Get your timing right(part-2)

The past seven years' date-wise trend of the Sensex and major equity funds clearly suggests that between the 23rd of a month and the 2nd of the next month, the Sensex is lower than during the balance period.

The reason, to some extent, can be attributed to the expiry of futures contracts on the last Thursday of each month, which can lead to selling, to close positions in the market.

Once the futures expiry is complete, the market starts consolidating again, inflating the Sensex and NAV values.

We observed the NAV behaviour of four equity funds - HDFC Top 200, Reliance Vision, Pru ICICI Growth and Franklin India Blue-chip. As is evident from the adjacent table, the NAV trend for the mutual funds under observation is similar to the Sensex trend. This indicates that an investor planning to go in for a SIP has to understand the trend and then take the plunge.

The trend in the years prior to '03-04 is similar to that of the Sensex. In all the earlier years from '00-01 to '02-03, investors would have made a saving if they had invested between the 23rd of the month to the 2nd of the next month. So, plan well and make sure to maximise your returns!

HOW DO SIPs WORK?

SIPs work on the premise of rupee cost averaging. Even seasoned investors find it difficult to predict the ups and downs of the stock market. Hence, the best resort is to go in for a disciplined way of buying units on a monthly or quarterly basis.

By doing so, investors can avoid the temptation of timing their investment. 'Market timing' is an activity that is best left to professionals. Moreover, the way to weather market cycles is to invest throughout the cycle, so that the investor automatically ends up buying more units at lower NAVs and lesser units at higher NAVs. Therefore, on a net basis, investors will be able to average out their unit costs over a period of time.

Get your timing right(part-1)

“While going in for a SIP, choose dates during the fag end of the month or very early during the month. This can help you get units at lower NAVs”

The Systematic Investment Plan (SIP) route is often suggested as the best way for retail investors to invest in equity funds. This is because it cuts the element of 'timing' by allowing investors to accumulate units systematically over a period of time.

ET Investor's Guide suggests an even better investment strategy - while going in for the SIP route, choose dates during the fag end of the month or very early during the month. If history is any indication, this method can help investors get units at lower let asset values (NAVs).

In the last six out of seven years, Sensex values, on an average, have been lower during the 23rd of a month to the 2nd of the next month. The situation was no different when a similar study was performed across equity funds.

Normally, there are 3-4 possible entry dates (mostly 1st, 7th, and 10th, 15th, 20th or 25th of a month) that an investor can choose from, to invest in any mutual fund for SIP requirements. Depending on the NAV as of the investment date, the investor is allotted units to his credit. By following the above investment strategy, investors are expected to generate maximum returns over the long term. On an average, investors will get units at a lower NAV than otherwise.
There is a clear trend in the way NAVs of the equity market and equity funds behave during the end of a month, as opposed to their behaviour during the middle of the month.

Read the Fine Print(part-2)

How to Invest

The different modes in which one can invest overseas in stocks, bonds, currencies, commodities, realty, et al include:

1. Direct Foreign Investment

2. Domestic Mutual Funds investing abroad: Sebi registered mutual funds have been cumulatively permitted to make overseas investments of up to $3 billion subject to Sebi guidelines. Further, such mutual funds which were hitherto permitted to invest in equity of listed overseas companies provided the overseas listed company held at least 10% in a company listed in India, have now been permitted to make such investments without the requirement of 10% reciprocal shareholding in a Company listed in India. Currently, only a handful of domestic mutual funds like Franklin Templeton and Principal PNB have launched funds which invest in overseas securities.

3. International Mutual Funds

4. Domestic companies with large foreign business/service exposure (indirect foreign investment)

5. Securities, Brokerage or Fund houses.

Recent Announcements in the Union Budget 2007-2008

The honourable Union finance minister, P Chidambaram, has announced in his Union Budget 2007 -2008 speech that he proposes to converge the different regulations that allow individuals and Indian mutual funds to invest in overseas securities by permitting individuals to invest through Indian mutual funds.

Hence, we may expect some changes/liberalisation in foreign investments norms soon.

Asset Allocation

One needs to carefully do the asset allocation between local and international investment. Although there is no ballpark figure, it all depends upon the risk-return profile of the investor and investment opportunity. However, for a conservative investor, an asset allocation of 5 to 20% towards international investments is fairly reasonable.

Conclusion

Although the Indian stock markets have seen strong growth over the last 3 years, the recent fall indicates that going forward, the growth could slow down. Thus, with the liberalisation of foreign investment norms, investing outside India is (shown become) comparatively easier than before, but before treading into foreign waters, one needs to consider the pros and cons thereof carefully.

Read the Fine Print(part-1)

"Learn about the process & restrictions before you plan to invest abroad"

We've heard the axiom "The world is your investment landscape". With the Reserve Bank gradually liberalizing the provisions relating to foreign investment, let's see how can one really go about investing abroad and what are the crucial factors one needs to consider while investing abroad. Moreover, the Union Budget 2007 -2008 has also made some announcements to enable foreign investments.

Why Invest Abroad?

As the renowned economist Adam Smith said "Never keep all your wealth in the country where you live because anything can happen - and usually does". As per Goldman Sachs, in the next 50 years, Brazil, Russia, India and China - the BRIC economies - could become a much larger force in the world economy. Moreover, some of the European countries have witnessed goods economic/financial progress over the last few years and so have certain USA companies investing in emerging markets. The pros and cons of investing abroad are:

Foreign Investment Restrictions

Investment outside India by residents of India has been restricted since ages due to the lack of foreign exchange reserves. However, with the gradual build-up of foreign exchange reserves, RBI has been constantly relaxing the law relating to foreign investments.
Till recently, RBI permitted resident individuals to:

1. Invest in the following instruments without any upper limit:

a. Equity of listed foreign companies, who in turn have shareholding of at least 10 per cent in companies listed on a recognized Stock Exchange in India as on January 1st of the year of investment, and

b. Rated bonds and fixed income securities provided however the rating should be at least A-I/ AAA by Standard & Poor or P-a/Aaa by Moody's or FI/ AAA by Fitch IBCA etc. for short -term obligations and corresponding ratings for long-term ones.

2. Remit up to $25,000 per calendar year (January to December) for any purpose without any distinction between the transactions being on the current or capital account.

