Category: Views

Don’t witch-hunt the RBI

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The questioning on the Nirav Modi issue has now reached a few current and one former Reserve Bank of India (RBI) deputy governor.

At the outset, one needs to distinguish between the Nirav Modi issue and the 80:20 gold scheme.

Nirav Modi, in cahoots with a couple of employees of Punjab National Bank’s (PNB) Brady House branch, took large amounts of loans without margins; loans which, it now appears, he could repay only by taking more loans.

His uncle, Mehul Choksi, appears to have benefited by changing a decimal point in one of his loans, and making off with a much larger loan than was sanctioned.

Nirav Modi is not at all connected to the 80:20 scheme. Mehul Choksi’s Gitanjali Gems was one of the Star Trading Houses (STH) that got a licence to import gold in May 2014, when gold was scarce in the country.

However, it is now well documented that of the 14 STHs, Gitanjali imported the least, and hence probably benefitted the least.

The questioning of the current and former officials of the RBI is hence in connection with the 80:20 scheme.

The question marks over this scheme emanate from both the timing of the relaxation and the Comptroller and Auditor General’s (CAG) remark that the STHs benefitted by Rs 4,500 crore because of the policy.

What the Central Bureau of Investigation (CBI) and other investigating agencies need to note, is that policies intended for general benefit often tend to help some more than others.

A policy to build, say the golden quadrilateral, pushes up prices of land in areas through which the road runs.

But the policy was not intended to benefit those owning the land. It was meant for the entire nation. One ought to see the 80:20 policy in this light.

When the taper talk hit the Indian rupee in July 2013 along with the other four “fragile” currencies, RBI’s and the government’s effort was to control imports and increase the flow of dollars into the country.

The FCNR (B) scheme was designed to attract Non-resident Indians (NRI) into depositing more dollars in Indian banks, with the RBI agreeing to bear the swap cost.

A number of NRIs made money hand-over-fist by leveraging nearly 20 times to benefit from the FCNR scheme. India got over $25 billion due to this scheme.

When the time came for the deposits to mature (in October-November 2016) the dollar had become cheaper, so the RBI didn’t lose any money buying back the dollars and repaying the NRIs.

But that’s beside the point. In the pursuit of more dollar inflows, so that the rupee didn’t look fragile, the government and the RBI started a scheme that enriched some NRIs hugely.

Does this mean RBI and the government were in cahoots with some handpicked individuals? No. The scheme was a policy decision to get more dollars.

The 80:20 scheme needs to be seen in the same light. The government banned gold imports because it was a large import item, and was unimportant enough for the country to do without for some time.

Both the government and the RBI were aware that anything rationed would benefit those who could lay hands on any amount of gold.

Yes, the STHs made money when they were allowed to import from May 2014, but one needs to note that from June 2013 to May 2014, a lot of jewellers made tonnes of money on gold imported by the banks.

This was how the scheme was designed: only four banks and two government trading companies MMTC and STC were allowed to import gold.

Jewellers who had a record of imports and exports until May 2013, were sold this gold at the landed price on promise they would use 20% to export jewellery.

They had the licence to sell the remaining 80% in the domestic market which earned them a massive premium.

If the CAG’s office tries to find out how many jewellers benefitted before the policy was liberalized, they will find that a clutch of jewellers made even more money than the Rs 4,500 crore the STHs did after May 2014. But that’s how rationing works.

In war time, nations ban a bunch of unnecessary imports, or impose price controls.

Black markets flourish and those who have the goods make money, nevertheless during wars, governments continue to impose rationing.

In all these cases, one assumes the larger good that is served by controlling prices or imports is more than the evil of some people making money.

Likewise in 2013, the extra bucks made by some FCNR 9B depositors and some jewellers was considered a price the nation had to pay to control the exchange rate from a free fall.

It may be recalled, at that time the United Progressive Alliance (UPA) government also decided to raise the price of petrol and diesel by 50 paise every month.

This was politically suicidal for the UPA because raising prices on the eve of an election would have hurt the ruling party.

But, the government went ahead and raised prices so that at higher prices, fuel consumption would fall and the country’s trade deficit would correct.

This act of the UPA government of raising fuel prices even on the eve of an election to serve a larger good is an act of statesmanship.

Short point, in the face of a massive current account deficit and a run on the rupee, many actions were taken by the government and the RBI to re-balance the deficit.

Some policies benefitted some persons. But witch hunting RBI officials of all people, is unfair and even dangerous.

Next time the country’s currency is in danger, RBI officials, who so far have been in the forefront of the fire fighting, may simply want to watch their own back sides instead of serving the country.

This column had pleaded in the past, and pleads again; controlling the exchange rate is a delicate task. Questioning RBI’s motives on hindsight can be a costly blunder.

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Why Sebi barred foreign portfolio investors from executing non-disposal undertakings

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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On March 14, 2018, capital markets regulator Securities and Exchange Board of India (Sebi) issued an informal guidance to UBS AG, a Sebi-registered foreign portfolio investor (FPI), clarifying the position on whether non-disposal undertakings (NDUs) constitute an ‘encumbrance’ under the Sebi (Foreign Portfolio Investors) Regulations, 2014, or FPI Regulations.

