Monday, November 30, 2009

FUNDS BEHIND INDIAN BROWSERS.


Zero interest rates of US and low interest rates of other countries made cheap money to flow like water coming out of a fountain. All these cheap money founded BRIC economies assets at cheap valuations giving them enough scope to generate healthy ROI.
Indian stock market was one of the most lucrative market to generate good ROI. This particular growth prospect made the FII’s to pick up investments avenues in Indian market directly via FDI or through stock market.
From early 2008, the Nifty nosedived from about 6,287 to just above 2,500 by late October and remained below 3,000 until late March this year. This can be attributed mainly to the virtual stagnation of global liquidity flows. Once the flow of funds started rest is now history. The speed of the journey of Indian market from the lows of 2008 and 2009 was very much eye catching. The speed made many economists around the world surprised. Cheap money started chasing the cheap assets around the world. Funds behind Indian stock market were:
 Many Americans – have are poured money into mutual funds that buy foreign stocks, especially in emerging markets such as China and India.
 Investors are rushing overseas too aggressively.
 This year, individual U.S. investors, still jittery about the stock market overall; have invested almost $21 billion into risky emerging-market funds.
 Overseas fund inflows into the Indian stock markets have crossed the Rs 60,000-crore (about $12 billion) mark so far this year.
 There is a sudden surge in foreign institutional investor (FII) inflows through the participatory notes (P-notes) in the last two months.
 The finance ministry have also revealed that the outstanding P-notes position in October 2009 is Rs 1,24,575 crore.
 According to Sebi, outstanding investment by August-end stood at Rs 110,355 crore. This means Rs 14,220 crore of FII inflows, or roughly a third of the total FII inflows of Rs 44,652 crore during September and October, came through the P-notes route.
 FIIs' net investments in Indian stocks this year have crossed US$15bn, as per SEBI's web site.

The below chart shows the historical data FII’s inflow in Indian stock market till 2008.

Between March 2001 and March 2007, the market value of shares owned by FIIs went up from $9.7 billion to $124 billion.March 2007 have been taken to exclude the pull out of funds in 2008.This will clear that what was their investments in normal phase of the World Economy.

The below image shows the FII's investments in India in 2009 only.

We find from the above chart that from March 2009 the cheap money started flowing into the roads of Indian stock market.
The US investment vehicles are so aggressive that recently Fidelity Investments, which just increased its recommended international exposure for a typical investor to 30% of one's overall portfolio from 20%, launched a program last month for individuals to directly buy securities online in foreign markets, something once reserved for financial professionals.
But the cheap money flowed from all directions into the Indian stock market. Even when I am writing this article we find that still huge amount of funds are still in the sidelines getting ready to pour into the Indian stock markets. Global emerging market equity funds have got an  investments around  $56.8 billion this year, putting them on track to eclipse a record $50 billion in 2007. A year ago funds had seen accumulated outflows of $40 billion.So India remains in the top list of develped economies for investments.Even if any recession comes in the future India will still remain the lucrative investments destination.

HAPPY THANKSGIVING TO INDIAN GDP


When the market started and I was busy in listening the CNBC TV.Suddenly around 11 am Udayan Mukherjee of CNBC TV jumped of his seat and shocked to find the GDP numbers of India.Within few minutes india was into a roller coaster ride. July-Sept GDP up 7.9%. Economist and all market speculators are having their eyes coming out of socket. Before I get into further analysis just a quick look into the break up figures.
 The construction sector grew at 6.5% while financing, insurance, real estate growth came in at 7.7%.
 The manufacturing sector grew at 9.2 % in the second quarter vs 5.1% a year earlier.
 The mining space has posted the highest growth at 9.5% as compared to 3.7% YoY
If we look into the historical GDP number of India we even get more shocked. Since in the history of Indian economy very often find GDP around the growth of 7.9% GDP.
The trend for India’s GDP growth rate are given below:

  • 1960-1980 - 3.5%


  • 1980-1990 - 5.4%


  • 1990-2000 - 4.4%


  • 2000-2008 - 6.4%

Few of the prime reasons behind 7.9% GDP numbers are :
 India has taken various policy measures to buffer the economy. Repo rate, SLR and CRR have already been slashed. CRR can be brought down to about three per cent (RBI’s medium term goal). All these measures in turn would infuse liquidity into the economy.
 GDP rate have also improved fabulously because of the high commodity prices which supported the agri sector.
 Indians have something to do with agriculture and inflation will soon prove a boon to the rural public. Their profits are going to soar. This rural boom will kick start the next round of self enhancing growth cycle.
 The growth rate of Indian GDP fell from 7.35% in 2008-09 to 5.36% till the end of 3rd quarter of the 2009-10.
 The cumulative FDI Equity inflows (from August 1991 – August 2009) stood at Rs. 5,20,589 crore.
 Budgetary support for National Highway Development Programme (NHDP) has gone by 23% on y-o-y basis for 2009-10.
 Expenses for the Commonwealth Games 2010, went up from Rs.2,112 crore in Interim Budget to Rs.3,472 crore for 2009-10 fiscal.
 Allocation to railways have gone up from Rs.10,800 crore in interim budget toRs.15,800 crore for FY 2009-10.
 Allocation under National Rural Health Mission (NRHM) has gone up by Rs.2,057 crore over Interim Budget estimate in 2009-10 of Rs.12,070 crore.
 Rs.2,113 crore has been allocated for IITs and NITs, comprising of a provision of Rs.450 crore for new upcoming IITs and NITs.
 India has weathered the global slowdown quite well because of substantial government actions. Fiscal stimulus in form of tax cuts, and spending increases on the rural sector and infrastructure has contributed to the rebound in production.
 Purchases of government bonds and lowering of repurchase rate by the central bank has been helping the banking sector. Adding to that a quite good performance of the agricultural sector and India looked like it had been set for a sustainable recovery.
 Fiscal pay outs such as Sixth Pay Commission award lower service tax excise duty and employment guarantee scheme have put Rs 1,20,000 crore (2.5% of GDP) into the system in turn boosting consumption demand.
 The Indian banking system is very much quite safe and sound with capital adequacy ratio of most banks at 12% against the mandatory nine per cent. The money multiplier will have to rise to meet growing demand for funds, subject to additional capital with banks.
 NPA are under stringent control of the RBI.
 Moreover housing/realty exposure of banks is less than 14% of the total loans and most of these loans are well collaterised.
 The markets are booming, the stock exchange is bullish, and the rupee-dollar rates have crossed new frontiers.
 And last but no the least India have shrugged off the poor monsoon affects on the agri sector.

