Archive for June, 2010

July Could be Jittery For the Markets

The month of July can cause real jitters for the Indian stock market and the party could end. Most of the top economists and market gurus have started saying that the year 2010 could be a mixture of two halves, the first half ending on a positive note and the second half leading to a sell off and a economic downturn.

There are 4 big events in the month of July because of which I believe markets may end lower in the month of July

1. First which I had already discussed in my previous post is the $30 billion IPO, by the China AG bank,
which could suck the liquidity out of the emerging markets and thus leading to a fall

2. Second in July only, perhaps in the later half of the month the EU will come up with its bank stress test
results and without any plan so as to how it would provide any kind of support to the ill banks the results
may provide another reason to sell the financials and other related stocks around the world

3. Third, from 17th July, Nifty futures will be traded on CME and this move is taken in order to facilitate US
investors to take exposure in Indian markets without facing the hassles of cross border investing. This, I
believe might lead to a liquidity crunched Indian markets

4. On 27th July, is the RBI Q1 credit policy, with statements from the governor that inflation being the
bigger concern than the EU crisis, and the recent fuel price hike, I believe it sets a strong case for the
RBI to go for a rate hike (and I think it might come as a surprise well before the actual policy date). The
Indian banking system which is already liquidity crunched because of the 3G and BWA auctions could take
a serious hit if this happens. The Bank Nifty falling by around 3% on Friday just after the fuel price hike,
signals the market expectations of a rate hike.

Thus, I believe that the best one could do in July, is to avoid long position and traders can also use low IVs as a tool to go short using the put options.

Be Cautious & Happy Investing…!!!

Author name:Rahul Sonthalia, Research Head, Kredent

To see other posts by the same expert click here

Minimum Alternate Tax (MAT)

Brief On Revised Discussion Paper For Direct Tax Code (DTC) For Minimum Alternate Tax (MAT)

Minimum Alternate Tax (MAT)

Current Situation:

MAT applicable on Book profit

Proposed in DTC:

The DTC has proposed a MAT on companies calculated with reference to the “value of gross assets”.

Limitation of MAT to be applied on basis of Gross Assets

  • Computation of MAT with reference to gross value of assets will require all companies to pay tax even if they are loss making companies or operating in a cyclical downturn.
  • An asset based MAT on loss making companies would result in significant hardship since they would not have the resources to pay the tax.
  • Logically Income tax should be on real income and any method for presuming income should also be reasonable enough to come closer to the real income.

Proposed in Discussion Paper for DTC:

  • MAT will be computed with reference to Book Profit.
  • Proposed MAT will not allow any carry forward

What will be the Impact of above on Corporate?

  • Corporate would end up paying more overall tax in a low profit year. Also there will be no relief against above average profits earned in a subsequent year.

Author: CA Shalini Tibe

Book Review – Screw it, Let’s do it

Book Review: Screw it, Let’s do it – Richard Branson

The Book

Screw it, Let’s do it – is a capsule of wisdom. You can read it cover to cover in 2.5 hours. In this book, the world famous maverick entrepreneur Sir Richard Branson narrated in a very lucid and frank way the guidelines that have formed the basis of his success. This book has a unique quality of binding and involving the reader while he read this book.

The book has 14 chapters – Just Do It, Have Fun, Be Bold, Challenge Yourself, Stand on Your Own Feet, Live the Moment, Value Family and Friends, Have Respect, Gaia Capitalism, Sex Appeal, Be Innovative, Do Some Good, Pow! Shazam!, Think Young. Reading at the topic of each of the chapters, I am sure everyone will be intrigued by the contents.

This is book is for the people who are looking for inspiration and motivation in their business or life. The personal experiences he has shared make you believe that earning money can be lot of fun.

About Author

Author of this book is one of the most audacious Entrepreneurs of the present world. Branson has beautifully portrayed his unconventional way of doing business. His full name is Sir Richard Charles Nicholas Branson. He was born 18 July 1950 and he is a British industrialist, best known for his Virgin brand of over 360 companies. Richard Branson is the 261st richest person in the world according to Forbes’ 2009 list of billionaires, with an estimated net worth of approximately £2.6 billion (US$3.9billion).

Other Books written by Richard Branson

If you want to know more about the maverick nature and adventure filled life of Richard Branson and his unique style of doing business, you must read his autobiography -

Conclusion

Like this review, the book, Screw It, Let’s Do It, is a quick read full of the wisdoms that made and still makes Richard Branson a successful man by anyone’s standard. And it is definitely worth a couple of hours of your time to read through it and learn more about what makes people like him successful.

