tag:blogger.com,1999:blog-3339063254798914342024-03-05T04:58:18.895-08:00BFC Capital Pvt LtdBFCBLOGShttp://www.blogger.com/profile/14291813554321437475noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-333906325479891434.post-26120811537454555592013-07-16T05:31:00.000-07:002013-07-16T05:31:11.611-07:00The Infamous Gang: CAD, Taper and Rupee slide<div dir="ltr" style="text-align: left;" trbidi="on">
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">From the Desk of Chief Marketing Officer</span></b></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Sharad Bindal</span></b></div>
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<br />
<div align="center" class="MsoNormal" style="text-align: center;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 16.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;"></span></b></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">I was
willing to write this blog a month ago but failed for I was enjoying my
vacations. By the time I returned, there was already a much hue and cry about
CAD and QE3 problems- problems supposed to be the primitive reasons behind
rupee fall.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Current Account Deficit:</span></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">Let’s
first understand CAD (Current Account Deficit) as people usually misinterpret
it with trade deficit.</span></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">The
Current Account and Capital account are two components of Balance of Payments
and Current account includes balance of trade(net revenue on exports less
payment for exports) and invisibles (net investment income i.e. earnings on
foreign investment minus outflow in the form of payment to foreign investors
and other cash remittances)</span></div>
<br />
The current account balance is one of two major measures of the nature of a
country's foreign trade (the other being the net capital outflow). A current
account surplus increases a country's net foreign assets by the corresponding
amount, and a current account deficit does the reverse. Both government and
private payments are included in the calculation. It is called the current
account because goods and services are generally consumed in the current period.<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">The CAD
in India was $ 93bn in 2012, second to US in volume, we can expect a saving
from low energy prices to the tune of $ 18-20bn in FY14, India still need
around $ 70bn from capital inflows. (Though I do not term it a healthy
situation to fill the gap of current deficit from capital receipts). Foreign
inflows like FDI and FII’s investments have been funding around $ 50bn for last
six years (except 2008).</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">My Point of Concerns: CAD, GDP Growth and Stubborn
Inflation</span></b></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">A few
days ago, one of my old industry friend was discussing with me the positive signs
of our economy and their so called positive effects on the Equity and Debt
market emphasizing primarily on CAD coming down from 4.8% to 3.6% and I really
wanted to make him a part of my negative economic indicators but his sheer
loyalty towards our economy and positive thinking stopped me from doing so.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">As the
improvement in trade balance in 4Q was known, the QoQ decline in the CAD as a
percentage of GDP was not a surprise. My point of concern is decline in
invisibles.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">Invisibles
declined by 8% YOY in Mar.13, the second consecutive quarter of negative
growth.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">Worryingly,
each major part of the invisibles set showed concerning trends:</span></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l1 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">1.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "Times New Roman","serif";">Investment
Income ( i.e. money sent back by MNc’s plus interest payments on bonds) has
stayed near record high levels around US$5bn/quarter</span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l1 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">2.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "Times New Roman","serif";"> Income
from software services remained barely positive( +1% YoY)</span></div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l1 level1 lfo1; text-indent: -.25in;">
<span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">3.<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "Times New Roman","serif";">Remittances
reported a second consecutive quarter of YoY decline.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">While
further dissecting the Reasons behind CAD falls, what I found was that
interestingly 4Q13 was only the second quarter since 2001 (barring the crisis)
when import fell YoY but unfortunately, this was accompanied by a fall in
export as well. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">For me, India’s
vulnerability looks serious: the second highest current account deficit in the
world after US funded by short term capital receipts, with reserve accumulation
stopped since 2008.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">My other
point of worry is the over-dependency on short loans in the form of short term
credit to India. In the current year $ 165bn will be the amount come up for
redemption or refinancing.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">One of
my greatest concerns towards Growth- inflation puzzle is that while the GDP
growth has slowed down from 9% in FY11 to decade low of 5% in FY13, the
inflation has just decelerated from 9.5% to 7.5% against the basic theories of
economy. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">At the
peak of the investment boom in 2007, private corporate as well as Government
