World Markets Simplified

If you have Rs 5 lakh to Rs 25 lakh and have been entrusting this money to a portfolio manager, you may not have this luxury for very long if a SEBI proposal becomes a regulation. 

SEBI in a concept paper has suggested that the minimum amount for investment under Porfolio Management Services (PMS) could be Rs 25 lakh, and not Rs 5 lakh, as it is at present. 

So where will someone with Rs 5 lakh to Rs 25 lakh go for customised investment advice and services? 

"Such a change will definitely affect people with these kind of sums to invest. They will have to invest in mutual funds," said Mr Dinesh Thakkar, CMD of Angel Broking. 

"Just going to a broker (and not under a PMS scheme) will not get the investor time and involvement that a portfolio needs. So the next route available is the mutual fund, where the money is managed by an expert," he said.

Broking houses, in fact, fear that people with such sums to invest might fall prey to their own employees and franchisees' misguided or self-serving advice. 

It is typical for people with Rs 5 lakh and Rs 10 lakh who do not want to invest in mutual funds to ask brokerage employees, or branch employees or franchisees for advice on what to buy and sell. "And these employees might unnecessarily churn their investments just to earn a bit of commission themselves," said the managing director of a large broking firm. 

"Under the PMS route, however, their porfolios would be centrally administered at the brokerage. There is a portfolio manager who is accountable, and whose incentives are linked to how well the porfolios do," he said. 

'Killed by regulation'

Some brokerages say they are no longer growing their PMS business. "We do not take on any new clients for PMS," said Mr Deven Choksey, head of KR Choksey Securities. This product, anyway, is being killed by regulation, he said. 

"Firstly, PMS is not sold scheme-wise, but the reporting on it has to be done scheme-wise. Second, we can't customise the investment according to the risk profile of an investor as SEBI has capped investment in single securities. 

"So if a doctor wants to put the bulk of his money in pharma and is willing to risk it, he cannot under PMS. If we are to function like a mutual fund, then what is the point," he said.

Existing PMS customers are serviced, but new customers are given advisory services by his brokerage. 

"The low minimum investment amount of Rs 5 lakhs makes these products (referring to PMS) accessible to retail investors without the protection which are available to retail investors under the mutual fund network," said SEBI in its concept paper.

"To the extent that the services under this route resemble fund management instead of customised services, there is need to recognise and regulate them as private pool of capital," says SEBI.

So, where funds are pooled they will have to be registered as Alternative Investment Funds, and where there is customised service for each portfolio this service will come under PMS. 

The latest update in this news-heavy night is that Japan's unpopular Prime Minister is out, after tellng his cabinet ministers that they have about one more week before packing up and looking for new jobs. As Reuters reports "The ruling Democratic Party of Japan is planning to pick a new leader on Aug. 29, setting the stage for parliamentary confirmation of a new premier and the selection of a new cabinet." We hope for the sake of the G7 that there is no massive crisis in the next 10 days, as a leaderless Japan will hardly provide confidence that any crisis can be circumvented. As for the Yen, it is hardly troubled and at last check was trading at 76.75 to the dollar. Not an all time record… but pretty close.

From Reuters:

Japanese Prime Minister Naoto Kan told his cabinet ministers on Tuesday that they are likely to resign on Aug. 30, Japanese Economics Minister Kaoru Yosano said on Tuesday.

The unpopular prime minister's comments effectively confirmed his intention to resign in coming days, clearing the way for Japan to select its sixth prime minister since Junichiro Koizumi ended a rare five-year term in 2006.

The ruling Democratic Party of Japan is planning to pick a new leader on Aug. 29, setting the stage for parliamentary confirmation of a new premier and the selection of a new cabinet.

Yosano also told a news conference that the government needs to devise steps to cope with the negative effects of the yen rise in the coming third supplementary budget for this fiscal year.

French President Nicolas Sarkozy and German Chancellor Angela Merkel have announced a plan to impose a financial transactions tax (FTT) for the Eurozone, as part of an effort stem the bloc's worsening debt crisis.