Regulation 32(2)(d) of the FPI Regulations imposes an obligation on the designated depository participant engaged by an FPI to ensure that equity shares held by an FPI are free from all encumbrances.  Therefore, as FPIs are not permitted to pledge shares, they execute NDUs to avail finance. An NDU is an agreement between a shareholder and a third party, usually executed in relation to any credit facility availed by the shareholder, wherein the shareholder undertakes to not dispose the shares during the existence of the agreement.

Safeguard for Creditors

An NDU assures the creditor that the debtor will not transfer the shares held by it by way of outside arrangements and leave the creditor without access to the assets of the debtor. Pursuant to executing an NDU, the shares are transferred to an escrow demat account but the beneficial interest in over the shares will remain with the debtor. The creditor will not be able to dispose off the shares to clear dues, like in the case of a pledge.

In the present matter, the applicant issued NDUs to avail finance or to enter into certain commercial contracts. However, it was unclear if issuing NDUs will amount to the creation of encumbrances as the FPI Regulations do not define the term encumbrance.

The Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST Regulations) lay down an inclusive definition of encumbrance. It is defined as to include a pledge, a lien or any such transaction, by whatever name called.

With respect to NDUs, it is clarified in the FAQs to the SAST Regulations that NDUs executed by promoters will be covered within the scope of encumbrance for the purpose of disclosure obligations. However, the applicant is not a promoter of any listed company.

Finally Some Clarity!

In light of the above, the applicant requested guidance as to whether the term encumbrance in the FPI Regulations would include NDUs executed by FPIs who are merely investors/acquirers and not promoters. The applicant also sought to know if FPIs are restricted from providing a limited undertaking to not transfer, dispose of, or create any encumbrances over the equity shares held by them without creating any rights in favour of the third party.

Sebi took a view that the term encumbrance used in Regulation 32(2)(d) of the FPI Regulations would include NDUs. Therefore, FPIs are restricted from executing NDUs and create an encumbrance over equity shares held by them in listed companies in India.

Currently, the FPIs are circumventing the FPI Regulations by executing NDUs to avail credit facilities as there is uncertainty on whether NDUs create encumbrances. By clarifying the position on NDUs, this informal guidance has provided much-needed clarity to the FPIs and the designated depository participants on the correct position of law.

Sandeep Parekh, is the managing partner of Finsec Law Advisors and Raghu Meka is an associate at Finsec Law. Views are personal.

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Revival in earnings is critical for rich valuations to sustain

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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After rising through most parts of 2017 and up until January 2018, global equity markets have turned jittery. Markets had become exceptionally calm but volatility is now back. A variety of crosscurrents is symptomatic with continued volatility going ahead. While fundamentals continue to support equities, the 2017 goldilocks situation of strong growth, but contained inflation is ebbing.

Growth in key economies is upping their long-term trend. Unemployment is at a multi-year low in developed world. Latest Purchasing Managers Index (PMI) and order inflows suggest continued expansion in business cycle and supports the earnings trajectory. Tax reforms and fiscal stimulus in the US point at further room to run, and consequently draws a line underneath the current equity market tailspin.

But any more good news on growth would imply faster monetary tightening. Concerns lurk over accelerating wage growth implying a tightening labour market, and capacity utilisation coming back. These, in turn, point to a build-up in the inflationary pressures, and possibility of more aggressive rate hikes.

Structurally, rising rates are good for equity market given that it reflects higher growth and restoration of pricing power to the corporates. But in a unique mix of events in last couple of years, global equity rally was also supported by easy liquidity (QE). US equities have benefited from aggressive buy-backs, at times funded by cheaper debt. Tighter monetary policy should lead to higher volatility and act as a headwind for valuations.

While remaining enthusiastic about the synchronised global economic growth, we also caution against the risk-loving behaviour and pressure on resources associated with it. As a result, subsequent economic and financial adjustments can be more aggressive and come sooner than expected.

US has imposed higher import tariffs on solar panels, washing machines, steel and aluminium. It’s not sure yet that it stops here or this is the opening salvo of a broader trade war. Other countries may retaliate. While the reduction in corporate tax is growth positive, the retaliatory import duties from other economies may adversely impact overall trade and growth.

India’s equity markets participated in the global rally, but the economy hasn’t participated fully in the global growth momentum. In line with the weak growth, earnings belied market expectations, yet again. FY18 is likely to see seventh straight year of earnings downgrades.

That said, after hitting the lows on the back of demonetisation and GST-related disruption, there has been a mild recovery in GDP growth. Interestingly, as opposed to the trend of last three years, investment seems to be driving the growth while consumption growth is moderating.

Order inflow for capital goods and infrastructure companies (particularly roads) has shown strong growth. Steel, Cement and auto-ancillaries depict improved capacity utilisation. These sectors can drive growth in private investment. However, low capacity utilisation in sectors with high capital requirement (power, textiles) could limit the pace of recovery. India needs an aggressive infrastructure push from the government. But this will be contingent on the tax-collection buoyancy.

