Growth Concerns Remain Central as RBI Cuts Rates by 25 bps
The first indications of the slowdown in growth were already there when the August policy was announced but there have been a lot of critical data points that came out post the August policy which hint at pressure on growth. GDP growth for June quarter came in at just 5%. The core sector growth was in a steady downtrend and actually dipped into negative growth of (-0.5%) in August 2019. IIP has also been touching multi-month lows even as PMI Services dipped sharply below 50, showing contraction in this segment. It is therefore hardly surprising that RBI has made growth the central theme of the October monetary policy.
Highlights of the October Monetary Policy
The repo rate has been cut by 25 basis points from 5.40% to 5.15%. This is the fifth consecutive rate cut since February and the RBI has already cut rates by 135 bps this year.
Since the reverse repo and MSF raters are linked to the repo with a 25 basis points spread either ways, they stand reduced to 4.90% and 5.40% respectively.
The MPC has retained the stance of the policy as accommodative and committed to it till growth pressures remain and inflation is within the range of 4% (+/- 2%) range.
All six members of the MPC voted for Accommodative stance and to cut rates. Dr. Dholakia voted to reduce the rates by 40 bps but other five members voted to reduce rates by 25 bps, which was eventually the majority verdict.
The detailed minutes of the monetary policy will be announced on 18th October and the next meeting of the MPC will be held on 5th December, 2019.
Economic context of the policy announcement
The economic context can be gauged from the fact that the growth rate for fiscal 2019-20 has been downgraded from 6.9% to 6.1%, one of the sharpest outlook cuts between two policies. RBI also expects the September quarter GDP growth at 5.3% and the GDP will have to grow at closer to 7% in the last two quarters for the full year GDP to be able to touch 6.1%. Growth, definitely, remains the million dollar question for the RBI.
The policy has expressed conviction that the cut in corporate tax rates to 22% and the tax rate for fresh investments to 15% would help boost consumption and investments. However, currently there is a big negative output gap and this rate cut will complement the tax cuts to bridge the output gap. Most of the high frequency growth indicators like GDP, IIP, Core Sector, PMI Manufacturing and PMI Services have been under strain.
In the past, the RBI has been wary of cutting rates in the midst of rising inflation. But RBI does not see any major upside risks to inflation. The median rate of 3.2-3.5% is expected to hold. Broadly, Kharif output has been at par with the previous year, albeit marginally lower. But the buffer stock of pulses is expected to keep prices in check. The bottom line is that even as weak growth remains a challenge, the tepid inflation may support a cheap money policy.
Will markets really be impressed by the rate cut?
To be fair, the 25 bps rate cut was already anticipated and factored into prices. There is little by way of positive surprise here. Also the markets are unlikely to be pleased with the growth outlook considering that the RBI has downgraded the growth projection from 6.9% to 6.1% for the full fiscal. Also, the RBI projection of 5.3% for the second quarter is much lower than all previous estimates. The RBI has also put the pressure on banks to improve their transmission ratio from the current 25% to a much higher level. Markets are also sceptical that this would mean pressure on banks and financials that account for 41% of the Nifty weight. These are some of the key challenges that are likely to make markets cautious.
Some parting thoughts on the policy
While we wait for the detailed minutes, it must be acknowledged that the RBI has moved the policy beyond rates and liquidity. For example, the policy has made an attempt to expand market eligibility for MFIs to participate. It has also permitted rupee derivatives with delivery to be traded on the IFSC. RBI will extend collateralized liquidity support on all NEFT days once it goes live in December 2019. Above all, the policy has also spoken about create a special fund to expand digital infrastructure.
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Know All About Stock Delisting and its Process
Just as listing a stock makes it available for trading on a recognized stocks exchange, delisting is about removing the shares from the stock exchange and ceasing it to be traded in the share market. Delisting can be either mandatory or voluntary. Mandatory delisting is enforced by the stock exchanges where the company has failed to comply with the listing agreement or where the public shareholding has gone below the threshold level.
We will focus on voluntary delisting of shares. Here the company voluntarily chooses to get the shares delisted and we have seen that in the case of many Nifty MNCs like Novartis and Cadbury as well as with domestic companies like Nirma. What does delisting entail and what happens to the stock in the share market after delisting?
Voluntary delisting for a variety of reasons
Companies choose to delist for a variety of reasons. Firstly, the company may want to avoid the hassles of being listed on the stock exchange. Secondly, delisting also makes sense when the promoters want greater and total control of the company. Thirdly, delisting can be done if the promoters are looking at privately finding a strategic investor. Delisting also makes sense when the company wants a difficult restructuring as price impact can be avoided. Lastly, companies may choose to delist when they don’t see any value addition in being listed on the share market.
