Gold Exchange Traded Funds

Gold has remained one of the favorite avenues of investment for Indians. Around 23% of investment is done in gold by Indians.

Amid the current global turmoil and the bear run share-market scenario, people are going for the traditional and safer option of investment: gold. They are investing in the yellow metal in a significant volume. With the advantages of gold over any other form of investment — security being the most desired — people are buying gold in all forms, be it coins, biscuits or jewellery, besides exploring new options like Exchange Traded Fund (ETF).
I have seen many people are not familiar with gold ETF, which have become quite significant in past few years. So this post in brief will provide readers to explore this avenue of investment in this downturn.

What are ETF’s?
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

What is Gold ETF?
Gold ETFs provided investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that participation through the trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value.
Gold ETF provides return that before expenses closely corresponds to the returns provided by physical gold. Each unit is approximately equal to price of 1 gram gold. But, there are Gold ETFs which also provide a unit which is approximately equal to the price of ½ gram of Gold.

Brief history
The first proposal of a gold exchange traded fund was originated by an Indian company called Benchmark Asset Management; a proposal was launched with the SEBI (Securities Exchange Board Of India) in 2002. This proposal was not approved at that time.
The Australia Stock Exchange was the first to launch a gold exchange traded fund in 2003 by Gold Bullion Securities under the symbol ‘GOLD’. This fund was fully backed, insured and deposited by gold bullion.

Difference between Gold Etf’s & Mutual Funds
Disparate Asset Classes
It is the nature of asset classes which differentiate gold etfs and mutual funds from each other. While former falls under the category of commodities, later comes under equity category. In Gold Etfs investor is vested with the opportunity, to invest in units of gold, which are traded on exchange as single stock. The units issued under the scheme represent the value of gold held in scheme. However in case of mutual funds, fund mangers invest in equity and equity related securities of gold mining companies. Since gold mining companies are not listed on Indian stock exchanges, the gold mutual funds invest in world gold funds that invest in gold mining companies across the world.

Returns attainable
Basic motive behind any investment is to gain high returns. The world gold fund has given absolute returns of 31.9% in the period since its inception in August 2007 to July 2008. Most financial advisors advise that investment in gold must be made for the purpose of diversification and at any point in time, about 10-15% of your assets must be invested in gold.

Nature of funds
Basic aim of both the funds is another important point which differentiates both the funds from each other. “The fund simply buys and holds gold on behalf of the investor without actively managing it. The aim is to give returns as close as possible, post-expenses, to that given for gold as a commodity,” however when investing in a mutual fund, the investor can rely on the expertise of a fund manager who indulges in active portfolio management and is able to make crucial decisions regarding selecting stocks of gold companies.

Benefits of trading in ETF’S
In ETf’s investors have the opportunity of buying as less as 1 unit on the exchange. Investors don’t have to pay entry or exit load and expenses on brokerage are less. Here gold etf’s score over mutual funds as in case of later investor has to bear defined load structure, entry and exit loads and other expenses.

There are five gold ETFs in the market today, namely Gold BeEs, Kotak Gold, Quantum Gold, Reliance Gold, and UTI Gold ETF. According to data published by Value research online, the returns from all the gold ETFs over the last one year have been practically identical.

IF you take a look at gold prices in the past few months, they have been moving in just one direction-- upwards. From Rs 10, 650 for 10 grams last January 2008, the price has moved to Rs 15,490 today. Gold price is at a seven month high and is up by 10% since January this year. The World Gold Council reports that global demand was up by 4 per cent in 2008.

Gold and stock markets have negative correlation, which can be witnessed in current scenario where volatility in stock markets have led to sky rocketing gold prices.

In 2009 itself Gold etf’s have outperformed gold mutual funds. ETFs have given 29 per cent returns in 2008 and over 8 per cent till now in 2009. In this current financial turmoil investing in shining yellow metal turns out to be the safest bet!!

Foreign currency convertible bonds

While I was searching for this impact of US crisis on India and depreciation rupee I came across this term FCCB (foreign currency convertible bond).and I came to know this plays important role in Indian capital market.
Let’s see how it works
An instrument in debt market where in which convertible bond is issued in a currency which is different than issuer’s domestic currency. For e.g. reliance industries issues a convertible bond which is denominated in terms of dollars and not rupees. This is the mode of raising money by issuing company in terms of foreign currency. As the name suggests it’s a convertible bond, means bondholder has an option of converting it into stock. Therefore convertible bond is a mix between equity and debt instrument.

FCCB policy in India
MinistryFinancegovernmentofIndiadefinesFCCB.Accordingit:"Foreign Currency Convertible Bonds" means bonds issued in accordance with this scheme and subscribed by a non- resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments; "


We all know that 2-3 years back Indian and emerging markets were on high growth trajectory path and were giving high returns. At that time FCCB became the popular tool for raising funds from overseas market. Aggressive companies went for the FCCB route to fund their expansion/acquisition plans because of the shorter lead times associated with the process as well as for the fact that the company gains exposure in to a global investor base.