So all the above are the key contributors behind astonishing GDP growth of 7.9%.Along with this it is clear that in the future Indian economy is on a roller coaster ride.The huge spending from the hands of government will boost up the consumption in the next coming quarters too. The huge spending is focused approach and not like the one in China.
Below is the Chart of historical GDP of India.

If we look into the key sector contributors of GDP growth we get historically:
Below are the contributions of different sectors in the India’s GDP for 1990-1991 –
Agriculture: - 32%
Service Sector: - 41%
Industry: - 27%
Below are the contributions of different sectors in the India’s GDP for 2005-2006-
Agriculture: - 20%
Service Sector: - 54%
Industry: - 26%

Below are the contributions of different sectors in the India’s GDP for 2007-2008-
Agriculture: - 17%
Service Sector: - 54%
Industry: - 29%

The service sector contributes more than half of India’s GDP. Earlier agriculture was the main contributor to the GDP. To improve the GDP and boost the economy, the government has taken various steps like implementation of FDI policies, SEZ’s and NRI investments.


Above is the chart of historical chart of India's inflation.
 Now RBI will have to check into inflation devil. GDP of 7.9% is bound to spook off the inflation. We are already having higher index for food prices.The CPI is already floating in the range of all time high in the history of Indian economy.  Excess flooding of money have created this euphoria. we should not be surprised if RBI takes immdeate steps to curb the rising devil. As we all know that one of the most common ways of controlling inflation by RBI is rolling back of interest rates which were given as stimulus plans. But that will not affect the long term journey of the Indian economy.To reasons behind this is.1) India has huge potential untapped as a Emerging Economy among the BRIC nations.2)The Indian economy have a high purchasing power parity then any other economy in the BRIC table.
By purchasing power parity we mean:
Using a PPP basis is arguably more useful when comparing generalized differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of the countries, rather than using just exchange rates which may distort the real differences in income. This entry gives the gross domestic product (GDP) or value of all final goods and services produced within a nation in a given year. A nation's GDP at purchasing power parity (PPP) exchange rates is the sum value of all goods and services produced in the country valued at prices prevailing in the United States.

The below chart shows the purchasing parity index of India in dollar terms.


 What ever happens in in Indian economy from RBI measures to any otehr measures as imposed from time to time.India remains in the top prority list of Investments.All we need is that to look into that Growth of income is important in itself, but it is as important for the resources that it brings in. These resources provide us with the means to bridge the critical gaps that remain in our development efforts.

Saturday, November 28, 2009

INDIA IN GULF'S LADDER OF INVESTMENTS.


BRIC countries have always remained a favored destination for doing investments and getting good returns other that any other investments. Each day we hear a word called FII’s. They are the ones who make the stock market climb new heights. In this article of mine I will try to describe and bring forward one the FII’s who one of the major investor in BRIC economies. The have huge wealth which gets accumulated year after year and we are among their most favorite destination once the BRIC economies started making a turn around to the World economies.
Very recently we heard the name of DUBAI panic. By the time I write this I hope my readers are well acquainted with the fiasco that happened on Friday. A BRIC economy has always remained a hot destination for investments. DUBAI, UAE and Gulf countries does investments via Sovereign Wealth Fund – SWF.

 What is sovereign wealth fund ?
A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Some countries have created SWFs to diversify their revenue streams. For example, the United Arab Emirates (UAE) relies on oil exports for its wealth; therefore, it devotes a portion of its reserves to an SWF that invests in other types of assets that can act as a shield against oil-related risk.
Sovereign wealth funds are nothing new, but they are growing larger. Dubai, UAE and the entire Gulf countries has a huge accumulation of sovereign wealth fund.

 They emerged in the 1970s in oil-producing emirates, such as Kuwait and Abu Dhabi, as a way to accumulate current account and budget surpluses during the oil boom. Now, Abu Dhabi boasts the largest fund, sized at $600-700 billion, and other countries have followed its lead.

 Since 2003, oil producing states have reaped a revenue windfall. As oil increased from $27.69 per barrel on average in 2003 to as much as $79 per barrel in 2006.

 Saudi Arabia, for example, saw its gross domestic product (GDP) increase by well over $130 billion over that time period, and the United Arab Emirates took home more than an additional $80 billion.

 Such revenues have generated enormous liquidity among the Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—and created unprecedented opportunities for large-scale overseas investments. The amount of money in these SWF is substantial.

 As of May 2007, the UAE's fund was worth more than $875 billion. The estimated value of all SWFs is pegged at $2.5 trillion

Other economies have also build up such sovereign wealth fund like:

 Norway established a fund for its excess oil incomes in 1990.

 Singapore has accumulated two large funds that, unusually, are not based on oil income.

 And more recently, China and Russia have instituted large sovereign wealth funds of their own.

 Today, such funds hold as much as $2.5 trillion in assets.