The National Company Law Tribunal (NCLT) portrays serious commitment to resolve the non performing asset (NPA) cases. RBI guidelines are also suggestive of recognising the pains rather than stretching it any further. Along with the recent events, there could be negative repercussions on the corporate credit growth in the near term. A host of PSU banks are on the brink of being put under the RBI’s prompt corrective action (PCA) plan. This may force them to recall the AT-1 bonds and partially negate the impact of recapitalisation efforts. I believe, the recent reform measures and learning from the current NPA cycle will ultimately lead to a structural improvement in corporate lending space.

We would be keenly watching if India is finally able to participate in global growth recovery. Some of the large export sectors such as textiles, Gems & jewelleries, pharmaceuticals and IT services haven’t done as well due to industry specific challenges. From a broader perspective, India hasn’t invested enough in innovations and R&D, which requires considerable attention by the policymakers and industry.

Rising bond yields may have an impact on domestic equity flows while global liquidity tightening could challenge the Foreign institutional investors (FII) investment. To that extent, revival in earnings is critical for such rich valuations to sustain. After the stellar performance in 2018, particularly in the mid and small caps segment, it is very important to keep an eye on valuations. With little scope of valuation re-rating, bulk of the returns are likely to be guided by earnings growth. We continue to focus on bottom up stock picking, which we believe is the best way to generate alpha.

Navneet Munot, Chief Information Officer – SBI Funds Management Private Limited. View are personal.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Indian market—Thy name is uncertainty

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Indian equity market faces a lot of uncertainty in 2018 related to macro, earnings and politics. This makes it very hard to take a concrete view on the market over the next few months. We expect a moderate 8-10% upside for the market in 2018, in case the key macro variables were to turn favourable over the next few months and earnings were to meet with the Street’s high expectations.

The Indian market at 17.3X FY19 earnings has limited scope for re-rating in the context of rising global bond yields and domestic macro and political uncertainties and the market’s current high valuations (despite the recent moderate correction) do not fully capture the deterioration in the macro over the past six months.

It is also possible that the macro factors worsen further, which will weigh on market multiples resulting in low to negative returns for 2018. The bond market seems suitably concerned about the weak macro, as can be seen in the sharp increase (about 125 bps based on 10-year G-Sec yields) in bond yields over the past six months. Earnings yields have barely budged over the same period. The equity market perhaps expects; (1) an improvement in the macro-economic conditions after the deterioration over the past six months, (2) strong 20% increase in FY19 earnings for the market and (3) favourable outcomes of state and general elections over the next Nine to 15 months.

The macro-economic variables are simply too uncertain—things could improve or worsen from current levels. The Indian market will have to contend with three big macro-economic variables over the next few months — GST revenues, inflation and crude oil prices.

If GST revenues fail to pick up over the next few months to match the government’s overall target of Rs 1.1-1.15 trillion per month for FY19, the bond market concerns about fiscal slippages and government borrowing for FY19 may increase leading to higher bond yields. However, if GST revenues pick up meaningfully, then bond yields may cool off. Current monthly GST revenues at Rs 860-900 billion are meaningfully lower than the required monthly run rate for FY19.

If inflation was to surprise negatively (higher than expectations) as a result of weak monsoon and steep increases in kharif MSPs, the RBI may be forced to raise rates, which would be a big negative surprise for the market. We (and the Street) expect inflation to taper down in second half of 2018, which would obviate the need for rate increases by the RBI.

If crude oil prices move up to $70/barrel (or higher), we would see further pressure on current account deficit  (CAD)/BoP and the rupee. We expect India’s FY19 CAD to be around $75 billion at $70/barrel crude oil price, which will exceed Foreign Direct Investment (FDI) inflows and bank deposits (around $50 billion per annum typically) meaningfully leaving the BoP exposed to volatile debt and equity FPI flows. However, if crude prices cool off to $60/barrel, CAD/BoP will be more manageable with CAD at around $60 billion.

Earnings uncertainty has increased over the past few weeks following the recent negative developments in the banking system and global trade. We currently expect net profits of the market (Nifty-50 Index) to grow 25% in FY19. However, we see downside risks to our earnings forecasts for banks and metals and mining sectors in case; (1) loan-loss provisions will remain high through FY19 for banks due to further slippages and increase in non-performing assets (NPAs) and (2) global commodity prices will decline as a result of restrictive trade practices by the major economies. We note that banks account for about 45% of incremental profits of the Nifty-50 Index for FY19 and the metals and mining sector another 12%. The next few weeks will provide more clarity on the earnings of banks for FY19.

If the PNB scam turns out to be an isolated incident and there are no fresh untoward incidents, we could see restoration of normal operations in the banking system over the next few weeks. Also, the favourable resolution of ongoing National Company Law Tribunal 1 (NCLT) cases over the next three to six weeks could restore confidence of investors, leading to a re-rating in the multiples of the private ‘corporate’ banks and even PSU banks.

