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Where Do They Stand?: Perspective
Where Do They Stand?: Perspective
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Perspective
There has been much action by the governments and central banks in the developed world both throwing several trillion dollars as so-called solution to the crisis. The size of balance sheets of the U S Federal Reserve and European Central Bank, which had a combined size of under a trillion in 2007, today is in excess of $ 6 trillion and set to mount further. Nothing that caused the crisis has been solved by the actions of the central banks and governments.Where do the fairly long list of persons (for the best among them, check out our preferred blogs and books published in The Wise Investor of September 2012) who saw the crisis stand now? The sum and substance of the views of this group is: We are a long, long way from a genuine solution to the problems in the developed world. Be prepared for long periods of low and slow growth. Throwing more debt (even if the source changes) is no solution to the problem. The worst is yet to come in the Eurozone. U.S situation is dire but for now has taken a backseat to the Eurozone, which is in the limelight. The focus of policy makers still continues to be to safeguard big banks and private bond holders. Periods burst of deflation is likely. Any recovery in the economy is unlikely to be of a sustainable nature. Unemployment remains a far bigger problem than what is suggested by the official numbers. Sundaram Asset Management
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Source: Colonel Flick (via The Williambanza17 Blog http://williambanzai7.blogspot.in/), September 2012 The Wise Investor October 2012
India View
Equity
India View
Bonds
Corporate profit growth will remain muted for some more time on the back of higher provisioning cost in the banking system, and the oil and gas sector having issues of their own. Capex cycle, especially power, looks very weak and will impact equipment suppliers. Consumption sectors are also slowing down on account of the high growth that we had in the past few years and a delayed monsoon and festive season, but does not concern us as much as the infrastructure space. The flow data seems positive and that should help equity inflow into some of the leveraged sectors such as power and infrastructure improving confidence significantly. This should help grease the wheels and increase the velocity of money. Equity assets have been shunned by all investors and will come back in favor for want of alternatives and a willingness to increase risk levels. Riding the volatility through by buying the dips is an attractive option, and a systematic investment plan a simpler option. Midcaps may be viewed as risky assets, but still outperform large caps by a wide measure. Volatility is more apparent in equity markets, while the bond markets may appear to be an oasis of calm. Equity assets do, however, have the potential to earn more and if one can reduce the lumpiness through a SIP, then one can take advantage of volatility. Satish Ramanathan Head - Equity A detailed view is available at www.sundarammutual.com Sundaram Asset Management
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1% NDTL not breached and capital account flows also improving can relieve pressure on liquidity alongside the lower credit growth the incremental credit growth from March 2012 at 96.2% has declined to 72.6% now. We expect the central bank to act pro--actively to contain the deficit within the 1% NDTL band if liquidity tightens in the busy season. We are also wary of the Rs 20000 to 30000 crore per month cash leakage in the festivities for the nest 2 to 3 months. Going forward, inflation looks to escalate on account of revised electricity prices and diesel price hikes. In this backdrop it will be difficult for RBI to cut rates yet in the upcoming monetary policy at the month end but any further government action towards fiscal consolidation may provide it room to ease rates. Strategy: With the current regulation of the liquid funds securities being marked to market with over 60 days and sector allocation limited to 30% of the fund size, it becomes imperative to maximize the yield of the 30% of the portfolio with adequate credit in the money market funds. On the longer-bond case for yields moving lower further looks stronger than before and we would look to remain invested for the fiscal 2013 and maintain duration with only switching securities. Dwijendra Srivatsava Head - Fixed Income A detailed view is available at www.sundarammutual.com The Wise Investor October 2012
1.00 -0.44 -0.01 -0.19 0.05 0.10 0.04 0.45 0.05 -0.30 -0.17 0.34 0.19 0.14 0.27
Mgd. Futures
1.00 -0.79 0.93 0.20 0.51 -0.33 0.14 0.46 0.80 0.05 0.69 -0.15 0.17
Global Equities
1.00 0.21 0.62 -0.04 -0.04 0.59 0.81 0.12 0.76 0.07 0.26
L/S Equity
Mar 00-Mar 03 Oct 07-Jul 12 1.00 0.19 0.06 0.50 0.50 0.21 0.64 -0.09 0.23
Abs. Returns
In the chart, I have compared correlations during the 2000-03 period (bright blue) with correlations in the current environment (dark blue). As you can see, with one or two exceptions, correlations are generally much higher now. Now, you could quite reasonably confine this observation to the academically interesting but why should I care? category, if it wasnt for the fact that most investors around the world continue to manage money in a way that is deeply rooted in the Modern Portfolio Theory school of thought even when facts suggest that a different approach to asset allocation and portfolio construction is warranted. Nowadays, only a handful of sovereign bonds are considered safe haven assets. Pretty much all other asset classes are now deemed risk assets and they move more or less in tandem. Even gold looks and smells like a risk asset these days. In the 2000-03 bear market commodities were an excellent diversifier against equity market risk with the two asset classes being virtually uncorrelated (+0.05). Nowadays, the two are highly correlated (+0.69). It follows that we are not only in a low return environment at present, as evidenced by the paltry return on equities since the end of the secular bull market in early 2000, but we cant rely on the ability to diversify risk either. Niels Jensen, Absolute Return Partners (www.arpllp.com)
The views presented by the author (s) do not necessarily represent that of Sundaram Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Investment Quiz
1 How many mutual fund houses are there in India now? 2 What is name of the German central bank? 3 What does PIIGS denote? 4 Who is the author of Big Short: Inside The Doomsday Machine? 5 Name the person in the accompanying picture? He too has played a key role in altering the shape of equity markets in India by donning key roles over the past decade and a bit.
Answers for September 2012 Quiz 1 If a fund is treated as equity-oriented, what are the tax benefits? No tax on long-term capital gains and dividend 2 What is the key benchmark index in Brazil? Bovespa 3 Who is the author of Exorbitant Privilege? Barry Eichengreen 4 This Web site started off as `Jerry and David's Guide to the World Wide Web'. Name the website? Yahoo! 5 Name the person in the accompanying picture? He has played a key role in altering the shape of equity markets in India? Ravi Narain, Managing Director & CEO. National Stock Exchange Disclaimer
Mutual fund investments are subject to market risks, read all scheme related documents carefully. The Statement of Additional Information of Sundaram Mutual Fund and Scheme Information Document of Schemes of Sundaram Mutual Fund, which are available at www.sundarammutual.com. Risk Factors: All mutual funds and securities investments are subject to market risks. There can be no assurance or guarantee that a scheme's objective will be achieved. NAV may rise or decline, depending on factors and forces affecting the securities market. There is risk of capital loss and uncertainty of dividend distribution. General Disclaimer: The Wise Investor, a monthly publication of Sundaram Asset Management, is for information purposes only. The Wise Investor is not and should not be construed as a prospectus, scheme information document, offer document, offer solicitation for an investment and investment advice, to name a few. Information in this document has been obtained from sources that are reliable in the opinion of Sundaram Asset Management. Opinions expressed by authors do not necessarily represent that of Sundaram Mutual Fund or Sundaram Asset Management or Sundaram Trustee Company or Sundaram Finance, the sponsor. Statutory: Mutual Fund Sundaram Mutual Fund is a trust under the Indian Trusts Act, 1882 Sponsor (Liability is limited to Rs 1 lakh): Sundaram Finance Limited; Investment Manager: Sundaram Asset Management Company Limited. Trustee: Sundaram Trustee Company Limited. Past performance of Sponsors/Asset Management Company/Fund does not indicate or guarantee future performance
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
The Wise Investor October 2012
Blog Picks
The views presented by the author (s) do not necessarily represent that of Sundaram Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Rank Return Rank Return 9 15 5 12 3 23 22 14 16 11 20 10 2.4 2.6 1.6 7.7 3.5 0.5 -1.4 2.5 0.7 6.8 -1.9 4.7 18 16 19 2 14 22 24 17 21 6 25 12 14.6 10.0 19.6 12.6 22.3 3.0 3.2 10.9 9.0 13.2 5.3 13.3
Rank Return Rank Return Rank Return 9 15 5 12 3 23 22 14 16 11 20 10 8.7 9.1 12.1 -2.4 2.5 -2.8 -8.3 -1.8 -3.0 -9.3 -3.4 23.7 4 3 2 10 7 11 18 9 12 19 14 1 27.3 23.1 29.0 9.4 31.2 12.0 12.6 18.8 18.1 16.7 8.6 9.1 4 6 3 19 2 16 15 8 9 10 22 20 36.3 38.4 46.8 -6.0 27.2 11.8 43.9 16.4 9.8 13.9 67.4 75.9
Rank Return 8 7 4 23 12 16 6 14 17 15 2 1 -5.6 -3.3 15.4 -43.3 -8.2 -11.2 21.9 -19.7 -29.9 -16.0 42.6 138.3
Source: Bloomberg; Analysis: Sundaram Asset Management; Returns is in percentage and in U.S. Dollar terms for each period and not on an annualised basis. Sundaram Asset Management
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Voices
