October Newsletter - 2018

Estimated reading time: 12 minutes 6 seconds


Symptoms - When finally after the outcome of an event, one tries to simplify the causes and effects of a complex situation (complex because the actual outcome was clearly not expected to happen) and starts to assume better predictive ability after linking something important before the event to the result.

An example - R.Beyth and B.Fischhoff devised the first experiment directly testing the hindsight bias. They asked participants to judge the likelihood of several outcomes of the Late US president Richard Nixon's upcoming visit to Beijing and Moscow. Sometime after President Nixon's return, participants were asked to recall (or reconstruct) the probabilities they had assigned to each possible outcome, and their perceptions of the likelihood of each outcome were greater or overestimated for events that had occurred. The title of the research paper was "I knew it would happen", and may have been instrumental in calling the bias as "knew it all along" effect. Another example from the field of investing, "The markets were obviously going to correct because Crude reached USD80/Barrel."

Steps to correcting the bias - The more complex the system, the more serious the consequence of the Hindsight bias. As systems become complex, we start forming conclusions based on our level of understanding which has an objective of trying to find answers like "if A, then B" and from there to "if A, then surely B". We should find answers to questions like"If A, then why didn't C or D happen instead of B happening"


IL&FS downgrades

IL&FS defaulted on repayment of Rs.100 crore to the Small Industries Development Bank of India (SIDBI) on September 10, 2018. This default followed a series of defaults starting August 28, 2018, when ILFS Financial Services, one of ILFS' subsidiaries, delayed repayment of commercial paper obligations. ILFS Financial Services has since been barred from accessing the commercial paper market until March 2019. As per Moody's, IL&FS's outstanding debentures and commercial papers as on March 31, 2018, accounted for 1% and 2% of India's domestic corporate debt market. Rating agencies slashed the credit ratings for both IL&FS and the subsidiary, IL&FS Financial Services and finally marked them to "default grade". Mutual funds initially wrote down the value of IL&FS bonds by 25%, and now many have written-off the entire exposure. The government took control of the IL&FS management and placed a new board. Mutual funds can expect to recover a good % of the default after the restructuring plan is rolled out.

Should a debt fund investor exit or never invest because of the defaults?

  1. Till now, all mutual funds have been able to recover the investments made by them in a company that has defaulted. When the recovery happens, the previous fall due to the debt downgrade gets recouped.
  2. A loss due to the write-down in the valuation of a bond that has defaulted is most likely temporary, however, a panic exit will make that permanent in the hands of the investor who exited. These exits by some would also result in gains to that extent in the hands of the residual investors in the fund.
  3. In certain cases, if the recovery does not happen then, the AMC can bail out the scheme by buying the bond.
  4. On top of the drop in NAV due to write-downs, there could be exit loads as well which could further increase the loss.

Important takeaways for fund selection:

  1. Credit rating agencies can also be late or even wrong in identifying default possibilities even if the instrument is AAA rated before the event of default.
  2. It is very likely that debt funds which perform highest in their category have a higher risk than the category.
  3. From 40 mutual funds which had IL&FS debt exposure, the funds with high concentration to IL&FS had a higher hit to their NAV. The concentration of holdings is a necessary check to avoid high exposure to any holdings at the combined group level including all subsidiaries.


"Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." - Paul Samuelson. The New York Times considered Mr Samuleson as the "foremost academic economist of the 20th century."

"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." and

"Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves." - Peter Lynch. Mr Lynch became famous as the manager of the Magellan Fund at Fidelity Investments between 1977 and 1990, averaging a 29.2% annual return. During his tenure, assets under management increased from $18 million to $14 billion.

"Your success in investing will depend in part on your character and guts and in part on your ability to realize, at the height of ebullience and the depth of despair alike, that this too, shall pass." - John Bogle. In 1974, Mr John Bogle founded the Vanguard Company, one of the most respected and successful companies in the investment world. In 1999, Fortune magazine named Bogle as "one of the four investment giants of the twentieth century."

"You make most of your money in a bear market; you just don't realize it at the time." - Shelby Cullom Davis. Mr Davis was an American businessman and philanthropist from the state of New York. In 1947 he created Shelby Cullom Davis & Company, which became a leading investment firm.

"The intelligent investor is a realist who sells to optimists and buys from pessimists." - Benjamin Graham. Mr Graham is widely known as the "father of value investing."