However, any fresh reports of malfeasance in banks could result in further government action against banks, which could affect lending and the fledging economic recovery.

Lastly, the Indian market will have to contend with uncertain politics by the end of this year as the three BJP-ruled states of Chhattisgarh, Madhya Pradesh and Rajasthan going for elections.

It is possible that even the general elections may be advanced to end of 2018/early 2019, which could provide another source of uncertainty to the market over the next few months, as the market will start focusing on the outcome of the general elections three to four months before the elections.

It remains to be seen whether the BJP can repeat its performance of  the 2014 general elections when it won 159 of the 171 seats in Chhattisgarh, Gujarat, Madhya Pradesh, Rajasthan and Uttar Pradesh. These states contributed significantly to the party’s majority in Lok Sabha.

Sanjeev Prasad, Institutional Equities, Kotak Securities Limited. Views are personal

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Steer through volatility with Asset Allocation

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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As we forayed into 2018, Indian markets were scaling all-time high with the BSE Sensex breaching 36,400 levels. This unidirectional Bull Run led a majority of retail investors to believe that equities are a zero-risk asset class.

Suddenly, we saw flows to the tune of Rs 21,069 crore in January into Equity and Balanced Mutual Funds. While it was a good sign that investors took to equity investing, helping financialisation of household savings, it was worrying since it could also mean that investors had forgotten the meaning of the word ‘risk.’

Such that, investors started questioning the returns from debt as an asset class. Some thought equity markets had the potential to deliver sizeable gains in a month equivalent to what debt markets could provide in a year.

However, with nervousness emanating from both global as well as domestic factors, market sentiments turned. Recently, Sensex plunged over 3,000 points from its record high of 36,443 hit on January 29, 2018.

The recent fall in the market has been due to the fall in the global factor that has been gripped by news of the Trump-led administration all set to impose import duties for steel and aluminium. Another reason for the fall is due to the rise in bond yields in the US. With the US Fed increasing interest rates, there has been a flight to safety from global market, including emerging markets to the US. The global risk aversion has weighed heavy on the Indian market that had already discounted the positive news from higher Q3 GDP numbers for FY18 as well as the recent state election results.

With equity markets amidst volatile times, novice equity investors who were only witnessing the uptrend saw equities for what it really is.  Equities tend to be volatile in the short-term and investors are now taking cognisance of this risk.  This is a positive sign because such investors are likely to be more careful and think about investing in other asset classes as opposed to just equity markets.

In our view, the Indian market is expected to remain volatile. The run up in the market was on expectation of improved earnings growth, which still hasn’t picked-up. We expect earnings growth to catch up in the coming 12 to 18 months. While there may be tailwinds such as steady crude oil prices, supporting the Indian market, ultimately it’s the corporate earnings that needs to fire which would drive the Indian equity market higher. Until then the Indian equity market will take a cue from the global markets. In such a scenario, Indian market will continue to remain volatile.

By volatility we do not say markets are going to see a sharp correction, it will remain sideways. We expect earnings to catch up, which will be positive for the markets. However, the headwinds for the markets are the rise in US interest rates. Even if the corporate performance improves, any parallel rise in interest rates will not see any meaningful gains in the market.

In our view, both fixed income and equity markets will remain volatile. Volatility is a normal part of investing so investors shouldn’t be surprised. The way for investors to weather this kind of environment is to just focus on asset allocation.

Asset Allocation is the key

It is important to realise that Equity is not a zero-risk asset class, but certainly rewards patience and disciplined investing. Also, volatility, an integral part of financial markets, is a healthy phenomenon.

While equities may deliver reasonable returns, one must also downsize the returns expectations for medium-term, considering that market valuations are already expensive.

When any asset class is meaningfully undervalued, only then you can choose to invest most of your portfolio in it. If equity becomes a dirt-cheap asset class like 2008 or 2013, then it could have been wise to invest just in equities.

In the current scenario, we are not asking investors to avoid equities completely. On the contrary, retail investors should focus on Asset Allocation, i.e., invest in both equity and debt, or in MF categories such as Dynamic Asset Allocation / Balanced Advantage Funds. Such funds invest in equities when markets are declining, and book profits from equities when markets are rising i.e. ‘Buy Low & Sell High’.

Add debt to your portfolio

We also recommend investing in debt, mainly through the low-duration Credit Funds.  In such funds, the duration risk is limited as the portfolio consists of ‘A’ or ‘AA’ papers. These have good potential at this point as the yields have gone up sharply. In fact, the yield-to-maturity on some of these categories is much higher than what it was.

Further, considering positive long-term outlook for Long Duration Funds, these can be suitable for systematic investing. We expect short-term volatility in this category, particularly with global yields going up.  Systematic investing through volatile times helps average out the cost of investments and creates long-term wealth.

As such, investors must consider investing in a judicious mix of assets based on suitability, risk appetite, and investment horizon.