 It is forecasted that they will grow to $12 trillion by 2015
Estimated assets under management by a range of sovereign funds at the end of 2007.The image below.
(Source data: National central banks, IMF, Morgan Stanley, RGE estimates )

A rapid rise in the price of major commodities between 2000 and 2008 greatly increased the cash holdings of some exporting countries, enabling them to seek new ways to diversify their wealth. AnotherOne of the prime reasons for building such reserves of sovereign wealth fund is not getting return from other non oil investment avenues like commodities. So they have built reserves where they can invest in emerging economies.

All these investments in the past have been made in other emerging economies but recently they have turned their heads towards BRIC economies.
How much India got investments out of the BRIC economies?
 An internal and yet unconfirmed government estimate has recently suggested that the UAE has invested around $4.5 billion (Dh16.5 billion) in India in the past few months.

 Several companies from the Arab world are now active in India.

 According to a recent survey by the Federation of Indian Chambers of Commerce and Industry of India (FICCI), a leading trade body, total trade between India and the Arab countries (including the Gulf) stood at around $102 billion in 2007-08. In the next ten years it is expected to increase by around five times this figure.

 In 2007-08 India’s trade with Bahrain grew by 65%, with Egypt by 35%, with Syria by 42% and with Kuwait by 27%.

 Between April 2000 and February 2009, FDI inflows from Arab countries were as follows: UAE $911 million, Oman $61 million, Bahrain $25 million, Saudi Arabia $16 million, Morocco $15 million, Kuwait $7 million, Tunisia $4 million and around $1 million each from Yemen, Jordan, Lebanon, Qatar, Egypt, Libya and Sudan

 Even Kuwaiti investors, geographically slightly further removed, have named India as the country of their choice.

 The Indian government has even entered into an understanding with Saudi Arabia and Oman to set up investment funds of $500 million and $100 million respectively.

Sovereign wealth funds from Kuwait, Qatar and the UAE are poised to pour billions of dollars into the markets of Brazil, Russia, India and China next year as they seek to tap into the BRIC countries explosive economic growth. SWFs will invest more into industrial companies, sizable companies with global footprint like car manufacturers, consumer products, and transportation. sectors.

Another point is  the Gulf as a key contributor in India’s development. Last year 2008 record oil prices and windfall revenues have driven cash rich Arab investors to park billions of dollars in industry. A number of investment and development companies of UAE and Arab countries along with Dubai have been developed by the Gulf governments to explore investment avenues both at home and abroad either through direct acquisitions, joint ventures or private equities. Among all these India is on the prime list.

FDIs to India from the Gulf have increased over the past couple of years, with both institutional and private investments in some projects, particularly by investors from Dubai Emirate. Few of them are Emaar Properties, Dubai Holding, Dubai Aluminium Company, Dubai Internet City and Dubai Ports are some of the major players with projects under process in India at present.
Below is the data of GDP of Dubai.

At the end I would like to add that if Dubai goes for tailspin in its finance activities the world remain at a huge threat, More over India remains at the high end of the risk.

Where the tide of risk lies from Dubai ?
 Property prices have fallen in Dubai,

 all constructions are for cash rich people,

 global recession have pulled off the buyers,

 So sellers will hardly get buyers,

 Crude prices are less,

 Not much income from crude as required for Dubai expansion,

 The rising debt needs to be bailout,

 Once Dubai gets bailout,

 After bailout Dubai have to sell assets, since no earnings from sell of costly properties. This debt will be cleared by shedding off the investments from Sovereign Wealth Fund.

Financial time bombs are present and are about to shake the world economies in the coming days.

Friday, November 27, 2009

DESERT STORM.

Forty years earlier Dubai was a village on the edge of the Arabian Desert. Locals citizens lived in houses made out of mud shacks and the only vehicle for travel or moving was ‘The Ship of The Desert’.

After 40 years Dubai have created artificial islands full of luxury villas, the world's tallest tower, an underwater hotel and many more things which might make tails spin of ones eyes. Dubai is now the glittering crown of the Middle East. The gulf state is now being known for its tall skyscrapers, wall-to-wall shopping centers and luxury hotels.
But the whole glittering castle is of the boom in real estate was constructed on sand. Sand made of credit/borrowed money. But the leash of bubble got broken when the financial crisis broke off sending the prices of real estate to rock bottom levels.
• Now prices in the real estate sector crashed where prices have fallen by up to 60%.
• 400 construction projects worth more than $300 billion have been shut down or postponed. The project cancelaation reveals demand havedried up and future outlook is also very bleak.
• Even after the world economy tried to come out of the dark woods of recession the Dubai real estate sector struggles to survive. They are finding hard to find buyers even after prices came down by 60%.
• Moreover the cost of living in Dubai has gone up like any thing.
• All these will add the unemployment in Dubai. Most of the Asians are placed their and they might come back as Dubai have less to offer now and cost of living have goes up.
• Foreigners have refused to buy the projects which have resulted further trap for inventory creation. This has resulted to default of payments of debt.
The fear in Western markets is that banks risk losing billions, which will damage their lending process and recovery of the economy too. Dubai World has a net exposure of debt of $59 billion of liabilities as of August. Where as the total debt of Dubai is $80 billion. So the Dubai World holds debt of 73.75% of Dubai’s total debt. The Dubai Government announced that it is restructuring Dubai World, an investment company owned by the government, with immediate effect. It has asked creditors for a six-month standstill on its obligations until at least 30 May 2010. Nakheel, a real estate subsidiary of Dubai World, has a convertible bond due next months
The most of the fear of UK and US is that Dubai might go for sell of assets which they are holding in UK and US. If this breaks out then one might find cascading fall in the world equities.
The fall in the share prices of banks eroded £14 billion from the UK alone.  As per Credit Suisse European banks could have an exposure of €40 billion (£36 billion) as loans to Dubai. Banks including HSBC and Royal Bank of Scotland have helped to finance Dubai’s acquisitions and are now on the hook if the state cannot repay its debts.