The government has hiked the interest rates on various small savings schemes for the October-December 2018 period across various instruments to the extent of 0.4%. In the fixed-rate products category, the revised interest rates for the three-and five-year post office time deposits (7.2% and 7.8%, respectively) look attractive compared with the interest rates provided for bank fixed deposits of similar tenures. Five-year time deposits in the post office also qualify for tax deduction under Section 80C. SCSS (Senior Citizens Savings Scheme) now offers a quarterly interest payout of 8.7%. Quarterly rates for Variable-rate products such as Public Provident Fund are revised to 8% and Sukanya Samriddhi Scheme to 8.5%.

SEBI has allowed both resident and non-resident Indians (NRIs), along with overseas citizens of India (OCIs), to invest in Indian markets through the FPI route, subject to KYC conditions. Sebi said that no single NRI, OCI and resident Indian could make a contribution of more than 25% in a foreign fund and the aggregate contribution of these investors can be 50%. Resident Indians can contribute through the RBI's liberalised remittance scheme (LRS), where USD250,000 per financial year may be sent abroad for various purposes. The regulator has allowed NRIs, OCIs and locals to act as investment managers (IM) of an FPI, provided they fulfil certain conditions but not in control of FPI.

Mutual funds charge investors for managing their schemes called the total expense ratio (TER), expressed as a % of assets managed. Recurring expenses, such as the management fee, distributor commissions, registrar fee, trustee fee and marketing expenses increase the TER. Sebi has recently fixed the TER across the AUM slabs for equity & debt schemes as per the following:


The fiscal deficit (Excess of Government Spending over Revenues) for first 5 months of FY19 widened to Rs.5.91 Lac Cr (94.7% of Budget Estimate for FY19). Total revenues stood at Rs.4.79 Lac Cr (26.4% of BE), while fiscal spending stood at Rs.10.7 Lac Cr (43.8% of BE).

Consumer Price-based inflation for July'19 came at 4.17%, slightly less than the market consensus and much below revised CPI of June'19 at 4.92%. Wholesale Price inflation for July'18 came in at 5.09%, lower than 5.77% reading in June'18.

India's trade deficit (Excess of imports over exports in USD) in July widened to the highest since May 2013 and stood at USD18.02 Bn compared to USD11.45 Bn a year ago. Imports rose 28.8% Y/Y to USD43.79 Bn while exports jumped 14.3% Y/Y to USD25.77 Bn in July 2018.

15 months after the Real Estate Regulatory Authority (RERA) as per the Real Estate Act, 2016 was set up in May 1st, 2017, only Maharashtra, Karnataka, Gujarat, Rajasthan, Madhya Pradesh and Punjab have fully-operational RERA's. 10 states and five Union Territories (UTs) have so far set up a Real Estate Appellate Tribunal. Less than two-thirds of all states have a fully functional portal. More than 2/3rd of the ~25000 projects registered across the country are in Maharashtra alone. Since its constitution, the MahaRERA has ruled in over 1,000 cases with judgements in some cases delivered within 30 days of complaint filing.

Government subsidy for liquefied petroleum gas (LPG) and kerosene, is set to increase by 66% over the budgetary estimate for FY19. Based on the current prices of LPG and kerosene, the subsidy on these products may touch Rs.41,478 Crore, against the targeted Rs.24,932 Crore. According to the latest estimates by the government, the LPG subsidy is set to increase by 73% over the budgeted Rs.20,377 Crore and kerosene subsidy will increase by 36% to Rs.6221 Crore. On kerosene, the subsidy comes to Rs.16.16 per litre and on LPG, it amounts to Rs.320.49 per cylinder, based on the data with the Petroleum Planning & Analysis Cell.

Prime Minister Modi launched Ayushman Bharat Health Insurance Scheme designed to provide health insurance up to Rs.5 lakh for the bottom 40% per cent of the population. It gives patients the option of using public or private service providers. 'Modicare' as dubbed by the media, is a hybrid plan between the system in Europe where treatment is provided virtually free to all citizens in hospitals run by public authorities and the American model where individuals are allowed to access private/public healthcare. The features of the scheme are: 1) 10 crore households, mostly rural poor and identified urban families, will get health coverage. 2) 1,300 illnesses, including preexisting ones, including cancer and heart diseases, covered. 3) Centre funds 60% of the scheme; States have to shoulder the rest. 4) 13,000 empanelled hospitals, 31 States and UTs have signed up for the cashless service. Only Telangana, Odisha, Delhi, Kerala, Punjab have not subscribed to the scheme


The RBI has asked Yes Bank's CEO Rana Kapoor to continue in his current post only till 31 January 2019. The bank's board must find a replacement for him by then. This is RBI's second such recommendation in as many months, as previously Shikha Sharma, former CEO, Axis Bank, was asked to step down in a similar manner.