The New Food Crisis: 10 years ago we entered a new era of rising resource prices after at least 100 years of steadily falling prices. It now appears that about five years ago we also entered a period of sustained food crisis for several of the poorest countries. This situation seems likely to continue for the indefinite future. If it does, it will cause the social structure of several countries to break down, resulting in waves of immigration on a scale unknown in modern times, outside of major wars. In the drive for resources, particularly food but also energy, country relationships are also likely to be destabilized, causing risks to global security. China, more concerned with future resource security than others, will find it particularly tempting to throw its increasing economic and military weight around. This risk also seems to be ignored or underestimated by national governments, although the military arms of several, including the U.S., seem to be exceptions. The vulnerabilities from food pressure can be easily demonstrated and are already beginning to play out. In developed countries, food accounts for only 10 or 12% of our total budget. For several poorer countries, food costs have risen to 40% and above of their total expenditures following the surge in global grain prices since 2002. Global grain prices almost tripled in the last 10 years. If they were to double in the next 20 years it would be painful indeed even for rich countries, but simple arithmetic will show how impossible the situation becomes for those poorer countries that start with a 40% share of food in their budget. Jeremy Grantham, GMO (Source: www.gmo.com)
The Solution is the Problem: On both sides of the Atlantic, the largest contributors to the current crisis are excessive debt and spending.We are now at a point where additional government stimulus measures will have negligible, if not detrimental effects on the economy and long-term growth. Debt has to be reduced, not increased by more deficits. Central planners have demonstrated that they dont have the discipline to implement the Keynesian model of surplus in good times in order to finance deficits in bad times. We have now reached the limit of indebtedness and need to muddle through a painful but necessary deleveraging. The politically favoured option of financial repression and negative real interest rates has important implications. Negative real interest rates are basically a thinly disguised tax on savers and a subsidy to profligate borrowers. By definition, taxes distort incentives and, as discussed earlier, discourage savings. Also, financial institutions, which are traditionally supposed to funnel savings towards productive investments, are restrained from doing so because a large share of their balance sheets is encumbered by government securities. The same is true for pension funds, which instead of holding corporate paper or shares, now hold an ever growing share of public debt. Pensioners, who are also savers, get hurt in the process. The current misconception that our economic salvation lies with more stimulus is both treacherous and self-defeating. As long as we continue down this path, the solution will continue to be the problem.There is no miracle cure to our current woes and recent proposals by central planners risk worsening the economic outlook for decades to come. Eric Sprott, Sprott Asset Management (Source: www.sprott.com)
The U.S. stock market: is simply (and correctly) discounting a much slower rate of economic growth going forward. It is currently in the 13th year of a long-term bear market, the 4th such long-term bear market since 1900. Each one of these bear markets has been defined as a transition from high valuations at the end of a long bull market, back to low valuations. Although valuations today are quite a bit lower than in 2000, the market is still in the middle of a process of becoming cheaper relative to earnings. Just as the valuation of an individual stock goes down when its growth prospects dim, the valuation of the entire market has declined as the economys growth prospects have dimmed. At some point, the markets valuation will be low enough that well be able to confidently invest in stocks knowing the market has already priced in most or all of the effects of our high debt, slow growth predicament, and all the money printing well likely see. In all previous bear markets, that point came at a valuation less than half of what we find today, so our market likely has some ways to go. As with an economy going through a deleveraging process, these bear market cycles take a long time to complete. Fortunately, the benefits for those who wait for end-of-bearmarket valuations are great enough to inspire our patience. The wait will have been worth it when the next opportunity arrives. Until then, we continue to view stocks as an asset to be rented, and only when they are in a very favorable position. Brian McAuley, Sitka Capital (Source: www.sitkapacific.com)
The views presented by the author (s) do not necessarily represent that of Sundaram Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.
Registered Newspaper Posted at : Egmore R.M.S., Patirika Channel. Posted on: 16/10/2012
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