The reasons behing for fccb becoming so popular and companies opting for it aggressively were following:
· Being hybrid instruments, the coupon rates on fccb are particularly lower than pure debt or zero, thereby reducing the debt financing cost.
· Fccb are book value accretive on conversion.
· Saves the risk of immediate equity dilution as in the case of public shares.
Lucrative offer for investors
Investors can also book profits through fccb route:
· Assured returns to investors on bond in the form of fixed coupon rate payments.
· Ability to take advantage of price appreciation in the stock by means of warrants attached to the bonds, which are activated when price of a stock reaches a certain point.
· Significant yield to maturity (YTM) is guaranteed at maturity.
· Lower tax liability as compare to pure debt instruments due to lower coupon rates.

In May 2007, at least 10 companies converted FCCBs into equity at a price decided when the bonds were issued to respective investors. The list includes NIIT, Bharti Airtel, Sun Pharma, Glenmark Pharma, Amtek India, Jain Irrigation Systems and Maharashtra Seamless. FCCB holders have witnessed a significant rise in value of their investments in these companies on the back of a sharp rise in share prices since allotment of the bonds.

Present day situation
Indian companies that had raised money through fccb’s during Bull Run to finance their growth and acquisition plans are currently in situation of doom. With demise of Indian stock markets the conversion price of these fccb’s has gone several times higher than their current market price.
Various estimates show that India Inc has issued close to $20 billion of FCCB’s in the past few years. Now the investor will only exercise its option to convert his bond into fixed number of shares at predetermined price if conversion price is lower than the market price. Now in this scenario of dooming stock markets conversion price in most of the fccb issues is several times above the market price. Therefore in such a scenario investors won’t be interested in converting their bonds into equity.
Let’s explore now in this situation what options are left with the companies who have issued these bonds.
· Issuing companies will now have to search for resources to repay the debt along with redemption period whenever it matures. For this companies will seek to fresh borrowings, with high interest rates, which in turn would impact their profitability.
· Another option which companies have is to reset the conversion clause, to bring it closer to reality.

No doubt lender will get back his money, but this will create big pain for ordinary shareholder. With the current state of the stock markets, most of them will have to buy foreign exchange from the markets to get rid of their liability. But this will depreciation of rupee and create more volatility in forex market.
By looking at the below link you can check out data for companies which have raised money through FCCB and where they stand today.
http://www.business-standard.com/india/storypage.php?autono=336251

References:
Economic times
Business standard

Affinity between stock markets & GDP

Sensex reached a peak of 20,000 and felled like a pack of cards to 10,000. What do these numbers suggest about macroeconomic growth of a country? Whenever there is news regarding some inflation numbers, IIP numbers markets react, but does this really matter, is there any evidence to it? Let’s find out:

Keynesian thesis states that “stock market is a casino”. However he also agnize that stock markets enable people with money to invest together with people who can put that investment to productive use.

This is one of the ongoing debates, on relationship between stock markets and macroeconomic growth, which has led to many studies done by various economist, analyst and financial policymakers but still not much is concluded.
I can’t mention various studies done on this issue but ill be here putting up a brief summary, on core theme of this debate.

If we trace the period between 1995 -2004, the CAGR (compounded annual growth rate) of real GDP and the BSE sensex shows a high degree of correlation, while real GDP has grown at 6.1%, sensex has also posted similar gains. However if we analyze the data more deeply, year on year examination gives a different picture. The outcome of this examination shows that, though Real GDP has shown a steady growth under the period of study, BSE sensex has been very volatile during the entire period. On year –on- year basis there seems to be no sync between the 2 factors.

However if one tends to consider growth in nominal GDP and corporate performance at the top-level, there it seems to be high degree of correlation. This is on account of the fact that GDP is aggregate of output of agriculture, industrial and services sector.

If we look at the trend stock markets are not always guided by fundamentals but also by sentiments. For instance, lowering of interest rates by the RBI (like until 2004) typically has an impact on the economy with a lag. But the signal that the RBI is reducing interest rates may prop up stock markets immediately and stock prices may react much faster.

However in present period there is a bit change in the trend, this due to the fact that Indian Economy is now more integrated with global world than before. At worldwide level capital markets evince attributes of perfect market with no or acceptable entry barriers, large number of buyers and sellers, absence of, or very low, transaction costs, tax parity, and free trading.
To attract international investments, countries compete with each other and promote their capital markets with savvy sops and policy announcements. It is in fact a reality that no modern economy can exist without an efficient capital market. This is what have attracted international investors and in recent years have made India their favorite destination. Since our markets globally integrated if we look in recent time trends, for instance when November IIP numbers came positive, were unable to pick up the markets, however most of the times we get to hear that markets are beaten due to weak global cues , or any uncertain event at international level have an effect on our markets.