S Naren, ED & CIO, ICICI Prudential AMC. Views are personal.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Earnings may well recover in 2019 given the poor growth of the past few years

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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There are four main questions:

What lies ahead for the markets in 2018?

Is this the golden era for stock market investments in India?

Will FY19 mark the revival of the earnings cycle?

What will be the effect of rising interest rates on the markets?

We have witnessed a surge in new investors entering the stock market and I believe it is incumbent upon investment managers to help set their expectations right and educate them on the nature of the stock market. The stock market is a market place, in which we get to allocate capital to businesses of our choice. Buying good businesses at a sensible price can enable a diversified portfolio to earn a reasonable return over time. A return, as many of you would be aware has been, higher than other asset classes over longer time frames and has provided the best protection against inflation. The return of the asset class is measured by the return of the main benchmark indices and active fund managers strive to add Alpha over and above the benchmark return.

As these new investors come in perhaps they seek certainty  in our answers to questions such as the four above. But it is not possible to have precise answers to the above questions.

The truth is that nobody can forecast the outcome for the market for any given calendar year consistently. The stock market does not recognise calendar years and its returns are not linear like in the case of Fixed deposits. If you ask a 100 people it is likely that somebody will get it right but you cannot establish who that person is before-hand and remember that even a broken clock tells time accurately twice a day. So take all predictions about returns with a pinch of salt. Even better distrust all forecasts. Nobody knows.

Whether this is a golden era will be judged by history ie post facto. It is impossible to know beforehand.  In 2003 there was no forecast that we would achieve average real GDP growth of 8.7% pa over the next five years. Or that the Sensex would rise at a CAGR of 43% from December 31, 2002 to December 31, 2007.

History is always written after the event. What we know as the period of Renaissance and the great enlightenment of Western Europe came to be labelled as such only afterwards. Same for the industrial revolution or the post-World War II boom in the US. These labels are best given after and not beforehand. What we now call the First war of Indian Independence (1857) was named as such nearly 50 years later in the early 1900s. (The British called it the Sepoy revolt of 1857 and maybe they still do). This may well be the golden period or it may not. How can anybody know beforehand? You should make your allocation to the asset class based on your financial goals and not based on forecasts of a golden period.

As regards analyst forecasts, I suggest we refer to the history book again. Analysts have been calling for a recovery in growth every year from 2014 and the numbers have not come good. Similarly during the period 2004-2007 analysts were consistently being surprised by the actual earnings growth coming in ahead of their forecasts. It is not that the analysts are poor at their job. The future is full of surprises — both good and bad.

To make a precise forecast for earnings is made all the more difficult by the number of variables and moving parts that go into it. Earnings may well recover in 2019 given the poor growth of the past few years and what looks like will be a weak base in 2018. But don’t anchor to these forecasts, they may or may not be right and the multiple that the market will pay for the earnings will fluctuate anyway. So why focus so much on the forecast?

As regards the impact of rising interest rates — It depends. Determining the causal impact of the changes in one variable on the stock market is challenging because the final outcome is affected by other variables. There may be little doubt that low interest rates have propped up equity valuations in recent times. This is true globally and in the past two years a similar case could be made in India as well. But we cannot be certain of the outcome in the market from a transition to higher interest rates, because the negative impact of higher rates may be offset by other factors.

For example,  if the increase in rates is an outcome of higher growth and it is reflected in rising earnings and expanding return on equity-the market may look through it.

Also, if the animal spirits of the investors rise during this period that may also contribute to the markets ignoring rising rates, at least in the short term.

Of course, beyond a certain point we do know from history that high interest rates are not good for equities. So the appropriate answer is that it depends. Correlation is not causation.

In answering the above questions with certainty, with precise forecasts of earnings & index targets we do a disservice to all investors— new and old.  Cut out the noise. Let me be clear, they are perfectly good questions but they should not be the basis of your investment strategy. The data you have seen and read about the superior long term returns from equities as an asset class are a fact. But to achieve them you will have to deal with volatility that is part and parcel of the asset class. How can you do that?

The simple way to navigate equities for most investors is through a Systematic Investment Plan (SIP). A long term SIP is the best way to escape the tyranny of sentiment and fluctuations in valuation. This will significantly increase the probability that that you create a portfolio at reasonable valuations by spreading out your investments over time. A SIP is not a maximisation strategy; it merely smoothens your return outcomes and enables you to overcome the behavioural challenges stemming from the intrinsic volatility of the asset class.

In addition, to achieve you financial goals, you would have to manage asset allocation in line with the appropriate range. You could also consider hybrid products or products where the Investment manager takes decisions on asset allocation.

As for more active investors they could combine an SIP or a Systematic Transfer Plan (STP) with more aggressive shifts in asset allocation. Many advisors have developed an asset allocation framework for this. The objective being to buy more of the asset class when valuations are depressed (be aware that this coincides with period when the news flow is very poor) and reducing allocations to the asset class when valuations are rich (news flow may well be very positive). Of course, this is easier said than done. In the words of the master, investing is simple, but not easy.