The policy would introduce a tiny tax on wholesale financial transactions – something long supported by European Union members Austria and Belgium. EU heads of state are expected to discuss the proposal at a meeting in October, ahead of the G20 summit in France in November.

The European Commission threw its support behind this tax in June, saying it could raise up to 50 billion euros a year by imposing 0.1% tax on stocks and bonds and 0.01% on derivatives.

The commission has even included potential funds raised by such a tax in its long-term budget forecasts for 2014-2020.

The tide is clearly turning in Europe and leaders are getting behind this idea.

I spoke at a forum on the tax at the European Parliament in March last year. Every seat was taken – and this most certainly was not people wanting to listen to me.

Meanwhile, the debate in Australia is basically non-existent. On one hand, this is fair enough – as Australia most certainly could not impose a FTT all by itself.

The risk of stock, bond and derivative trading moving offshore, if we were to go it alone, makes the idea a political impossibility.

Despite this fear, it is clear that Australia needs to pull its head out of the sand. We have a seat at the G20, and the deliberations on this tax at that forum will be important.

We have so far opposed the tax simply because the Americans have, which has become our default position on most foreign policy matters over the past 15 years.

Australia needs to examine the evidence and take a more informed view in the G20 forum.

Because of the scale of modern financial market activity, a tiny FTT would raise somewhere between $75 billion and $500 billion annually, if applied globally.

Civil society is campaigning vigorously for this tax around the world, because it sees in it a source of revenue to address global poverty and fund the climate change adaption that is much needed in poor countries. These civil society campaigns have had considerable impact in Europe, but very little here.

The great attraction of this idea is that it's clearly rarest form of tax – a tax you should want irrespective of the revenue it might raise.

Keynes recommended such an impost in his seminal work, and 40 years ago the Nobel Laureate in economics, James Tobin, proposed the tax as a way to make markets more effective.

The idea is that an FTT would dissuade purely speculative short-term transactions and shift the balance of trading towards investors who are more focussed on the underlying value of the asset being bought and sold.

Since Tobin promoted the idea, there has been a sea change in market trading that makes the need for it much greater. In 2009, computer-driven trading accounted for at least 60% of equity market trading, 40% of futures trading in the US and 30% to 40% of European and Japanese equity trading.

This high-frequency trading is driven and executed by computer programs aimed at exploiting minor price fluctuations. The assets are often bought, held and sold in less than a second. No human mind is brought to bear on these individual trades, and the underlying real economic value of the asset being traded rarely influences the trade.

There is considerable evidence that the proliferation of this sort of trading has made markets less effective at their core function – setting prices.

Markets these days deviate for sustained periods from the prices that would be indicated by economic fundamentals. They are now driven by a tsunami of ultra-short-term trades.

An FTT would make such trades uneconomic, and the resulting markets would be able to perform their real functions of setting prices and allocating capital more effectively.

The United States has not supported an FTT, which is evidence of the power of that country's banking lobby. Barack Obama supported an FTT as a presidential candidate, but the oval-office perspective is obviously different.

Could the introduction of a tax in Europe prompt US policymakers to reconsider their position? Once foreign exchange transactions between euros and US dollars are taxed in Europe, with none of the revenue going to the US, the incentive for the US to follow Europe's lead will be massive.

But the pivotal nation in this debate today is not the US, for Europe can impose such a tax with little fear of any significant amount of trading moving to the US. The pivotal nation is the UK.

While continental Europe could impose this tax on foreign exchange transactions in euros, which clear and settle in Europe, applying the tax more broadly would risk trading in other asset classes moving to London.

Britain under Gordon Brown supported the tax, but not under the current government. So the scene is set for some interesting horse trading as Sarkozy and Merkel try to persuade David Cameron of the merits of, and need for, this crucial tax.

