward, especially in the first half of April. However, the structural factors would take time to unwind and the rollover of bank CD’s towards May-June could again put an upward pressure on rates, even as the peaks witnessed in the Jan-Mar 2011 quarter are unlikely to be retested. The Government’s fiscal position has been better than market expectations which led to a rally in Government bonds after the Union Budget. In view of the under budgeting of subsidies the eventual evolution of the borrowing program would still be challenging, especially in a stubbornly inflationary scenario. The first half borrowings of Rs 2.5 lakh crores have been in line with the market estimates. Maintaining the FY 2011-12 deficit target of 4.6% and net borrowing of Rs. 3.58 lakh crores (including T-bills of Rs. 15,000 crores) look challenging to achieve as subsidies are seriously under-estimated. Revenue growth targets look achievable but expenditure containment would be challenging. However, continued global uncertainty, recent growth in Bank NDTL and bleak prospects of growth in the developed economies along with RBI’s current significant moves to tackle inflation would keep a check on rising bond yields. On balance, it is expected that long term interest rates would see an upward bias and could peak out in this quarter.
4. Fund Focus – SBI Gold Exchange Traded Scheme
Gold ETFs have started gaining prominence as they offer investors an easy and convenient way to access the Gold bullion market besides acting as an effective diversifier to portfolio. SBI Gold Exchange Traded Scheme (SBI GETS) helps investors to invest in Gold in demat form without any hassles.
In an exclusive interview with Mr. Raviprakash Sharma, Fund Manager, SBI Gold Exchange Traded Scheme (SBI GETS), he helps us demystify Gold ETFs. He also discusses the various benefits of investing in SBI Gold Exchange Traded Scheme (SBI GETS) and the outlook for Gold going forward.
1. What are the distinct benefits of investing in a Gold ETF? Gold ETF is a passively managed mutual fund scheme which aims to provide investors a medium of participating in the Gold bullion market without taking physical delivery of Gold. The units are traded on the stock exchanges as any other listed security. Gold ETFs aim to provide returns that closely correspond to the returns provided by physical Gold, subject to tracking error.
Distinct benefits of investing in a Gold ETF
• Acts as an excellent diversifier for the portfolio
• A cost effective and relatively cheaper way to participate in the gold bullion market
• No worries of storage, security & purity
• Good liquidity since the units are listed on stock exchanges
2. What portion of asset allocation should be made in gold as an asset class?Given the extremely low correlation of Gold with other asset classes it always acts a good diversifier in the portfolio. We believe that Gold is an insurance against policy makers losing control of fiscal and quantitative monetary policies, and recommend an exposure of atleast 4-8% of the portfolio. It acts as a natural hedge in uncertain economic environment, high inflationary regime etc.
3. What are the distinct features of SBI Gold Exchange Traded Scheme (SBI GETS)? Apart from the above mentioned benefits of investing in Gold ETF, one of the unique features of SBI GETS is that the scheme always remains fully invested in the underlying asset (99.5% of the portfolio) and does not take any cash call on the direction of Gold prices, thereby ensuring that the investor gets maximum participation in the Gold price movements.
4. What are the factors that determine the movement of gold prices? Is there any correlation between the price of gold and other asset classes like equities and debt? Gold being a commodity, the basic factor determining the price movement would be the demand - supply equation. Though demand can be higher or lower, supply has been over the past decade stable or lower, due to its limited resource availability. This has helped to keep the prices higher on an average. Further, because of its limited resource availability, Gold has not lost its value over a period of time and becomes an important asset as a hedge against inflation. Gold has an inverse correlation with currency, especially US Dollar. A weakening US Dollar would result in the Gold prices moving higher and vice-versa. Having said that, one should also take note of certain other factors such as macro-economic uncertainties, geo political tensions etc., which also play an important role in influencing Gold prices. Higher the uncertainty, higher is the demand for yellow metal and vice-versa.
Gold has a very low correlation with other asset classes - equities, debt etc. and thereby acts as an excellent diversifier for the portfolio.