Vetri Subramaniam is Head- Equity UTI Asset Management Company Ltd. Views are personal.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Expect lower returns this year than 2017, says Nilesh Shah

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The year 2017 was a year of splendid returns. Small caps led the charge with more than half a century. Mid cap and large caps also scored more than a quarter of a century. There was absence of volatility. This came on the back of subdued earnings as valuations kept expanding.

But 2018 is unlikely to match 2017 on returns as well as volatility or risk parameter. It is likely to be more volatile and yet deliver lower returns.

We expect 2018 to be more volatile as there are couple of risks on the horizon which can impact market.

The first risk is the political risk. India is going to face state elections in crucial states in the calendar year and general elections in May 2019 as per schedule. State election of Karnataka in May and Rajasthan, Madhya Pradesh and Chhattisgarh in the second half of the year are likely to impact the market because the results will determine how market will asses the stability of the next government.

The general election itself will start getting discounted by the market in the fag end of the year based on various factors. In 2004, markets soared ahead of election, based on the India Shining campaign and crashed post election on seeing a Left front-supported government. In 2009, the markets had corrected to price de to a khichadi sarkar and moved up on seeing a stable government.

In 2014, the market continue to rise on expectations of a stable government. Elections have played an important role in the market in the past and 2018 and 2019 are unlikely to be different.

The second Risk for the market is rising interest rates globally led by the US and withdrawal of liquidity by central
banks around the world. India has been a beneficiary of global flows partly due to low to negative interest rates and liquidity pumped in by central banks of the developed world.

The US Fed is looking to raise interest rates three-four times this calendar year. If that pushes the US 10-year yield to above 4%, flows to the emerging market debt as well as equity will certainly slow, impacting India. We expect central bankers to be calibrated and gradual in their approach.

We don’t expect them to be cavalier to disrupt markets but it is worth remembering the risk of liquidity disappearing.
The other risks are usual suspects like oil prices and monsoon etc.

Fortunately, oil prices look to remain elevated for a short period of time and monsoon is likely to be normal with advent of La Niña. It is safe to to say that in 2017, India enjoyed a good macro environment with lower inflation, lower fiscal deficit, lower current account deficit, lower NPAs etc.

Year of Deterioration

But this year is going to be a year of deterioration. The fiscal deficit is budgeted to be wider and in an election bound year, is likely to exceed the budgeted estimate. The current account deficit on account of higher oil prices is likely to deteriorate. Inflation has picked up, though within the comfort zone of the RBI. This deteriorating macro situation is likely to keep market volatile.

For markets to move upwards, fundamentals and flows are required. Last year, flows pushed market upwards whereas fundamentals were lagging behind. In 2018, fundamentals are likely to be better whereas flows could take a breather.

In 2017, mutual funds absorbed huge flows. Their work over the last two decades resulted in an inflection point. Their flows are outpacing FII flows. In the budget of FY2019, a non- level playing field was created by taxing mutual funds but by exempting Insurance companies ULIPS. This can adversely impact flows in mutual funds.

We expect the finance minister will restore level playing field for the benefit for Indian markets. FII flows can be adversely impacted if MSCI carries out its threat of reducing India’s weightage in the Emerging Market Index. We have to work hard to educate MSCI in not doing the same.

The flows in 2018 will be driven by events like restoration of level playing field between Mutual Fund and ULIPs and MSCI weightage apart from how investors price in the political risk and withdrawals of liquidity / rising interest rates in global markets.

This year, the fundamentals are good despite some strong head winds. India Inc is doing a marvellous job despite the burden of high real interest rates and overvalued currency.

They are also doing well to absorb the lesser availability of credit especially at lower end of the rating curve. The combination of high real rates, low credit availability and overvalued currency has subdued demand and kept capacity utilisation of India Inc at lower levels.

There is Optimism in the Air

India Inc was cautiously optimistic for the bulk of the last three years as apart from rates, currency and credit, they had to tackle disruptive reforms like demonetisation and GST. Now they are becoming optimistic shedding cautious stance. They are becoming optimistic as demand seems to be picking up and an election bound government is likely to keep the spending tap open to boost demand. This will help improving capacity utilisation, leading to better margins.

If rates, currency and credit normalise, the recovery will be more broader and more faster. The investments in 2018 are likely to be led by the government and PSUs.

But I can see support from private sector post formation of the new government. Sectors such as agriculture, rural and infrastructure are likely to see higher growth due to focus of the election bound government.

In a lighter vein, 2018 can be described as “ Liquid Oxygen”, a joke made famous by Bollywood villain Ajit. Liquid will not allow a person to live and oxygen will not allow a person to die.

The markets upside will be capped by political uncertainty and rising interest rates and down side will be protected by the improving corporate bottom line.

For investors, 2018 is a year when they need to focus on asset allocation rather than market momentum. It will be a year of volatility rather than steady rise. It will be year of stock picking rather than sector picking. It will be a year of large caps rather than micro and mini caps. It will be a year of playing contrast rather than chasing momentum.

