‘The stock market crash is an opportunity for the long-term investor’

HDFC Mutual Fund’s Executive Director Prashant Jain
HDFC Mutual Fund’s Executive Director Prashant Jain

HDFC Mutual Fund’s Executive Director Prashant Jain feels the medium-term outlook for the economy is as good as ever

While panic has gripped global markets after China’s sharp slowdown and currency adjustments, some analysts see the fall in shares as an opportunity to buy into Indian equities.

Speaking to Bloomberg TV India’s Abha Bakaya and Priyank Lakhia, HDFC Mutual Fund’s Executive Director and Chief Investment Officer Prashant Jain says India can break away from the pack of EMs (Emerging Markets) to emerge a large and vibrant economy, and a standalone asset.

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In the last few days, markets worldwide have been roiled by volatility and uncertainty. Do you expect the volatility to continue because 2016 was expected to be a better year?

Volatility in the short run is the basic nature of equities. The economy and markets are in a very healthy transition – from high inflation and high interest rates towards low; from sharp depreciation of the rupee towards stablility; from high twin deficits to moderate figures. Interestingly, FDI inflows are now bigger than our CAD, which points to a fundamental improvement on the external side. The economy is also transitioning to more capital expenditure-driven growth compared to mainly consumption-driven growth over the last several years.

The markets are also in transition. Transition means that you give up something which has worked for last cycle – in this case FMCG, pharmaceuticals, etc and adopt something new. This will take time as there is reluct-ance to adopt something new, to give up what has worked in the past. This can cause some pain in the short to medium term.

Despite this, I am positive about the economy and markets. It has been observed in the past that whenever Indian markets have corrected around reasona-ble valuations driven by external factors, they have proved opportunities in disguise.

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China has just sent jitters across equity markets. Can that be a big worry not just for the near term but for entire 2016?

I am not worried. China and the US are large markets. So whenever they have sharp corrections, it does impact the Indian markets. But such impact is limited to very short periods. It is more important to focus on how the local economy is doing and what the valuations are. The economy is moving in the right direction. The progress has no doubt been slower than what was anticipated for a number of reasons – some local and some global, but six to nine months from today, the recovery will be stronger and more visible. Valuations in India are quite reasonable. Let us not forget that over the last seven years the Indian stock markets have not done anything worthwhile – they are up a mere 20 per cent despite more than doubling of the economy in nominal terms. I look at this fall driven by issues in China as a good opportunity for the discerning and the long term investor.

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If you look at the domestic growth story, some pockets like banks and capital goods have not seen a pick-up. How much longer will it take to gather momentum?

If you go back a few years, we had very high inflation and consumption growth was largely driven by fiscal stimulus and high subsidies, etc. That phase is coming to an end. We are seeing a tax-GDP ratio going up and subsidies coming down. That is not good for consumption. So, I think consumption will continue to grow, but at a more sedate and sustainable pace. The real pick-up has to come from the capital expenditure side of the economy. In the first phase, the capex revival is being led mainly by the infrastructure sector, the government and its entities. This is the stage we are currently in. It is also a fact that a meaningful revival in private capex will still take some time because capacity utilisation in the manufacturing sector is below the optimum level. Also, bear in mind that while financial markets tend to think in terms of quarters, meaningful change takes years. To summarise, my opinion is that before the end of next fiscal, economy, capex and asset quality in banks, etc would have witnessed meaningful improvement.

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The worry is that faith in the regulatory autho-rities has not returned to a 100 per cent.

With the benefit of hindsight, we can always say we could have done this or done that. What is important is to take corrective actions and to move forward. On that score, there is not much to complain. The good thing is that no short cuts are being resorted to and thus when the impact of changes that have been brought about, or are underway, are visible, these will be substantial and will last a long time.

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What’s your expectation about the pace of reforms in 2016?

I have observed that in India change is seldom smooth. Probably because we have a federal set-up, a democratic form of government and India is a large country. Despite these challenges, a lot has been achieved in the last few years – oil subsidies are being phased out, Tax-GDP ratio is improving, fiscal deficit is coming down, there is a sharp improvement in FDI, Jan Dhan and DBT transfers [have been introduced], step-up in government spend on infrastructure, State Electricity Board reforms – these are major steps, [there has also been] good progress in roads, railways etc. News flow in India is seldom positive and the headlines are mostly about what has not been done. My key expectations from the current year are GST rollout and a quick measures to safeguard the steel industry. These have arguably been delayed and are critical to attracting more investments and to create more jobs. Steel investments are without doubt a large opportunity for India.

