KNOWLEDGE - ENDOWMENT BIAS

Symptoms - The tendency to place a significantly higher value on things when we already own them.

An Example - The endowment effect was identified by economist Richard Thaler in the 1970's when he gave the example of a man who bought a case of wine in the late 1950s for about $5/bottle. A few years later, his wine merchant offered to buy the wine back for $100 a bottle and the man refused, even though he had never paid more than $35 for a bottle of wine ever. Similarly, people holding on to shares for a long time that were purchased in an IPO and wanting a higher price even if the investment is already profitable due to emotional reasons, optimism, belief that the shares will continue to go even higher and supposed loss aversion.

Steps to correcting the bias - When someone is too fond of something they own, the following questions may help in overcoming the endowment bias.

1. If I have the money, will I buy the same product (shares) at the current selling price?
2. Would I buy the product (shares at the current market price) if I was not owning the product now?
3. Do I own this product because I have an emotional attachment, or the product is a great investment story?

PRUDENT INVESTOR

YOU ARE A PRUDENT INVESTOR IF:

1. You do not act (buy/sell) based on tips from newspapers, TV channels and contacts
2. You understand your risk profile that takes into account your willingness and ability to take risk
3. You follow asset allocation where debt and equity distribution is as per your risk profile
4. You are a long-term investor with an investment time horizon of more than 3 years
5. You do not increase equity exposure more than your prescribed limit when Sensex/Nifty indexes are on an uptrend
6. You do not decrease equity exposure more than your prescribed limit when Sensex/Nifty indexes are on a downtrend
7. You do not expect your portfolio to appreciate linearly and do not compare its performance with Fixed Deposits during the downtrend
8. You do not hold on to investments despite adverse fundamentals because they are at a loss
9. You consider the risk of investments without getting swayed by advertised high returns
10. You have realistic return expectations in accordance with the portfolio and its constituents' risk (volatility)

THE GOVERNMENT AND THE RBI PUBLIC FIGHT

The Indian Government and the RBI public disagreement in November were preceded by differences earlier based on letters that were sent by the government, invoking "Section 7 of the RBI Act" on contentious issues:

1. During the hearing in a case filed by the Independent Power Producers Association of India challenging the RBI's February 12th circular to initiate insolvency proceedings on the stressed power assets, the Allahabad High Court, in August, said the government could issue directions to RBI under Section 7 of RBI Act. Following this, the government issued a letter under Section 7 to the RBI governor seeking his views on power companies in relation to the February 12th circular.
2. The second instance of invoking Section 7 was when the government on October 10th sought the governor's views on using RBI's surplus capital reserves for providing liquidity.
3. The third letter pertained to regulatory issues, including withdrawal of Prompt Corrective Action (PCA), easing constraints on banks for loans to small and medium enterprises (SMEs).

After the Board Meeting on November 19th, the RBI made concessions on the capital adequacy of banks, while the two contentious issues of transfer of surplus reserves and relaxing norms for weak banks were referred to committees. The board has advised RBI to let banks recast loans up to Rs.25 crore given to micro, small and medium enterprises (MSMEs). The issue of transfer of excess RBI reserves to the central government has been referred to an expert committee, the membership and terms of reference of which would be finalized jointly by the government and the RBI.

The government struggling to meet its fiscal deficit target of 3.3% of GDP in the face of less than initially expected GST collections, wants the transfer of the excess capital according to their calculation to bridge the fiscal deficit gap. As per the latest Annual Report, RBI has a capital buffer of 27% of the balance sheet, which is second only to the % reserves held by the Central Bank of Norway. As per the government, the RBI is using too conservative a methodology for calculating reserves and thinks that the RBI is sitting on excess capital of ~Rs.3.6 lakh crore.

The central bank defends itself by saying that the reserves are crucial for it to help the country at the time of a future crisis. The formula used by the RBI to calculate capital needs under the economic capital framework is based on 'stressed value at risk' while most central banks use 'value at risk' valuation. The stressed value at risk calculates the loss at a probability of 0.01% (99.99% confidence level) which requires it to maintain reserves at a much higher % of its assets. If a 1% probability or 99% confidence level is taken which is the normal value at risk formula, the Central Bank would not need to maintain a high % of its assets as reserves.