When we dig into the past to find out the type of investments growth made in Dubai we find some astonishing facts.
• US-headquartered private equity firms like The Carlyle Group active in the Middle East, UK firm were historically more active at entrepreneurial investments and acquisitions in the Middle East.
• A sample of such transactions was the acquisition of Middle East news portal AME Info by Emap, a UK Media group.
• Acquisition of Dubai-based recruitment firm iQ Selection by UK-based Imprint Group was another sample of such UK edge over US firms.
• Firms like Goldman Sachs, Morgan Stanley are already based in the Middle East and expanding. Ironically, this is happening at the same time that Middle East sovereign wealth funds are making high-profile investments in the US.
• US Treasury Secretary, Henry Paulson, have even visited the Middle East  in 2007-08 and assured investors in Abu Dhabi that the United States will remain open to sovereign wealth funds.
• Moreover Gulf governments hold more than US$400 billion worth of US investments, making them second only to China as America's biggest creditor
• Dubai-based Nakheel Group entered into a 10 bln usd deal with India''s DLF Ltd for residential projects in Tier I and II cities in 2007 which was followed by three financial institutions -- Khaleej Finance and Investment (KFI) from Bahrain, Kuwait Investment Company (KIC) and Kuwait Finance House (KFH) -- from the Middle East promoting a 200 mln usd fund for investing in India.
So the investment process of Dubai along with US and UK is very much convoluted. They are all well entangled in terms of investments. The burst of the boom might have a huge affect beyond our vision. The most affected will be the emerging economies in coming days if Dubai is unable to find a way out that might drag the world economy back to recession. Moreover developing economies will hesitate to do investment in emerging economies in the coming days. This failure will increase the risk of doing investments as well as will shaken the confidence of doing investments in emerging economies.

Who ever says that emerging economies will not get affected should understand that before any fresh investments the lack of confidence will play the game. Its true that there is ample amount of liquidity which is dragging the world market to roller coaster ride but this time their might be no one as in case of a double dip.

Thursday, November 26, 2009

CONVOLUTED TURBULENLENCE OF JAPAN.


Japan’s second quarter GDP increased by 4.8% in 2009 from a year ago. This was surprising for most economists as the predicated a 2.7% growth. The figure is very much reliable as the GDP number came riding not only at the cost of export buts also domestic demand contributed too. Consumption of goods has increased in Japan along with investments growth in manufacturing and capital goods and other sectors excluding residential projects.
4.8%GDP growth came from the following: 
 Domestic demand gained 3.3% from a year ago and private demand jumped 4.2% in the period.
  • The report notes that private consumption advanced 2.8%, while consumption of households increased 2.9%.
  • Private residential investment declined 27.5% and private non-residential investments soared 6.6%.
    But there is a mismatch of data which is well highlighted.
  • Japan's exports fell 23.2% in October from a year earlier.
  • Exports to Asia, which now account for more than half of Japan's total exports, fell 15.0% from a year earlier.

The below chart shows the Export and Import figures comparison for October 2008 to October 2009

October 2009
October 2008
Percent Change

Exports
5,308,867
6,914,811
-23.2

Imports
4,501,781
6,990,025
-35.6

Balance
807,086
75,214

-


So when export is down and even the export to Asian economies which constitutes 50% of Japan’s exports then from where one gets an economic growth of 4.8% based on domestic consumption growth of 3.3% and private demand of 4.2%.It well hard to find the growth ladder steps climbed by GDP  in real terms when the spikes of ladder are missing. We only hope that in the coming days we will get more realistic picture of the Japan economic growth.



Japan has another problem which might become a big threat to other Asian economies. We are always concerned about rising fiscal deficit of US and Europe but we never noticed the rising bubble just besides our next door. Gross public debt mushroomed during years of stimulus spending on expensive dams and roads, and this year it passed 187% of Japan’s economy.


Yes Japan has a fiscal deficit of 187% of its GDP. That debt could soon reach twice the size of the US$5 trillion (RM17 trillion) economy — by far the highest debt-to-GDP ratio in recent times— and the biggest, in real terms, the world has seen. Japan’s outstanding debt is as big as the economies of Britain, France and Germany combined.
·        For reducing this deficit Japan for the first time since the chaos of World War II, Japan will issue more  new government bonds than it will receive in tax receipts.

·        Japan will keep on selling more bonds this year and next to reduce the bubble of debt.

·        Japan got into such deep debt is a tale of reckless spending. The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, riddling Japan with highways, dams and state-of-the-art ports

·        They also provided like cash support for families with children and free high schools — could ultimately widen budget deficits at a time when tax revenue continues to plunge in the aftermath of the global financial crisis.
 Japan has also failed to build up its reserves. The yen made up 3.08 %of foreign currency reserves in mid-2009, down from 3.29% a year earlier and down from 6.4% in 1999. In mid-2009, the dollar accounted for almost 63% of global foreign reserves.
In the coming days we will get yen valuation just simply eroding. It is now hitting 14year high but in the coming days it will just have a cascading Journey.

 But we also find some hidden treasures within Japanese economy. Japan has made some radical changes in its economic policies which will boost its coming industrial days. We might get the burden of debt falling back and giving new shape to the economy to grow. When we dig into the invisible analysis we find that from 2001 to 2005 :
  • For U.S. companies, Japan is an attractive investment destination offering high investment yields. U.S. direct investments in Japan offer the highest yields among the country’s direct investments in major industrialized nations, exceeding the global average including developing countries.
  • Yields from direct investments in Japan are 1.5 to 2 times the yields from E.U. industrialized nations.
  • Direct investment yields of U.S. companies from Japan averaged 13% per annum from 2001 through 2005. This figure not only exceeds the global average of 10%, but it is also the highest among all G7 nation.
  • But among all these the twist in the story line is that Japan’s economic growth rate was not particularly high. On the contrary, it lagged behind other industrialized nations in most of the period. This made the return on Japan investment more lucrative.