3. Remit up to $5,000 per remitter/donor per annum towards gift and donation each aggregating up to $10,000.

Recently, RBI issued AP (DIR Series) Circular No 24dated December 20,2006, which has enhanced the limit from $25,000 per calendar year to $50,000 per financial year (April to March) for any current/capital account transactions. However, the above revised limit of $50,000 includes remittances towards investments in overseas companies (the requirement of 10% reciprocal shareholding in the listed Indian company by such overseas company has been dispensed with), gift and donation.

Sustaining the Unsustainable(part-2)

Since then, economists have vied with each other to overturn this orthodoxy. Indeed, rejecting the conventional wisdom is now conventional, as Jeffrey Frankel, an economist at Harvard University, has pointed out. Three years ago, Michael Dooley, David Folkerts- Landau and Peter Garber, all Japan, Saudi Arabia, America and the EU economists at Deutsche Bank, argued the world economy was enjoying a reprise, the Bretton Woods era. America's large external deficit could be sustained for years as Asian central banks kept their currencies cheap in order to foster export led growth. In '05, Ben Bernanke said global interest rates were oddly low, suggesting a glut of saving abroad, not a shortfall of saving at home, was responsible for the flow of capital to America. Recent papers have picked up similar threads, arguing that imbalances may prove to be more persistent and less perverse than once thought. A study by IMF economists showed poor countries which export capital grew faster than those which rely on importing it from abroad.

One reason may be the feebleness of their financial markets. Ricardo Caballero and Emmanuel Farhi of the Massachusetts Institute of Technology, and Pierre-Olivier Gourinchas of the University of California, Berkeley say emerging economies have been accumulating real assets, but their generation of financial assets has not kept pace. Thanks to weak property rights, fear of expropriation and poor bankruptcy procedures, newly rich countries are unable to create enough trustworthy claims on their future incomes. Lacking vehicles for saving at home, the thrifty buy assets abroad instead, because emerging economies' supply of financial instruments is so unreliable, people may hoard more of them as a precautionary measure.

If global imbalances are the result of such frictions, they are unlikely to unwind quickly. Financial systems do not mature overnight. If Mr. Caballero is right, America is also less vulnerable to a sudden run on its securities. Where will the excess demand for global assets go? So far, the behaviour of financial markets seems to vindicate his point. But it's a mistake to place too much faith in these new studies. If the dollar tumbles, there will be plenty of academics ready to take the old theories off the shelf and eager to say: "We told you so."

Sustaining the Unsustainable(part-1)

“Global investors are worried about many things. Why is America's current-account deficit not one of them?”

Sour subprime mortgages, sluggish retail sales, the spectre of a broader retreat in credit and consumer spending. These are the American shadows that spooked investors across the globe this week, sending share prices tumbling from Manhattan to Mumbai. For years, the longest shadow of all was cast by America's imposing current-account deficit. But in these fretful times, no one seems to be fretting much about the country's reliance on foreign funding. Latest figures show Americans spent some $857 billion more than they produced in '06, the equivalent of 6.5% of GDP, and a new record. China's trade surplus in February was the second highest on record. It has reached almost $40 billion in the first two months of this year.

China's government, one of America's best creditors, has announced it is seeking a better return on a chunk of its forex reserves. It will create a new investment agency, which looks sure to diversify some of the central bank's assets out of the American Treasury bonds that now dominate its portfolio. None of this had much effect on the dollar. Measured on a trade-weighted basis, it has fallen by a mere 0.04% since the recent financial turbulence began on February 27. And as investors yawn at America's deficit, so too do policymakers. A year ago, finance ministers and central bankers from the G7 group of countries promised to take "vigorous action" to resolve the imbalances between the world's savers (particularly China, Japan and oil exporters) and borrowers (especially America). The IMF was hoping to reinvent itself as the overseer of this grand macro economic bargain. A year later the venture has fizzled. The IMF sponsored discussions between China, Japan, Saudi Arabia, America and the EU have yielded little. What explains this non-chalance? By some measures, the world is already rebalancing. The dollar has fallen by 16% from its’02 peak in real terms. Compared with the previous quarter, America’s current account deficit shrank in the last three months of ’06 and was below $200 billion for the first time in more than a year. That decline was a lot to lower oil prices. But even excluding oil, America’s trade balance seems to be stabilizing as exports boom and imports slow. Even so, it is hard to escape the conclusion that both investors and officials have become less worried about global imbalances. A few years ago, most economists argued the spectacle of poor countries bank rolling America's deficits was the perverse and unsustainable consequence of American profligacy. Economic theory suggested capital should flow from rich countries to poor ones; and that America could not increase its foreign borrowing for ever. Empirical studies showed that deficits of more than 5 % of GDP caused trouble.

Asian Stocks Fall For the Third Straight Week

ASIAN stocks fell posting their third weekly loss.

Mitsubishi UFJ Financial Group and Toyota Motor led Japanese stocks lower on concern the level of pay rises will damp growth in the region's largest economy. "With wage increases so weak, there's not much hope for a recovery in spending," said Tomokatsu Mori, of Fukoku Capital Management in Tokyo.

TDK gained after saying it's in talks to buy a unit of Alps Electric, boosting speculation there will be further consolidation in the electronics industry.

Japan's Nikkei 225 Stock Average declined 0.7% while the broader Topix index slid 1 %. China's Shanghai and Shenzhen 300 Index lost 1.6%. Gauges fell in Australia, Hong Kong, New Zealand, Singapore, Thailand and India. Mitsubishi UFJ, Japan's biggest bank slipped 3%, its biggest loss since October 12. Toyota, the nation's biggest automaker, lost 0.7%. Suimitomo Mitsui Financial Group, Japan's No. 3 lender, declined 2.8%.

The world's second-largest economy grew 5.5 percent in the three months ended Dee. 31, the fastest pace in three years, the government said this week. Business investment rose 3.1 percent in the quarter, up from the 2.2 percent preliminary estimate. In contrast consumer spending rose 1 percent in the quarter, down from the preliminary 1.1 percent expansion. Stagnant wages may keep consumers from spending more on goods and services, denting economic growth and making bank stocks, which derive most of their earnings from the domestic economy, less attractive.

Global Markets Sneeze(part-2)

Adding to the housing worries, tile US Mortgage Bankers Association said delinquencies for all home loans rose to a three-year high of 4.95% in the fourth quarter, and to 13.33% in the risky 'subprime' market.