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While there is no doubt that things are improving, there are headwinds. For instance, government outgo from the 7th Pay Commission recommendations and OROP is massive. While government spending has gone up, is it translating into positive results on the ground?

The higher tax collections on petroleum products will go a long way in moderating the impact of the Seventh Pay Commission [recommend-ations], OROP policy, etc. The intent of the government in reducing fiscal deficit is very important given the several means at its disposal. In my opinion, the govt is serious about continued moderation in fiscal deficit. As regards impact on the ground, the timelines involved in reviving capex are long and I feel that the wait to see more action on the ground will not be a long one now. I dare say that the medium-term outlook for the economy is as good as I have ever seen.

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What’s the outlook for investors getting into equity? What is the kind of returns we can expect?

Investors can look forward to good returns over the medium-to-long-run – above-average or above-trend returns – because the economy should keep on improving with every passing year and valuations are reasonable. India, over time, will break away from the emerging markets (EMs) – it could be in current year also. While most EMs are in deep pain because they are commodity exporters, India is the biggest beneficiary of the commodities downturn. In the next few years, India should emerge as a large and vibrant economy. It can thus become a standalone asset.

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With the kind of flows coming from domestic funds, will retail investors flock to the market?

What we are getting today is certainly more than what mutual funds were getting earlier, but it is still $10-12 billion a year. What are the household savings in India? [It is] $500 billion per annum. So what is flowing into equity funds is just two per cent of savings. Fortunately, Indian investors are displaying a rapidly improving understanding of equities. If you look at the returns from equity MFs over medium to long periods it is very encouraging despite the short-term aberrations. A large number in the country are beginning to understand that. Also, keep in mind that physical assets like real estate or gold are not doing well. I therefore think while there could be monthly or quarterly fluctuations, this is the beginning of a good trend for the next several years.
[“source-thehindubusinessline”]

Crude sinks 4% as market braces for more Iranian oil

Western sanctions on Iran are expected to be lifted within days, potentially paving the way for more crude oil exports from the country, under a landmark agreement on Tehran's disputed nuclear programme.
Western sanctions on Iran are expected to be lifted within days, potentially paving the way for more crude oil exports from the country, under a landmark agreement on Tehran’s disputed nuclear programme.

Iran sanctions may be lifted within days

Brent crude futures plunged more than 4 per cent to near 12-year lows on Friday as the market braced for increased Iranian oil exports, with the lifting of international sanctions possible within days.

Brent and U.S. crude oil were on track to close lower for a third consecutive week, down roughly 20 per cent from their 2016 highs.

The International Atomic Energy Agency (IAEA) could issue its report on Iran’s compliance with an agreement to curb its nuclear programme during a Friday meeting in Vienna, potentially triggering the lifting of Western sanctions.

U.S. crude futures were 5 per cent lower at $29.64 per barrel at 1053 GMT, after posting the first significant gains for 2016 in the previous session. The contract earlier hit $29.39, the lowest since November 2003.

The March Brent contract was down $1.15 at $29.73 a barrel. Earlier on Friday, it fell to $29.43, the lowest since February 2004.

The February Brent contract, which expired on Thursday, closed higher for the first time this year at $31.03 per barrel.

Still, influential U.S. bank Goldman Sachs on Friday maintained its $40 price forecast for U.S. crude for the first half of 2016.

“The key theme for 2016 will be real fundamental adjustments that can rebalance markets to create the birth of a new bull market, which we still see happening in late 2016,” Goldman said in a report.

Others were more concerned about the impact of new exports from Iran. While experts warned that not all sanctions may be lifted immediately once the agreement on its nuclear programme came into effect, any additional oil would add to a glut that has pushed prices into a deep slump since mid-2014.

“In the very short term, another price drop cannot be excluded in particular after sanctions against Iran are being lifted,” Commerzbank analyst Carsten Fritch told Reuters Global Oil Forum.

“That means a drop towards $25 is quite possible, but not much lower than that.”

Commerzbank cut its 2016 forecast for oil prices, changing its year-end expectation for Brent to $50 per barrel, down from a previous forecast of $63.