  • The table below lists the U.S. direct investments in six major industrialized nations (G7 member nations other than the U.S.) as well as global average investment yields from the corresponding countries. To absorb yearly variations, five-year averages were used in the comparison. The shaded fields indicate the countries offering the highest yield in each applicable industry.
    Even in the recent times Japan again changed its polices to make its country further lucrative.


The below  image shows the the rate of US investments in Japan:


In early 2008, the Ministry of Economy, Trade and Industry (METI) proposed two measures to encourage foreign investment by reducing the potential Japanese tax burden on foreigners investing in private equity funds.
·        The first provides an exemption from local tax nexus (that is, treatment as a permanent establishment – PE) for foreign limited partners in certain kinds of Japanese limited partnerships (or “similar” foreign partnerships).
·        The second provides an exception for such partners from the partnership attribution.
All the above two measures were successfully incorporated into the 2009 tax reform, which was passed by the House of Representatives of the Diet on 27 February 2009 and became effective beginning 1 April 2009.
But the most important part to be accentuated is that how Japan will make benefits out of all these measures and investments. Else Japan will just remain an economy to make money and no real growth for the country. This will be cleared in the coming days of Japan economic movements.

 Japan is now in the mixed of its journey where it has to try hard more than US to come out of the dark woods of rising fiscal deficit. Since it erodes not only the reserves but makes the economy less competitive. Thats why other economies are taking advantage of Japan economy and making such high yield of returns on its economy.

BEFORE YOU CHOOSE AVENUES FOR TAX SAVING -SERIES II



In my last article I started with the advance planning stage for tax saving where one should to plan for tax saving starting from now so as to avoid eleventh hour preparation and most importantly Miss Selling. Since we often find that at the last moment preparation the few culprit Financial Agents or Advisors take the advantage of panic and does miss selling.
 In this second series I will discuss on the one out of the two most hot picked tax saving investment tools.
 Normally there is a thumb rule which one should follow for tax saving is that what ever is ones    age, he should go for equity investment according to that age limit. It might sound confusing don’t worry I am removing the confusion. If my age is 25 years then according to the financial thumb rule I should have an investment portfolio of 25% in debt and remaining 75% in equity. This is calculated by simply deducting your age from a value of 100. If my age is 45 then I should have an equity portfolio of 65% in equity and 45% in debt.

  • This thumb rule is equally important for doing investment in Tax Saving too. Since in many case we find that all the investments in tax saving now a days is being parked in equity where ones exposure is often more than 100%.
  • Its true that equity investments fetches much higher returns as compared to other investment avenues. But just remember what happened to your tax saving funds when the Indian equity markets went for a rock bottom decline. We find that all the NAV of the major tax saving funds having exposure in equity went for a cascading fall in their NAV values.
  • Mark there is another thumb rule which needs to be abide that is always make calculation for negative returns too which will help you to calculate the amount of risk one can take. This is very much important at times when the market enters for a prolonged Bear market phase.
  • Now many of friends will say that equity investment is for long term. Since we all ways gain in log term equity investments. True. I agree will all of you but tell me one situation where one is having all his eggs  in one basket.
  • So before doing any investment in tax saving instrument please calculate your current tax saving investment portfolios.
  • One should plan in this way that apart from doing investment in equity one should also try the other avenues available under section 80C for tax saving.
ELSS is one of the most picked investment tool for tax saving among all other tax saving avenues. ELSS stand for Equity Linked Saving Scheme. It is an mutual fund where all the pool of funds is invested in equity market with a ratio varying from 0-80% and remaining 20% in Debt fund.
 This year doing investment in ELSS will fetch more advantage. As SEBI have scrapped Entry Load on Mutual Funds, all these tax saving ELSS are now free of entry load. This makes your investment corpus to get invested without any deduction of charges as earlier their used to be a deduction of 2.25%. So if one does an investment of Rs.10000 his total investment will be Rs.10000.Where as in earlier case there is used to be a deduction of 2.25% which amounted to your investment of Rs.9775.This makes the ELSS more attractive this time for doing investment in tax saving.
Few Things one should look in to before doing investment in ELSS.
·        Make a detailed calculation of your current status of your tax saving investment portfolio.
·        Before investing in any ELSS look out for the negative returns the fund have generated before looking into the positive returns. This will help you to judge the fund performance in negative times. Since in every bull market even the worst funds works superbly. To judge the performance look for Sortino ratio of the ELSS.
·        The Sortino ratio classifies risk in terms of upside and downside risk. It arrives at a minimum acceptable return (MAR) for an investor. Whenever the fund return is less than the MAR, it adds the underperformances, but does not add out performances. This is a better measure of risk than volatility
·        Don’t get lured by the Dividend promotion campaign of ELSS. We have often found that during tax saving months that is from January to March many fund houses comes out with dividend module.
·        One must know that after dividend declaration the NAV of the fund drops down.
·        When a fund pays 40% dividend, for instance, its net asset value drops from Rs10 to Rs6. So investors get back part of the principal amount invested in the form of dividend, with no value addition by the fund house.
·        So avoid this type of traps. Since your investment will get locked for 3 years. So if the fund performance is not too good during downward trends of the market, the fund might not be able to scale back and provide you some return at the end of the third year in case the equity market remains bearish for 3 years.
  One more thing I would like to inform all my tax saving friends that this time you’re Financial Agent or Advisor might not suggest you to do investment in ELSS. Since as entry load have been scrapped by SEBI the agents will not get any commission out of the ELSS. So you might find some new marketing strategies by your advisor pushing you hard to do investment in insurance or some other product which carries some commission.
 So in this situation all you need to do is to do an advance planning for tax saving. That’s the main reason why I have started asking you before 4 months to do your tax saving investment calculation.
Don’t do last moment preparation and don’t cry later on that I have been miss sold .Miss selling never happens in one way. Both the parties the client and the advisor is involved.
In my next article I will bring out the hard ugly pictures of Tax Saving mistakes and their solution to avoid.

