February Newsletter - 2018

Estimated reading time: 7 minutes 13 seconds


Symptoms - The self-belief that one has higher skills or an edge compared to others due to success in the recent past. A fallout of overconfidence bias is that we tend to remember winners and the effect of these winners on the portfolio. Overestimating the expected return and underestimating the volatility of the return in a shorter time-period, one tends to put more weight in whatever one feels more confident. An example could be: Holding a major part of ones' investments in stock options of the company where the person continues to be employed.

Steps to correcting the bias - Review in detail the investment decisions over the years. A detailed review of all the decisions (winners and losers) will help in evaluating our abilities and the real factors that lead to the winners and losers in the portfolio.


Historical data suggests that investing in the equity markets when the trailing 12 months PE is above 27 times leads to negative returns on those investments even if the holding period is extended to 3 years.

As no one can predict when people may panic, therefore no one can predict when markets will fall, because markets fall when people panic. Therefore, we advise clients to spread their equity allocation over time. "This time is different" is a frequent phrase used to defend at times when people get sceptic about investing at higher market valuations. Every time it is different, but the results thereafter are the same. If it was different then the PE levels should have been much lower compared to all the other times which would have given more credibility to the rally so far. Every time, the justification on why it is different this time, is actually the difference!

To an extent, diversification and fund specific research can insulate the portfolio but following asset allocation is the main contributor. Holding liquid funds and building up position in not so highly correlated instruments like gold will create emergency funds and liquidity in times of equity market correction.


SEBI has issued a discussion paper that proposes to segregate all financial advisors, individuals and entities like banks, nonbanking finance companies (NBFCs) and corporates from business of distributing financial products either directly or through holding or subsidiary company and vice versa. The regulator wants existing registered investment advisors to choose between providing investment advice or distribution services before 31st March 2019.

SEBI is in talks with National Payments Corporation India to develop an alternate payment mechanism to reduce the timeline for listing post IPO from the current 6 days under ASBA mechanism.

With effect from 1 February 2018, mutual fund houses have to benchmark their funds' performance to the Total Return Index (TRI) of the Benchmark the fund has selected. TRI includes dividend returns over and above the price return.

The government announced that its GOI Savings Bonds (taxable), 2003, earning 8% interest per annum, will cease subscription from January 2.

SEBI has allowed strategic investors to invest up to 25 per cent of the total offer size of a REIT (Real Estate Investment Trusts) or InvIT's (Infrastructure Investment Trusts). The investment will be locked in for 180 days post public issue listing and the price for the strategic investor cannot be lesser than the public issue price. At present, only two InvIT's have been listed.

SEBI is planning to introduce fresh measures to curb the retail participation in the equity derivatives market. A couple of likely measures would be a) to increase the exposure per contract size, b) to increase the STT on the premium paid. Current F&O turnover is more than 18 times cash market turnover, this was ~9.3 times in 2011.


A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. These blocks become an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The first blockchain was conceptualized in 2008 by an anonymous person or group known as Satoshi Nakamoto and implemented in 2009 as a core component of bitcoin where it serves as the public ledger for all transactions.

Blockchains help overcome the need for a trusted service provider and are predicted to result in less capital being tied up in disputes and litigations. Blockchain recording has the potential to reduce systemic risk and financial fraud. They automate processes that were previously time-consuming and done manually, such as the incorporation of businesses. In theory, it would be possible to collect taxes, to conduct conveyancing and to provide risk management with blockchains.

Distributed ledger, transparency due to visibility to anyone with access to the system, peer to peer transmission without control by a central node and no scope for data tampering make blockchain the technology which can disrupt how the financial transactions in the future will be conducted by removing the need for trusted "third-parties" such as banks to complete the transactions. The technology also lowers the cost of networking, therefore allowing several applications.


The government has decided to reduce its additional borrowing from the previous figure of Rs.50,000 crore to Rs.20,000 Crore for the remaining part of FY18.

The GST Council cut the tax rate on 29 goods and 53 services' effective from 25th January. The GST Council will take up bringing real estate, electricity, petroleum products under GST in its next meeting.

India's merchandise trade deficit widened to a three-year high standing at $14.9 bn in Dec-17 compared to $13.8 bn in Nov-17. This widening was mainly due to a considerable deceleration in the exports growth while imports inched up modestly.

India's wholesale inflation (WPI) in December 2017 over December 2016 was 3.58% compared to a 3.93% inflation in November 2017. The consumer inflation (CPI) rose to 5.21% after rising to 4.88% in November from 3.58% reported for October. The decline in vegetable prices was not sufficient to cancel the rise in fuel prices.

India's manufacturing PMI grew to 54.7 in December from 52.6 in November with a sharp increase in output and new orders.

Railways Minister Mr. Piyush Goyal is trying to get approval of funds for the overhaul of Indian Railways' signaling system including automation at an estimated cost of Rs.78,000 Crore in the forthcoming budget.


Indian pharma companies received 301 generic drug approvals from the US Generics market in 2017, a 43% increase over approvals in 2016. According to an Economic Times Report, Zydus Cadila led with 66 approvals in 2017, followed by Aurobindo at 52, Glenmark at18, Lupin at 17, Gland Pharma at 16 and Cipla at 10.

The steel ministry as part of their budget wish list has asked the finance ministry to bring down the import duty on coking coal to 0% from 2.5% along with a 0% import duty on scrap steel from current 10%.

The government is considering allowing up to 100% FDI in private banks and 49% in public sector banks.

India's leading auto maker, Maruti Suzuki Limited's Board of Directors has approved reducing the royalty rates on all models launched since Jan 2017. In the December 2017 quarter, the royalty paid to the Parent Company was reported at ~5.3% of its net sales.

IDFC Bank announced its merger with the non-banking financial company (NBFC), Capital First. The share swap ratio has been fixed at 139:10, which means 139 shares of IDFC Bank will be allotted for every 10 equity shares of Capital First.

ONGC is acquiring the government's entire 51.11% stake in Hindustan Petroleum for about Rs.370 billion in an all-cash deal by the month-end. With this acquisition, ONGC will become India's first vertically integrated 'oil major' company, having presence across the entire value chain.


US GDP grew at an annualized 2.6% rate in the last quarter of 2017 as per preliminary estimates over the same quarter of 2016. Consumer spending which accounts for 70% of the GDP rose at a 3.8% rate with consumer durables rising 14.2%. US Credit Card Debt is at record high level and this may pose risk if people fail to reduce their outstanding credit card balance.

China's economy expanded at a faster pace than expected. China's economy grew at a pace of 6.8% in the fourth quarter of 2017 from a year earlier beating estimates compiled by Reuters and Bloomberg. Growth for the full year at 6.9% is the first instance of a higher than previous year growth since 2010.

Saudi Arabia, the world's top oil exporter and de-facto leader of the Organization of the Petroleum Exporting Countries (OPEC), said that major oil producers agreed they should continue cooperating on production targets beyond their deal on supply cuts expiring in 2018.

Despite 4 months after the elections, Germany continues to move on without a government formation. However, Germany's Social Democrat Party (SPD) headed by Martin Schulz has voted to start formal coalition talks with Chancellor Angela Merkel's Christian Democratic Union (CDU). A new government could be formed by March 2018 if the talks are successful.



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