What is the process for voluntary delisting?
When a Nifty or Sensex company or any other company intends to delist, the following steps need to be followed.
A resolution has to be passed in the board meeting for delisting the shares with prior intimation to the stock exchange. A Special Resolution must be moved and prior approval of shareholders is obtained via postal ballot.
An application for in-principle approval must be made to the stock exchange with details of shares to be delisted and the capital statement. At this stage, the stock exchange will insist on paying any pending dues to the stock exchanges before granting approval.
The investment banker is appointed by the company to manage the delisting. The first step is to open an escrow account and deposit the estimated amount of consideration for buyback of shares calculated on the basis of floor price. The Floor price is the minimum price that shall be paid to the public shareholders. Deposit to Escrow account can be made in the form of cash or as bank guarantee.
The next step is to make a public announcement with basic details in at least one large English national daily, one large Hindi national daily and one regional language newspaper of the region where the stock exchange is located. Post the public announcement, the letter of offer to public shareholders is sent within 45 working days to reach them at least 5 days before the opening of bidding.
During the offer period if physical shares are tendered, then it will be sent to the RTA for verification. Merchant banker will transfer these to the promoter after deciding the final price and making of payment to the shareholders.
Delisting is done through the book-built route and final price will be the price quoted by the majority of shareholders. If promoters agree to the price, acceptance of final price is communicated within 8 days of the closure of the offer. The delisting offer will be deemed successful if promoter stake + PAC stake + eligible bids touch 90% of shares issued. Otherwise, offer is deemed unsuccessful and the delisting is cancelled. Even the promoter is entitled to reject the offer within 8 days of close of offer.
Once the final price is accepted by the promoters, additional funds (if necessary) have to be transferred into the Escrow account. The final payment to the shareholders must be made within 10 days from the date of closure of the Offer. For shareholders who did not participate in the offer, once the acceptance crosses 90%, the promoters can cancel the shares of the remaining shareholders and remit the funds to them. That is absolutely legitimate.
After the payment to all shareholders is completed, company must make final application to the Stock exchanges (within 1 year) requesting for delisting of shares. Once the compliance department verifies that all requirements are met, the stock exchange will dispose the application and delist the shares. From that date, the shares are officially delisted.
A Quick Guide to Recession Proofing your Investments and Finances
If you have an online demat account and an online trading account, you are all set to trade in equities. However, the best of traders and investors are always tested in challenging market conditions. It is one thing to react to risks like an industrial slowdown but it is another thing to prepare your portfolio in advance for such an eventuality. That is what is called recession proofing your portfolio.
Your investment portfolio should be designed to manage the risk as you create wealth in the long term. But there are some key challenges. Different asset classes are driven by different considerations. There are times equities will perform better and there are times debt will do better. The question is how to build a portfolio that can continue to perform under various market conditions? Here is how your approach to a recession proof portfolio should look.
Risk diversification is the best way to be recession-proof
When you invest in an asset class there are risks involved. For example, equity has market risk, debt has interest rate risk and commodities have price risk. Diversification is all about spreading your asset mix. There is a lot of merit in diversification. It is not just enough to open your online trading account and online demat account and buy shares. The key to creating an all-weather portfolio is to diversify your risk across a variety of asset classes. This will enable you to enhance average returns irrespective of cycles in investments.
An extension of diversification is managing correlations? Even within the equity class, defensive sectors do not move in tandem with the high beta sectors. There are specific asset classes like gold and commodities which share negative correlation with other asset classes. The key to creating a recession proof portfolio is to mix assets that have low correlations or even negative correlations.
Balanced and hybrid funds can be a good mid-point
Balanced funds mix debt and equity to give a calibrated flavour of wealth creation and stable income. Hybrid funds automatically have a recession proof flavour to them. Even within the balanced funds category, there are options available which makes it a lot more flexible. You have balanced funds with a predominance of equities. At the other end you have MIPs with a predominance of debt. These two extremes can be combined with a dynamic investment plan to give more flexibility and discretion to the fund manager. That can give you a very good all weather portfolio approach and most of us tend to underestimate the power of such hybrid funds in managing volatility in markets.
Nothing beats a systematic approach in volatile times
A recession means weak growth, low equity prices and weak NAV. How about making the best of it with a SIP approach? We have heard of the SIP approach to investing quite often, but one of the best ways to create an all-weather portfolio is to adopt a phased approach to investing. When you adopt this approach, the rupee cost averaging works in your favour. This is helpful in all types of market conditions, especially over a longer time frame.