I got this book brand new hard cover @ just at Rs. 134 (after 19% discount) from Flipkart

Crude oil price update

 

Chinese news of yuan free float (click here for MB update) had its affect on crude oil as well and NYMEX light sweet crude oil opened up and touched a high of $ 78.92/ barrel against last week’s close of $ 77.18. However it retreated back to $ 77.82 towards close as impact of the same was said to be limited.

 

Crude oil traded with a negative bias for the next three days under the effect of a surprise rise in US oil inventories. Inventories rose by 2 million barrels against an expected decline of 1 million barrels. This was taken as a sign of reducing demand from US. Negative hosuing data also weighed on the prices.

But Friday turned the table in favor of bulls. News that a tropical disturbance on the Carribean Sea can develop into a storm pushed the prices up by $ 2.35. As per a news report, the tropical storm has a 30% chance of developing into the storm and threatening production in the Gulf of Mexico region.

Price settled at $ 78.86/ barrel, up $ 1.68 from last week’s close and up $ 2.51 from last week’s low.

Storms in the Gulf harm crude oil production and consumers in anticipation of a price rise pre-pone their purchase which leads to an increase in prices even before the effect of storm is felt. Thus we expect prices to trade with a positive bias for the week. However, there will be volatilty in the prices and any news regarding storm will be very closely monitored by the traders.

Author:Praveen Bajaj

Govt Securities update:June 26, 2010

For the first 4 days of the week, government securities moved in a range. Benchmark 10 year bond, 7.80% 2020 bond moved in between 7.55% and 7.61%.

Results of buyback of securities, in which RBI accepted amount of Rs 806 cr against a notified amount of Rs 10,000 cr. This led to a slight increase in the yields on Monday.

 Outflow of funds for payment of Broadband Wireless Access (BWA) auctions kept liquidity conditions tight. Amount accessed through the Repo window touched a high of Rs 82,915 cr on Thursday and averaged around Rs 70,000 cr per day of the week. Comments from officials that  liquidity easing measures to be taken took some pressure off the bond market.

Primary articles’ inflation for the week was at elevated levels at 17.6% compared to 16.86% last week. This again put pressure on the bonds and yields rose in the first half of trade on Thursday.

Rally in US treasuries after the announcement from Federal Reserve that low rates will be retained for an extended period of time kept the sentiments on a bullish side. These mixed sentiments kept the yields in a range.

However on Friday, after the announcement of market linked oil prices, yields jumped to the weekly high of 7.68% (click here for MB update). The benchmark bond closed the week at 7.65%, 9 bps higher than last week’s close of 7.56%.

For the next week, we expect the yields to trade on a bullish side due to inflationary concerns. Liquidity situation might ease but concerns of rate hike due to high inflation will overshadow the ease in liquidity.

Author:Praveen Bajaj

Equity market update: June 25, 2010

Markets started the week on a positive note with Sensex rising 305 points or 1.7% to close at 17,876.55 on Monday on positive global cues due to China announcing that it will take measures to make yuan float more freely against dollar and other foreign currencies (Click here for MB update).

After that, index moved in a range bound manner for the next three days. However, on Friday, markets were on a correction mode and were negative since the beginning ahead of the Empowered Group of Ministers’ (EGoM) meeting on fuel prices. In the afternoon, after the decision regarding freeing the prices was announced (Click here for MB update), markets moved deeper into red and closed the day at 17,574.5, 155 points down from Thursday’s close.

On a weekly basis, this was a change of 4 points on Sensex.

Derivatives contract for June series expired on Thursday which has been taken as positve for the markets on the basis of roll over of open positions.

Foreign funds have been net investors in the market. So far this month,foreign funds have been net buyers of around $1.7 billion of Indian stocks against being sellers of about $ 2 billion in May. Index has gained 3.7% in the month till now.

Decision to free oil prices has again sprked concerns regarding rate rise, even before the next policy announcement, which might way on the sentiments and pull the index down for next week.

Author:Praveen Bajaj

India to move to market movement based oil prices

The Empowered Group of Ministers (EGoM), headed by Finance Minister Pranab Mukherjee, have decided in the meeting just now that India oil prices such as petrol and diesel prices will be determined by market.

Details of the same, as to how this exactly will be carried out will be disclosed later and we will update you on the same.