The crux of the issue is that economy goes through business cycles of recovery, boom, slowdown and recession. Stock market also moves on the similar pattern. For instance if India GDP grows at 10% in one year, the sensex may not gain similar percentage during the same year. However, the relationship may hold true over the longer-term. It may be stated that the state of the economy has a bearing on the share prices but the health of the stock market in the sense of a rising share price index is not reflective of an improvement in the health of the economy.
In summing up the basic purpose of all studies done is to find out relation between economic growth and stock markets. Though it can’t be neglected that stock market directions are based on fundamentals in long term, however these assumption may turn out to be dangerous for investors in short term. Therefore all analyst advice to go for investment in stocks with a long term view.

Sectors to be Bullish in 2009

In the period of downturns investors should make safer bets by investing in defensive stocks. These stocks tend to perform during recession. These stocks remain stable through various phases of business cycle. They however tend to underperform during an expansion phase. However they are able to register profits in their balance sheets as they produce goods and services which are always needed such as food, power, water and energy.

It is easy to estimate share prices of defensive sectors as they tend to grow relatively at a stable rate that can be predicted with some degree of accuracy, based on historical trends. Some of the defensive sectors to watch in 2009 are as follows:

Telecom: Despite of being in news over the year for various controversies, analysts are still bullish on telecom sector for 2009. In the atmosphere of this economic turmoil telecom is adding on consumers at a whirlwind speed. The figures released by the Telecom Authority of India (TRAI) for the month of October show an unprecedented 10.5 million users added. Resisting the current financial turmoil, India continues to witness high demand in its mobile- phone segment at an increasing rate in FY 2009. This is due to rollout of 3G technology and WIMAX networks and implementation of mobile number portability (MNP). In numeric terms India’s mobile phone is expected to upsurge to 136 million units up by 23.9% from 110 million units in 2008. This compares 16.8% growth in 2008. According to isuppli cellular subscribers in nation will show a growth of up to 319.9 million by the end of 2008, up by 36.9% from 233.6 million of 2007. It is also being estimated that India’s total wireless subscriber’s base will grow at compound annual growth rate (CAGR) of 25.1% from period 2007 to 2012 to reach 715 million by end of 2012.
The reason behind increase in India mobile handset market is decreasing costs of calls, the availability of inexpensive handsets, increasing geographical coverage and operators rising portfolio of value added services (VAS).2009 is expected to be the rollercoaster for telecommunication sector mainly driven by 3G and WIMAX coming in the markets.
Stocks to look in this sector: MTNL, Bharti Airtel, reliance communications (which has launched 3G services)

Engineering and capital goods: in short to medium term current global slowdown may impact growth momentum in capital goods sector. However, the order books of many companies in this sector are strong, leading to visibility of earnings in near future. There has been a growing consensus among policymakers that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. This will lead to larger participation for private sector companies in large infrastructure projects. The gap between supply and demand for power increasing. So, power equipment companies can look forward to increase in revenue from power generation and distribution, as the government will be forced to augment the supply side. There is a thrust on development of new wells and improvement of output from old wells in the oil and gas space. This will lead to more projects for engineering companies.
Stocks to look in this sector: BHEL, Punj Lyod, JP associates, Suzlon energy

Oil and gas: India ranks 6th in the world with refining capacity of 3.4%. 76% of India’s demand for petroleum met through imported crude. There has been restive change in the governments approach to E&P activities in the country. Just over 60% of potential in oil sector has been explored so far. In order to enhance energy security of the country, the government has increased thrust on exploration leading to substantial investments in this sector. With this refining activity has been growing.
Current status of India’s refining capacity
· 19 refineries’: 17 in public sector, 2 in private sector
· Capacity had grown from 62 MNT in April 1998 to 149 MNT in January 2007
· Refining capacity is expected to reach 235 MMT BY April 2012.
· Surplus refining capacity of 86 MMT projected in 2011-12
· Large export potential.

Thus post -2009 increased production of oil and gas will be seen. The demand growth for oil and gas will outperform supply growth for sometime to come. The demand for natural gas in India is estimated to increase from about 113 million standard cubic meters per day(mscmd) in the financial year 2008 to 396 mscmd by year 2022.demand for petrol , diesel and jet fuel are expected to grow at a compounded annual rate of 1.7% ,2.5% , and 2.2% respectively till 2010. The medium term outlook for refining margins looks positive due to robust growth in demand.
Stocks to look on to: ONGC, reliance industries, reliance petroleum, carin India

FMCG
FMCG market is something no one can overlook. Increased focus on farm sector will boost income of the rural population and provide more growth prospects for the FMCG companies. FMCG sector is also likely to benefit from growing demand in the market. Since the per capita consumption for almost all the products is low in the country, FMCG companies have extensive opportunities for growth. FMCG companies are showing resilience to economic slowdown. The sector had witnessed higher sales growth in the inflation environment. FMCG sector is expected to grow over by 60%. That means it will translate into a annual growth of 10% over a 5 year period. Products like, hair care, household care, male grooming, female hygiene are and chocolates and confectionary segments are likely to be fastest growing segments.
With cooling of commodity prices, FMCG companies have further reason to cheer. Products in categories like coconut oil, skin care would benefit with lowering of commodity prices. As the sector has the domestic focus, the possibility of an impact of global slowdown on these companies is limited.
Stocks to look on to: HUL, P & G, ITC, Colgate Palmolive