The Dow Jones Industrial Average fell more than 240 points overnight for its second-biggest drop in almost four years on Tuesday, with a tepid 0.1 % rise in the US retail sales in February providing little cheer for investors.

But barring a really severe economic downturn in the US, the Asian economies should continue to enjoy solid growth, said Tim Rocks, Asian equities strategist at Macquarie Securities in Hong Kong.

"We see the outlook as fundamentally very, very strong. Domestic conditions in Asia are very, very healthy. We don't see the Asian markets as particularly expensive overall," he said.

"We think it's a danger to become too defensive in this environment. Obviously we're .not going to know the full extent of this slowdown in the US for some time now so there's some reason for caution, "he added.

Across the region, stock price screens were awash with red.

Sydney lost 2.1 %, Shanghai slid 1.97%, Manila fell 3.38%, Seoul declined 2.0%, Kuala Lumpur was down 2.7% in late deals and Singapore shed 3.06%. Indian share prices were not spared from the rout, with Mumbai down over 3% in early deals. Dealers said the disquiet about the US economy had unnerved investors who are still jittery after last month's big sell-off sparked by heavy losses in Shanghai.

"The latest bout of share market turmoil has its origins in the US even though a 9% one-day fall in Chinese shares (on February 27) may have provided an initial psychological trigger," AMP Capital Investors head of investment strategy Shane Oliver said in Sydney.

"We remain of the view that while recent weakness and volatility in share markets may have further to run, it is just another correction in a still rising trend, " he said.

Global Markets Sneeze(part-1)

“Jitters over Chinese markets resurfaced after data on inflation, loans and trade boosted speculation.
US Mortgage Bankers Association said delinquencies for all home loans rose to a 3-year high of 4.95010 in Q4”

Global stock markets sell off spread to Asia on Wednesday following steep losses in the US and Europe as signs of trouble in the US housing sector spooked investors.

The falls reversed much of the markets' recent recovery from the worldwide rout that began late last month with a 'slump in Shanghai.

Jitters over the Chinese markets resurfaced after recent data on inflation, loans and trade boosted speculation that the authorities there may be forced to take further steps to cool the booming economy, dealers said.

At the same time, the US housing worries drove the dollar down towards new three month lows against the yen in a setback to Japanese exporters, contributing to a 2.92% slump in Tokyo.

The falls mirrored heavy losses across Asia after the Dow Jones Industrial average dropped 1.97% on Tuesday when data showing rising mortgage delinquencies stoked unease about the slowing Housing sector.

The main European markets opened sharply lower on Wednesday, extending Tuesday's losses.
Dealers said the US housing figures had fanned concerns about a possible credit crunch that could put the brakes on consumer spending in the world's largest economy.

"The sell-off in the local market was due to the correction in overseas markets amid the mortgage loan concerns," said Celestial Asia Securities director Kitty Chan in Hong Kong where shares closed 2.57% lower.

"Bad debts and all these issues could take the market lower still if more (bad) news is uncovered in the near term," she said.

Collateral Damage Continues for US Stocks(part-2)

PROFIT FORECASTS

Shares o. both companies rose to records this year. The retreat from those highs stemmed from concern that the market for collateralized debt obligations, backed by derivatives and bonds in addition to loans, will dry up.

When Moody's reported fourth-quarter earnings on February 7, the New York based company said it anticipated lower revenue this year from rating securities backed by home mortgages.
Even so, the company projected "low double-digit percent revenue growth" for all of 2007. The average forecast of eight analysts surveyed by Bloomberg calls for a 14% increase.

McGraw-Hill also based in New York, reaffirmed last week revenue and earnings will increase more than 10% at S&P this year. Sales rose 14% last year at the financial services unit, the fastest growth among the company's three main businesses. Operating profit climbed 18 % and fell at the other two segments, media and education.

FAVOURABLE RENTS

Maguire, whose shares have lost 16% since February 8, rents space in two Irvine office buildings to New Century. The lender also signed a lease on a third, set to open in September.

A year of lost payments on the current space would total $6.5 million, or 12 cents a share, the Los Angeles-based REIT said in a statement on Tuesday.

Other tenants pay much higher rents than New Century does, according to the statement 45-52% more for the current space and25 % more for the new building. The numbers make the stock's decline look exaggerated, and the same may be true for Moody's and McGraw- Hill.

Goldman Sachs Group Inc's fiscal first quarter earnings have become the most extreme example of a pattern among Wall Street firms: making more money than analysts expect.

By earning $6.67 a share in the three months ended February 23, Goldman surpassed the average forecast in a Bloomberg survey by 34%. The out performance was anything but unusual.

The world's biggest securities firm by market value, based in New York, has beaten analysts' first -quarter estimates by an average of41 % since fiscal 2003.

Collateral Damage Continues for US Stocks(part-1)

“Cos Anticipated Subprime Defaults Will Discourage Them from Selling Loan-Backed Bonds”

(Maguire Properties Inc, the biggest office landlord in downtown Los Angeles, is taking a hit as well)

(David Wilson)

THERE'S no shortage of collateral damage in the US stock market from the collapse of subprime mortgage lenders. Shares of Moody's Corp and McGraw- Hill companies, the parent of Standard & Poor's, are falling in anticipation that subprime defaults will discourage companies from selling loan-backed bonds. Any slowdown would mean less demand for the debt ratings that Moody's and S& P provide.

Maguire properties Inc, the biggest office landlord in downtown Los Angeles, is taking a hit as well. The real estate investment trust's tenants include New Century Financial Corp, the second-largest lender to home buyers with relatively low credit ratings.

New Century, based in the Los Angeles suburb of Irvine, California, lost its New York Stock Exchange listing on Tuesday after failing to meet creditors' demands for funds. Accredited Home Lenders Holding Co, a competitor, said on Tuesday it would seek more financing after bankers made a similar request.

The fallout from the industry's travails has moved far beyond the brokerage firms and banks that are active in the subprime business - maybe too far.

Moody's has dropped 20% and McGraw-Hill has declined 11 % since February 8. Subprime lenders began sinking the day after New Century said it would report a loss and HSBC Holdings plc said it would set aside more for loan losses than analysts anticipated to compensate for defaults.

A New Worry for Wall Street(part-2)

Until now, the exchanges have routed orders through a system called Intermarket Trading System. ITS is three decades old and observers are worried it won't be nimble enough to handle the potential increase in order traffic next week as exchanges and networks route more orders among themselves.

Most exchanges will begin moving away from ITS as the new rules go into place, but they'll do so gradually. Meanwhile, last week's lurching market demonstrated the risk of placing too much technological strain on the system. The market rout on February 27 overwhelmed NYSE's own messaging system, forcing delays in handling orders. By the end of the day, floor brokers were processing orders manually. Many stayed after hours to confirm trades. Messaging traffic was even worse last Wednesday, according to NYSE chief executive John Thain, who said it hit 20,000 messages a second at one point.

"One of the servers got overwhelmed," he said during a conference call arranged by Prudential Securities last week. "A certain number of orders that were sent to the exchange got caught in this queue and didn't necessarily get executed the way people thought."

Mr. Thain said the exchange had "rebalanced" its servers and would be adding capacity. But trade delays, which spread to other networks and exchanges though less noticeably, have increased the anxiety as Regulation NMS kicks in. The chief executive of one relatively new network, BATS Trading in Kansas City, said in an e-mail to a regular group of some 1400 readers that he was "concerned about the stability of the public markets in the transition to Regulation NMS." David Cummings, the BATS CEO, added, "I would urge all participants across the industry, especially those with high-speed automated trading models, to be mindful of any unnecessary loads their orders could place on the markets."

The messaging snafus were enough to pique the interest of the SEC, which has been talking to NYSE about what happened. Mr. Thain has denied news reports that a bigger investigation into this week's events is underway.

A New Worry for Wall Street(part-1)

"All trade orders now have to be routed to whatever exchange offers the best price. This means markets like NYSE group's Big Board could lose share to smaller regional exchanges"

LAST week's market turbulence and technical glitches have over-shadowed an important regulatory change that kicks in this week in the US. Beginning Monday, all trade orders are supposed to be routed to whatever exchange offers the best price, meaning markets like the NYSE group's Big Board could lose share to smaller regional exchanges and electronic networks.
The impact won't be completely felt for another month, courtesy of a delaying action from the New York Stock Exchange (NYSE). Last week, the exchange received an extension from the Securities and Exchange Commission (SEC) that gives it until April 5 before it has to comply with all of the new rules, which are called Regulation NMS.

The NYSE says it needs more time to connect its systems to those of potential rivals, including the International Securities Exchange and Knight Trading's Direct Edge. The exchange made a similar request in January to get the deadline moved from February to March.

Last Friday, an NYSE spokesman downplayed the request for the extension, saying the exchange was already compliant with Regulation NMS and could route orders to 10 other exchanges or networks. "There's no drama here,” the spokesman said. But the request to hold off the change comes after several high-tension days at NYSE and growing concerns among traders that the initiation of Regulation NMS will jam up communications among exchanges. Late on Friday, the SEC said in a statement that "exceptional trading volume and price volatility of the equity market over the past few days raise the potential of even greater challenges” during NMS' phase-in. The agency said if problems arise, it will consult with the exchanges whether they are so serious that the NMS rules should be suspended.

Equity market trends dampen investor mood

The renewed sell off in global equities over the past two days is not exactly a surprise to investors but it has dashed the hopes of those who believed the worst had come and gone.

It now begs the question of whether what has been happening on financial markets since the end of February is a traditional "10%" correction or something more threatening.

"Markets were clearly premature in thinking 'right, we've done it, let's start behaving as were earlier,” said Dresdner Kleinwort strategist Philip Isherwood. "This isn't going to wash through within a week, " he added.

European and Japanese shares have lost around 3% over the past two sessions and the S&P 500 lost 2% on Tuesday before showing some calm on Wednesday.

The latest trigger was concern about an unraveling of the US sub prime mortgage market in which lending institutions are exposed to higher-risk borrowers.

But this issue has merely been lurking in the background as part of general investor angst about the health of the US economy and an exceptionally high degree of risk appetite driving a wide array of investments higher.

Since "Correction 2007" began roughly at the end of trading on February 26 volatility has soared and markets have gyrated. Recent stock gains, for example, were enough to persuade some that calm at least had returned, if not the rally itself.

This week's sell offs, however, have left the S&P 500 down 5% since February 26, the FTS Euro first 300 off more than 7% and the Nikkei down 8.45%. It may not be enough if market tradition has anything to say about it.

Almost by definition, a correction is expected to slice some 10% off an index - perhaps twice which in riskier emerging markets- particularly if it comes in a bull market, that is, one that is seen as being in a secular rally.

Retail investors check out of equity funds

(Muthukumar K)

RETAIL investors appear to be having second thoughts on investing in equity schemes of late. As per the latest data released by Association of Mutual Funds (AMFI), net inflows into equity funds during the first two months of 2007 has slowed down to Rs 3,663 crore as compared to Rs. 6,607 crore in the corresponding period of the previous year. Usually, inflows into equity funds pick up during the fag end of a financial year. But this time around, investors appear to be rattled by the volatile trend in the past couple of months. According to some financial planners, the money that used to flow into tax -saving equity schemes is now heading for safer havens like 5 year fixed deposits that also offer tax benefits. Some banks are now giving 9.50-9.75% returns for its fixed deposits holders.

Says Sameer Kamdar, country head-mutual funds, Mata Securities, "Higher post-tax returns on 5-year bank deposits have seen many investors preferring them over ELSS. Also, with 'mediocre' returns expected from equity markets going forward, the lure of higher returns no longer exists." There are two major reasons why inflows into equity funds increase in the December-March period every year. First, this is the time when most fund houses dole out dividend. And distributors of- ten sell the dividend story akin to a stock that is soon going ex-dividend and investors fall for the bait. Market sources even hint at many HNIs being tipped off in advance about dividend record dates that helps them beat the 90-day Sebi rule aimed at preventing ‘dividend stripping'. Secondly, marketing initiatives for ELSS schemes also start around this ' time, leading to higher inflows into these funds.

So what has changed? Clearly, the downtrend in the stock market, since the second week of February has shaken the confidence of investors. At this point, downside risks far outweigh the potential savings in tax by investing in the stock market.

This flip-flop in investment strategies of retail investors is nothing unusual, finds an ETIG study. A comparison of Sensex values and equity fund buying reveals that retail investor waits for too long to be convinced that the market is indeed in a bull phase. Only then does he start investing his money. Often in his quest to time the market, he catches the bull wave by its tail. In other words, he enters the markets when the markets are dose to peaking.