As of now, diesel prices have been hiked by Rs 2/ liter but eventually they will be market linked.Petrol prices will be hiked by Rs 3.50/liter the same time, LPG prices have been hiked by Rs 35/cylinder and Kerosene prices by Rs 3/litre. New prices will be effective by mid-night today.

Before the meeting it was speculated that EGoM may either decide to raise the prices or may go ahead with Petroleum Minister Murli Deora’s suggestion of oil price decontrol.

The move has been taken to reduce the oil subsidy burden on the Govt. The government has provided only Rs 3,108 crore towards petroleum subsidy in the current year against an estimated fuel subsidy bill for 2010-11 of nearly Rs 90,000 crore at an average crude oil import price—popularly called Indian basket—of $80 a barrel. If the prices of petroleum products were not revised, the huge subsidy bill could easily eat up the bounty the government received from the 3G and broadband auction.

This move of EGoM is likely to affect inflation adversely. Inflation is already at a high level (To read our May inflation update, click here). WPI inflation for the month of May breached the 10% mark coming at 10.16%. Though food articles are largely blamed for high inflation, but fuel index is also catching up fast. This move of EGoM is likely to put more pressure on inflation. However, Oil minister was of the opinion that the hike will have marginal effect on inflation and the hike will be absorbed by the consumer. An increasing inflation will put pressure on RBI to raise policy interest rates (What are policy rates?), may be even before First quarterly review of Monetary Policy towards the end of July.

G-Sec markets experienced selling pressure after the release of news and yields on benchmark 10 year bond, 7.80% 2020 bond rose to touch a high of 7.6368 from the close of 7.5682 yesterday. Towards the end of the day, yields have risen to as high as 7.67%.

Equity markets have taken this as a very positive note for oil marketing companies particularly HPCL and BPCL, which jumped 5.4% and 5.5% respectively from yesterday’s close. HPCL finally ended 13.66% up whereas BPCL ended 12.8% up on Sensex.  Overall equity index have been on a negative side since morning and have not shown any significant movement to the news. Sensex was down 0.88% on the close of market.

Author:Praveen Bajaj

Overnight Index Swap 2 – Pricing of OIS

This article is part 2 of the series on Overnight Index Swap. To see first part of Overnight Index Swap series click

Overnight Index Swap – 1

Pricing of OIS

Pricing involves calculating the fixed rate of interest for a given floating rate benchmark. This pricing can be done on the basis of term money rates prevailing in the interbank market or on the basis of yields on G-Sec or corporate bonds.

Example

For simplicity sake, lets take a 7-day OIS, where counterparty A agrees to pay another counterparty B a fixed rate of 7% pa and receive overnight MIBOR on a notional principal of Rs 25 cr.

Floating rate leg

Interest is calculated on a daily basis as shown below.

Overnight MIBOR rate for these days is given in third column. In the above example we have assumed that day 3 is a public holiday thus interest for Day 2 and 3 are calculated simultaneously taking the rate of day 2.

Total interest accrued on floating rate leg is Rs 377,081 as shown above.

Alternatively, this interest can be calculated by compounding the daily rates for the each day. In this case the compounded rate over 7 days is 0.1508% for 7 days or 7.86% pa.

Fixed leg interest

At 7% pa, the interest for 7 days is Rs 335,616.

Thus A, which was to receive floating rate of interest will receive Rs 335,616 from B, which was paying floating rate and receiving fixed rate. By looking at the rates as well we can calculate the amount of payout. Floating interest rate is 7.86% and fixed interest rate is 7%, A will receive the difference amount from B.

Reversal/ Cancellation of contract

There are two ways in which the OIS contract can be cancelled-

  1. By entering into a reverse contract for the remaining tenor. For instance, in the above example, if A wants to reverse the contract on day 4, it can sell a contract for 3 days i.e enter into a contract to receive fixed and pay floating for 3 days ending on day 7. Notional principal in this case would be the original amount plus accrued interest for 4 days on the basis of floating rate. This method, however, is credit and capital inefficient as it involves booking extra credit limit for a reverse swap whereas cancellation of the outstanding swap would release credit limits
  2. By canceling the contract. This involves payout of funds for the interest differential for the period from start date to cancellation date and payout for cancellation premium which is calculated on the basis of the cancellation rate given by the counterparty.

In next article related to Overnight Index Swap we will discuss about the uses and various risk associated with Overnight Index Swap (OIS).

Author : Praveen Bajaj, MBA (SCMHRD)

Should I invest in real estate now?