Tuesday, November 24, 2009

INDIAN BANKING MAKES US JEALOUS.



After 31st March 2010 Indian banks will have to adhere to the Basel II norms. India had adopted Basel I guidelines in 1999. later on in February 2005 gain , the RBI had issued draft guidelines for implementing a New Capital Adequacy Framework, in line with Basel II.
The deadline for implementing Basel II, originally set for March 31, 2007, has now been extended. Foreign banks in India and Indian banks operating abroad will have to adhere to the guidelines by March 31, 2009.
So let us dig what is this Basel II al about and how it will affect the Indian Banking sector.

What is Basel II ?
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face.
Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline – to promote greater stability in the financial system.


Lest digg out how all the three above pillars will bring changes in the Indian banking segment.
The first concept deals with minimum capital requirements.
This is one of the most important and prime tool which makes our Indian Banking Sector jealous.
 Banks have to keep aside 9 % capital against various risks. The risk consist of interest rate risk in the banking book, foreign exchange risk, liquidity risk, business cycle risk, reputation risk, strategic risk. This rate is expected to increase after much talked about Basel II norms come into place. So all the above risk will make the Indian banking sector more secured and more stable just like the one during the US financial crisis.
 In other words it can be described as the minimum amount of capital a Bank should maintain to cover its various business risks. This might affect the credit growth of banks since in first place Indian Banks are basically born skeptical which also acts as a boon in times of crisis. Banks will have to increase their margins for providing loans and moreover may reduce the rate of percentage of sanctions they make in usual conditions.
 Now a question might come up in the mind that what will be the affect on loans-this will be answered after 31st March 2010 when Basell II comes in to play.

The second pillar of Basell II is supervisory review.
 Banks have been given the power by which they will not only maintain the minimum capital requirements but will also be able to have a process by which they can assess their capital adequacy themselves. This process, and its assessment by the supervisory authority, is central to the second pillar of the Basel II Accord.
 This also ensures that banks will be able to make arrangements to ensure that they hold enough capital to cover all their risks. The prime responsibility will lie on the indvidual banks to compile with the norms.
 This review process will provide benefits when another financial crisis will hit in the future. We should not forget that when the US banks were getting sold out the Indian Banking segments stood still as if nothing has happened. That’s why we can go off to sleep when our prime wealth is being safely preserved in the Indian banks. It works in this frame work shown below.

The last but the most important one of Basel II is market discipline.
The recent financial crisis in US and the bailouts of the Century old Banks have raised the voice of market discipline. This is one of the most important pillar of any financial process.
Market Discipline in banking and financial sector is highly required in coming days as more globalization will expand. Market discipline as per Basel II focuses on:
 To achieve increased transparency through expanded disclosure requirements for banks.
 This will make sure that the banks are well positioned to handle the complex business process.
 This will bring transparency in the process followed with adequate updating to the banking regulators on the involved process of the various banks in dealing complex products.
So over all it can be concluded that with the advent of Basel II, banks with a risk appetite, i.e. high risk - high return lending strategy or lending without proper appraisal merely to generate additional business will find the going tough. We believe that such business models, which take disproportionately high risks, will not survive. The business models, which should survive, will be where risks are within acceptance levels for the banks backed by adequate returns.
After implementing Bsel II  our Indian Banking will feel more jealous.

CHINA'S FINANCIAL REFORM IN 2010


When the Obama administration is launching a broad push for action on financial regulatory reform China is making a big leap towards changing its financial structure of its economy. They have planned to bring new reforms which will crown their financial market to new heights.
In other words it can be termed that when the West is struggling to develop strategies to curb and impose restriction on its financial market China have decided to make most of the opportunity of the Closed Doors of US financial system.

China has decided to bring the following changes in the financial market in 2010 are:
 Launching an International Board on the Shanghai Stock Exchange (SSE) and expanding a platform to facilitate the trading of complex derivatives, including ETF products.

 This platform will increase the huge cheap money that constantly flows from other economies to Emerging Economies. This platform of China will attract more opportunities where return on investments will be high.

 The Exchange Trade funds will be the most lucrative for generating return as till now in 2009 US have injected 26 billion into emerging-markets funds so far this year. Of that, $15 billion came in through exchange-traded funds. So China will be the next hot destination for pulling of large funds.

 The launch of the derivatives platform will also enable the launch of futures products based on exchange rates, interest rates, stocks and bonds in coming years. This will give boost to the opportunity that will take birth in 2010 out of the rising inflation. This rising inflation will make interest rates swap to play a vital role and China has taken the first step to reap the profit out of it. Also once the interest rates increases bonds derivatives will play a huge profit making opportunity.

 The biggest reason behind all these reforms is China's financial system is already flooded with cash from a record $1.27 trillion in new lending this year, the trade surplus, foreign direct investment, and inflows of speculative capital, or so-called hot money, adding to the risk of bubbles in stocks and property.