Iran’s oil exports were already on target to hit a nine-month high in January, with 1.10 million barrels a day of crude, excluding condensate, to load.

Tehran is expected to target India, Asia’s fastest-growing major oil market, as well as its old partners in Europe with the increased exports.

[“source-thehindubusinessline”]

Asia shares hit 3-1/2-year lows as oil resumes fall

An investor checks stock information on a mobile device at a brokerage house in Shanghai, China, in this file photo.
ReutersAn investor checks stock information on a mobile device at a brokerage house in Shanghai, China, in this file photo.

China shares fall after loan, M2 data miss expectations

Asian stocks surrendered earlier gains to hit 3-1/2-year lows on Friday as renewed pressure on oil prices and disappointing Chinese data kept investors on edge.

MSCI’s broadest index of Asia-Pacific shares outside Japan declined 0.3 per cent to the lowest level since June 2012, and was on track for a loss of 2.7 per cent for the week.

Japan’s Nikkei rose 0.7 per cent, but was set for a weekly loss of 1.9 per cent.

Oil prices rebounded on Thursday, with international benchmark Brent futures rising 2.4 per cent to $31.03 a barrel, recovering from its 12-year low of $29.73 hit earlier in the day.

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But that rally, largely driven by short-covering after a 20 per cent fall since the start of year, proved to be shortlived. The collapse in oil prices has spooked financial markets as investors worried about the health of the global economy, with a slowdown in China and volatility in its markets making for a nervous start to the year.

“Market sentiment was cautious to begin with, as overnight gains in US equities were complicated by losses by European indices,” said Bernard Aw, market strategist at IG in Singapore. “Furthermore, oil prices were under pressure once again, constraining any relief rally in energy and material stocks.”

Brent crude opened weaker on Friday and lost 0.6 per cent to $30.69.

US crude fared even worse, slumping 1.8 percent to $30.63 as the prospect of additional Iranian supply looms over the market. It had posted the first significant gains for 2016 in the previous session.

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Stocks in China also returned to negative territory after a brief rebound in late trading on Thursday.

The bounce – which saw the Shanghai Composite index reverse an earlier fall to a 4 1/2 month low to end 2 per cent higher – raised suspicions among dealers that a “National Team” of investors, who participated in a rescue when markets plunged in August, had been behind the move again.

Chinese shares extended earlier losses on Friday after data showed new yuan loans in December were well below the previous month’s lending, and broad M2 money supply growth also slowed, with both missing expectations.

The Shanghai Composite and CSI300 lost 1 percent each. That put the former on track for a 6 per cent loss for the week, and latter for a decline of 5.1 per cent.

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Worries that a depreciating yuan could spark competitive currency devaluation across the region have also hit global shares this month.

On Friday, the Chinese yuan, posted modest early gains. That put the yuan 0.1 per cent up on the week, but it was still around 1.4 per cent weaker against the dollar than it started the year and has lost nearly 5 per cent since August.

The People’s Bank of China set a marginally weaker midpoint of 6.5637. The spot market opened at 6.5920 per dollar and was changing hands at 6.5869 at midday, 21 pips firmer than the previous close.

“There are some hopes that a series of Chinese economic data due early next week will give investors relief,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities.

“Traditionally Chinese shares perform relatively well around the time of lunar new year and Shanghai shares also appear to be supported around the 3,000 mark even as they briefly fell below that level yesterday,” he added.

China will publish a host of data on Monday and Tuesday, including December quarter gross domestic product.

The rebound in oil prices on Thursday helped to lift US shares from three-month lows, although that came on the heels of a 1.5 per cent loss in the broader European FTSEurofirst 300 .

The S&P 500 gained 1.7 per cent, led by a 4.5 per cent rise in the energy sector.

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The US market was also helped by comments from St. Louis Federal Reserve President James Bullard that the continued rout in global oil markets has caused a “worrisome” drop in US inflation expectations that may make further rate hikes hard to justify.

US retail sales data due later on Friday will be on investors’ radar as they try to gauge the likelihood of the Fed raising rates in March.

In the currency market, the yen advanced after earlier losses on a resumption of demand for the safe haven currency.

The dollar slipped 0.1 per cent to 117.89 yen, after earlier rebounding from a 4 1/2-month low of 116.70 yen hit on Monday.

