July Newsletter - 2018

Estimated reading time: 10 minutes 2 seconds


Symptoms - Loss aversion refers to the tendency to prefer avoiding losses than acquiring gains. Some studies suggest that losses are psychologically twice as powerful as gains. This term was framed by famed psychologists Amos Tversky and Daniel Kahneman in the early 90s.

Examples - A). Loss aversion has a very significant effect on Real Estate Investments, an asset class which is influenced by emotions more than any other asset classes. People are unwilling to sell their properties for a price less than the buy price after adjusting for inflation even if they realize that they are losing time waiting for the right price. Real Estate Investments often account for a large share of individual wealth, and so a fall in property prices can have important financial consequences on the overall wealth of an individual. B). The "ING International Survey - Savings 2015" found that people in Europe are more likely to know the interest rate they receive on savings than how much interest they pay on debts while the interest cost on debt paid is higher than the savings interest received. Psychologists use the term "ostrich effect" to describe this tendency to avoid information we expect to be painful to hear because of our dislike of losses.

Steps to correcting the bias - Financial Planner, Carl Richards in the New York Times Paper, suggests taking the "Overnight Test." Suppose You are holding a stock that was recommended by a friend currently at a loss. Imagine someone sold your shares overnight and had left the cash realized from the sale to you. You have a choice to buy back the shares or use the cash to add to the latest recommendations. Your decision to buy the shares without any valid reason suggests the extent of the "loss aversion" bias. Most people would not buy back the stock.


The price-earnings ratio (P/E ratio) is the ratio for valuing a company's shares that measures its current market price or the last transaction relative to its Earnings per Share which are derived by the company's profit after tax upon total Outstanding Shares. The P/E ratio is also known as the Earnings Multiple.

Let's try to derive the PE ratio for a listed company Hero MotoCorp Ltd. which is a significant player in the two-wheeler segment in the Auto Industry in India. The current price is Rs.3467.70, and the current Market Capitalisation is Rs.69,254 Crores. The division of Market Capitalisation by the Share Price gives the No. of Shares issued by Hero MotoCorp Ltd. leading to a total of ~19.97 Crore Shares. This number will be used to derive the earnings per share (EPS). To get EPS, we need to know the Profit after Tax. The Profit After Tax for the last four quarters on a standalone basis is Rs.3697.36 Crores. Dividing the PAT by the Number of shares which is 19.97 Crores as calculated above, we get EPS as Rs.185.13. After that, we can conclude that Hero MotoCorp's PE is Current Price divided by the EPS which leads to an answer of 18.73 which implies that for every Rs.1 of earnings, the market is ready to pay a price of Rs.18.73.

PE Ratio can be backwards-looking as well as forward-looking. Like the profit figures available for the previous 12 months, we can have growth estimates for the profit figure in the next financial year or the year after. The expected Profit After Tax divided by the expected no. of shares used as the denominator and 1-Year, 2-Year forward looking PE Ratio can be found out by taking the current price as the numerator and dividing it with the forward EPS. The PE Ratio can be used to compare two companies mostly in the same sector especially on the forward PE basis because that will account for the growth expected in the next 1, 2 years. The Index can also have a PE, and this could be used to measure the current level of overvaluation or the undervaluation of the market.

The inverse of the PE ratio known as the Earnings Yield % is compared with the current bond yields. Typically, Earnings Yield should be below the bond yield as stocks are likely to report higher growth in the future compared to interest payments by the bond which has a limited maturity and fixed coupon payments.


More than the volatility of prices, it is volatility inside the investor's mind which is riskier to the investor's wealth accumulation journey. Imagine deciding to stop investing because of a temporary decline in portfolio value. A most beneficial situation to accumulate units of stocks and mutual funds because of the fallen price per unit can within a second become a situation of panic and despair. The investor may decide to stop investing at that spur of the moment and turn an opportunity on its head and make it a dead end.

Volatility in the market is a friend unlike the volatility of the mind because if not for the former then prices keep going up and we don't get to buy more units at lower prices. It is also not guaranteed that in the long term all investments become positive and that is where a well-diversified portfolio with practical research will help. Course correction helps remove bad performers. Overall, a well-diversified portfolio and investing calmly when the markets are down, lead to the eventual creation of wealth and fulfilment of financial goals.


SEBI reduced the time to announce the price band from 5 days to 2 before opening the IPO offer. SEBI has also reduced the minimum anchor investor size to Rs 2 crore from Rs 10 crore in the case of SME IPOs, introduced a cut in the timeline to three years of financial disclosure from five previously needed for filing an IPO and has permitted the inclusion of insurers and foreign portfolio investors in the anchor investor category.

The Association of Mutual Funds in India (AMFI) has written a letter to the fund houses asking the Mutual Fund Asset Management Companies (AMCs) to pass on the benefit of a steep reduction in additional expenses that were charged by schemes, to investors. Sebi on 29th May had drastically slashed the additional "expense" charged by mutual funds to just five basis points from 20 basis points, as part of its effort to help increase the penetration of such products among investors.

