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August Newsletter - 2018

Estimated reading time: 8 minutes 27 seconds

KNOWLEDGE - INFORMATION BIAS

Symptoms - The tendency to collect more information beyond a point that the information collected ceases to affect the decision that has already been made. Financial News Channels and Websites present investors with plenty of information every day and it is difficult to filter the material, relevant info from non-material info.

Examples - Getting worried or influenced by daily share price or market movements or random company developments that usually contain no information that is relevant to an investor who has invested not as a trader but for the long term. Because of the analysis, evaluation and the dedicated coverage on price movements, company developments etc., investors may sell shares giving more than deserving importance to the analysis on the news and in some time, the company may recover from the news and in the meanwhile, the investor would have put that money in some other company which may lack that initial research conviction.

Steps to correcting the bias - Pay more attention to the events that can affect the company or portfolio over the time frame that matches the holding period or more. For example, if an information about a company has a very short-term influence while the holding period in that investment is long and the information has no bearing on the company in the longer term then the investor should not react rather use other people's reaction to invest more at a lower price due to the reaction. Quarterly results of a company could be disappointing for some reason but the investor needs to see if this reason is how temporary or how permanent. 

APPLICATIONS OF THE RULE OF 72

The rule of 72 helps in quickly calculating the no. of years required to double

the income in a scheme with a certain interest rate compounded annually or

could also determine the rate of annual compounding if the no. of years required to double the income in a scheme is pre-told.

For example, if a fund doubles the investment in 8 years, then using the rule of 72, one can find the rate of annual compounding which is 72/8 giving 9% as the annual compounded yield on the product. The rule of 72 works best when the rate of return or the time of investment is between 6-12% range.

The rule of 72 can be used to determine the effect of inflation on the purchasing power of a currency and is useful in the case of retirement solutions where the return potential is considerably reduced on one hand and on the other, inflation risk and risk of outliving financial corpus is high. For example, if the long-term inflation assumed is 9%, then the purchasing power of a fixed amount reduces by 50% in 8 years and to 25% of the amount in 16 years from now.

The Rule of 72 can also be used to determine the effect of expense ratio on a Regular Plan Mutual Fund investment, Mortality Charges on a ULIP Fund. On the same lines, one can also find the approximate time it would take to triple the investment by using 114 instead of 72 dividing by the rate of return or determining the rate of return if the expected time to triple is known, and for quadrupling the investment, use 144 instead of 114.

The Rule of 72 assumes that the return on the product is annualised. Use the Rule of 70, if the frequency of compounding is semi-annual and use the rule of 69 if there is continuous compounding.

FINANCIAL NEWS

As per an Economic Times report, PF subscribers are likely to be soon offered flexibility to opt for any combination of debt and equity as per their choice and risk assessment, with the labour ministry bringing a new policy that will remove the existing cap on investments.

Securities and Exchange Board of India (SEBI) is set to initiate proceedings by sending a show-cause notice to ICICI Prudential Asset Management Company on the issue of investing in the initial public offering (IPO) of its sister concern, ICICI Securities on the last day of the IPO. Earlier, SEBI had asked the AMC to refund the 240 Crore invested on the last day of the IPO along with a 15% interest till the time the payment is actually made from the time of allotment. The regulator has also asked the AMC to make good the losses on all investor redemptions in the 5 schemes till the date when the AMC actually pays the money to these schemes.

As per the Insurance Regulatory and Development Authority of India's (IRDAI) data as on March 31st 2018, Rs.15,167 Crore of amount belonging to policyholders is lying unclaimed with 23 life insurance companies. On the basis of this information, the Insurance Regulatory and Development Authority of India (IRDAI) has asked the companies to disburse old insurance claims after identifying the concerned policyholders or beneficiaries.

SEBI on July 20 has proposed that companies with borrowings exceeding Rs.100 crore should meet at least 25% of their loan requirements through the bond market. The new framework could become mandatory from April 1, 2019.

THE 16 NEW DEBT FUND CATEGORIES

Similar to the re-categorisation of Equity Mutual Funds under 10 categories, Debt Mutual Funds have also been categorised under 16 new categories. The new categories can be broadly split into 1. Maturity-based Fund Categories 2. Duration based fund categories and 3. Ratings based Fund Categories. The 16 categories are as follows:


SECTOR & COMPANY NEWS

Though still, early days with the earnings season, from the 370 companies that have reported earnings, show that Revenues in the first quarter for FY19 have risen 22% Y/Y and Net Profits have gone up by 19%. Weakening Rupee that aided the IT companies, Domestic Infra stimulus that helped L&T, rural demand helping Consumer Goods companies, were some of the key factors. However, there are some key dampeners like low base effect of 1Q FY18 with an earnings growth of 8% Y/Y where many companies became cautious due to GST introduction, rising Commodity Costs and lower Rupee leading to higher Material Costs and lower margins, and finally, a 29% increase in Interest Costs for non-financial companies.

