Money & Debt
Atul kumar, Senior Fund Manager, Quantum Long Term Equity Fund & Quantum Tax Savings Fund
The month of October saw the BSE Sensex falling by 1.3% on total return basis as compared to previous month. Other broader indices such as BSE 200 and BSE 500 also declined during the month. Among the sectors, FMCG and Healthcare were the ones which were positive during the month. Power, Real estate, Oil & Gas and Metals were lackluster and lost most during the month. On a year-to-date basis, the Sensex has risen decently by 21.74% in the year 2012.
FII inflow (net) during the month of October was at 1.97 Bn USD. So far in Calendar 2012, FIIs have purchased equity stocks worth US$18.1bn and Domestic Mutual funds have been net sellers in equities to the tune of US$2.95bn. Indian rupee depreciated by 1.8% against US Dollar during the month.
On the global front, problems in Europe persist and there have been hints of further monetary easing. US goes for voting for President candidates, though there has been a moderation of growth there too. Loose monetary policy is likely to continue in the Developed world.
As the result season progresses, a number of listed companies announced financial number. On an overall basis, companies are able to grow on sales and profits.However, there are few companies which are getting impacted due to general slowdown in economy.
Continuing from the last month, the Indian Government announced a number of reforms to woo investors and get the economy on track. FDI increase in Insurance to 49% and allowing 49% FDI in Pension were among the measures undertaken. However, these require the approval of Parliament and implementation remains doubtful in current scenario. On the political side, there was also cabinet reshuffle by the Union Government to project its seriousness to get the economy moving.
RBI came out with its widely awaited monetary policy during the month. There were expectations that there will be cut in policy rates which will bring down the overall interest rates. Given the high level of inflation at Wholesale and Retail level, RBI rightly chose not to tinker with the rates in spite of pressures from the Government. It cut the CRR by 25 basis points from 4.5% to 4.25% to take care of liquidity in the system. GDP growth target was also reduced for FY13 to 5.8%.
We remain optimistic about Indian equities in the long run. Despite the double digit rally in Sensex for Calendar year 2012, we see current equity valuations as reasonable. We remain hopeful of India continuing to record GDP growth of 6.5-7% over next many years, irrespective of global uncertainties. Investors should hold on to equities for inflation beating returns in the long term.
Data Source: Bloomberg, Morgan Stanley Report
Chirag Mehta, Fund Manager, Quantum Multi Asset Fund, Quantum Gold Savings fund & Quantum Gold ETF
With a good run over the last two months it was a time to get some breather. Keeping up with the seasonal trends gold prices corrected in October after the big rally seen in the previous month. The decline in prices of close to -3% can largely be attributable to profit booking and technical sell off after prices failed to surpass the $1800 per ounce mark. Dollar strength, improvement in U.S jobs data and growth concerns in China were used as excuses for selling gold.
There were mixed set of cues driving gold prices. On one hand policy actions suggested a more accommodative stance supporting gold. The ECB will begin purchases “once all the prerequisites are in place,” President Mario Draghi said after policy makers left the benchmark interest rate at a historic low of 0.75 percent.
The Bank of Japan announced an expansion of its asset-purchase program by 11 trillion yen ($138 billion) to 66 trillion yen. On the other hand, a stronger dollar kept gold prices subdued. There will always be periods of profit-taking but the broader picture for the metal remains fundamentally strong.
A global accommodative stance will continue to support gold. Despite the speculative sell off, holdings under exchange traded products have increased to record levels indicating that the long term holdings will still remain intact and are still extremely worried about the macro economic scenario.
Investors boosted holdings in exchange-traded products to an all-time high of 2,585.1 metric tons valued at $142.4 billion. Gold ETP holdings gained 7.9 percent since the end of July and now account for almost a year of mine production.
There are concerns that demand from china will likely decline as the economy recovers as suggested by its exports, industrial production, retail sales and fixed-asset investment growth after a seven-quarter slowdown. On the contrary, its rather likely that gold demand will pick up on account of china’s fondness for gold as a preferred from of investment as better economy leads to increased incomes.
On the other hand, physical demand may increase in India. India’s imports are set to climb for the first time in six quarters as a decline in domestic prices stokes jewelry and investment purchases before major festivals. Industry experts expect gold imports to increase to 200 metric tons this quarter. That compares with the 157 tons in the fourth quarter of 2011, according to World Gold Council data. With the festival season and marriage season starting now, demand is likely to gain further momentum.