Dark Pools in Asia Pacific â€" Watch This Space Posted by  Lee Kha Loon, CFA to CFA Institute Market Integrity Insights Dark pools have been back in the news in Asia recently. An article by Asian Investor (subscription required) on 17 August noted there is an increasing trading volume of small-cap stocks in Australia, Hong Kong, and Japan in alternative trading systems since the beginning of the year. Some 30 percent of executions in Credit Suisse’s dark pool, Crossfinder, relate to shares outside the top 200 names in Hong Kong; in comparison, such names account for only 10 percent of exchange transactions, which remain dominated by blue chips. According to the article, this trend is less pronounced in Japan: small cap trades represent 6-8 percent of Crossfinder trades, a similar proportion to on-exchange transactions. Meanwhile Liquidnet, an institutional-only dark pool platform provider, reported that trading volumes have increased in recent months in the Asia-Pacific region driven by higher market volatility.

Joe Biden came to China, saw, and failed to conquer the locals' ridicule. Punctuating just how "effective" Biden's visit to China was in order to "reassure that the US is solvent" (no seriously, that;s the name of the article) is a just released article in the Securities Times by Wang Tialong, member of Chinese think tank Center for International Economic Exchanges in which he went on to blatantly say that "The U.S. may be on its way to default on its debt despite the U.S. government's ability to print more money, a Chinese think tank researcher said Monday." Now this is nothing new in the escalating war of words between the two countries, although increasingly China appears to be attacking the primary loophole that defenders of the unsustainable US debt use, namely the fall back to the USD as a reserve currency. Wang went on further to implicitly accuse the US of fabricating economic data: "There is also no way to punish the issuer country if it falsifies its accounting and there is no way to restructure the issuer either, Wang said." Well, when China accuses the US of "falsifying accounting" you know you have hit rock bottom.

From Dow Jones:

The U.S. may be on its way to default on its debt despite the U.S. government's ability to print more money, a Chinese think tank researcher said Monday.

There is no guarantee for sovereign debt, which increases the risks the lenders face, said Wang Tianlong, a researcher at the China Center for International Economic Exchanges, a think tank supervised by the country's economic planner, adding that the issuer could be more careless in using the loans.

In the short term, the U.S. doesn't have much ability to reduce its deficit, Wang said in an opinion piece published in Securities Times. He added that the U.S. lacks the political system to guarantee that it will not default on its debt.

There is also no way to punish the issuer country if it falsifies its accounting and there is no way to restructure the issuer either, Wang said.

Wang's comments come after the U.S. Vice President Joe Biden said Sunday the U.S. "never will default" on its government debt and reassured Beijing that Chinese investments in the U.S. are safe.

Slowly, surely, China is realizing that the endgame is nothing short of out of control debt inflation, which is precisely what having no way to "restructure the issuer" means. That plus sending the US to bankruptcy court may be somewhat problematic. It also means that Chinese holdings of US debt will be increasingly worthless, and its population increasingly stabby as the price of hogs resumes its record climb. The only alternative is for the CNY to float and for the Chinese, Russians and Germans to say enough to this broken economic model and launch a gold (and other hard asset) backed currency. The only question is when.

News Highlights - Week of 15 - 19 August 2011

Malaysia's real GDP growth moderated to 4.0% year-on-year (y-o-y) in 2Q11 from a 4.9% expansion in the previous quarter. Private consumption increased 6.4% y-o-y in 2Q11, while public consumption growth stood at 4.0% y-o-y. Gross domestic capital formation expanded 3.2% y-o-y in 2Q11. Growth in the manufacturing and construction sectors moderated in 2Q11 to 2.1% and 0.6% y-o-y, respectively. Meanwhile, consumer price inflation in Malaysia eased slightly to 3.4% y-o-y in July from 3.5% in the previous month, with food and transport costs rising 4.9% and 4.8%, respectively. In Singapore, growth in retail sales accelerated to 10.9% y-o-y in June from 9.6% in May. Thailand's real GDP grew 2.6% y-o-y in 2Q11, compared with revised 3.2% growth in 1Q11.

* The People's Republic of China (PRC) raised a total of CNH15 billion in the Hong Kong, China offshore market last week from its sale of (i) CNH6 billion worth of 3-year bonds, (ii) CNH5 billion worth of 5-year bonds, (iii) CNH3 billion of 7-year bonds, and (iv) CNH1 billion worth of 10-year bonds. The average coupon rate of the bonds was lower by 225 basis points compared to onshore yields. Also last week, the PRC's Vice-Premier Li Keqiang visited Hong Kong, China and expressed support for the development of the CNH market. 