To improve transparency and credibility to the spot price polling mechanism in commodities, Sebi has proposed through a consultation paper to make it compulsory for exchanges to accredit an independent polling agency and bring such agency under its purview for obtaining reliable spot prices and details of the quality and grade of the traded commodities from the polling participants.


The oil ministry has asked refiners to prepare for a 'drastic reduction or zero' imports of Iranian oil from November as per a Business Standard report quoting two industry sources indicating that the government is responding to the United States' demand to cut trade ties with Iran. India, the biggest buyer of Iranian oil after China, will be forced to take action to protect its exposure to the US financial system mainly in the form of shipping, banking, and insurance channels.

India's Tata Steel and ThyssenKrupp AG on June 30th signed a definitive agreement to combine their European steel businesses in a 50/50 joint venture under a new company. The new company will be called "ThyssenKrupp Tata Steel BV," and will be based in the Netherlands with a combined capacity to produce 21 million tons of steel a year, making it the second largest steelmaker in Europe after ArcelorMittal. While the JV gives equal shareholding to the two companies, ThyssenKrupp will get a bigger share from the proceedings out of an expected IPO of the JV.

The Insurance Regulatory and Development Authority of India (IRDAI) on Friday approved a proposal by Life Insurance Corporation of India (LIC) to raise its stake in IDBI Bank up to 51% from the current 10.82%, LIC is likely to inject ~Rs.10,000 Crores in to the Bank for the 40% additional stake it is acquiring. The IRDAI has given LIC a special relaxation from its rule on a 15% holding cap for insurers in a single firm. LIC will also have to bring down the stake to below 15% gradually.

Reliance Industries has signed an agreement to acquire US-based open telecom solutions provider Radisys. The cash acquisition at roughly $74 Million is likely to cement Jio's position in futuristic areas such as 5G and Internet of Things (IoT) and Open Source Architecture Adoption. The 600 employees and Nasdaq listed Radisys will be delisted post the acquisition.


Coming over the Wholesale Price Index (WPI) reading at a four-month high of 3.18% in Apr-18, the May-18 reading increased to a 14-month high of 4.43 % on rising fuel prices (11.22% Y/Y) as well as food(1.6% Y/Y). Consumer price inflation (CPI) stood at 4.87% in May compared with 4.58% in April. Economists polled by Bloomberg had estimated CPI inflation at 4.9%.

India's trade deficit widened to a four-month high of $14.62 billion in May from $13.84 billion in May 2017 as imports surged nearly 15 % on a Y/Y basis. India's exports in May rose by 28.18 % Y/Y to USD 28.86 billion while imports were up 14.85 % Y/Y to USD 43.48 billion.

After falling for three years in succession, money parked by Indians in Swiss banks rose 50% Y/Y to ~Rs.7000 Crores in 2017. As per Finance Minister Mr Piyush Goyal, 40% increase in foreign remittances is on account of the RBI's Liberalised Remittance Scheme where a resident Indian can remit $250,000/year. The Minister added that under the agreement for automatic exchange of information signed with Switzerland in November 2017, both countries have started data collection by the global standards in 2018 and will mutually exchange it from 2019.

The Finance Ministry retaliating to US import duty action said in a notification that effective from August 4 India will hike customs duty on several imported goods from the US, including Bengal gram, lentils, and artemia.

Under the guidance of The Ministry of Power, the Bureau of Energy Efficiency (BEE) carried out a study and recommended that the default setting in the air-conditioning should be at 24oC. The BEE estimates that by keeping the air conditioner at the default (factory) temperature settings, which is at 24 oC, as much as 20 billion units, worth Rs 10,000 crores annually can be conserved. The government has decided to issue an advisory to all establishments and manufacturers in this regard. The Union Minister of State for Power, Mr R K Singh held a meeting with the major air-conditioner manufacturers and advised them to keep the default setting of air conditioners at 24oC.

After having been stationary for nine days since June 13, the South-West Monsoon has covered the entire country 17 days in advance of its regular onset date of July 15th. Of the four months, June contributes 17% of the total rainfall, July 32%, August 28% and September 23%. The India Met Department expects July to see 101% of "the long-period average rainfall."


The cyclically adjusted price-to-earnings ratio for the S&P 500 also called the Shiller P/E ratio stands at 32. According to Russell Investments, the current level is the highest in the history besides 1929 and the late 1990s. Russell expects the total return of U.S. equities over the next decade to be very subdued at only about 2% per year.

The ECB held its benchmark refinancing rate at 0 % on June 14th and said the monthly pace of the net asset purchases would be reduced to €15 billion from September to December 2018, and then stopped. As was widely expected, The Bank of Japan left its key short-term interest rate unchanged at -0.1 % at its June 2018 meeting.

U.S. producer prices increased more than expected in May, leading to the biggest annual gain in nearly 6-1/2 years, but underlying producer inflation remained moderate. US Fed raised policy rate by 25 bps, and signalled two more hikes in 2018.

President Donald Trump said the US would stop conducting military drills on the Korean peninsula, after his historic summit here with North Korean leader Kim Jong-un.




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