Seriously look at gold as a hedge for your portfolio
One good way to create such a recession proof portfolio is to allocate 10-15% of your portfolio to gold. The advantage of gold is that it automatically outperforms in turbulent market conditions and thus gives you a natural hedge against negative returns in other asset classes. Also, gold has been traditionally uncorrelated with assets like equity and that gives gold a genuine advantage in being recession proof.
Take a serious look at commodities
Commodities are yet to emerge as a genuine asset class in India and hence you need to find ways of allocating money to commodities. Typically, industrial commodities follow a longer down cycle and up cycle and are a lot more predictable. Hence by including commodities it is possible to ride the uptrend, spread the risk of the portfolio and also reduce your exposure to regular asset classes. One can invest in commodities either through commodity stocks or through global commodity funds. In fact, global commodity funds will be the best method of participating in this theme as they represent commodities as an asset class.The key to creating a recession proof portfolio is three-fold. Get your asset class mix right and build in diversification. Then, adopt a more dynamic approach to asset allocation. Lastly, the phased approach always works best.
How to Balance Between Short Term Returns and Long Term Returns?
The common refrain about investing is that it is a long process hence you must not focus too much on short term returns. But, as Keynes said, in the long run we are all dead and therefore you need to look at short term returns too. Not all goals are long term goals and there are some short term goals too. Hence any investment decision has to be a mix of short term and long term investment returns. Under normal circumstances, there are no tactics required to make a substantial amount of money. It’s a long term process and often requires commitment and patience during market fluctuations. But an important decision is about crafting the fine balance between long term and short term outcomes of your investment.
When to balance: when goals are varied
Typically, most of us have a variety of goals to cater to. Some maybe short terms goals like planning for a car loan margin or a home loan margin. Some goals could be medium term goals like creating a nest egg, buying a second property etc. Then there are long term goals like retirement planning, planning for your child’s college, creating an estate etc. Your investment choice and investment return expectations must be based on the tenure of goals. For short term goals ranging from 3 to 5 years you must prefer liquid or bond funds with limited credit risk. Returns will be low but so will be risk; and the investment will be liquid. For medium term goals, focus must be on G-Sec funds, MIPs and balanced funds. For long term goals, you can look at a mix of diversified equity funds, index funds and multi cap funds since equity gives the best risk-adjusted returns over a longer time frame.
When to balance: when undertone of the market is changing
This is slightly more discretionary in nature. With some detailed research, you can decide to increase the equity exposure when the markets are undervalued compared to historical averages. On the other hand, if the P/E is well above the historical band and the bond yields are moving down, it is time for you to go overweight on debt. Moreover, if you are getting into volatile market conditions, you must look to increase your allocation to gold. Each of these decisions has unique risk and return implications.
How to balance: short term and long term options available
Most of us have heard of short term investments and long term investments, but would not be sure of what they mean. What is the difference between them and what investment strategy is best for you? Short term returns arise from short term investments while long term returns originate from long term investments. Even in case of long term investments like equities, your strategy can be short term trading returns, medium term strategic returns or even long term wealth creation.
Let us understand the long term and short term terminologies. A long term investment is an investment that can be held for a longer period of time. Normally, long term investment is for a period of more than 8 years. On the other hand, a short term investment is an investment that is held for a period of 2-4 years. Investments between 4-8 years are normally classified as medium term investments. Short term investments include certificates of deposit, money market funds, and short term bonds. Numerous people try to play the market or take risks with intraday trading or even with futures and options trading. But it is advisable that one should do appropriate research before going for short term online share trading. Long term investments are safer and suitable for beginners.
Achieving balance is all about paybacks
When it comes to investing, it is essential to discover the right balance based on your individual condition. Before investing, whether it is for long term or short term, set clear objectives in mind. Even though you are interested in short term investments, it is advisable to set aside a share of your money for long term investments. This will safeguard your investments if in case you happen to lose money due to an unexpected market reaction or bad investment selection. Investing is a significant money making tool and not something to sidestep or be scared of, so do it with patience and careful research.
What is Nifty 50?
Nifty is the short form for the NSE Fifty and as the name suggests it consists of the 50 most active and liquid stocks in the Indian markets. Unlike the Sensex which uses 1979 as the base year, the Nifty uses 1995 as the base year since the NSE itself came into existence only in 1994. The chart below captures the Nifty since inception.
What you must know about the Nifty 50
The Nifty is also a general index like Sensex, that tracks the market overall. It is also one of the most actively traded indexes in the futures and options segment and it is available for F&O trading in India and abroad. Nifty is also calculated using the free float methodology where the stocks are weighted based on the free float market capitalization of the stock. While the Nifty was launched on April 22, 1996, it uses November 03, 1995 as the base year with a base value of 1000. That means at the current Nifty value of 11,700 it indicates wealth creation to the tune of 11.70 times over the last 24 years. The index is rebalanced semi-annually and the Nifty values are available on a real time basis during trading hours. Apart from being traded on the NSE, the Nifty 50 futures are also traded on the SGX (Singapore Exchange).