 These new reform will pull out the funds from these economic sensitive sectors to the financial market sector.
But the most important twist of the reform that will be keenly watched that is how the Chinese governments will handle such a huge amount of liquidity once it comes to financial sector.
The modernization of China's financial sector and development of efficient capital markets will help China realize its goals of achieving long-term, sustainable, and balanced development. These reforms will make China to attract more liquidity.
If the Chinese bubble burst from all corners then Asian economies particularly the Emerging Asian Economies will be the most severely affected.
At the same time it can be said that the in the future the next threat of financial crisis will come from China. And even if it happens then it will simply eliminate the Asian economies particularly the emerging economies of Asia.

Monday, November 23, 2009

TAX SAVING HABIT--A CHANGE IS REQUIRED


We are just running 4 months short of the night mare of filling our slip of tax savings. These 3 months are the key months for an agent as well as for an investor to play both sides of the game. In the next following lines I will explain how both the sides of the games are being played.
We have got bored with hearing the word of miss selling But when it happens we found our selves in the mid of an ocean scouting for an island.
Agents take the advantage of the last minute preparation habit of investors and en-cash the opportunities of miss selling financial tax saving products.
All we need to do is to bring some changes in our habits and do the tax planning for the financial year 2009-10 in advance. Moreover before one decides for tax saving one should look into the all the list of probable deductions under which one gets benefits of tax saving.
As for my readers I am once again giving the list of all the deductions available under section 80/c.

Specified Investment Schemes u/s 80C

• Life insurance premium payments

• Contributions to Employees Provident Fund/GPF

• Public Provident Fund (maximum Rs 70,000 in a year)

• National Saving Certificates. [NSC]

• Unit Linked Insurance Plan (ULIP)

• Repayment of Housing Loan (Principal)

• Equity Linked Savings Scheme (ELSS)

• Tuition Fees including admission fees or college fees paid for Full-time education of any two children of the assessee (Any Development fees or donation or payment of similar nature shall not be eligible for deduction).

• Infrastructure Bonds issued by Institutions/ Banks such as IDBI, ICICI, REC, PFC etc.

• Interest accrued in respect of NSC VIII issue.
Additional Tax Advantages where one can reap the benefits of these also are as follows:

Deduction under section 80 CCC(1)

This section allows a deduction of up to Rs. 10,000 to an individual in respect of contribution to ‘Pension’ scheme of LIC of India or any other Insurance Co.

Tax saving Pension plans available in market are LIC’s Jeevan Suraksha, ICICI Pru Life Time Pension, Bajaj Allianz, Aviva Life Pension Plus, Max Easy Life policy, Tata AIG’s Nirvana Plus etc.

Section 80 CCE

Aggregate deduction u/s 80 C, u/s 80 CCC and 80 CCD can not exceed Rs. 1,00,000. ( One Lac)

Deduction under section 80D.

Under This section, a deduction up to Rs 10,000 (Rs 15,000 in case of senior citizens) is allowed in respect of premium paid by cheque towards health insurance policy, like “Mediclaim”. Such premium can be paid towards health insurance of spouse, dependent parents as well as dependent children.

Deduction under section 24(b)

Under this section, Interest on borrowed capital for the purpose of house purchase or construction is deductible from taxable income up to Rs.1,50,000 with some conditions to be fulfilled.
Often in our busy and hectic schedule we forget that some times we are fully secured in doing investments under the various avenues under section 80c.
This is one prime area where agents take the advantage of unawareness and last time preparation.

• I request all my readers to calculate that is the limit of Rs.1lakh is filled or not. If you have done tax saving to the tune of Rs.1lakh then one should not go for additional tax saving.

• Since the major reason is that all your tax saving investments will have a minimum lock in period of 3years.

• So rather than investing additional in 80c beyond the limit it would be wise and prudent to go for investment in some other financial product other than 80c.

• In the market we find mainly two type of tax saving schemes sold like hot cake.

So before you give a call to your I Advisor who will sell his product to you make a calculation of the specified conditions.
I will discuss about them in my 2nd series of Tax Saving.

CHEAP MONEY DEBT


Last week the federal head declared that interest rates will remain zero for a longer time and there are least chances of any hike in the coming few quarters. Speculators and world stock market jumped and rejoiced this declaration as good as ‘Celebration of Christmas’.
Cheap money supply will remain for some more time giving more opportunity to invest in emerging market and increase the assets prices. But among all these we forgot to accentuate that US fiscal deficit is rising which is not a burden for US economy but will be shared equally among other economies. Now a thought line will emerge among my readers that how that happens to affect.

If we look at the past journey of the US fiscal position we find that:
• In the last year of the Bill Clinton Presidency, America reported a fiscal surplus of $236 billion.
• Trade deficit in 2000 was already a high $380 billion
• In the year 2008, it became miracle by transforming the $236 billion surplus to a deficit of $410 billion.
• By 2007, it had ballooned to $700 billion.
A real miracle happened in the fiscal deficit. Moreover we also find the US consumers were running the life on the wheels of borrowed money. American households splurged $110 billion of borrowed money where most of the debt coming through the sub-prime route.
The below chart shows the rsisng US debt.