FINANCIAL NEWS

SEBI has extended the deadline for compulsory dematerialisation of shares held in physical form to April 1st, 2019 from December 5th, 2018 failing which requests for effecting the transfer of securities shall not be processed.

SEBI is planning a short lock-in period for investments in liquid funds. The Market Regulator may also make it mandatory for liquid funds to mark to market the value of all bonds that have the maturity of 30 days or more. Currently, this is mandatory for a maturity of 60 days or more. SEBI is planning to introduce new rules on segregation of mutual fund portfolios or so-called side-pocketing in the event of a default by a company on its bonds. Side-pocketing is a method by which a fund separates a single or group of defaulted instruments from the main portfolio.

A panel appointed by SEBI has recommended that Indian companies should be allowed to list overseas based on fulfilment of certain conditions even without being simultaneously listed on the NSE or BSE. The market regulator has set a minimum capital threshold of 1000 Crores for listing overseas and allotment to at least 200 investors, besides recommending 10 overseas jurisdictions, with strong anti-money laundering policies who are members of the International Organization of Securities Commissions (IOSCO) and Financial Action Task Force (FATF). We have treaty obligations for sharing of information and cooperation, to ensure that the new rules, if implemented, are not misused.

Apart from the mandatory three-year third-party cover for new cars and five-year third-party cover for new two-wheelers, the Insurance Regulatory and Development Authority of India (IRDAI) has directed an increase in the owner's personal accident cover in the motor policy to Rs.15 lakhs from the current cover of 1 lakh for two-wheelers and Rs.2 lakh for four-wheelers. The respective premiums are increased to Rs.750 from Rs.50 for two-wheelers and Rs.100 for four-wheelers and should be taken for three years. The accident cover is compulsory in the first year. Though this is a good step by the regulator, it should have made the longer duration cover mandatory for older vehicles as people sometimes don't renew their policies especially if there is no intention to sell their vehicles. Also, new buyers should compare policy features on an insurance platform online and do their own due diligence rather than directly purchasing insurance from vehicle dealers at their showrooms.

DOMESTIC ECONOMY

FY19 GST collections were projected to be Rs.12 Lakh Crore, a run rate of Rs.1 Lakh Crore on a monthly basis. However, only April and October have reported collections above the target while average monthly target stood at Rs.970 billion in the first seven months. To meet the yearly target, each of the next five months has to yield Rs.1.107 Lakh Crore, at least 14% growth in the next five months. For fiscal deficit, Central GST is more important and the CGST collections have to rise to Rs.3.4 trillion in the next five months against Rs.2.6 trillion in the first seven months to meet the budget target of Rs.6.04 trillion for FY19. It is expected that the Centre might get Rs.50,000-60,000 Crore less from CGST and integrated GST against the budget projections, and will force the Centre to seek alternate ways to not increase the fiscal deficit from the target of 3.3% of GDP deficit in FY19.

Total adjusted non-food bank credit (lending from banks to the commercial sector) grew at 15.6% Y/Y to Rs.97.32 Lakh Cr. compared to Rs.84.22 Lakh Cr. in the fortnight a year ago. During the fortnight ending Nov 9th, 2018 actual non-food credit grew by 15.12% to Rs.90.51 Lakh Crore, while the total non-SLR investments grew by 22.26% to Rs.6.81 Lakh Crore. The growth rate was the highest since the demonetisation period in November 2016.

The government's website for MSME borrowers will offer automated processing of loan with an in-principal approval in less than an hour for loans worth Rs.10 lakh to Rs.1 crore. The interest rate starts at 8% and collateral coverage is not mandatory. Firms registered on the GST portal would be able to avail this facility on the GST portal itself and also get a 2% rebate on interest rates. Public sector companies have to compulsorily procure 25%, instead of 20%, of their total goods and services purchased from the MSMEs. Of the 25% procurement mandated from the MSMEs, 3% must now be reserved for women entrepreneurs.

India jumped from 130th ranking in 2016 to 77th ranking in 2018 on the World Bank's Ease of Doing Business rankings. Much of this improvement is on account of better performance on three parameters, a) dealing with construction permits, b) trading across borders and c) starting a business. Country-wise data shows that India now fares better on some of these indicators than its emerging market competitors such as China, Vietnam and Bangladesh.