More and more central banks are getting involved in the gold market which is incredibly bullish for gold. Brazil and Turkey’s central banks increased holdings of the precious metal. Brazil added to its gold reserves for the first time since December 2008, and Turkey also raised its holdings.
IMF chief Christine Lagarde summaries current macroeconomic scenario very succinctly “The global financial system is no safer than it was on the eve of the 2008 crisis”. And the policy response to the whole economic malaise has been to paper over the problem. You cannot solve a debt problem by issuing more debt. Nor, you can strengthen an economy by filling the system with more dollars.
Quantitative easing is likely to undermine investors’ confidence in paper money, supporting gold. In today’s world, it is imperative for any investor to have allocation to gold. We are living in age of financial repression; we have negative real interest rates which punishes savers. Also, we are concerned with potentially substantial inflation over the long run given the amount of money being pumped in the system. Global quantitative easing debases currencies; gold is well positioned to move “substantially higher”. The whole economic situation is going to get worse rather than better given the policy response. People are increasingly diversifying into gold.
The short term movement in gold will be primarily be driven by the anticipation and then the actual outcome of the U.S elections. The markets perceives winning of Obama as good for gold because it entails the continuation of unconventional policy measures and thereby a drag on the fiscal front to continue as well. Whereas, if Romney wins then there’s some uncertainty relating to his strategy and policy measures towards the acute problems faced by the US economy. In his speech, he has commented on the need to reduce deficit but there isn’t any concrete roadmap for the same. Historically, government spending has increased by more during Republican administrations then compared to the Democratic ones.
Romney like previous republican candidates who have assumed power is making promises of reducing the size of governments. It’s not happened in past to make us believe it will happen this time either. Republicans are generally in favour of boosting the amount of money spent on the military. An increase in military spending is always politically viable to accomplish and is the most unproductive of all spending. So, a Romney victory in November would probably change the composition of the federal budget, but its looks extremely unlikely that it would result in curbing government spending. Regardless of who wins in November, it's a good bet that the US federal government will be a bigger part of the economy four years from now than it is today. And as always, the government growth will be enabled by the Federal Reserve.
Data Source: Bloomberg, World Gold Council, GFMS
Arvind Chari, Senior Fund Manager, Quantum Liquid Fund & Quantum Equity Fund of Fund
The RBI has continued to focus on inflation as its dominant concern while formulating its monetary policy. The fact that they have lowered the GDP growth to below 6%, and still not reduced the repo rate indicates their stance very clearly. This underscores the deep wedge in the growth inflation dynamics facing the government and the RBI. The tone of the RBI in the macro economic review and its policy document does indicate some amount of frustration and in-ability to cut the repo rate further despite the growth slowdown. But they have significantly eased liquidity conditions since November 2011 and we have seen a sharp drop in short term interest rates since March due to benign liquidity conditions.
But this time, the expectations were built on a repo rate cut and the decision to not cut the repo rate must have taken some doing given the overt pressures from the finance ministry.
The RBI although has acknowledged governments efforts towards fiscal consolidation in increasing its monetary space going forward. Rate cuts now seem probable only in the January –March quarter policy as headline inflation readings in the next 2/3 months is likely to shoot up even from current levels.
Given that the RBI seems focused on headline yoy inflation which has remained above 7.5% and non-food manufacturing inflation which has been sticky above 5.5%; even in the January policy they would have December inflation data which is likely to be higher than the current levels. Thus we believe that based on these very parameters indicating an easing in Q4 was maybe unnecessary.
We also remain a bit surprised with RBI’s assessment of systemic liquidity deficit being high. Systemic liquidity deficit, when adjusted for government cash balances of about INR 500 bln, is around INR 250 bln, which is not high at all. Given that the CRR is already at decade low and is a buffer against structural liquidity tightness (like FX outflows, currency leakages, lower multipliers, etc.), they could have addressed this frictional (short term) tightness through Open Market Operations (OMOs). But given that the CRR has been cut, we expect liquidity to remain benign and thus short term interest rates would remain comfortable.
Overall, despite keeping an anti-inflation stance throughout, the RBI has delivered substantial monetary easing through rate cuts, CRR and OMO and should now arm-twist the banks in cutting their lending rates and lowering their fat margins. Banks have been quick to reduce deposit rates on easier liquidity conditions and it is about time for them to pass on the benefit to borrowers.
India Infoline Research Team / 15:28, Mar 13, 2015
Markets are now reinforcing the perception of an early interest rate hike by US Federal Reserve, with consensus calling for the hike taking place in June, when compared with the prior expectations of a hike in September.