When there is a correction, he is usually among the first ones to jump ship. Data for the past eight years shows that during the bearish periods of 2001 and 2002, not much money flowed into equity funds.

Global Investors Worrisome(part-2)

These moves are aimed at draining liquidity from the banking system and taming growth in lending. The China stock market blowout was a shocker, but that same index fell 6.5% on January 31 and has been ricocheting up and down in 3 % swings all year. Timing is everything when it comes to global market psychology-and the Chinese stock declines came just as fresh worries were surfacing about the health of the US and Japanese economies. After the troubles in China, and before US markets opened up, came word of dismal durables goods data in the US. Reports said former US Fed chairman Alan Greenspan had suggested a recession was possible in the US in '07. The result was a 'perfect storm' of bad news that unnerved investors in the US. The declines in the US boomeranged back to Asia and Europe. Isn't the stock market sell-off going to hit the Chinese economy, and thus global growth? That's unlikely since most Chinese families have their money stashed away in bank deposits, not stocks. The investor class is growing rapidly, but the market shock will not have a huge impact on the economy. China remains on course to grow 10% this year and may overtake Germany as world's third biggest economy. One concern is the Chinese government goes too far to stamp out asset bubbles in the stock and realty markets, and restrictions on lending overshoot and take a bite out of the economy.

What's this yen carry trade business all about?

Since the late 1990s, the BoJ has kept short -term rates near zero and raised them slightly to 0.5% in February. That has been an invitation for hedge funds and institutional traders to raise yen funds cheaply and buy better performing bonds and 'other investments in emerging markets and elsewhere yielding 4-6%, or more. This is more worrisome than the stock market rout in China, given the linkages between the yen carry trade and the bond markets in rich world economies and emerging-market investments. Global investors have been unwinding their yen-financed bets and that has added instability. The yen has appreciated 3 % against the dollar since the market trouble started as investors are selling off bonds and stocks and paying back their yen loans. This process could feed on itself, because as the yen appreciates it, takes more foreign currency to pay back those loans. Developing Asian economies like Indonesia and the Philippines are vulnerable to I the unwinding trend. They have "fairly high levels of external and public debt and among the lowest ‘forex reserves' in the region. Thailand could also feel some pain if the yen really spikes. So, could the export -driven Japanese economy.

What will mitigate the market risks from China and Japan?

A few months of less volatile trading will help. China's economic fundamentals are robust. An orderly correction that cools off exchanges in China is welcome. Assuming Japanese interest rates continue to rise; investors could reverse-engineer their yen-fuelled trades in a less treacherous environment and the impact on emerging bond and stock markets will be more benign. Here's to a little market serenity for the rest of '07.

Global Investors Worrisome(part-1)

Why Japan's More Worrisome Than China

“Global investors may be far too worried about the market risks from Chinese stocks, but unwinding the 'yen carry trade' could prove bumpy”

A lot of wealth has vaporized in recent trading sessions, as investors have been swept up in a wave of selling in global equity markets that started in China on February 27. Sell-offs has moved across most of Asia, Europe and the US, and some $1.5 trillion in m-cap has been wiped out. Concerns about the quality of the 'sub-prime' US home mortgage market and possibility of recession in '07 fed the selling trend. But two of the biggest market risks are believed to be centred in Asia. The importance of China's $2.7-trillion economy to global growth, trade flows and corporate profits has some worried about the negative impact of a downturn in Chinese equities.

There is the disturbing prospect of a messy unwinding of hundreds of billions of dollars' worth of highly leveraged trades in risky emerging-market investments and US dollar assets that have come from the ultra-cheap yen, thanks to rock-bottom Japanese interest rates since the late 1990s. This is a result of the so-called yen carry trade - in which investors borrow in yen, flip over into foreign currencies and invest in non-Japanese bonds and stocks. How real are these risks? Here's a background to guide investors through volatility in global markets.

Why China?

It's ironic that the 9% plus slide in the Shanghai & Shenzhen 300 index had such a big impact on global markets. For one thing, its causes were homegrown. Share prices at these two mainland markets had jumped 130% last year, and valuations were absurdly high. Analysts had been calling for a 15-20% correction for months. These markets are powered by Chinese investors who aren't allowed to invest abroad, so they aren't influenced by trends in the US or Japan. Nor do foreign investors have a huge stake in the A-share market. The selling was mostly domestic-driven and influenced by the People's Bank of China move to raise required cash reserves that lenders must park with the central bank.

Risks of Trading in Commodity Futures(part-2)

They have been through the ups and downs of the physical market; know how to take losses on the chin, and whom to trust. They don't understand graphs. But they do understand sauda. And they have the best noses in the business for sniffing out opportunity, collectively or alone. For them, the vaida bazaar is another way of playing for that elusive ‘ek rupiya per bori'. Unless your dad is one of them, you stand little chance.

Then there are the moneybags bored by the easy game of shares and stocks. They have so much cash and so much appetite for risk that a bouncer or two only whets their interest further. Equity market players are crowding into commodity markets in search of novelty.

Do all these three types of players matter to you? Yes, because your paths are destined to cross. Like a one day cricket match, commodity exchanges are zero-sum. There is a winner and a loser. Some one makes a pay-in and some one else receives the pay-out every day by 12 noon. Once the futures contract has expired, there is no tomorrow. If your trade turned out badly, you must take the full loss.

Always remember that you are competing against others in the commodity market. In equity markets, you are competing only against yourself. The professional trader, the lalaji and the Dalal Street big boy are all going to make money when somebody else loses. There is a very strong chance that someone may be you. Studies elsewhere in the world show that only a handful of amateurs last more than three years. The rest are broke.

The other big point to remember is that in commodities, there is no ban on inside information. In equity markets, companies and brokers who use inside information to anticipate or cause stock movements are investigated by Sebi and even jailed. Futures traders have no such restraints.

All commodity traders have a jungle sense of what will make the market move. Outsiders have limited chance of understanding their smoke signals.

You will also never know how much position each company or big trader has taken. There is limited public disclosure. Investors who own 5 % or more of a company's stock must publicly disclose their holdings. Commodity exchanges certainly know who is doing is what, but that's of little use to you. It is easy for small investors to enter the commodity markets. Surviving them is another matter

Risks of Trading in Commodity Futuers(part-1)

What are risks of trading in commodity futures?

(Nidhi Nath Sriniwas)

AS an individual investor, are you worried about sharks preying on hapless minnows in the commodity markets? That isn't surprising.