Birla group sold its 'More' chain to Amazon-Samara in a deal size pegged at about 4,500 Crore. The retail chain venture was launched by the Aditya Birla Group in 2007. After more than 10 years of operations, Aditya Birla's retail plans have been shelved as competition from e-commerce players gets stronger. The Aditya Birla Group has been trying to sell More for sometime as the Retail Venture reported a loss of 644 crores in FY17 and debt reached 6,573 Crore. Under the deal signed on Sep 19th, Witzig Advisory Services Pvt Ltd, owned by Indian private equity firm Samara Alternative is the lead buyer with a 51% stake while Amazon has acquired the remaining 49% stake. Amazon also acquired a substantial stake in RKN Locations which is More's backend company.

The total installed capacity of solar power generation has crossed 25 gigawatts (GW), according to Mercom India Research. The country recently marked 25 GW of installed solar photovoltaic (PV) capacity, with the last seven months seeing over 5 GW of solar PV capacity getting installed. This includes both large-scale and rooftop solar. In January 2018, Mercom had reported that India had achieved 20 GW in cumulative solar installations, meeting the original target set for 2022. The target has now increased to 100 GW by 2022.

Domestic airlines carried 17% more passengers in August on a Y/Y basis at 1.13 Crore passengers. IndiGo retained the number one spot with 47.57 Lakh passengers followed by Jet Airways (15.61 Lakh) and Air India (14.41 Lakh). Spicejet carried 14.04 Lakh passengers while Go Air flew 10.14 Lakh passengers. Vistara flew 4.23 Lakh and AirAsia carried 5.37 Lakh passengers. Spicejet reported the highest passenger load factor of 93.6 per cent during the month among all the domestic airlines. Passenger load factor shows how many of the total seats on offer by each airline are getting filled.

The US has formally said no to a complete rollback of the tariffs imposed on Indian steel and Aluminium imports. In March, the Trump administration imposed stiff tariffs of 25% on steel and 10% on aluminium imported from India, China, the EU, Mexico, Russia and Canada, citing security threats. India announced retaliatory tariffs on 29 items in June but delayed implementation to August 4 and subsequently to September 18 and November 2, hoping to resolve the issue amicably. The US has said no to a complete rollback and has asked India to come up with a counterproposal capping exports to a % of last year exports.


US Fed officials raised interest rates for a third time this year with a 0.25% hike to a range of 2-2.5%. They reaffirmed their outlook for further gradual hikes well into 2019 with another 0.25% expected in the December meeting. After eight rate hikes since late 2015, the fed funds rate is now at the highest level since October 2008 after the collapse of Lehman Brothers Holdings Inc. Fed's rate hike widens a gap with its peers elsewhere as the European Central Bank said it would maintain its policy rate of -0.4% at least through next summer, while the Bank of Japan is set to stick to -0.1% until 2020.

The Bank of Japan policy board voted 7-2 to keep shorter-term interest rates at -0.1% and maintain a zero yield for the 10-year Japanese government bond. The bank also reiterated that it would buy Japanese government bonds at an annual pace of JPY80 trillion (USD712 billion) for the next 12 months, although the actual speed of Japanese Government Bond purchases fell to JPY45 trillion in the most recent 12-month period.

Italy's populist coalition government of the Northern League and the Five Star Movement is going to present its budget in Mid October. Both Five Star and the League ran their campaign based on anti-austerity policies, high spending on infra and social welfare, and tax cuts for lower-income Italians. To maintain their promises, they would have to resort to more government borrowings. Italy's national debt is 130% of GDP. The finance minister has proposed a cap of 1.6% on the fiscal deficit. The parties rejected the proposal and have agreed to a target of 2.4%. The EU would not accept Italy flouting fiscal responsibility rules and has the power to reject the budget.


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