The euro advanced 0.1 per cent, fetching $1.0879.

The European Central Bank said it saw scope for further cuts in its deposit rate in minutes of its December meeting, but many ECB policymakers appeared sceptical about the need for further action in the near term.

Commodity-linked currencies retreated after their earlier gains, with the Australian dollar slipping 0.4 percent to $0.6957, compared with Thursday’s four-month low of $0.6910.

Saudi Arabian shares, one of the worst performing market along with China so far this year, hit five-year lows on Thursday.

Low oil prices not only hurt many oil-producing countries but also prompt their sovereign wealth funds to sell assets to finance budget gaps, putting pressure on many assets.

[“source-thehindubusinessline”]

Energy shares lead Wall Street rebound

S&P has best day since Dec

A rally in battered energy shares led US stocks to rebound on Thursday, while financials rose after upbeat results from JPMorgan Chase & Co.

The S&P 500 registered its biggest daily percentage gain since December 4 and ended back above 1,900 in the heaviest volume day so far this year.

Though the market finished off its highs for the day, analysts said some investors see a bottom in energy shares, which were among the most heavily sold shares in the market’s rout that began at the start of the year.

The S&P energy sector shot up 4.5 per cent, its best percentage gain since late August.

Shares of Exxon Mobil surged 4.6 per cent, also the biggest percentage gain since late August, to $79.12, while Chevron jumped 5.1 per cent to $85.47, among the biggest boosts to the Dow and the S&P 500. US and Brent oil prices ended more than 2 per cent higher.

Also rebounding were biotechs, with the Nasdaq Biotech Index ending up 4.0 per cent.

“You have had people trying to pick a bottom both in the energy commodity itself and energy shares a few times in this long slide down and again today,” said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey.

He said exchange-traded funds may have bought energy stocks, forcing short-sellers to cover positions.

The Dow Jones industrial average closed up 227.64 points, or 1.41 per cent, to 16,379.05, the S&P 500 gained 31.56 points, or 1.67 per cent, to 1,921.84 and the Nasdaq Composite ended up 88.94 points, or 1.97 per cent, to 4,615.00.

The S&P 500 remains down 9.8 per cent from its May 21, 2015, record closing high, however, and analysts said plenty of caution remains, thanks to lingering concerns about demand for oil and a slowdown in the global economy.

Traders noted the S&P 500 has fallen 10 per cent from near a 52-week high for the second time in a relatively short time, while rallying 10 per cent in between. That’s only happened on four other dates – in 1929, in May and October of 2000, and in 2008, “not particularly good years for the bulls,” wrote Art Cashin, director of floor operations at UBS.

Daniel Morgan, senior portfolio manager at Synovus Trust Company in Atlanta, does not see stocks headed for a bear market and said upbeat earnings reports from tech and other companies could put the market on stronger footing.

JPMorgan rose 1.5 per cent to $58.20 on better-than-expected results. Citigroup, Wells Fargo , Morgan Stanley and Bank of America also rose.

After the bell, however, shares of Intel fell 4.7 per cent to $31.20 as its results showed a profit that beat expectations but slowing growth in its data center business.

Chipotle was up 6.1 per cent at $454.30 after the company expressed confidence in preventing future food poisoning outbreaks at its chains.

About 10.0 billion shares changed hands on US exchanges, compared with the 7.5 billion daily average for the past 20 trading days, according to Thomson Reuters data.

Advancing issues outnumbered declining ones on the NYSE by 2,079 to 1,005, for a 2.07-to-1 ratio on the upside; on the Nasdaq, 1,961 issues rose and 899 fell for a 2.18-to-1 ratio favoring advancers.

The S&P 500 posted one new 52-week high and 115 new lows; the Nasdaq recorded six new highs and 439 new lows.

[“source-thehindubusinessline”]

Shanghai index closes at lowest since Dec 2014

For the week, the CSI300 shed 7.2 per cent.
ReutersFor the week, the CSI300 shed 7.2 per cent.

China stocks dropped more than 3 per cent on Friday, capping another tumultuous week in which the Shanghai Composite index tried and failed to stay above lows hit during last year’s summer crisis.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 3.2 per cent, to 3,118.73, while the Shanghai Composite Index lost 3.5 per cent, to 2,900.97 points, its lowest level since December 2014. It broke through a key support level from August.

For the week, the SSEC was down 9 per cent while the CSI300 shed 7.2 per cent.

Sentiment was hit by weaker-than-expected loan data, and investors took advantage of Thursday’s 2 percent rebound to reduce equity exposure further.

[“source-thehindubusinessline”]

What’s on the menu for agri-commodities?

2016 may see select food crops such assugar and wheat gain

Between 2000 and 2011, global agri-commodities enjoyed an untrammelled bull run. Rapidly rising prices in turn led to record levels of production year after year. Besides, populist hikes in the support and procurement prices of food grains in both China and India over-incentivised production and added to global supplies. The pile-up of stock eventually caught up with prices. Most agricultural commodities touched their all-time highs in the second half of 2011 and thereafter started to decline.

If you leave out a few commodities like pulses, 2015 saw one of the worst performances in recent years from the agri-commodities complex. Excess supply and cheaper fuel are likely to keep prices of many agri-commodities subdued through 2016. Reduced interest in commodities from financial investors is a dampener for the asset class too. Amid all this, 2016 may bring cheer for a select club of farm products.

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India is not exactly an open market for agri-commodities, and government interference in export, import and futures trading affects demand and supply of specific commodities and, in turn, their prices. Besides Chinese demand, other determinants of prices of agri-commodities are exchange rate movements, local weather conditions and their impact on domestic production. A relatively strong rupee against the US dollar, vis-à-vis currencies of countries like Argentina and Brazil, will influence the market too. The El Nino hopefully will taper off after March and will not affect India’s critical June-September monsoon.

India is a net exporter of agri-commodities and needs to watch recent developments at the WTO as well. Many analysts believe that immediate elimination of farm export subsidies by developed countries, as agreed at the WTO’s 10{+t}{+h} Ministerial at Nairobi, will increase international prices of agri-commodities, and boost India’s export competitiveness. However, most developed countries provide their farmers direct support, which is categorised as green box, i.e. non-trade distorting and thus they may not need to remove them. And top farm subsidiser, China has won time until 2018 to comply. Thus, the short-term benefits to India’s farm exports from the WTO will be limited. With this big picture scenario in mind, what will 2016 bring for individual commodities? Here’s an assessment.

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Tur (kharif) crop harvesting has already begun in the key States of Maharashtra and Karnataka, but arrivals are low and prices are already at double the levels of December 2014. Moreover, a very poor chana (rabi) crop quality is expected in Karnataka despite increased acreage due to soil moisture stress. Additional triggers would be the fall in global output due to drought in Myanmar, Canada and Australia. However, continued stock limits on traders and the Centre’s determination to contain prices of pulses through increased imports will ensure price gains in 2016 won’t be as high as in 2015.

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Lower production of soybean domestically, expectations of improved demand from China’s hog industry and robust feed demand from dairy and poultry industries will make soyabean crushing profitable for millers. However, bumper crops in the US and Latin America, huge global stock piles, sluggish export demand for Indian soyameal and increased shipments from Argentina post-devaluation of the peso will contain the upside.

El Nino-induced dry weather in Indonesia and Malaysia (accounts for 85 per cent of global production) together with forest fire in Indonesia will impact production of palmoil.

Thus, a decline in the global stock-to-use ratio and firm demand will strengthen palmoil prices this year. However, subdued demand for bio-fuel due to low crude oil prices will limit any price rise.

Soyabean oil prices may remain broadly in range with enough supplies and a likely demand shift from palmoil buyers on rising palmoil prices.

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India’s production is expected to contract to 26-27 million tonnes (MT) due to lower acreage and damage to crops in Maharashtra and Karnataka. Thai sugar production is likely to decline for the first time in five years.

Brazil’s adverse weather conditions during the harvesting period will also add to the global production deficit. However, existing global sugar stocks at over 85.4 MT and a weaker real may restrict price gains.

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Cotton fell below ₹14,000/bale at the start of 2015 on de-stocking and import curbs by China. Year 2015 ended with unexpected export demand from Pakistan.

While world cotton production is estimated lower in 2015-16 for the fourth successive season, additional spinning demand may come from Vietnam and Bangladesh.

As a result, we don’t see any reason for further weakening of cotton prices.