5. To optimally benefit from gold ETFs, what should be the time horizon for an investor? The ideal horizon for investment in Gold ETF should be a minimum of 3-5 years. Also, a school of thought suggests certain asset classes to be a part of the portfolio always, though the allocation to a particular asset class will differ depending on the economic cycle and individual’s risk profile. Gold, according to us is one such important asset class that should be a part of the portfolio always subject to individual risk appetite. In current scenario, we would recommend a 4% - 8% allocation to Gold with a horizon of atleast next 3-5 years.
6. Is investing in gold ETF in the current market scenario advisable? As a matter of fact, Gold should always be a part of the portfolio. Given the sharp run up in Gold prices in recent past, one may apprehend investing at current levels, however, we would suggest that one shouldn't worry about prices too much, because at the end of the day, asset allocation matters more than the prices. Gold price may continue to strengthen from here on, given the current scenario of uncertainty in economy and financial markets, rising inflation, geo political tensions etc. However, one should be cognizant of the fact that given the sharp upmove in recent past (more so due to the Investment demand), Gold prices may witness some profit booking down the line.However, given the diversification benefits and the fact that Gold acts a natural hedge against inflation, it makes sense to invest in this asset class in the current market scenario.
7. What is the short term and long term outlook on international gold prices? Gold has given positive return every single year in the last decade on investors preference for physical assets in a world awash with liquidity. Sovereign debt crisis, easy liquidity and risk aversion make a right concoction for Gold prices to witness upswing rally in the medium term. Having said that, one should note that the rally in Gold prices had greatly been supported by the Investment demand (ETF’s globally) and by the logic of investment, profit booking would be an integral part of the same.
5. Feature Article – Japan’s disaster- A new worry for the global economy
The global economy has been going through unprecedented times of tumult for a fairly long time (about 3 years). The sub-prime crisis was the first in series which started in the US in the first half of 2007 and later spread across the world, and became a major global financial crisis by mid-2008. Later, in 2010, debt-ridden member nations of the Euro zone came on the verge of a collapse, posing a new threat to the global economic recovery. After several collaborative efforts along with the European Union (EU) and the International Monetary Fund (IMF), member states were able to bring the situation under some form of control. But, political unrest in the MENA region (Middle East and North Africa), beginning in Tunisia followed by Egypt, and now having spread to Libya sparked fresh concerns. Several MENA countries are oil-rich and any unrest in these nations leads to fears of choking of oil supply, which leads to a price rise and stokes inflation across the globe.
Even as the global economy is reeling under high oil prices, the latest development to put a wrench in the global economic growth has been the natural calamity that befell the world’s third largest economy viz., Japan. On March 11, 2011, Japan was hit by a severe earthquake, which triggered tsunamis, thereby affecting coastal areas of Japan. The catastrophe led to serious loss of life and property and rendered millions of people homeless. The problem intensified after explosions and fire broke out in four nuclear reactors at the Fukushima Daiichi plant, stoking fears of a nuclear disaster and disrupting power supply to the nation’s industries. While the Japanese people and economy are used to facing earthquakes, especially due to its location in one of the most seismically active region in the world, not many had expected to be hit by such a severe earthquake followed by the developing nuclear crisis.
The calamity has also hit the economy at a critical juncture when Japan the country is seeing signs of slowing down. Latest QoQ GDP data showed that Japan's economy shrank by an annualized real rate of 1.1% in Q4 2010, a sharp turnaround from the revised 3.3% growth seen in Q3 2010 and the first quarterly contraction in more than a year. This late-year down-turn also led to China surpassing Japan to become the world's second largest economy in 2010. Japan's nominal GDP last year came to $5.47 trillion, less than China's $5.88 trillion. The economy has also been suffering from high fiscal deficit worries with leading rating agencies S&P and Moody’s downgrading the rating/outlook of the economy citing the country's ballooning deficit. The latest catastrophic earthquake and tsunami that hit the economy is expected to further slow down the recovery process of the economy with total recovery costs expected to reach near $300 bn, which could put additional pressure on Japan’s fiscal deficit.
The calamity in Japan had a strong impact on the global equity markets in the ensuing week. The Japanese stock market was the worst affected and registered its the biggest two-day sell-off in 24 years on March 14 and 15, plunging 16% in 2-days. Another problem that emerged was that as the Japanese stock market fell, the yen continued to strengthen against the US dollar. The Japanese yen had risen to levels close to the highest against the US dollar (since the Second World War) on March 17, 2011 (intra-day). A strong yen hurts exporters’ overseas profits when repatriated. Japan’s economy is heavily export oriented and so is the Nikkei 225 index.