announced around Rs. 5 Trillion of new projects every quarter and now it has
come down to a striking figure of Rs. .67 trillion.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">It
compels me to support the RBI contention and its worry over the pattern of
current inflation that the problem is from supply side rather than from demand
side.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">To add to
my worry is that when my central bank will realize it completely that rate cuts
will not help in such a case, I am afraid about the future of bond yields!!!!</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">This is
nothing but postponing the D- Day. Rather than taking aggressive measures for
strengthening of overall economy, we are just carrying forward the deep impact
to some future days.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">My View:</span></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">I still
believe CAD to settle down between 4-4.5% by Mar.2014.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Are we heading to Solvency crisis?</span></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">However,
though India’s indebtedness is rising, external debt to GDP is not at that
level that can cause a solvency crisis (21% of GDP) like some of European
countries. Even percentage of foreign currency reserves to external debt (144%
of reserves) is higher in the decade but much lower what it used to be in
1990s.</span></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">So, from
my point of view – the solvency crisis is out of question. (<b>It proves that I do
not mention only negative indicators of our economy – allegation I face
sometimes</b>)</span></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";"></span></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";"></span></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">The Infamous “Taper”:</span></b></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">The
Employment report of US dated 5<sup>th</sup> July 2013 was not at all bad. On
the basis of prevailing economic conditions, I think , they would be needing
somewhere 250000 jobs a month and at this rate, to achieve the level before the
recession, it will take around five years and unfortunately without a clear
shot, I fear full recovery might not happen at all.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">Monetary
policies might do the trick but suddenly rather than becoming more aggressive
the Fed has started talking about the infamous “Tapering”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">Sometimes,
I feel that the talk about “Taper” has done more damage than perhaps the
“Taper” itself would have done.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">I
strongly believe that aggressive monetary measures may finally get the US back
to full employment and wish the same as I recall tha last time they were in the
same situation what happened was…………..</span></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">“WORLD
WAR II”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">My View:</span></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">Only if
I could, I would have recommended a jobless rate threshold of 5.5% instead of
6.5% to Fed.</span></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">Anyway,
as I believe that the reduction in the bond buying program or “taper” is more
of monetary policy measure open for flexibility rather than a strategic move.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">I AM OF
THE VIEW THAT sooner or later the Fed will realize the current importance of
lowering of job threshold rather than bowing in front of conventional monetary
governing theories.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">I see
tapering is out of question in near future……. (<b>Another positive talk from my
side!!!!!</b>)</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">Rupee Slide:</span></b></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">In
june.13, the rupee dropped to an all time low of 59.7 per dollar and sliding
continuously. A sharper than expected trade deficit ( due to surge in gold
imports) triggered the then fall in rupee and the domestic currency further weakened
after uncertainly regarding the early pull back of QE3 by US Fed. In June.13 FII
pulled out $5.4 bn from Debt market and $1.8 bn from equity market.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">Even in
the recent past, shocks of smaller magnitude have been sending the rupee into a
tailspin. The recent capital flight was in response to a common shock across
all the emerging economies. Brazil, Indonesia, Turkey, Korea, Russia, Philippines
and South Africa saw their currencies weaken by 5-17 percent. Among these, the
South African Rand, Brazilian Real and Russian Rouble depreciated the most as
these economies have a high current account deficit and rely heavily on foreign
funding.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">The
increasing vulnerability of India’s external account impairs the rupee’s ability
to counter even smaller shocks. With limited intervention from the RBI, the
value of the rupee against US dollar is almost entirely influenced by demand
and supply conditions.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Times New Roman","serif";">Have a
look on the four episodes of rupee depreciation in the past decade:</span></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo2; text-indent: -.25in;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">1.<span style="font: 7.0pt "Times New Roman";"> </span></span></span></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif";">Aug.08
to Mar.09: Lehman Crisis- Very Big shock-Low vulnerability</span></b></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "Times New Roman","serif";">After
the Lehman crisis, the rupee registered a sharp fall against the dollar due to
net FII outflows of US$6.7bn during Aug.08 to Mar.09. The rupee fell to a new
low of 52.1 per dollar from 42 per dollar during this period.</span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo2; text-indent: -.25in;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">2.<span style="font: 7.0pt "Times New Roman";"> </span></span></span></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif";">Aug.11
to Dec.11: EU recession- Big Shock- Rising Vulnerability</span></b></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "Times New Roman","serif";">In
Aug.11, the rupee began weakening subsequent to the news of double dip
recession in the euro zone. In Dec.11, the rupee fell by nearly 17% YoY and
reached a new low of 54.2 per dollar.</span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo2; text-indent: -.25in;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">3.<span style="font: 7.0pt "Times New Roman";"> </span></span></span></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif";">April.12
to June.12: Fear of Greek exiting from EU- Anticipated Shock- high Vulnerability</span></b></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "Times New Roman","serif";">In
April.12, the rupee started weakening in response to news of Greece exit from Euro
zone. This Uncertainty caused the net FII inflow to fall to US$56 million. Moreover,
the fear of a global credit freeze resulted in preponement of dollar purchase by
India companies to service huge repayment scheduled during the fiscal. The
rupee fell to a new low of 57.2 per dollar in June.12 declining by 25% average
YoY.</span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo2; text-indent: -.25in;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">4.<span style="font: 7.0pt "Times New Roman";"> </span></span></span></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif";">May.13
to July.13: “Taper Announcement”- small shock though high vulnerability</span></b></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "Times New Roman","serif";">After
the Federal Reserve announced a gradual withdrawal of their bond purchase
program (popularly known as QE) in May end 2013. FII’s began pulling out funds
from debt markets of most of the emerging markets and caused turbulence in
rupee’s movement in spite of the fact that this shock was of much low intensity
than the earlier one.</span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "Times New Roman","serif";">My
point is that the rising vulnerability of India’s external account is
influencing currency exchange rates to the extent that speculations (or we can
say smaller shocks) have become a bigger trigger than a dramatic change in the
fundamentals itself.</span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 14.0pt; line-height: 115%; mso-bidi-font-size: 11.0pt;">My View:</span></b></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "Times New Roman","serif";">I
believe this depression to be a very short lived situation and expect the
currency to come up at a level of Rs. 55 per dollar by Mar.14 though volatility
will still be an inherent feature.</span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpLast">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif";">At Last:</span></b><span style="font-family: "Times New Roman","serif";"> by the time I have ended writing
this blog, RBI has already taken the aggressive measure to control rupee slide
and thus, I will try to deliver my next blog on the same very soon.</span></div>
</div>
BFCBLOGShttp://www.blogger.com/profile/14291813554321437475noreply@blogger.com2tag:blogger.com,1999:blog-333906325479891434.post-72434614593362260622013-04-20T00:20:00.001-07:002013-04-20T00:20:14.023-07:00Gold Glitters Contd........<div dir="ltr" style="text-align: left;" trbidi="on">
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<br />
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From the Desk of Chief Marketing Officer,</div>
<div class="MsoNormal">
Sharad Bindal</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
In continuation of my previous Blog on the precious metal, I
would like to draw all of your attention on the concluding statement:</div>
<div class="MsoNormal">
“But remember always to watch is this the right price to
start with Gold?????”</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Surprisingly, as, in June.2012, in my previous blog, I did
not find the reasons of gold moving rapidly upward in the last two years; I
still did not find the logic of its dramatic fall except some strong
apprehensions making way for smart speculations.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
However, I can attribute following factors, as the primal
reasons for the erosion of shining of the metal:</div>
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">1.<span style="font: 7.0pt "Times New Roman";">
</span></span></span>Net Selling by ETF’s<br />
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">2.<span style="font: 7.0pt "Times New Roman";">
</span></span></span>Apprehension of ECB selling Gold<br />
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">3.<span style="font: 7.0pt "Times New Roman";">
</span></span></span>To some extent, Panic Selling to avoid risk<br />
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">4.<span style="font: 7.0pt "Times New Roman";">
</span></span></span>Worry over the possibility of the slowing down
of QE3 by US Federal.<br />
<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Keeping in mind the factor that the C3 mining cost of the
Gold is roughly around $1200/oz and adding in it the usual profit or incentive,
one can have a normal price of Gold at $1350/oz (approximately Rs. 25500/10 gm)
surprisingly close to the current trading price, I feel that the bottom is
somewhat had been hit already.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>I am waiting for the dust to settle down after absorbing the
current selling pressure and subsiding of apprehensions and have a prediction
of level of $ 1500/oz by Dec.13 </b></div>
<div class="MsoNormal">
<br /></div>
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<br /></div>
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<br /></div>
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<span style="mso-spacerun: yes;"> </span></div>
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<br /></div>
</div>
BFCBLOGShttp://www.blogger.com/profile/14291813554321437475noreply@blogger.com0tag:blogger.com,1999:blog-333906325479891434.post-7304655805230003362012-06-20T04:25:00.000-07:002012-06-26T00:48:48.207-07:00<div dir="ltr" style="text-align: left;" trbidi="on">
<b style="background-color: white; font-size: 12pt; line-height: 115%;"> Gold Glitters- The understanding of Precious Metal</b><br />
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span><br />
<span style="font-size: 12pt; line-height: 115%;"><br /></span><br />
<span style="font-size: 12pt; line-height: 115%;">From the desk of Chief Marketing Officer</span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Sharad Bindal</span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Before 2009,
I have never analyzed gold as an asset class as I was unable to understand how
to evaluate an asset which has no underlying value except what people assign to
it and which has no future cash inflows.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">As per my
understanding of analyzing securities:<o:p></o:p></span></div>
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</div>
<ol style="text-align: left;">
<li><span style="background-color: white; font-size: 12pt; line-height: 115%; text-indent: -0.25in;">An
asset can be and should be analyzed if it carries some future cash inflows</span></li>
<li><span style="background-color: white; font-size: 12pt; line-height: 115%; text-indent: -0.25in;"><span style="font-size: 7pt; line-height: normal;"> </span></span><span style="background-color: white; font-size: 12pt; line-height: 115%; text-indent: -0.25in;">It
exposes itself to the price fluctuation in relation to market forces such as
demand and supply etc.</span></li>
<li><span style="background-color: white; font-size: 12pt; line-height: 115%; text-indent: -0.25in;">And
most importantly, it carries some intrinsic value or book value with it.</span></li>
</ol>
<br />
<div class="MsoNormal" style="margin-left: .25in;">
<span style="font-size: 12pt; line-height: 115%;">For the sake of better understanding let’s take few examples
of known asset classes:<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo2; text-indent: -.25in;">
<span style="font-size: 12pt; line-height: 115%;">(A)<span style="font-size: 7pt; line-height: normal;">
</span></span><span style="font-size: 12pt; line-height: 115%;">Stocks:
it carries future inflows in the form of dividends, price fluctuations are
there as to forward earning of the company etc. and every stock has some book
value as well.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo2; text-indent: -.25in;">
<span style="font-size: 12pt; line-height: 115%;">(B)<span style="font-size: 7pt; line-height: normal;">
</span></span><span style="font-size: 12pt; line-height: 115%;">Bonds
and debentures: Contain future inflows in the form of interest, fluctuation
with respect to interest rates movements and an intrinsic value in the form of
maturity proceeds.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Almost every
asset class satisfies the entire above-mentioned criterion to make the same analyzed
with respect to its market price.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Now the
flaming question in front of me is to: How to evaluate an asset class which has
no intrinsic value and as well no future inflows, though it is exposed to
market risks and fluctuation in prices like any other security.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Critically
saying, if gold is trading at Rs. 28500 per 10 gram, this is the price which
people have assigned to it as per their perception.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">One can
argue about finiteness of the gold or somewhat scarcity of it, but that is
equally related to any other precious metals also like platinum, and then I
started to believe that Gold is “not<b> a
metal only rather a religion. It has such value as people assign to it.”<o:p></o:p></b></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">By the time
I started working on analyzing Gold as an asset class, I started seeing people
knowing the future of the precious metal more than I do. In a way I relate
things to the era before financial crisis of 2008. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Before the
financial crisis most of the biggies of financial world felt that they have
understood how things worked, then the crisis occurred and things changed. The new
developments led to many consequences:<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">First, they
imposed heavy losses. Second, they provided a new level of uncertainty to the
world of finance and thirdly they called up the need to search for things to
provide more safety and certainty in the new uncertain world. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">I guess,
this search actually led many to look for Gold as an alternative asset class.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Though, I
started advising my clients to look for Gold as an alternate asset class by the
mid of 2009, so why I am putting negative things about gold?<o:p></o:p></span></div>
<div class="MsoNormal">
<b><span style="font-size: 12pt; line-height: 115%;"><br /></span></b></div>
<div class="MsoNormal">
<b><span style="font-size: 12pt; line-height: 115%;">Merits of Gold: <o:p></o:p></span></b></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">No doubt
that Gold is an ideal investment, it is a hedge against inflation, accepted
worldwide and a reliable store of value also.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Unlike
currency, it cannot be created out of thin air and the supply of gold is
finite.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Moreover, it
is tangible and unlike other forms of investments exist only in electronic
form, it can be owned with the feeling of ownership.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Finally,
Gold seems to be perfect.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">But, to
remind again, Gold is nothing but a shiny metal and its applications in the
real world are less than that of Silver. Except jewellery and electronics very
little of its value comes from its actual usefulness.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Therefore,
the purpose, usefulness and applications of gold will not be of much help while
putting up a price to it or justifying its prevailing market price.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">To an extent
I believe “that Gold has no financial value other than that which people assign
to it, and thus it should not be a part of typical investment plan.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Due to
uncertainty introduced by the financial crisis the gold has attracted attention
and has doubled in price over roughly the last two years and I have been asked
about my view on gold more in those two years than in all the rest put together.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">As I started
my career as fixed income specialist, so, by nature I am not very fond of
riskier asset class such as equity and commodity and perhaps this is why I
never had clients asking me about gold and till the time of financial crisis
Gold was considered irrelevant as other asset classes were performing well.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b><span style="font-size: 12pt; line-height: 115%;">My Opinion:<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">As an
analyst, I really find it difficult to value a non-income producing asset like
Gold.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">I can value
a security, company or property by adopting the typical financial strategy like
P/E ratios, dividend yield and capitalization rates and comparing to the
prevailing interest rates and their historic performances etc. and can arrive
at an assessment that whether this asset is cheap or dear.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">But to the
best of my knowledge, there is no analytical way to value an asset that does
not produce cash flows. So one can say that all non-income producing assets are
only worth what buyers will pay for them.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">One can
argue that the same is the case with income producing assets as well as their
prices also fluctuate but the price fluctuation is only for short term as they
are going to produce fresh cash inflows in coming future and it is obvious that
eventually their price will move in the direction of that value. They are not
required to do so in a particular time frame but that expectation provides a
solid base for investing in them.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">I believe
that no asset can be termed as good or bad without referring to its price and
if it is so, how we are going to evaluate that the price of gold is right?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">While having
conversation with my client, I asked:<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">How do you
feel purchasing Gold @ 24000/- per 10 gram?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">He said: great,
I would like to invest in there<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">I asked:
would your answer be the same, if it were 26000/-per 10 gram<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">He Said:
yes, but with little caution<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">I asked: and
if it were 29000/- per 10 gram<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">He Said: not
at all.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">I asked: so
the price of Gold matters?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">He Said: of
course<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">I asked:
then how can be you so sure that it is fairly priced at 24000/- per 10 gram.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">He Said:
hmmm….., <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Many
research group has quoted about the fact that gold had hit the height of
$850/ounce in 1980 and had gained only 2% per year since then and as of now it
would have to be at $2400/ounce to merely equal the 1980 price in inflation
adjusted returns.(e.g. Reuters, November 29)<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">Now this is
why I do not like making point to point comparisons. In the above example how
do we know that the gold was reasonable priced in 1980. For the time being, consider
that the gold was overpriced in 1980 then even failed to show much appreciation
in the interim period, it could be still overpriced today.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">To support
my assertion, I would like to take the mid 1999 period when the gold was $250/ounce;
it’s been up approx 16% per year for the last decade. In this case the synopsis
for the determination of gold prices on the basis of past prices changed
drastically.<o:p></o:p></span></div>
<div class="MsoNormal">
<b><span style="font-size: 12pt; line-height: 115%;"><br /></span></b></div>
<div class="MsoNormal">
<b><span style="font-size: 12pt; line-height: 115%;">The conclusion:<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">To conclude,
I would like to say that since Gold has worked for hundreds of years, it
probably will keep on doing so. It might not do so forever, but what‘s the
probability this will be year it stops?. So I wouldn’t bet against it, rather I
might recommend a position in the metal. Not because I see gold as wealth creation
tool, but rather as a useful contributor to safety through diversification.<o:p></o:p></span></div>
<div class="MsoNormal">
<b><span style="font-size: 12pt; line-height: 115%;"><br /></span></b></div>
<div class="MsoNormal">
<b><span style="font-size: 12pt; line-height: 115%;">At Last:<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"> Ya, I think Gold is probably more likely to
continue as a store of value and therefore one should have a position. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 115%;">But remember
always to watch is this the right price to start with Gold?????<o:p></o:p></span></div>
</div>BFCBLOGShttp://www.blogger.com/profile/14291813554321437475noreply@blogger.com0tag:blogger.com,1999:blog-333906325479891434.post-25118926411340987242012-03-27T00:00:00.000-07:002012-03-27T00:00:21.164-07:00Roadblocks for advisory fees<div dir="ltr" style="text-align: left;" trbidi="on"><br />
<div class="MsoNormal">From the desk of Chief Marketing Officer</div><div class="MsoNormal">Sharad Bindal</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">Post Aug.2009, after abolition of entry load in Mutual funds, I have met a number of investors and confronted with their reluctance of paying advisory fee to their “Advisors” as envisaged by SEBI to be the future of Investment industry.</div><div class="MsoNormal">To sum up, following are the roadblocks prevailing in the way of healthy financial practice by opting for Advisory model:</div><div class="MsoListParagraphCxSpFirst" style="margin-left: 37.5pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><b>Absence of a tangible and visible product:<o:p></o:p></b></div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto;">Unlike any other product the outcome/ performance of which can be known immediately after buying it; the outcome of financial advisory can be judged only after a long period.</div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto;">This makes people reluctant to pay advisory fee instantly and then to wait for long for analyzing them.</div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><b>Lack of Trust:<o:p></o:p></b></div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto;">Since the investors have been conned by their agents and distributors in the past, they are now reluctant to rely again on new advisors and moreover paying a fee to them makes them more reluctant.</div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><b>Agent Vs. advisors:<o:p></o:p></b></div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto;">While an advisor may work hard on preparing of financial and goal based planning customized to the requirement of a particular client, an agent may come up with past return chart extracted from various available websites without even knowing the risks associated with the products suggested or the requirement of the client.</div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto;">What makes a difference for most of the clients are that the agent is working for them for free and that too with a clear depiction of “promising returns” while on the other hand, Advisor is charging a fee and presenting some products with not so promising returns (as suggestion involves risk adjusted return analysis). </div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><b>Linking up of Performance with Advisory Fee:<o:p></o:p></b></div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto;">Many a times, I have been asked by people while briefing them the concept of Advisory, as how much returns I will generate for them if they pay a fee to me. While making them to understand that actually the so called guaranteed returns are features of fixed income products only, I have been asked as to “HOW I AM DIFFERENT FROM OTHERS, THEN”.</div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto;">The answer to this question actually lies not only in delivering the better returns rather following a process driven system while putting forward my suggestion customized in the manner to meet their specific requirements.</div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto;">The need of the hour is that a client should understand that even if a particular scheme is topping the chart in terms of delivering returns, it may not be suitable for him considering the specific requirements viz. lesser investment horizon or lesser risk appetite. What he requires is a customized plan of investment solutions matching exactly his requirements.</div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><b>Linking of Portfolio Size with Advisory Fee:<o:p></o:p></b></div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto;">There is a perception in minds of people that they should pay advisory fee if and only if they have certain amount of portfolio and since they have lesser amount of portfolio, it is not worth paying.</div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto;">Well, the fact is that the one is required to focus more when he is in accumulating phase of life as early planning of financial goals produce dramatic results in future. </div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto;"><br />
</div><div class="MsoListParagraphCxSpMiddle" style="margin-left: 37.5pt; mso-add-space: auto;">Wishing these Roadblocks will disappear soon paving way for the healthy practice in the industry.</div><div class="MsoListParagraphCxSpLast" style="margin-left: 37.5pt; mso-add-space: auto;"><br />
</div></div>BFCBLOGShttp://www.blogger.com/profile/14291813554321437475noreply@blogger.com1