With the improvement in economic conditions, property price have picked up in some metros, Tier-I and Tier-II cities across India. The global slowdown brought the focus of the developers back to quality of construction and delivery timelines. The real estate market is rapidly becoming brand conscious. Developers with strong execution capability command premium over their peers. In this backdrop our analyst Rahul Sonthalia gives his views regarding investment in property in various metro cities of India now.

Mumbai

  • Mumbai is a ‘hot property’ when it comes to buying or selling real estate
  • The buyers here pay a steep premium because a residential or commercial property is a coveted asset in this ‘city of gold
  • While demand for budget flats is very strong, demand for commercial space is slowly picking up
  • Real estate prices in Mumbai have gone up by about 24.0% till April 2010 as compared to prices in 2007
  • Volumes in 1Q10 in Mumbai dropped compared to 3Q09 and 4Q09 due to price escalation
  • Most developers focus on premium housing because of higher margins, though the demand for mid-income housing is high
  • Buyers and investors may be advised to wait for correction and then enter the market

Delhi & NCR

  • The October 2010 Commonwealth Games in New Delhi have proved to be a big trigger for real estate in Delhi and NCR region
  • Rising demand for residential and commercial property in Delhi and NCR regions have driven the property prices quite high
  • Further, new Metro links have provided boost to property prices in the city and NCR
  • Volumes in 1Q10 in Delhi dropped compared to 3Q09 and 4Q09 due to price escalation
  • The end-users can buy a home now as the prices are expected to go up further due to the ensuing Commonwealth Games
  • As for investors, they too can enter and make decent profits in about a year’s time

Kolkata

  • The property prices in Kolkata had risen by a whopping 59.0% in about a year-and half since 2007
  • After the rally, realty prices have remained stable in the second half of 2009
  • Prices in areas like Salt Lake City, Maniktala, Lake Town, Bhawanipur etc. 60-100 per cent in first half of 2009 as compared to 2007 prices
  • Since the prices have already appreciated quite a lot, it is advisable to wait for the prices to correct and then decide on buying/investing

Bengaluru

  • The lag effect of the global economic crisis which began in late 2007 and continued till end-2008 saw prices of residential and commercial spaces declining sharply in 2008 as well as 2009
  • However, the fall in property prices was arrested in second half of 2009 as prices began to stabilize
  • With the revival of the IT sector, the positive impact will be felt across all markets
  • This may be the ideal time to buy or invest in residential and commercial properties

Chennai

  • The fall in demand from IT professional for residential properties and IT companies for office space saw property prices correcting in the second half of 2008
  • Property prices have stabilized in the second half of 2009 and with revival in demand expected from IT professionals and companies, one can expect prices to show an upward trend going forward

Author:Rahul Sonthalia, Research Head, Kredent

China decides on ending Yuan peg

Facing growing pressure from around the world, The People’s Bank of China (PBOC) announced on Saturday that it is prepared to allow the country’s currency to float more freely against the dollar and other foreign currencies. The bank said that “this step is in view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China”

This step by the Chinese government would end the two-year Yuan Peg to Dollar (6.83) and will take the pressure of Beijing at the G20 meet at Toronto next week. It seems that the Chinese will not strongly revalue its currency because the very next day in a follow up statement it ruled out a one-off revaluation and said there were no grounds for a big appreciation of Yuan. However, the revaluation will have a dual impact on Chinese economy

  • On one hand it would make the Chinese exports expensive for the world market and will benefit exports from other competing countries like India, Brazil and other South East Asian economies
  • On the other it would make imports cheaper for China and will give the government a strong tool to manage its inflation, increase the purchasing power of the people and resulting in more broad based growth and in turn leading to the establishment of service sector in the country

All and all this move by China is good news for the global economy and other developing countries that are unable to compete with China in terms of exports because of its week currency.

Impact on India

This will ease India’s trade deficit with China and will help Indian exports of textiles, leather products, marine products, engineering products, auto ancillaries more favorable in comparison to the Chinese exports.

The trade between India and China soars closer to the US$60 billion target, India’s trade deficit with China is increasing. In 2009, India suffered a trade deficit of US$15.8 billion against China, while in 2008 the trade deficit was 11.17 billion., thus a stronger Yuan will help in eliminating this deficit and also increase the cost of Chinese imports of electrical machinery and other goods into India and benefit Indian manufactures.

Indian Sectoral impact of China’s yuan move

Its advisable to invest accordingly.

To read our earlier article on Chinese economy click here

Author:Rahul Sonthalia,Research Head, Kredent

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