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BIG NEWS – Sep 01st 2017


Posted on 01-Sep-2017 Comments  0

Q1 GDP Growth


Don’t read too much into the sharp fall in GDP…



The Q1 GDP number announced on August 31st came in sharply lower than the Reuters estimates of 6.6%. The GDP growth at 5.7% and the GVA growth at 5.6% for Q1 represented nearly a 200 bps fall from the corresponding quarter last year. This raises serious questions over the ability of the Indian economy to sustain its growth edge over China. It was only last year that India had overtaken China in terms of GDP growth. At 5.7%, the GDP growth appears to trail Chinese quarterly GDP growth by nearly 120 basis points. Let us understand this in greater detail…


Blame it on demonetization…


Not surprisingly, demonetization became the fall guy for this slump in GDP. While it is true that demonetization did shrink the SME sector,the overall impact cannot be attributed purely to the demonetization effort. Agreed, that it did create a liquidity crunch, but that should have resolved once the remonetization effort was undertaken from January 2017 onwards. As per the RBI data, almost 100% of the notes with the public have come back and nearly 85% of that has been re-issued. If the growth pressure is visible despite that, we are probably missing the larger story. The pressure on GDP growth despite remonetization goes to prove that the Q1 GDP number actually hints at a larger structural problem. The short term reason can also be attributed to the introduction of GST in July.


How GST made an impact…


The launch of the GST effective July 2017 marked a quantum shift in the way the indirect tax regime was administered in India. The first quarter specifically saw aggressive de-stocking across industries as manufacturers preferred to remain light on inventories ahead of the GST launch. If that was the case, then the impact should revert from the next quarter itself. With the GST Council committing to be more flexible on rates, that should not be a worry for manufacturers any longer!


Watch out for structural issues!


The truth is that there are 2 structural issues that are actually holding back growth and both pertain to the supply side. Firstly, real interest rates in India are unsustainable high. Real interest rate at over 4.50% is hardly the rate at which corporates can meaningfully borrow and invest productively. The RBI has to sit with the Finance Ministry and work out a pragmatic solution. Only then will credit off-take pick up. The second challenge is the strong rupee. The SME segment in India is the real feeder for the export sector in India.That is being constrained by a strong rupee which is leading to negative growth for SMEs. So, let us pause for a moment before dumping all the blame on demonetization. There are structural issues.Let us acknowledge them and address these on priority! ©


Trading Hours


Who really benefits from longer trading hours…



The topic of longer trading hours first came up a few months back when the MSEI had mooted the idea. However, with the limited clout of MSEI it did not make any headway with both the BSE and NSE ignoring the idea. However, this time the suggestion has come from SEBI and the exchanges may look at it more keenly. The idea is to extend the trading hours by another 2 hours till 5.30 pm to avoid the cannibalization of domestic exchange volumes to other exchanges like Singapore and Dubai…


We are globally at par…


Indian stock exchanges are currently operating for 6¼ hours, which puts at par with most of the leading exchanges. Only France, Singapore and the US trade for longer hours and that is more because these 3 centers happen to be major hubs for the flow of global capital. Back in 2010, the Indian exchanges extended the start of trading from 10 am to 9 am, but that has hardly made any significant impact on volumes. Like in the past, the trading volumes continue to be concentrated in the first 1 hour and the last 1 hour. The 4 hours in between normally tend to see tepid volumes in the absence of any specific triggers. Longer trading hours will create a huge pressure on the brokers, traders as well as the back-office and compliance infrastructure of Indian brokers. The point is that incremental volumes may not really justify this effort. That is the crux of the matter!


What about institutional trades?


That could be the big challenge. Currently, a large chunk of the equity trades tend to get routed into India through Singapore. Similarly,most of the F&O trades tend to get routed into India through Hong Kong. Both these countries are situated in a time zone that is 2½hours ahead of India. If trading gets over at 5.30 pm then trade confirmations and custodial approvals should be completed by 6.30 pm which will correspond with 9 pm in HK and Singapore. Then, the FIIs will have to take stock of their currency hedging. Actually, it would make the entire task of trading in India quit impractical.


Volumes are not about hours…


It would be naïve to believe that Indian bourses are losing volumes due to shorter trading hours. Firstly, Dubai Stock Exchange is taking away a chunk of the P-Note trades after the SEBI came down heavily on P-Notes. Secondly, the SGX Nifty has always attracted volumes as it is dollar denominated index and gives a natural currency hedge to FIIs. Last, but not the least, other exchanges like SGX and Dubai do not impose a steep statutory cost like the STT on market trades. That tends to change the economics of trading on these exchanges. Longer trading hours may not be the answer. The real answer could lie in addressing these exchange-level issues! ©


MF Benchmarking


Will the Total Returns Index really be a better measure?



Recently,SEBI has been calling upon Indian mutual funds to shift their method of bench marking mutual fund performance. The regulator has been asking mutual funds to benchmark their fund performance based on the Total Returns Index (TRI) as against the Absolute Returns Index (ARI)that is being followed right now. Let us first understand this difference a little better in the current context…


TRI versus ARI…


The current focus of Indian mutual funds is to assess performance based on the ARI. The ARI calculates the absolute difference between the index values between two points. For example if the Nifty was at 8000 on Jan 01st 2016 and it was at 9000 on Jan 01st 2017, then the 1-year return for the benchmark index will be considered to be 12.5%. The performance of an equity fund will now be judged with reference to this return. So, if a fund had generated are turn of 15.5% in the last one year, then the fund would be deemed to have outperformed the benchmark by 300 basis points. The TRI also considers the return impact of corporate actions like dividends into the calculation. Let us impute that in the above example. Let us assume that the Nifty also had a dividend yield of 1.50% during that period. Therefore, as per TRI, the fund out performance will not be 300 basis points but just 150 basis points. TRI, thus, makes the picture more realistic.


Does it really add value?


To begin with, it does add value! In fact, Quantum Mutual Fund has always followed TRI while the much more formidable DSP Black rock MF is also shifting to the TRI methodology. What TRI does is to put the alpha (excess returns) that fund managers claim, in a better perspective. It is also a case of comparing apples with apples as your fund NAV includes the dividend received. Therefore, the benchmark should also rightfully include the dividends in their calculation. The answer is that it will put Alpha in a much better analytical context!


But there are practical challenges…


Dividends are not exactly a uniform income for all recipients as it is taxed at different rates depending on the size of the dividend. That complicates the benchmark. Secondly, more and more companies are paying corporate benefits in the form of share buybacks rather than via dividends as buybacks are more tax-efficient. The wealth effect of a buyback will depend on whether the offer is accepted or not and that will complicate the calculation. So, when these practical challenges are added up, the shift to TRI may not really add value.It may be easier for funds to provide the dividend yields on the index and leave it to investors to decide. It looks like the shift to TRI could actually complicate matters for investors! ©


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