* Japan's merchandise exports dropped 3.3% y-o-y in July amid the yen's appreciation and weak demand from the PRC and the United States. Singapore's non-oil domestic exports fell 2.8% y-o-y in the same month. 

* Overseas remittances to the Philippines rose 7.0% y-o-y to USD1.7 billion in June, after climbing 6.9% in May, on the back of sustained foreign demand for Filipino workers. The Philippines posted a balance of payments surplus of USD1.3 billion in July, compared with USD222 million in June.

* Foreign direct investment (FDI) in the PRC rose 18.6% y-o-y to USD69.2 billion in the first 7 months of 2011, including a 19.8% y-o-y increase in July. 

* In the PRC last week, Beijing Energy Investment raised CNY2 billion from a dual-tranche bond sale. Last week in the Republic of Korea, Shinhan Financial Group priced KRW230 billion worth of dual-tranche bonds; Hanjin Heavy Industries issued KRW200 billion worth of 3-year bonds; and Meritz Finance Holdings raised KRW200 billion from a dual-tranche bond sale. Meanwhile, the Bank of Thailand (BOT) plans to offer THB50 billion of savings bonds this month, while Indonesia mandated three banks for its planned USD-denominated global sukuk (Islamic bond), which is expected to be launched at end-September or in early October.

* Government bond yields fell last week for all tenors in Indonesia and the Philippines, and for most tenors in Malaysia, Singapore and Viet Nam. Yields rose for most tenors in Thailand while yield movements were mixed in the PRC; Hong Kong, China; and the Republic of Korea. Yield spreads between 2- and 10- year maturities widened in Indonesia, while spreads narrowed in most other emerging East Asian markets.

* Finally, some of the more interesting economic data due this week include consumer price inflation for Japan, Singapore, and Viet Nam; the 1-day repurchase rate for Thailand; exports for Hong Kong, China and Viet Nam; and the current account balance for the Republic of Korea.

Fresh trouble seems to be brewing for the UPA government, as the Comptroller and Auditor General (CAG) has completed two more high-profile audit reports that could bring attention back to political corruption and misdeeds at the highest levels.

Sources said the CAG has finalized and printed its audit reports on Air India and oil exploration contracts, including the one for Reliance's KG Basin. The reports are expected to be forwarded to the government in the next few days. It's up to the government then to table it in Parliament as the scheduling is done by it.

Whenever they are tabled, the reports are likely to draw attention to the government's decision making—by respective ministers and even an empowered group of ministers—on some of the major commitments of public funds and resources. The CAG report on AI covers, among other things, the purchase of 111 aircraft for over Rs 40,000 crore in 2006. Sources said CAG had made adverse observations on several aspects, ranging from the wisdom behind ordering so many aircraft by a financially weak body to the financing of the deal. Losses on account of what's described as wrong purchase plans, inflated loans, delay in the return of leased aircraft, etc, are estimated at over Rs 2,000 crore.

Sources said the audit report on oil exploration contracts is also ready. It has estimated direct loss at a few thousand crores because of the contract given to RIL for KG Basin, to Cairn India in Barmer district, and to a joint venture comprising RIL, British Gas and ONGC in the Panna-Mukta and Tapti gas fields.

The Air India audit covers the period of 2002 to 2010, most of which falls under the UPA, when Praful Patel was the civil aviation minister. Raising questions about the very contract for the aircraft purchase, it has said the purchases should have been executed in two phases. The original plan was to purchase 35 Boeing aircraft on firm order, with the option for adding 15 at a later stage. But the EGoM altered this to buy 50 at one go because of possible financial benefits.

The top auditor has also drawn attention to the delay in the setting up of an MRO (maintenance, repair and overhaul) facility in India by Airbus as an offset for the contract. It has examined the merger of Air India and Indian Airlines as well.