Nilesh Shah is chief executive officer and managing director at Kotak Mahindra Asset Management Company

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US approval of Glenmark’s Clobex shows red flags are not the end of the road for pharma companies

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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On March 27, 2018, pharma company Glenmark announced the approval of the generic version of Clobex spray, a drug used to treat inflammation and itching of the skin caused by allergies and psoriasis. On a normal day, the approval by American drug regulator USFDA would not have mattered as the market size is only $30 million in the US with three-four competitors.

But given that the drug was approved from Glenmark’s dermatology facility at Baddi in Himachal Pradesh gave the announcement more attention than it would have usually. It happened to be the first approval the company received after the USFDA issued seven observations to the facility after an inspection conducted in November 2017. Usually, if the US authorities have reservations about a facility, they wouldn’t allow any new approvals.

A Positive Turn of Events  

While the facility itself doesn’t contribute much to the US — it accounts for less than 10% of Glenmark’s total US sales — the market was worried about the observations. Not only were the USFDA observations several, these also included the notorious out of specification ones, which meant test results fell outside the acceptance criteria. According to experts, the observations even held similarities with Lupin’s Goa and Indore plants that eventually escalated to warning letters. In fact, Lupin’s Goa plant and Glenmark’s Baddi facility shared the same inspector.

But with the approval coming through, it seems things have turned out differently for Glenmark. Receiving an approval to manufacture a drug (in this case Clobex spray) after being issued observations is considered positive (unless there is shortage or critical need of the drug).

An approval generally implies the USFDA is okay with the reply by a company to its observations and that it undertook remedies for making drugs for use by patients in the US from a facility.

Outcomes Matter, Not Observations 

Though the Glenmark stock barely moved on this news, I found the incident interesting. It was an example that reiterated that all instances of observations issued by the USFDA are not the same. One can’t assume similar outcomes for similar observations.

The incident shows that the number of observations doesn’t matter as much as the nature and intensity and that the reply and steps undertaken to remediate the observations by the company matter as much.

I’ll leave you with a few examples:

• Lupin’s Goa plant got three observations in April 2017.  Warning letter came in November 2017.
• Dr Reddy’s Srikakulam API plant got two observations in April 2017. Warning letter is still outstanding.
• Dr Reddy’s Bachupally plant got 11 observations in April 2017. It received inspection closure report, or an establishment inspection report (EIR) from the USFDA in December 2017.
• Sun Pharma’s Dadra plant got 11 observations in April 2017 and an EIR in Oct 2017

Whether all EIRs are positive needs a different discussion; in these cases we are assuming they are.

Ekta Batra is an anchor and associate editor, research at CNBCTV18. She has been tracking pharma and healthcare for almost a decade.

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Five things to keep in mind while buying property in FY19

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Buying a property is one of the most critical investment decisions. Whether the decision will pay off depends on several factors. Here are a few things to bear in mind before you take the plunge.

One, don’t take the plunge just yet if you dream doubling your money in the next two-three years.  Sure, sales have started picking up and prices are looking a lot better in 2018 than they were in 2017.

Yet , my take is that unless you can lay hands on a sweet deal through a distressed sale, which essentially means the property is 10-15% cheaper than the market rate, don’t bother. Type in your budget and location on any of the leading online portals. The flats listed for sale on these sites will give you a pretty fair idea of the going rate.

Different Story for Genuine Homebuyers

Two, it’s a totally different story if you’re buying a home to inhabit.  Get going right away. For the exact same reasons as above. Inventory of unsold units is slowly but steadily falling, with new launches down 70% from the peak of 2013-14. Prices across the top eight top cities have started recovering.

It’s wise to buy when the price curve starts improving because you don’t want to catch a falling knife. Plus you get a decent tax break of Rs 2 lakh every year on your housing loan.

Three, for those of you earning up to Rs 18 lakh a year and looking to buy your first home, my recommendation is — act now! Government-sponsored CLSS (Credit Linked Subsidy scheme) knocks off another Rs 2.4 lakh from your EMIs and there is a straight-up subsidy available on home loans until March 2019.

Beware of the Splendour

And who doesn’t love villas and independent homes? But my take is stick to high-rise projects in gated communities with smart basic amenities – a club house, swimming pool and sport facilities such as a tennis or badminton court, a nicely laid-out walking or jogging track.

Don’t swoon over glitzy facades, elaborate landscaping, fountains, Jacuzzi, spas and fancy fittings.  Spend your budget on the largest carpet area or space between the four walls you can possibly buy.

Apartments are easy to maintain and are socially more fun. Your kids will find plenty of playmates and leave you in peace for binging on Netflix.  And if you don’t have kids, even better. You will find plenty of likeminded people to hang out with.

Four, what about buying a property to rent out? I’m going to stick my neck out on this one and say it’s not a bad idea.  Financial planners recommend this kind of investment as a portfolio diversifier, citing property rental income as an inflation hedge. Except in India the rental returns on residential property in the most sought after localities don’t stack up today. At best you will get 2-3% of the capital value as annual rent.