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India’s rabi wheat acreage is down 7 per cent until end-December. Top wheat growing states, such as UP, MP and Punjab, recorded a winter rainfall deficit of over 60 per cent with adverse implications for yield. However, global wheat supply for 2015-16 is estimated at a record high of 734.9 MT.

Argentina removed its export duty on wheat in order to gain global export share. Lower growth in demand will add to existing stock piles but the recent bout of hail and frost in Australia, combined with bad weather forecast for the EU, may provide some support to wheat prices.

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Significant reduction in acreage due to drought-like situation in Maharashtra, better export prospects and fast declining carry-over stocks may push turmeric up this year.

[“source-thehindubusinessline”]

Gold and silver in 2016: a prediction

Silver may be the better bet, but gold could target $1,155

The surging dollar, prospect of higher interest rates in the US and the slump in commodity prices bore down on precious metals in 2015. While gold prices dropped 10 per cent, silver slid 12 per cent and platinum slumped by a sharp 26 per cent on worries of drop in demand for diesel cars in Europe (after the Volkswagen emission scandal).

Investment demand for all the three precious metals was poor as investors took shelter in bonds. SPDR Gold fund, the largest gold ETF in the world, saw its holdings drop to the lowest in many years. Hard-bitten bullion investors are now thinking twice about betting on precious metals.

So, will the tide turn in favour of these metals in 2016? Many believe that as the Fed continues with its scheduled rate hikes in the next 12 months, the selling in gold will accelerate. But there are two factors that can counteract this, to set the direction of gold this year.

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Gold prices tend to be inversely correlated to the dollar. Currently, most players expect the dollar to strengthen this year on the back of Fed rate hikes. But if the Federal Reserve delays its second rate hike (expected in March) due to unfavourable economic conditions or effects less than four hikes that it indicated in the last meeting, the greenback can lose muscle. Even otherwise, during the past up-cycles in rates, it has been observed that the dollar skyrockets just before rates start to go up, but moves down after the first two/three rate hikes. Should the dollar weaken, that can provide a leg-up to gold prices.

Crude oil moves

The direction of crude oil prices feeds directly into global inflation expectations. And rising inflation expectations are bullish for bullion. Currently, crude oil prices are on a slippery slope. But if the global economy holds up and oil eventually stabilises around $50/barrel, that may help gold. Though there is a fear that if sanctions on Iran are lifted, the incremental addition to oil output will be high, one cannot be sure that oil prices will head further down.

At current price levels, there is not much new investment happening in oil exploration and drilling. Plus, it won’t take much for speculators to wind down sell positions to jump on to the buy side. As the base effect of lower crude prices will also wane this year, higher inflation could provide new legs for a gold rally.

But there are risks to these scenarios. In 2016, if the US economy posts good growth, safe haven buyers may again start to pile on to the US dollar in place of gold. This will be negative for gold. If forecasts of $20/barrel for oil or a weaker euro play out, then gold may continue its slide.

Better to bet on silver

Given the uncertainties for gold, within the precious metals pack silver looks a more promising investment for 2016, on account of its better fundamentals. The grey metal is seeing supply drop at a fast pace across the world — from Chile to the US and Canada. Last year, silver production in Canada dropped over 20 per cent. The US, which is among the top 10 producers, saw silver production drop 7 per cent in the first 10 months of 2015. Drop in output follows a steep fall in silver prices. With production costs for silver miners at about $17/ounce, market prices are already below $14/ounce. If more unviable silver mines shut down this year, the supply deficit will widen. This will be the fourth consecutive year of a global supply shortage in silver.

Technically

Gold prices may start the year on a weak note. As more visibility is available on the Fed’s next rate hike, prices can drop further from the current $1,061/ounce levels to even $1,000/ounce. But going by past experience, when the second rate hike happens by March or so, gold prices can reverse direction.

In 2015, gold prices hit a low of $1,046/ounce in December. All its attempts to rise to $1,200 levels since then have failed, with bullion not being able to cross even the $1,100-mark.

In 2016, gold may target $1,155 on the upside. This represents the 61.8 per cent retracement of the upmove from the 2008 low to the 2011 high. Further upside from here can take the yellow metal to $1,200.

In the near term, however, the metal can test support at $1,000. If it doesn’t hold at $1,000, it may go down to $970.

[“source-thehindubusinessline”]

Dividend issue: AMFI defends brokers

Mutual funds are operating within the boundaries set for them with regard to dividend declarations, CVR Rajendran, CEO, Association of Mutual Funds of India, told BusinessLine on Thursday.

Capital loss & NAV

This was in the context of capital market regulator SEBI asking fund houses earlier this week if they were resorting to the practice of dividend stripping in their schemes.

When a fund declares a dividend, the investor essentially pockets the dividend but shows the fall in the net asset value as capital loss. This loss is then set off against real capital gains made elsewhere on other investments to reduce the net tax payable. Rajendran, however, insists that fund houses keep to the rules of dividend declaration on their schemes.

A senior fund manager commented that SEBI might conduct a forensic audit into these fund houses and examine the nature of their inflows to check if they allowed dividend stripping.

Back in 2014, fund houses declared bonus units to help some investors cut corners around their taxes, a practice that was called bonus stripping. Once this came to light, industry body AMFI asked fund houses to discontinue their bonus plans.

[“source-thehindubusinessline”]

‘Communication between rating agencies, debenture trustees should improve’

SEBI Chairman U. K. Sinha (file photo)
SEBI Chairman U. K. Sinha (file photo)

To protect investor interest, market regulator SEBI is working on a mechanism to improve the time and frequency of communication between the credit rating agencies and debenture trustees with respect to changes in debt instrument ratings of listed firms.

“The time and frequency of communication between a credit rating agency (CRA) and debenture trustee needs improvement,” SEBI Chairman U. K. Sinha said here.

Noting that investors tend to suffer by not getting information with respect to changes in rating of debt instruments within the right time, Sinha said the market regulator is “getting into the area” to ensure that relevant communication takes place between a CRA and debenture trustees in a timely manner.

“There is no institutional mechanism for a dialogue between CRA and debenture trustee. We have started working on it now,” the SEBI chief said.

“If they (debenture trustee) are told in time then investor interest can be protected,” he said.

Sinha’s comments come in the backdrop of the Amtek Auto fiasco and a growing number of loan defaults, triggering the downgrade or suspension of ratings without the same being properly communicated to investors.

“We observed that the reason for suspending ratings were not known,” the SEBI chief said.

“So we have told them that and, perhaps, will issue instructions. The dialogue and consultation process is going on,” he said.

Sinha also said SEBI has advised mutual funds to have their own internal system to analyse debt instruments in addition to ratings from CRAs.

Besides, he said the regulator had asked the International Advisory Board if regulations can be framed to ensure that members of a rating committee are external.

“The board has advised us that no regulator should be prescribing who the members of the rating committee should be, so we will not be doing that,” Sinha said.

“But we do hope the CRA process of rating is not guided by any conflict of interest,” he said noting that so far the regulator has not witnessed any single instance where the rating process can be doubted.

“SEBI’s view is that CRA performs an important role. It is also for CRA that expectations of companies and investors are met in a transparent manner,” he said.

On the corporate bond market, he noted that many companies have begun to use debt issues to meet their short-term requirements and while the debt market has not grown to expectation, “in the coming years the corporate bonds market should grow substantially,” Sinha said at the ICRA 25th anniversary celebrations last night.

[“source-thehindubusinessline”]

FDSL’s IPO subscribed by 2.1 times at NSE’s SME platform

The IPO of Fourth Dimension Solutions Ltd (FDSL), which closed for subscription on NSE’s SME platform ‘Emerge’ on January 7, got subscribed by 2.1 times.

The net issue offered to public was for 27.44 lakh equity shares which got subscribed 2.1 times amid the volatile market conditions, a company statement said.

FDSL is an information technology (IT) infrastructure, technical support services and operations outsourcing company.

The company’s public issue was for Rs 8.7 crore for 28.92 lakh equity shares at a price of Rs 30 per share. Out of total issue size, 1.48 lakh shares were reserved for subscription by market maker, it added.

FDSL is the last SME IPO of 2015 and the 12th listing on NSE Emerge.

Sarthi Capital Advisors was the sole and lead manager to the issue. This is going to be 3rd listed company by Sarthi Capital on NSE Emerge and their 13th IPO on SME exchanges.

The other upcoming IPOs on NSE Emerge by Sarthi Capital include Hitech Pipes and Wealth First Portfolio Managers.

[“source-thehindubusinessline”]