September Newsletter - 2018

• Mitraz Knowledge
• Sep 30 2018

Estimated reading time: 9 minutes 22 seconds

KNOWLEDGE - BANDWAGON EFFECT

Symptoms - Sometimes, people want to buy shares of a certain company because everyone they know is talking about it, heard good things about that company, end up buying the share without doing any research to justify a buy. Outside the world of investing, the bandwagon effect or the herd mentality is quite visible in important decision making situations where people want to suppress their thought especially if it is different to the group's thought either because they fear their idea may be rejected by the group or they believe that the group must be right even before thinking about presenting their idea.

Steps to correcting the bias - The great investor Warren Buffet tells "it is wise to be fearful when others are greedy and greedy when others are fearful." Bandwagon effect typically hurts when the person acts on the trend much later after the trend has begun or adopted by many. Acting as contrarian at all times is not advisable and acting according to the group at all times is also not advised. Sufficient research should be the foundation on which one should decide to follow or not to follow. The decision is not based on a mere belief that the trend will continue, and more and more people will jump on to the bandwagon.

INDEX FUNDS VS ACTIVE MANAGEMENT FUNDS

Generally, the larger the Index in terms of the total market cap of the constituents vis-à-vis the entire market, more difficult it becomes for an active fund to beat that index fund as the expenses in an index fund are negligible as compared to the active fund. Over the last 5 years in India, ~50% of the large-cap funds have outperformed the Index Fund post the expenses on an annualised basis. The lower indices in terms of the market cap like the mid cap index have very few Index Funds and avoiding active funds in these categories results in much lower overall potential return.

If Active Funds are selected wisely, then there can be a significant difference in actual returns over an Index Fund due to the higher compounding effect of 2-3% extra returns.

Direct Option in the same Active Funds reduce the expenses by almost 1% and this adds further capital appreciation over a long period of time.

As the economy develops over time, the large-cap index is likely to become even bigger in terms of market cap and then selecting a low expense fund becomes really imperative.

Index funds outperform during certain intervals while good active funds maintain their outperformance steadily over a longer period. Besides, Index holdings change over time depending on better companies replacing old economy and lower growth companies, this move can be best captured by active funds.

HOW DO CURRENCIES COLLAPSE AND ITS EFFECT

A big economy can dictate trade terms with a small economy. For example, the Trump administration in US placed a series of sanctions against Turkey for its refusal to release Mr Andrew Brunson, an American pastor detained by Turkish authorities for his alleged support for the outlawed Kurdistan Workers Party and the Gulenist movement, both of which are accused of being involved in 2016's failed coup against President Erdogan. Those sanctions included the announcement of a doubling of tariffs on metal imports into the US from Turkey.

A smaller economy with a trade deficit can get hurt if the big economy decides to impose sanctions or create unfavourable trade terms because exports reduce and imports don't come down proportionately.

A trade deficit needs to be matched with a capital account surplus which keeps the home currency steady. If foreign capital starts to dwindle then as the home currency starts to weaken, imports become costlier.

Rising import costs and overall lower exports increases the trade deficit, and this spirals to further weakening of the home currency.

Cost-push inflation in the home country due to higher import costs force the economy to increase the interest rates and this is done also to try and attract the foreign money which if successful can pull up the domestic currency in the short term.

A smaller economy may also have a high reliance on foreign debt besides the inflow of money to match the trade deficit. A high domestic interest rate will also mean lesser demand for consumption which means lesser cash flow to service the debt and debt itself becomes costlier due to the domestic currency depreciation. Thus a currency trap can become a debt trap. The combination of the various variables can continue to deteriorate the situation.

FINANCIAL NEWS

The Securities and Exchange Board of India (Sebi) on Wednesday said it would review the norms on foreign portfolio investors based on inputs received from various stakeholders including the Government of India and the Ministry of Finance. SEBI has formed a committee to review the norms under the chairmanship of HR Khan, former Deputy Governor of RBI. It will also look at the concerns raised on the circular issued by Sebi in April which said that non-resident Indian (NRIs), persons of Indian origin (PIOs) and overseas vehicles set up by Indian financial services groups cannot be 'beneficial owners' or fund managers of foreign portfolio investors (FPIs) investing in India and such funds should either be closed or ownership structure changed by 2018 end.

SEBI may broaden the definition of startups to include non-tech companies and allow them to list directly on the main board of stock exchanges under a separate segment. The changes are part of the proposals prepared by a Sebi-appointed panel to revive startup listings. The regulator is expected to take a final call on these proposals by September.

NSE has got approval from the US derivatives regulator Commodity Futures Trading Commission (CFTC) to offer its products to US-based investors. Now, US-based institutional investors will be able to trade in NSE-listed derivatives without any restrictions that SEBI had placed on FPI's from issuing P-Notes on derivative instruments when the transaction is not for hedging purpose and without a one-to-one position in the underlying instrument.