Over the next four to five years though, as demand and supply mismatch goes out of the system and more and more younger population joins the workforce, rental yields should improve, especially if price rise remains under check, which I believe it will. If you are the patient kind, buy a smart one or two bedroom apartment in a tier-I city with high employment potential. Stick to the big cities and avoid smaller ones.

Five, if you’re one of the erstwhile heavyweight real estate investors sitting on a few flats hoping to get your dream price one day, do smell the coffee! A home to live in, another to rent out  is all you should own, unless you’re seriously rich.

Genuine homebuyers are back, especially for ready-to-move-in property. So sell now if you find a buyer, at the going market rate and switch to a well performing equity or balanced fund.  Your net worth will look a whole lot better, several years from now.

Manisha Natarajan is Group Editor, Real Estate & Urban Development, Network 18 and has been watching real estate closely for 7 years.

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Eventful policy, uneventful presser

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The RBI shocked, nay pleasantly surprised the bond and stock markets. It drastically cut its inflation forecast for the first half of the current year by half a percentage point to 4.7-5.1% from 5.1-5.6% in February.

It further cut the inflation forecast for the second half of the year (Oct-March) to 4.4% from its earlier forecast of 4.5-4.6% . Given that the RBI’s or rather the MPC’s mandate is to keep inflation close to 4%, this forecast effectively means there is no rate hike for at least one year. Indeed since the RBI’s Monetary Policy Report ( a document that it puts out twice a year, given its inflation-targeting mandate) forecasts FY20 inflation at 4.5% chances are there are no rate hikes for the next two years.

The RBI doesn’t say why it has cut the inflation forecast so drastically. Perhaps it is because inflation in the just ended quarter i.e March 31, is mostly coming at 4.5% , a good half a percentage point lower than the 5.1% that RBI forecast. Much of this is because of the unexpected crash in food prices. Looks like RBI has merely worked this into the April-September forecasts.

It is a little more difficult to explain the cut in the inflation forecasts for the second half. Although it is a minor cut, it is bewildering because, the government has promised to increase the minimum support prices for crops to 1.5X the production cost.

Economists believe such an MSP can well push up inflation by half a percentage point. Of course these are guesstimates, but it is fair to assume that the RBI also fears some hike due to MSP; it mentions this as a risk to its forecast.

What is more, the government has also indicated that it is preparing to implement the MSP diligently by paying farmers the difference between the market price and the MSP, with states bearing part of burden. Dr Ashok Gulati, a former chairman of the agricultural prices commission estimates that if market prices are 10% below MSP, the government’s scheme will cost Rs 43,700 crore, and if they are 20% below MSP, the cost to the exchequer could be Rs 87,400 crore. This means that the other risk the RBI points to its estimates, higher-than-expected fiscal deficit from states and centre, is a threat that will most likely be realized, especially in an election year.

Also, the RBI has assumed that crude prices will be around $68. There is a good chance that crude prices are even higher. Interestingly the RBI dovetails its inflation forecast with only upside risks. It hasn’t mentioned a single downside risk. All this clearly arouses skepticism about this 4.4% forecast.

Though, to be fair the RBI governor said at the outset, that he will be data dependent.

So is the RBI merely taking a gamble. The strong speech of the deputy governor on Jan 14 had scared away banks from the bond market.

The yield curve steepened to historic highs, as a result, the difference between the overnight repo rate and the ten year yield climbed to 160-175 basis points for a better part of February and March, versus a usual spread of say 70 basis points. This jump in yields threatened to jeopardise growth and more importantly the government borrowing programme.

In the past two weeks the government and RBI have taken two significant steps to bring down bond yields. First the government cut its first-half borrowing programme by 22% and hugely reduced the amount of long-term bonds that it plans to sell. Then the RBI moved in and allowed banks to provide for their mark-to-market bond losses in FY18 over four quarters instead of doing it in the quarter when the loss was incurred. This benign inflation outlook could be seen as an effort to push through the first half government borrowing programme.

Afterall the RBI, as the governor said today, is always data dependent. If the MSP impact on food is high and the fiscal deficits are larger than budgeted, the RBI can always raise its inflation forecast in the August or in the October policy.

There is, hence, a bit of uncertainty for markets in the second half of this year. Inflation could be higher than forecast exactly at the time when the government will be borrowing more than it usually does in that part of the year.

Of course, the RBI’s gamble may pay off and food inflation may indeed remain benign due to perhaps globally soft food prices, which experts say often rubs off on Indian food prices.

That said, what is uncomfortable about the RBI’s forecasts is the wide variation between two consecutive policies. What changed so much in two months that RBI cut its inflation forecasts so much.

Again, in the February policy, the RBI spoke of the need to “nurture” the “nascent economic recovery”. And just sixty days later it speaks about declining output gap in the economy and growing investments. That’s simply too much variation between two consecutive policy statements.

Finally, what was most inexplicable today was not anything in the RBI’s statement but what happened in the press conference that followed. Seven journalists got a chance to ask questions and not one uttered the word PNB or ICICI!

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow