Asset Class Views as under –
· Fixed Income – Time to play duration . Expect cumulative policy easing of ~100-150 bps by March 2013 as RBI expects to keep the repo rate above headline inflation (7%)
o RBI has clearly indicated over the last few months that the interest rate cycle has peaked and it's time to support growth. The growth rate estimates for FY 12 have been revised from 8% in Jan 11 to 7% in Dec 2011. Similarly for FY 13 the growth rate estimates have been revised to 6.5% much below the comfort zone of 7.5% - 8.0% of RBI
o Inflation has come down to the comfort zone of 7.0% - 8.0%. From the high of 10% seen in the month of Sep 2011 Inflation has come down to 7.47%.
o With slowdown in domestic consumption demand clearly demonstrated by lower import figures, lower inventory figures & decline in gross capital formation. We expect the inflation to continue its downward trajectory.
o The key risks to the above remain the fiscal policy of the government. Though the market is pricing in 5.5% fiscal deficit in 2012 it expects the fiscal deficit to come off in FY 13. Any indication to the contrary in the budget would reverse the falling yield scenario and yields could move back to 8.4% - 8.5% levels.
· Equities seemed to have bottomed out till we approach the Union Budget . Recent rally is nothing specific to India. This is happening across the globe from China, Turkey to Mexico in anticipation that a second round LTRO & possible QE3 could come in from the Fed.
o Liquidity is here to stay – ECB has injected $500 bn of liquidity into the system. Fed has also proposed to keep interest rates low till 2014
o Interest rate easing has started in India – The CRR cut by the RBI has signaled a start of easing monetary policy stance in India which could result in a cut of 150 bps – 250 bps over the next 12 – 18 months
o Results for the quarter have been in line with the consensus estimates and there hasn't been any downgrade to consensus estimates after 4 quarters
o Europe problems seem to have been temporarily resolved. The yield on Italy bonds 1 yr yield has moved from 2.62% to 2.14% ( peak of 8.45%)
· Still not the time to be overweight equities. Structural issues remain
o India has still not taken measures to address the supply side constraints plaguing the economy. Markets have moved in anticipation of reform and resolution of supply side issues post the assembly elections. Any negative surprise would result in markets giving away some of the gains seen in the last 1 month.
o The markets have more or less discounted a possible $100 billion Greece default. However, whether this would lead to a cascading effect is yet to be seen.
o Structural issues in Europe and US are still to be resolved. US is running $ 1 trillion deficit for the 4th year running. In Europe growth is unlikely to return with the austerity measures being proposed. Any reversal in easy liquidity conditions could have a big impact on the markets.
o With the interest rate cycle reversing , we expect consensus estimates for Sensex to move up to 1250 – 1275 range for FY 13. Our March 2013 target for Sensex at 16x P/ E would be 20,000 – 20, 500. On the downside we expect the Sensex to get strong support at 16,000 – 16,500 levels.
· Gold – Global liquidity to support prices. Increase allocation is advised
o Turning positive as continued injection of liquidity by Fed and ECB would support gold prices
o Rupee has appreciated significantly against the $ and we don't see a significant appreciation from the current levels. We would expect the rupee to give up some of the gains and see levels of 50 – 51 in the next 2 -3 months. This should support gold prices in rupees
With India still overwhelmingly dependent on foreign military hardware and software, the government is all set to clear a new set of guidelines for creation of joint ventures between defence PSUs and private companies as a step towards bolstering the domestic defence industrial base (DIB).
Defence ministry sources say the new policy on JVs will be taken up for approval by the Union Cabinet on Thursday, a few months after the government had put "on hold" the joint venture between defence shipyard Mazagon Dock Ltd (MDL) and private shipyard Pipavav after receiving a barrage of complaints by other rival private shipyards.
"The new policy will boost private sector entrance in the defence arena. It is also needed since there over 40 offset contracts (with global armament firms who have bagged or about to clinch Indian defence deals) worth over Rs 50,000 crore being negotiated," said a source.
"Then, around $20 billion MMRCA (medium multi-role combat aircraft) project will itself have 50% offsets...the potential is huge," he added.
The announcement of the MDL-Pipavav JV had led to a lot of heartburn among other private shipyards like L&T and ABG, which had complained of arbitrary decision-making by MDL in selecting Pipavav.
With the Navy having 46 warships on order, and several more in the pipeline, private players are jostling with each other to grab both Indian as well as foreign warship-building contracts.
MDL is the largest among the four defence shipyards, with an order book of around Rs 1,00,000 crore, including the Rs 23,562 crore project for six Scorpene submarines and the Rs 41,007 crore one for seven guided-missile destroyers.
Kolkata-based Garden Reach Shipbuilders and Engineers (GRSE), Goa Shipyard Ltd (GSL) and Hindustan Shipyard Ltd (HSL) at Visakhapatnam also have large order books.
But the capacity of the four shipyards is limited, with a big demand-supply gap, which has prompted the government to go in for public-private partnerships to meet timelines for ship-building.
The government has also come out with a new Defence Production Policy to progressively reduce India's strategically-vulnerable dependence on foreign military imports by bolstering indigenous R&D and private sector participation in a major way.
The defence sector was opened up in 2001-02 to 100% private investment, with up to 26% FDI, but the results so far have not been very encouraging. The abysmal performance of DRDO, eight defence PSUs and 39 ordnance factories has meant India, which fancies itself as an emerging superpower, still imports over 70% of its military requirements.
Reliance Industries may price a $1 billion 10-year bond that will be used to fund capital expenditure in its US shale gas business, two sources with direct knowledge of the deal said.
The company has indicated pricing of 365 basis points over US treasuries for the bonds, which will be issued by Reliance Holding USA, they said.
Proceeds will also be used to refinance short-term debt incurred in the shale gas business, the sources said.
The deal is being led by Barclays Capital, Bank of America Merrill Lynch, Citigroup, HSBC and UBS, they said.
Standard & Poor's has assigned a BBB long-term rating to the senior unsecured notes, which will be guaranteed by Reliance Industries.
Gujarat IFAs want to bid for Fidelity's business !
Ever since the news headlines announced Fidelity's decision to consider exiting India as one of its strategic review options, there has been a lot of buzz and a lot of backroom work going on. Prospective bidders have been discussing finer aspects of the deal. Big international names have been doing the rounds as prospective buyers / bidders. While all of this action has been going on in Mumbai and overseas, an IFA from Gujarat has come up with an idea that most would consider audacious - he wants IFAs from across the country to come together and jointly bid for Fidelity's business ! And he has got a number of IFAs from Gujarat who seem to be enthusiastic about this. Read on to understand his dream - and decide for yourself whether this is a dream that you might want to support - or dismiss....
Gujarat has a rich tradition of producing entrepreneurs who dare to think beyond what others think is possible. Whether it is the Reliance story or the Nirma story or the Adani story - they all have one thing in common - an entrepreneur who dreamt of something most others regarded as foolish and impractical. Sure, for each such success story, there must be numerous more that failed - stories of entrepreneurs who dreamt big but could not really execute big.
Is this a dream that most will regard as foolish and impractical? Which way will this dream go - only time will tell. But then "dare to dream" is a success mantra that most management gurus preach, don't they?
Nitin Patel is a man on a mission
Ahmedabad's Nitin Patel is a man on a mission. Ever since the news of Fidelity's possible exit from India hit the headlines, Nitinbhai has become a man possessed by a big idea. When I met him last week at the ICICI Prudential i-mentor session that I was conducting for select advisors from Gujarat, he shared with me his proposal to create a consortium to bid for Fidelity's India business. Many of the advisors at the session seemed to be enthusiastic supporters of his idea. And, he believes that he can easily rustle up another 50 distributors from Gujarat who will come on board. Here is his proposal and his rationale :
1. Good quality asset book
Fidelity, he believes, is one of the few AMCs which has a robust product portfolio - no misadventures of ill-timed product launches that have created ill-will among investors
Performance of their equity schemes is quite satisfactory, in his view
Brand loyalty from investors is visible - he has seen clients of his who are very comfortable continuing their SIPs in Fidelity Equity Fund, which they started at the launch of this fund - even when they contemplate switching out of some other schemes of some other AMCs
2. Ill-timed exit is an opportunity
If Fidelity does exit now - at a time when markets are low and business volumes are low, it presents a good buying opportunity, in his view. In the next 3 to 5 years, markets and volumes are bound to grow and the same business will have a much better valuation than what it can fetch today. Fidelity's India business is a great value buy today, in his view.
3. Why should IFAs not come together and bid?
Nitinbhai wants IFAs from across the country to come together and bid for this business. The outline of his proposal goes something like this :
Find a strong corporate group which will pick up a 51% stake and which can satisfy all of SEBI's qualifications for the promoter
Distributors come together to pick up the balance 49% stake. This will automatically give the business the much needed distribution strength, which any AMC needs for growth.
Distributors will be happy to put the funds of this AMC high up on their recommendation lists, he says. A combination of a good product portfolio and a personal stake in the success of the AMC will motivate distributors to recommend this AMC's products much more vigourously.
Over the next 5 years, as markets and business volumes improve, there is likely to be a significant upside available to distributors who come together today to bid for this business, at today's valuation.
4. Give us DSOPs, like you give your employees ESOPs !
Nitinbhai in fact says that should he be a shareholder in the AMC, he would happily settle for much lower commissions. Companies give their star performers ESOPs - employee stock options - to align their personal interests with those of the company's. In a similar way, if IFAs are given DSOPs - Distributor Stock Options, they should agree to lower commissions and look for a much bigger longer term upside from their relationship. Lower commissions will automatically translate into higher profits for the AMC. Higher profits mean higher business valuation - which means a bigger upside on the DSOPs. Nitinbhai says that this kind of a hybrid compensation structure - is a win-win for all.
DSOP - an idea whose time has come?
The talk about DSOPs got me thinking - is this an idea that should be explored by the MF industry? Of course, the one hitch in this DSOP proposal is that none of the AMCs are listed yet. Lack of listing denies any DSOP or ESOP holder of any exit - which is a pre-requisite for the success of any such incentive plans. But, instead of dismissing the idea completely, is it worth a thought? If an AMC were to get listed, and were to reward its key employees and key distributors with ESOPs and DSOPs and lower the salary and commission payouts respectively, would this not boost profitability and therefore valuation and thus result in a win-win for all? After all, in an AMC's business, salary costs and distributor costs are the two biggest expenses. What if an AMC were to reward its key distributors with DSOPs instead of trips to exotic locales for example? Would that not be a better idea for all? Of course the flip side to this entire argument could be that it actually deepens conflict of interest for distributors rather than eliminate it. Should a distributor or an advisor's earnings be more aligned to the satisfaction levels of his investors or to the fortunes of his AMC partners?
What do you think?
What do you think of Nitinbhai's idea of getting together to bid for Fidelity's business? Too fanciful? Too bizzare ? Or is it a daring move that should be supported? And what do you think of the DSOP proposal - which can actually be independent of any idea of bidding for any AMC? Should AMCs look to get listed and reward their key stakeholders - employees and distributors with stock options? Will that be a win-win situation? Would you settle for lower commissions in lieu of DSOPs? And, how serious is the conflict of interest situation, if something like DSOPs were to be introduced? Share your thoughts with fellow advisors across the country by posting your comments in the box below - its YOUR forum