The Left parties, Soma Gandhi, and even Lok Sabha MPs have expressed the view that futures should be banned or else severely curtailed because of high chances there could allegedly be price manipulation. Unscrupulous traders, betting cartels, and sharks from the equity markets seeking fresh prey in commodity futures. Part of their apprehension is simply because they don't really understand how commodity exchanges are structured and the checks and balances that technology has made possible. It's easy to demonise anything that you don’t understand. That is why the government has not taken their views too seriously. It understands the value of commodity futures in price stability.

But as a small investor, your concerns are far more immediate. Even a 10% chance of getting scalped is too high a risk.

What's more, unlike business losses, it much harder to forgive and forget? So, it’s time to figure out what really are the chances that your money will remain safe from sharpshooters in the commodity wild west.

Let me tell you the tough facts first. You can lose your shirt even when everyone is playing by the rules. And despite what the red brigade says, most people do play by the rules.
The problem lies in the very nature of commodity futures.

The commodity trading world is dominated by professionals. There are three kinds. All the big companies have special trading desks manned by MBAs and finance whiz kids who can spot opportunity in a technical graph that looks like something you last admired when your kid was three years old. They spend their days bending minds around fundamentals, shorts, longs and basis. Sure, you can compete but it means quitting your day job.

The big companies are outnumbered by traditional traders (or the "lalaji types") and brokers in the physical markets like Naya Bazaar and Jhaveri Bazaar. Sitting on their pan masala -stained gaddis, the Hasmukhbhai Shahs and Chaganmal Chhajju Lal Jains have been dealing - buying, selling, processing - a commodity for decades. Jewellers, besan chakki owners and metal traders are classic examples.

SOMETHING FRESH(PART-2)

About Trading on Nymex

Though initially hesitant, Vishal approached UTI Bank to fill up the forms for remitting funds overseas. In Vishal's trading kitty was just Rs 50,000. The bank charged him a small commission and opened his account with Nat West Bank in London. On January 23, 2007, Vishal's bank account with Nat West showed a deposit of $1114. That is just 2% of the $50,000 that RBI permits him to remit for trading overseas.

Since, he is familiar with physical silver prices, Vishal decided to trade in the same metal on Nymex. Using CMC's platform, Vishal made his first Nymex trade on silver with $64 as margin money. On January 30, he put in another $64. Put together, he had bought 30 kg silver on Nymex by leveraging $134. As silver prices were rising, on February 1, he booked a profit of $570 (Rs 25,000) on his total investment of $134.

On February 3, Vishal checked Nymex silver prices and found that they were still at the level on which he had sold. Quick off his feet, he put in $135 at one shot this time to pick up 30 kgs silver. Last week, he again booked profits of $550. His Nat West account now shows $2277. Vishal's next plan is to buy 350gms gold on Nymex and see how it goes. But success has not gone to his head. I've no desire to become rich overnight, he says. Slow and steady is his mantra.
What makes Vishal special? Nothing really, Except that he is an apt symbol of young India who is not afraid of doing venturing out into the world. Unlike old-style sharpshooters, Vishal does not do arbitrage between Nymex and MCX metal prices, which is a notch better than satta. He has no due how dabba trade works.

But like Ratan Tata, L N Mittal and Kumaramanglam Birla, he too has understood that India has opened its doors to opportunity overseas. The facilities available to Vishal are available to all of us. It only needs thinking big. He is fully aware that index funds, professional traders, and punters across the world eat tiny investors like him for breakfast. As Vishal says, "FIIs are our enemies. They take money out from, the share market. We have to earn some of it back for India. “It's not a spirit you can ignore.

SOMETHING FRESH (part-1)

About Trading on Nymex

(Nidhi Nath Sriniwas )

DO you need a B-school pedigree, years of experience and a wily brain to become pan of the global commodity markets? It is time to find out. I stumbled upon Vishal Shah, a 27 -year-old, whose wife runs a tiny shop 'Silver Age Jewellery' in Mumbai's Breach Candy area. His father is a retired rice wholesaler. Yet this perfectly ordinary man-on -Mumbai-street has been able to double his money trading silver on New York's Nymex exchange. That too in three weeks. That's no ordinary feat. This is his story.

Vishal has never been to a fancy college. He speaks halting English. But he is good at accounts because since he was 15, he helped balance his father's bahi khatas. He dabbles in shares to supplement the joint family's finances. His only business tools are a three-year-old assembled PC, MTNL Triband, and Hindi news channels on TV. And his trading philosophy is impressive though he doesn't know Jim Rogers from John Travolta.

So, what gives? Vishal first thought about commodity trading in 2005, when he opened an account with Share khan, the brokerage firm, to trade metals on MCX. But he found the whole experience most confusing and expensive. The margins and commissions were steep; there are hardly any profits and the rules hard to understand. In frustration, Vishal gave it up.

In late 2006, he was approached by a Reliance Money (part of Reliance Capital) salesman who told him that Indians are now also allowed to trade on foreign commodity bourses. Somehow, the idea of trading abroad clicked with this otherwise highly risk-averse trader. He opened an account with the brokerage. Reliance Money has permission to let its customer’s trade on Nymex through its UK-based partner CMC Markets, which runs an online derivatives platform. But Vishal himself needed RBI's permission before he could start trading overseas.

New World Patterns (part-2)

The highest growth rate was recorded by expenditure on medical care and health services, which increased by more than II %. This was closely followed by expenditure on hotels and restaurants and that on transport and communication, which rose at an annual average rate of about 9%. Two categories - recreation, education and cultural services and furniture, furnishings, appliances and services - also recorded significant growth. This reflected a perceptible shift in consumer spending from primary products to higher value-added manufactured goods and services.

This brings us to the question: What determines the spending behaviour of individuals? To reiterate, a host of factors; besides income levels, influence consumer expenditure patterns. As MISH surveys of NCAER indicates, rapid infrastructure penetration (particularly, availability of electricity) is the panacea for most of our problems. Availability and access to infrastructure of all types - power, roads and transport, telecom and water and sanitation - is a major factor leading to a huge gap between urban and rural penetration of consumer durables and non-durables.

Then there are marked differences in lifestyle between the urban and the rural areas. What cannot be overlooked, however, is that the middle class (those with an annual household income of Rs 2-10 lakh at '01-02 prices) has increased at a rate of 12.2% per year from '01-02 to '05-06, while for the next four years, its annual growth rate is expected to be around 13.7%. Similarly, the size of the lowest income class will shrink steeply from 72% to 52 % by the end of the decade.