Around 90 lakh trucks have been off the roads since July 20 with truckers protesting against high diesel prices, removal of all toll barriers across the country and reduction of the third party insurance premium, the abolition of TDS, and the introduction of a national permit. The Truckers body, All India Motor Transport Congress (AITMC) called off the indefinite strike on the 27th after the government assured them to look into their demands. The Associated Chambers of Commerce & Industry of India (ASSOCHAM) said that the countrywide strike would have resulted in a cumulative loss of Rs.50000 Crores to the Economy.

In a recent report by Rating & Research Agency, ICRA observes that when battery costs fall below $100/kWhr, a $90/barrel of oil would make Electric Vehicles competitive to the conventional petrol and diesel vehicles. As per ICRA, the cost of batteries have fallen from $800/kWhr in 2011 to $208 in 2017 and is expected to fall to $70 by 2030. As per The Business Line article which cited the ICRA report, diesel and petrol form around 50% of the total product volumes derived per tonne of crude oil processed by a refinery, and a much higher share of 65% in terms of value derived from crude oil.

DOMESTIC ECONOMY

India's wholesale inflation grew 5.77% in June, highest in the previous 54 months, driven by food items and fuel prices. The WPI data for the April has been revised to 3.62% from 3.18% earlier. CPI inflation increased by 5.00% in June 2018 compared to 4.87% in May 2018.

After a four-month high of $14.62 billion in May'18, India's trade deficit widened to over five-year high of $16.6 billion largely on account of surge in crude oil prices, data from the trade ministry showed. India has become the world's sixth-biggest economy, according to updated World Bank figures for 2017. India's gross domestic product (GDP) amounted to $2.597 trillion at the end of last year.

The 28th GST Council meeting on 21 July recommended cutting rates on more than 50 items including daily use appliances like Washing Machines, Vacuum Cleaners, small TV's up to 24 inches and Lithium-Ion Batteries, effective from 27th July. Within a period of 13 months since GST was rolled out, 384 commodities and 68 services have seen a rate reduction and no rate increase. Going forward, the 28% tax slab would only contain luxury or sin goods and currently, at present 35 items remain in the 28% slab from the original list of 226 items. In those 35 items, apart from demerit items like Tobacco, Cigarettes and Pan Masala, items like Cement, Auto-Parts, Tyres are also included. The non-sin items are expected to see a cut in rates to 18% from 28% going forward.

The India Meteorological Department observed that till July 25th, the rainfall deficiency narrowed to 3% of the long period average from a 9% recorded earlier in the month. States like Bihar, Maharashtra, Telangana and Andhra Pradesh and the North-Eastern States have seen below normal rainfall and is expected to get more rain in the coming days. Available data suggest that sowing till July 6 was 14% lower than last year same time while reservoir levels have improved to 32% as on July 19th, compared to 18% as on June 30th.

INTERNATIONAL NEWS

For the second quarter ending June 2018, US GDP grew at a strong 4.1% Y/Y, fastest since, 4.9% in 3Q, 2014. The US Commerce Department also revised its 1Q reading to 2.2% from 2%. There were strong contributions from exports ahead of expected tariff wars with China, 4% increase in Personal Consumption, a 7.3% increase in Business Investment and 3.5% increase in Government Spending.

China's trade surplus with the United States widened to a record monthly high of $28.97 billion, up from $24.58 billion in May. The Nikkei Japan Services PMI (Purchasing Manager's Index) improved to 51.4 in June of 2018 from 51.0 a month earlier, as new orders and output grew at a faster pace.

Industrial production in the Euro Area rose by 2.4% Y/Y in May 2018, following a 1.7% advance in the previous month and beating market expectations of 2.1%.

Iran's currency hit a record low of 100,000 rials to the dollar on 29th July amid a deepening economic crisis and the imminent return of full US sanctions after the US announced in May that it was pulling out of the 2015 nuclear deal and is set to reimpose its full range of sanctions in two stages on August 6 and November 4, forcing many foreign firms to cut off business with Iran.



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