Sectoral and Stock mix of the Nifty 50
There are over 13 key sectors represented in the Nifty but the most significant is the financial services sector which has a weightage of 38.85% in the Nifty. Other than financial sector, energy has a weightage of 15.30%, IT has a weight of 13.67%, consumer goods have a weight of 11.29% and autos have a weight of 6.08%. Put together, the top 5 sectors account for more than 85% of the overall weightage in the Nifty and have a substantial influence on the indices.
In terms of specific stocks the top 10 stocks in the Nifty by weight are as under:
TCS, despite being the most valuable company in India in terms of market cap has a much lower weightage due to its limited free float. Since inception, the Nifty has given an annualized return of 11.04% excluding dividends. The returns would be closer to 12.6% if the annualized dividends were also added. The Nifty currently quotes at a P/E ratio of 29.01 on trailing earnings, a price to book ratio of 3.71 and has a dividend yield of 1.13. All these figures keep changing on a regular basis but they are useful parameters to determine if the market overall is overpriced or underpriced.
The Nifty represents nearly 67% of the free float market cap of the NSE and is therefore fairly representative. It is a very important tool for benchmarking portfolio performance, for index funds / ETFs and for index derivatives used in portfolio hedging.
About 5paisa:- 5paisa is an online discount stock broker that is a member of NSE, BSE, MCX and MCX-SX. Since its inception in 2016, 5paisa has always promoted the idea of self-investment and has ensured that 100% operations are executed digitally with minimal to no human interventions.
Our all-in-one Demat account makes investment hassle free for everyone, be it an individual newly venturing into the investment market or a pro investor. Headquartered in Mumbai, 5paisa.com - a subsidiary of IIFL Holdings Ltd (formerly India Infoline Limited), is the first Indian public listed fintech company.
5 Tips To Get Higher Return From Share Trading
Trading unlike investing appears to be a high risk game and quite often it is. There is no tested method of earning higher returns in trading and it comes with practice in the live market environment. While there is nothing foolproof, here are five tips that can enhance the chances of being profitable.
Focus on a few stocks and build expertise
This is the cardinal principle of smart trading. You can successfully identify opportunities in a large array of stocks. You need to focus yourself on a small universe of around 10 or 15 stocks. There are two reasons for this. Share trading is quite multifaceted because you need to understand fundamental triggers, technical levels, news flows, F&O data, among others. You obviously cannot do that for a large number of stocks. The other most important aspect in share trading is that you are able to commit higher capital when the conviction level is much higher. That is only possible if you focus your time and energy on a handful of stocks.
Focus on the high momentum stocks
To make money in share trading you need to trade frequently. The whole idea is that you churn your capital rapidly and for that you need stocks with momentum. What do we understand by momentum? It is the speed and intensity of reaction of a stock to news, triggers or chart patterns. To cite an example, it is hard to trade frequently in stocks like Tata Power or NTPC because the momentum is very weak. These stocks make small moves over a long period of time. To enhance returns, you need to focus on the high momentum counters.
It is always better to trade in high beta stocks
This point may be related to the previous point but nonetheless, it makes sense to look at it as a separate point. Stocks are typically either aggressive or defensive stocks. Normally, stocks with a beta of less than 1 are called defensive stocks while stocks with beta greater than 1 are called aggressive stocks. Normally, trading and churning is much more profitable when you focus on stocks with a Beta of more than 1.5. That is when you actually get the benefit of momentum working in your favour. High beta works both ways, but that is where short side trading comes in handy, which we shall look at in the next point.
Learn to play the short side of the market
Normally, there is a degree of fear associated with short trading. In fact, short sellers are as important as buyers in the share market. Short sellers play on the selling side of the market when they have a negative view on the stock. You can sell in the cash market and buy back the same day or if you want a longer time horizon, you can use futures or put options. The short side of the market is also not too crowded as most retail investors prefer to stay on the long side. You can widen your share trading horizon by playing the market both ways.
Always trade with a favourable risk-reward ratio
You may wonder what is the role of risk in profiting from the share market. Ironically, managing risk is the key to earning higher returns. The risk reward is the return you can expect for every unit of risk. It is important for 2 reasons. Firstly, it helps you measure the risk properly. Secondly, you can decide on the size of your commitment to the trade based on the risk-reward ratio.
There is really no formula for being more profitable in the share market and you need to figure your own unique method. At least, you can plan to be more profitable!