Consumer house holding was next to negligible. If we make a quick look at the US consumer savings we find:
• In 1950, when the Post-War boom began, savings as a percentage of disposable income in American households was a respectable 8% or so.
• The savings percentage rose to almost 12% by 1980.
• By 2004 savings rate had plunged to 0%.
• By 2007, it was nearing -2%.
Savings were not in the dictionary of the US consumers. This also resulted to high borrowings and finally the Sub prime crisis won the match.
What we find in the future is that US will face hard times to generate revenue for itself.
• At present US will have a $1.75 trillion deficit this year. The figure represents 12.3% of estimated gross domestic product, double the previous post-war record of 6% in 1983, and the highest level since the deficit totaled 21.5 percent of GDP in 1945, at the end of World War II.
• The stimulus along with Zero interest rates will spook higher the fiscal deficit. We are enjoy the Cheap Money at the cost of the GDP.
• The fed might be able to bring smile on the faces of investors for the time being but will not last much. It might have to go much faster to hike its interest rates. Since as long the interest rates remain zero the fiscal deficit will climb to 15% of GDP in the year 2010.
• In order to reduce the fiscal deficit the US government has to impose taxes on corporate and individuals. This might not be prune decision keeping the weak business confidence.
• Total government debt will move well above the G20 average. In a few years the AAA rating of Treasury bonds of US could be in jeopardy.
• When unemployment is hanging around 10.2% then imposing taxes on corporate along with individuals will be not being advantageous for US economy.
• Even if the US plans to cut on spending that will result to no new job creation which will bring higher numbers of unemployment.
• Hence taxation is not the way of capping the rising fiscal deficit. At the same time savings of households are running at negative zone in the current phase along with an rising unemployment of above 10.2%
So speculators and world stock markets are playing their game but not for a longer time and will have to face something more than a night mare.
The real journey of the world stock market begins once the interest rates get rising. As US fed is behaving in a cool way  to the world economy but in real terms its is sitting on a active volcano of rising debts followed, with no corporate growth with less investments in capital extensive sectors.
Spending of stimulus and zero interest rates are happening but not much for the desired purpose.
Every one is busy in making money at the cost of cheap money.

Saturday, November 21, 2009

I HAVE CHEAP MONEY-WHAT TO DO WITH IT?


Zero interest rates of US and low interest rates of other countries made cheap money to flow like water coming out of a fountain. The money flowed into the equities of emerging markets where in 2008 and beginning of 2009 all the emerging markets was valued at dirt cheap levels. This gave an opportunity to the cheap money to generate abnormal return from investing in emerging markets.
U.S. investors have pumped roughly $26 billion into emerging-markets funds so far this year. Of that, $15 billion came in through exchange-traded funds -- portfolios that hold every stock in a market benchmark with utterly no regard to price.
If we take the case of India we find that equity market recovered 90% from the lower levels of November 2008.
The same story is applicable for all the other BRIC nations’ stock market where a similar turnaround has happened. Several markets, such as Brazil and Peru, are up roughly 100% in 2009.These assets have suddenly soared to illogical growth resulted to another valuation bubble. We find that fundamentals don’t match with the assets price movement. In the past couple of months we failed to predict the BRIC nation’s equity markets and the reason behind such a failure is that cheap money flow.

The most fearful nightmare that is chasing the emerging market financial system is that once the US along with other nations hikes their interest rates the Cheap will no longer be available resulting pull back of the funds form the assets of emerging countries. This will result to a sudden cascading effect on the stock market. The gainers of this effect will be the cheap money and the losers will be those stock markets on whose cost the gains have been made.
Recently few of the economies have understood the cheap money theory and asset bubble which made them to change their policies to change the flow of cheap money.Brazil and China reacted to change the direction of cheap money.

WHY AND WHAT MADE TAIWAN TO LEASH THE EASY MONEY FLOW.
 Overseas funds bought $13.4 billion more Taiwan shares than they sold this year, helping lift the Taiex stock index 69% and the Taiwan dollar 1.7%.

 Brisk foreign fund inflows over the past month or so have pushed the Taiwan dollar to one-year highs this week.
 Improving relations with China and a pending agreement to expand cross-border investment is also attracting capital from abroad.
 Taiwan estimates $11 billion in speculative hot money that has flooded into the island will fall in the near future, as Asia central banks increasingly worry about brisk fund inflows into their local asset markets.
 The central bank bought the greenback to slow the local currency's gains on Nov. 17 after the island's dollar rose to the highest level in more than a month.
Stronger currencies could also crimp exports of emerging countries by making their goods less competitive, hindering economic recoveries.
Taiwan's exports fell for a 14th straight month in October, sliding 4.7% from a year earlier. So falling dollar have created a huge loss for the export countries and more gain for the players of cheap money
Brazil also followed a similar story which forced the economy to change the policies toward cheap money flow.
WHEN WE CAN EXPECT THE PULL BACK OF CHEAP MONEY.

 The US Federal Reserve’s insistence on near-zero interest rates has prompted investors to borrow cheaply in dollars to finance options on risky but high-yielding assets. That has created an enormous bubble.

 If the bubble goes off to burst out dollar will go simply go for reverse play.

 If the US economy enters a double-dip recession, or if it outperforms expectations prompting the Fed to raise interest rates sooner than anticipated, investors will close their short dollar positions and head for the safety of US Treasury bills, just as they did late last year.

 Even the World Bank last week warned that inflationary pressure could force central banks throughout Asia to tighten monetary policy, specifically citing equity and real estate prices in China, Singapore and Hong Kong as unsustainably high.
Now, with enormous reserves of liquidity chasing a small number of available assets, Asian central bankers are faced with a choice:

 allow their currencies to appreciate at the expense of exporters,

 Intervene regularly in foreign exchange markets to keep currency rates as they are.

So in the coming days we will find many economies to change their policies to reduce the flow of cheap money into their markets.
A similar planning is happening at India too but it will not go for such a decision at present to curb the flow of cheap money. It will wait for much longer time to see the actions of other economies on cheap money.

So India will have some time still left to enjoy the cheap money. But when interest rates will increase in the coming days by other economies, just imagine Indian market at that point of time. Assets will make a cascading journey, ruining the retail investor’s hard earned money by a sudden shock.
Taiwan and Brazil changed their policies to curb cheap money in order not to get their retail investors hard earned money ruined by a sudden shock.

In my next article I will bring forward the Indian story of cheap money.

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