Over the past decade, there has been a steady increase in urban disposable income and many middle-class households are moving up the income ladder. This can partly be attributed to more and more women joining the corporate world, leading to a phenomenal increase in double income families.

Riding high on availability of lucrative financing schemes and all-round social and economic' development, consumer tastes and perceptions are evolving swiftly. It is for the producers to react to this scenario in order to meet the changing and growing needs of consumers. The success of a product depends, to a large extent, on its affordability, easy availability and ability to be important to the consumer. Hence, the foremost challenge for companies will be to devise a multi-pronged strategy to cater to a multi-tiered consumer base through continuous improvement and creation of new products, effective targeting and positioning of goods and improving the price-value equation. The future is wide open.

New World Patterns(part-1)

(RAJESH SHUKLA & PREETI KAKAR)

“Share of essential items like food, clothing, electricity, fuel and footwear in average annual per capita consumption expenditure has come down, while the share of durables goods has increased “

The Indian economy has ushered in a new era, wherein the country's per capita income growth in recent year" has out-performed that of other major "Asian economies. However, the gains of prosperity have been distributed unevenly. The paradox of plenty amid poverty ceases to lift. For instance, per capita income in the richest state of the country is, about five times that of the poorest. India's economic diversity matches its social diversity and this engenders a wide spectrum of consumers in terms of their income levels and spending behaviour.

What is noteworthy here is that the diversity is not only visible in the spending behaviour of people with different levels of income, but also with the same level of income. This is because income levels by themselves do not reveal much about market behaviour and purchasing power. There are other factors, such as location, cultural conditioning, and to some extent, level of education and occupation, that determine the spending behaviour of individuals.

Household consumption expenditure over time has been moving in the direction dictated by forces of economic growth and expansion. The National Sample Survey (NSS) data reveals that the level of consumption in the urban sector is much higher than that in the rural sector. In the rural sector, about 22 % of the population as a whole had monthly per capita expenditure (MPCE)' below Rs 300, while in the urban sector, less than 5% of the population had an MPCE below Rs 300. On the whole, the average MPCE was 87% higher in the urban areas com¬pared to the rural areas.

While states like J&K, Himachal Pradesh, Punjab and Kerala ranked higher than others in terms of spending in the rural sector, Delhi, Maharashtra and Mizoram topped the list in the urban sector.

There are major differences in consumption expenditure of the top and bottom deciles of the population. If the poor spend Re 1 on food, the rich spend Rs 4. Marked differences can be observed in luxury items like jewellery and appliances (ACs, refrigerator, washing machines). If the poor spend Re 1, the rich spend Rs 188 on large appliances.

The share of essential items like food, clothing, electricity, fuels and footwear in total average annual per capita consumption expenditure has reduced, while the share of durables goods has increased, which reflects the changing preferences of consumers. In this change, one can observe a movement from more to the less essential, or from the essential to the non-essential. While the gap between the rural and the urban market will be bridged only radically, one can rejoice that aggregate expenditure at the country level grew steadily at an annual rate of 4.5% be¬tween 1996-97 'and '02,03.

Hints, Tips and Handcuffs(part-2)

The SEC will act even when it has no one to put the cuffs on. Recently, it filed a suit against unknown investors who had profited in the options market before the announcement of a takeover of TXU, the Texan utility. Over $ 5 million of profit from these options has been frozen; while investigators try to identify who bought them. Insider trading is hard to quantify, but regulators see evidence that it is alarmingly common. The boom in mergers has provided more scope to make a dishonest buck ahead of deals In Britain, almost a quarter of takeover announcements in '05 were preceded by suspicious price movements, according to the Financial Services Authority, the country's markets regulator. In America, reports of suspect trading patterns filed by the NYSE to the SEC have doubled in the past two years.

Banks have responded by tightening internal checks on wrongdoing. But these are only as good as the people who apply them? One of the 13 busted ring members worked as a compliance officer at Morgan Stanley. It was "like the head of the CIA turning over secret info to Osama bin Laden," as a pundit put it.

Banks dealings with hedge funds are also coming under scrutiny. Hedge funds were big beneficiaries in the Morgan Stanley case and last September, Linda Thomsen. SEC's enforcement head singled out insider trading by hedge funds as a particular threat. Mutual funds have long complained that Wall Street broker’s give advance warning of big 'block trades’ to their favourite clients; and the apples of the brokers' eyes are increasingly hedge funds. Then there are some like the late Milton Friedman, a Nobel laureate in economics, who argued that insider trading should be legal, because it benefits all investors by quickly introducing new information to the market. Why should everyone have to wait for a company's press release?

The issue of insider trading is riddled with grey areas. At what stage, for instance, does sounding out interest among institutional clients for an upcoming corporate financing become something sinister? These fine lines are one reason why cases against insider trading are so hard to build. It is rare to find a smoking gun. The SEC and others use algorithmic programs to catch unusual peaks and valleys in trading. Though cutting-edge, the maths takes them only so far. Proving intent, says Mr. Ricciardi, requires plenty of "good old fashioned detective work."

Hints, Tips and Handcuffs(part-1)

“American regulators have declared war on insider trading’

A WHISPERED aside in a bar, an in¬discreet remark in an e-mail- this is the stuff on which inside trading thrives. But Blue Bottle, a Hong Kong firm fingered on February 26 by US markets watchdog, the Securities and Exchange Commission (SEC), showed more chutzpah. It netted $2.7 million trading on information it had gathered by hacking directly into computers to view press releases before they were published.

This is not the most egregious insider trading case of recent days. That accolade goes to a ring of 13 bankers and-fundmanagers, including ex-employees of UBS, Bear Steams and Morgan Stanley, Recently, they were busted by the SEC for trading illicitly ahead of mergers and analysts' stock tips. What started as a ruse to repay a $25,000 debt, allegedly spiralled into a lucrative seam as colourful as it was criminal? Mobile phones were binned to cover their tracks and cash passed around in Doritos packets. Some say the bust was the biggest blow against insider trading since Ivan Boesky was jailed and fined $100 million.

That was 20 years ago. More recently, the SEC has lost its place in the vanguard of financial crime-fighting. In the rubble of the dot com collapse, it was made to look flat –footed by Eliot Spitzer; then New York's attorney-general and now its governor. Now, Christopher Cox, SEC's chairman since '05, has made fighting insider traders a priority. SEC must prevent any "buzz in the markets that you can get away with it," says one of his officers, Walter Ricciardi, "Nothing paints a picture as well as people being led away in handcuffs."

Winning Mutual Funds(part-3)

Then there's the cost of owning the Janus fund. It's dearly not the cheapest way to invest in non-US markets, with an expense ratio of 0.89%. And if you sell it within three months of purchase, you will be punished by a 2 % early- withdrawal fee.

I'm not arguing for or against the Janus fund. You can't dispute its performance or the need for owning non-US stocks mat are initially bought at discounts.

At this point, the grown-up talk about evaluating potential pitfalls comes to mind. Is it worth taking on the additional risks of a single manager, foreign currencies, small companies and the stock market all at once?

With small, foreign companies, you may have a greater chance of bankruptcy if their local economies weaken. And there's always the wild card of currency fluctuations. A rising dollar would lower the, relative value of these stocks.

The question should be how much risk you can afford, said Larry Swedroe, director of research at St. Louis-based Buckingham Asset Management and author of "The only guide to a winning investment strategy you'll ever need.” Swedroe said those people whose livelihoods are hurt most by slumping economy may want to have reduced positions in small-cap stocks relative to investors who have stable incomes that are less affected by economic swings. Applying that observation, doctors, teachers and government employees may be better able to invest more in small-value companies than stock brokers, real-estate agents, construction workers and individual business owners, Swedroe said.

"The important thing to understand is that small and value are independent risk factors and you need to diversify across that, he said, "Those investors with a high correlation of their earned income to the economic cycle should consider limiting their exposure to small and value stocks.” - Bloomberg .

Winning Mutual Funds(part-2)

Hold on. Am I recommending that you buy the funds with the best 2006 performance? No, but in the spirit of comprehensive financial planning, you will need to examine the risks and rewards of these vehicles to see if they can fit into your holdings. Let's take Janus Overseas Fund as a case in point. While 2006 was easily its best year since 1999- returning 47% - the fund has had some tough times. The good news: It's ranked in the top 1 % of similar funds over the past three years. Yet 2000 through 2002 was an ugly period, when it lost money every year with annual losses of at least 23%.

How do you know if you are buying into Janus' fabulous run of me past four years or the 2000-2002 train wreck?

You don't, yet many investors believe high returns will continue even after a year of price declines. They hold on, hoping me fund manager will get his hot hand back. Sounds like a casino strategy, doesn't it?
Although less than two months of returns should be no barometer for the rest of 2007, the fund bas risen more than 4% this year, beating almost three-quarters of its 'peers as of February 16.

Winning Mutual Funds(part-1)

How to resist last year's winning mutual funds

Investors Should Look At Broad-Based, Passive International Portfolios to Hedge Risks

(John F Wasik) CHICAGO

THE temptation is oh so great. Wouldn't it be convenient to invest in a list of last year's top-performing mutual funds and hope for the best?

After all that's the recommendation of far too many financial journalists, who then move on to other things, conveniently forgetting the warning sticker of every mutual-fund company that past returns are never guaranteed. I will refrain from this kind of financial delusion. While you can never expect yesterday's winners to continue their streak, you can make an argument for hedging risk and grabbing returns through diversification.

Last year's gainers were a case in point. International stock mutual funds that specialised in bargain-priced or value companies did extremely well. There are sound reasons for buying and holding them –and for not overloading on them.

Some of the advances posted by these funds were nothing less than spectacular. The top 15 in the Bloomberg mutual funds database were dominated by non-US small-cap companies, valued between $500 million and $1 billion. All of those funds gained at least 29% last year.

Profit from regular churn

“Buy-and-hold strategy’s passé, FIIs profit from regular churn”

Buy-and-hold strategy’s of investing in equities, for long epitomised by value investor Warren Buffet, does not seem to be appealing enough to quite a few foreign fund managers investing in Indian stocks. This is evident from the way in which they have been churning their portfolios during calendar year 2006. ET analyzed the bulk deals made by foreign institutional investors (FIIs) in 2006, and came up with some interesting results.

In at least a couple of dozen stocks, the total value of shares that has changed hands between various Flls have been many times the total free- float market capitalisation of those companies. And if one were to compare this with the value of FII stake in those companies' instead of the total free-float market cap, the churn ratio rises considerably. And these numbers are only for bulk deals. If block deals are added to these figures, the churning ratio would be mum higher. According to Sebi guidelines, trading volumes in single scrip accounting for more than 0.5 % of the equity capital of the company done by any exchange member has to be reported as a bulk deal.” A transaction is said to be a block deal if a minimum quantity of 5 lakh shares or minimum value of Rs 5 crore is executed through a single transaction between 9.55 am to 10.30 am.”

With the Indian equity market at a crucial juncture, market watchers feel portfolio churning by foreign funds could rise further.

Jon Thorn, MD, India Capital Fund managing Indian equities worth more than $250 million, based in Hong Kong says, "With Indian equity markets nearly valued in the short term, volatility will be on the higher side."

The analysis shows that in stocks where the total value of bulk deals traded in one year exceeded the free-float market capitalisation of the stock at the end of December 2006, the prices have appreciated significantly. For example, Educomp Solutions, Sadbhav Engineering, Atlanta, Tulip IT, Action Construction, Nitco Tiles, BL Kashyap, Indo Tech Transformers, Voltamp, et al. These stocks were the ones where all the bulk deals in the year amounted to over Rs 500 crore in value. The same was true for many stocks where the total value of bulk deals, was very significant but did not exceed the free-float market cap of the stock at the end of the year. For instance, the value of FIT bulk deals in Reliance Industries was around Rs 21,000 crore in 2006, less than a fourth of the company's market cap in end-December. However, there were exceptions like Shyam Telecom, IL&FS and Pyramid Retail where the stock price has declined despite high level of churning.

So what does this trend indicate? One obvious fact is FIIs are keen to take some cash off the table when it is available.

Not surprising, considering that even as the Indian equity market continued to be on an upward spiral for the last couple of years, it has always looked expensive when compared to other emerging markets. The second reason could be the rising influx of short-term investors, especially hedge funds, into the market. Currently, there are 1,059 FIIs registered with the capital market regulator Sebi.