The markets have however recovered from thereon after the central bank pumped massive funds in the financial system. The Bank of Japan (BoJ) announced that it would inject a record $183 bn into the economy to reassure global investors in the stability of the Japanese financial markets and banks. BoJ also earmarked an additional $61 bn in aid for risky assets in an effort to bolster market confidence shaken by the disaster. BoJ also reiterated its commitment to its three-pronged approach of comprehensive monetary easing, ensuring financial market stability, and providing support to strengthen the foundations for economic growth. Further, the Japanese government announced that it would spend $2.4 bn left over from the budget for the fiscal year ending March 31 to pay for the recovery effort. Meanwhile, on the currency front, Japan along with G7 member nations intervened in the foreign exchange market by selling the yen to contain further damage to the markets and the economy.
The economic impact of the Japanese crisis is expected to be relatively moderate and short-lived on the global economy. This is because even though the country is a major trading nation, its contribution to world economy has reduced considerably in recent years. Japan’s contribution to world economy was 18% in 1995, which receded to 9% in 2010. Further the drop in economic output from Japan has also helped ease crude oil prices, which were trading near their 2 ˝ year highs and is expected to reduce prices of agricultural products and other raw material. On the domestic front, the recovery process is expected to help the Japanese economy in the medium-term with increase in employment opportunities and demand for raw materials for rehabilitation.
However region wise, the East Asia region is likely to be the most impacted in the medium term due to the crisis owing to its close linkages with the Japanese economy. East Asia accounted for around 9% of the Japan’s total external trade and disruption to production networks could create problems as Japan is a major producer of parts, components, and capital goods supplier to the region’s production chains. On the investment side, Japan is a large source of Foreign Direct Investment (FDI) to East Asia, especially to countries like Thailand, the Philippines, Korea, Malaysia, Indonesia, and Singapore. This disaster may slow the pace of outward FDI and thus, the investment in these countries may be affected.
As far as the Indian economy is concerned, the natural disaster is unlikely to cause a significant impact on the country as Japan is not a major trading partner for India. However, both nations had recently signed a Comprehensive Economic Partnership Agreement that would remove tariff lines on 94% of the goods traded between the two countries over a period of 10 years. The deals also set a target to more than double bilateral trade to $25 bn by 2014 from $10 bn in 2010. Further, India and Japan had also signed an agreement to boost trade and agreed to speed up talks toward a civilian nuclear energy deal. The recent adverse developments could have a negative impact in the short term, however things are expected to span out in the positive over the long term.
Disclaimer: In the preparation of the material contained in this document, the AMC has used information that is publically available, including information developed in-house. Information gathered & material used in this document is believed to be from reliable sources. The AMC however doesn’t warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material, no such party will assume any liability for the same. Further, all opinions included in this newsletter as of date & are subject to change without any notice. All recipients of this material should seek appropriate professional advice and carefully read the offer document and before dealing and or transacting in any of the products referred to in this material make their own investigation. The Fund, the AMC & Trustees and any of its directors, officers, employees and other personnel shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner whatsoever. The recipient alone shall be fully responsible / are liable for any decision taken on this basis of this material. This newsletter is prepared for distributor and private circulation only. The distributor will abide by the regulation/ code of conduct issued from SEBI/ AMFI from time to time.
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Statutory details: SBI Mutual Fund has been set up as a trust under the Indian Trusts Act, 1882. State Bank of India ('SBI'), the sponsor is not responsible or liable for any loss resulting from the operation of the schemes beyond the initial contribution made by it of an amount of Rs. 5 lakhs towards setting up of the mutual fund. Asset Management Company: SBI Funds Management Private Limited (A joint venture between SBI and Société Générale Asset Management) -191, Maker Tower 'E', 19th Floor, Cuffe Parade, Mumbai 400 005. Trustee Company: SBI Mutual Fund Trustee Company Pvt. Ltd. Mutual Fund investments are subject to market risks. Please read the Offer Document carefully before investing.