SECTOR & COMPANY NEWS

The Centre has extended the domain of the ethanol blended petrol program to include extracting the fuel from surplus quantities of maize, jawar, bajra and fruit vegetable waste. Previously, ethanol blending was permitted from excess sugar cane production. The government has set a target of 10% ethanol blending in petrol by 2022 leading to savings of Rs.12000 Crore plus on an annual basis.

Swedish furniture major Ikea said its staff strength in India may see a ten-fold rise to 15,000 in future, whereas the company may look at removing around 7,500 jobs globally also as part of the restructuring. Ikea said it is on track to invest 1.5 billion Euros in India and aims to be present in many cities in the country in the coming years. In August 2018, the global furniture giant opened its first India store in Hyderabad and is looking next to enter Mumbai with both online and stores presence. The company intends to reach out to 200 million Indians in the coming three years through different channels as it looks at India as a new and expanding retail market for Ingka group which is the parent firm of Ikea.

According to the Telecom Regulatory Authority of India (TRAI) report, broadband subscription in India has increased by 3.89% in September compared to August 2018. As per the report, there were 48.17 crores subscribers at the end of September. Out of the total broadband subscription, as on September-end 2018, the top five service providers have 97.86% of the market share. These service providers are Reliance Jio Infocomm Ltd. (25.23 Crore), Bharti Airtel (9.93 Crore), Vodafone (5.18 Crore), Idea Cellular (4.79 Crore) and BSNL (2.01 Crore).

The RBI reduced hedging requirements for external commercial borrowings (ECB's) of maturity between 3-5 years from 100% of the loan to 70%. The hedging reduction would help Indian companies borrow funds relatively cheap as hedging cost added up substantially to the final cost. The reduction of the hedging requirement would benefit companies engaged in manufacturing and software development, shipping and airline companies, infra companies, asset and housing finance companies. This is the second major relaxation by RBI in foreign currency borrowing after the government raised concerns on the illiquidity in credit markets. Previously, the central bank had reduced the minimum tenure for borrowing by the ECB route to three years from five years.

INTERNATIONAL 

On the very same day US President Donald Trump dined with Xi at the G-20 Summit in Argentina, Canada arrested Wanzhou Meng, CFO and daughter of the founder of China's flagship company Huawei at the behest of US Authorities. The Wall Street Journal had reported in April 2018 that the U.S. authorities are investigating whether Chinese tech giant Huawei violated sanctions on Iran. That same month Washington barred Huawei's rival ZTE Corp. from exporting U.S. technology in a separate case over exports to Iran and North Korea. A Republican member of the Senate Ben Sasse commented that Huawei is an agent of China's communist party and applauded Canada for the arrest. The US, Australia and New Zealand have already blocked the use of the Chinese firm's equipment in infrastructure for new faster 5G mobile networks.

The Brexit withdrawal agreement and political declaration vote in the UK Parliament will take place on Dec 11th, 2018. The leaders of the other 27 EU countries have signed on the withdrawal agreement and political declaration. The deal also needs to be approved by the European Parliament which will vote early next year and the EU Parliament members are expected to follow their leaders by backing the deal. If the UK parliament rejects the deal, then there could be multiple possibilities. As per the Brexit deal, the UK will be leaving the EU on March 29th, 2019 at 11 pm UK time. The deadline could be extended but the EU says all 28 EU members would have to agree for that to happen. However, the European Court of Justice has said the UK could cancel Brexit altogether without the agreement of others.

France's President Macron has decided to raise the tax by 6.5 cents/litre on diesel and 2.9 cents/litre on petrol by Jan 1st, 2019 on the back of 7.6 cents and 3.9 cents raised already in 2018 for diesel and petrol, respectively. The decision was met with demonstrations and protests across the country. The protests termed as the "yellow vest movement" after the high visibility jackets carried by drivers in France as part of safety equipment for use in case of a breakdown or an accident had initially focused on the rise in diesel price rise but has now grown into a full protest against rising living costs, particularly in rural areas, and other grievances against President Macron's perceived pro-rich policies.