DOMESTIC ECONOMY

The fiscal deficit (excess of government expenditure over government revenue) for Apr-July 2018 period widened to Rs.5.40 Lac Cr and has reached 86.5% of the Budgeted Expenditure (BE) for FY19. Total revenues stood at Rs.3.49 Lac Cr which is 19.2% of BE, while fiscal spending stood at Rs.8.89 Lac Cr, 36.4% of BE.

Trade deficit (excess of imports over exports) in July rose to the highest since May 2013 at $18.02 Bn compared to $11.45 Bn in July'17. For the April-July period, Trade Deficit widened to $63 Bn as against $51.5 Bn a year ago. Imports in July'18 rose 28.8% to $43.79 Bn while exports jumped 14.3% to $25.77 Bn.

India's Real GDP for Q1 FY19 surpassed market expectations at 8.2%, better than 7.7% growth reported in Q4 FY18. Correspondingly, Nominal GDP (including Inflation) surged to 13.8% in Q1 FY19 on the back of strong growth in private consumption and investment and the Real GDP growth for Q1FY19 stood at 8.0% compared to 7.6% in Q4 FY18. GDP at constant (2011-12) prices in Q1 FY19 is estimated at Rs.33.74 lakh crore, as against Rs.31.18 lakh crore in Q1 FY18.

The Income Tax Department issued as many as 1.96 crores new PAN cards during the quarter ending March 2018, taking the total number to over 37.9 crores, as per the official data released on Tuesday. Income tax returns filed this year mainly reflect tax paid in FY18. The Income Tax department has said the returns filed rose 70.86 per cent at 54.2 million till August 31, the last date of filing returns, against 31.7 million a year ago.

As per a NABARD Survey, farmer income grew 37% between FY13 and FY16 and more than 88% of rural households now have bank accounts, but only about 24% of them use ATM services at least once in three months.

SECTOR & COMPANY NEWS

The US Citizenship and Immigration Services (USCIS) has extended the temporary suspension of premium processing for H1-B visas, popular among Indian IT professionals, by another 5 months till February 2019. Premium processing is a feature that shortens the usual processing time of H-1B visa petitions from an average of six months to 15 calendar days for a fee of $1,225. Under the premium processing, the USCIS has to respond within 15 days to the H-1B visa petitions submitted to it.

Creditors to about 30 stressed power projects will now refer these projects to bankruptcy courts after the Allahabad High Court denied any relief to the power sector from the Reserve Bank of India's February 12 circular setting a 180-day deadline for resolution. These stressed assets comprise 18 coal-run and a dozen gas-based and hydropower projects.

From September, buyers of new cars and two-wheelers must purchase upfront insurance cover for at least three and five years, respectively. Long-term premium payments would proportionately raise the initial outgo on new vehicles, but save consumers the trouble of yearly renewals.

A 22% dip projected in Brazil's sugar output at 30m tonnes in 2018-19 against an 11% rise in India's output of 35.5m tonnes is likely to result in a massive surplus inventory despite the Government permit to export 2m tonnes. Given the annual domestic consumption of about 25 million tonnes, a surplus of 8-9 million tonnes will be added to the system. By September 2019, the country is likely to see a never before surplus of about 20m tonnes unless the export increases which again depends on global sugar prices. A lower sugar output could have been possible if higher quantity of ethanol could have been produced from B-heavy molasses (where sugarcane juice is diverted for ethanol, resulting in lower sugar output), but the price fixed for ethanol is Rs.47-49 while the industry wants Rs.54-55/litre to incentivise the industry to produce less sugar and more ethanol.

INTERNATIONAL NEWS

The U.S. and Mexico have reached a tentative agreement to update the provisions of the North American Free Trade Agreement. It is widely expected that Canada will join in as well. The Mexico-US discussions focused on crafting new rules for the automotive industry. The deal would require 75% of auto content to be made in the NAFTA region, up from the current level of 62.5%, a US trade official said. The Trump administration said the deal improves labour provisions, in part by requiring 40% to 45% of auto content to be made by workers earning at least $16 per hour.

U.S. President Trump said he was ready to impose more tariffs on $200 billion worth of goods from China. The US has already imposed tariffs on $50B in Chinese products, and Beijing retaliated with tariffs on $50B in American goods. The US President warned in an interview given to Bloomberg that the US will withdraw from the World Trade Organization if "they don't shape up" - a move that could easily disrupt the world trading system. The US President also added that the European Union's proposal to eliminate auto tariffs is not good enough and compared the EU's trade policies as similar to China's policies.

According to Fitch's global head of sovereign ratings, James McCormack, people are less focused on the Emerging Market rout this time that started in Argentina and Turkey and has spread to Asian Emerging Markets than in the previous occurrences. The rating agency has also said that India and Indonesia have sufficient ability to bear any contagion effect of the current Emerging Market rout.

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