Dhaval Shah- GSEC : Returns in excess of 20 % now !!!??


Dear Investor

If you have not invested in Government Securities funds, yet. Fortunately, you have not lost an opportunity because though RBI cut the repo rate by 0.25%, due to March ending liquidity situation, which usually remains quite strained in debt market and due to that intended gain was not realised.

But, do not delay now. 10 yr bond yield had hardened to 8 % from 7.85 % from middle of march. It has started softening from 1st April and now quoting at 7.95 %.

With more weak data pouring in from domestic and international markets, expectation of returns are climbing high. I am tempted to say, we can safely target 20 % returns( mostly guaranteed ) in Government securities fund in next 1-1.5 years.

One percent cut in interest rate translates into 10% returns in Government Securities(Bonds).

I hope, you heeded my advice to reduce equity exposure of your portfolio. That should have saved you, 15-50% loss on your investments.

In Detail

RBI reduced Repo rate by 25 basis points. There was an expectation of 50 basis points cut. I said to clients, if RBI reduces 25 basis points that indicates RBI will cut rates moderately and if reduces by 50 basis points that will indicate aggressive stand of RBI. But, I am very sure of RBI favouring rate cuts against inflation concerns in time to come. I will explain in detail, later.

But, RBI not only reduced just 25 basis points but also asserted that there is limited room for further rate cut, if inflation persists at present level.

Important question is , would RBI continue to concentrate on inflation at the cost of growth? And if yes, when stance will change? At 4% GDP? At 2% GDP?

I have lauded RBI’s performance and decisions because in last 15 years, RBI has taken decisions independently, not getting influenced by Government and politicians.

But, few times, RBI has delayed key – turning decisions and thus has fallen behind the curve. I argued same, when RBI delayed rate hikes in 2010.

I wrote on 17th May, 2010, that RBI is behind the curve. By the time, RBI started to raise rates aggressively, inflation had reached to 10% from negative territory. The price we paid for delayed decision is, RBI had to raise rates to 8.50 % to contain inflation , wherein RBI could contain inflation with 7% repo rate during true bull run of 2007.

I strongly believe that RBI is falling behind the curve in reducing rates. Is to contain inflation alone,, the responsibility of RBI? To contain inflation, which was propelled by high food, energy and real estate prices, RBI killed rest of the economy. Interest rates remained above 7% for more than 2.5 years.

Industrial production got hit hard by RBI policy. Yes, Government policies and governance deficit are equally responsible factors for the same. But, cost of money decides everything. Industrial Production Index hit the -5 towards end of 2011 and since then has fluctuated between -4 to +5. In pre crisis period, it remained above +5 and mostly near 10 and mostly above 10 in 2007.

If for any reason, Oil prices, food prices and Real Estate prices remain at the present level, Will RBI prefer to kill the rest of the economy, to cure 2-3 sectors of the economy? Oil prices are beyond our control(decided by OPEC and market forces), if Coal India does not mine enough and power sector imports coal at double the price and pass it on to consumer, it is beyond RBI’s control, Food price inflation has structural issues( cold storage, transportation, access to market) and for Real Estate, I do not know whom to blame Black money, Politicians, Land mafias, lack of transparency, archaic laws, absence of regulator?

Can these problems be solved by Keeping interest rates elevated? Who does not know in India that we have parallel Black Economy. Food prices are high because FCI and Agriculture minister want to control the market, FCI does not have proper storage facilities, tens of thousands of tonnes of food grains get rotten in godowns of FCI, food subsidy is the best way for politicians to steal huge amount of government money( Only Uttar Pradesh has scandal of 2 lac crore, yes you read it write, food subsidy, Read: http://hungryindia.hpage.co.in/up_food_scam_14876315.html , figure of 2 lakh crore was reported by CBI).

Does RBI has capacity or has it been empowered to contain such things? I think, then it is just illusion of RBI that its interest rates control the food and energy prices. As it got proved, food prices remain elevated during last 2-3 years in spite of RBI keeping interest rate above 7 %.

Good news is – when RBI delayed rate hike in 2010, RBI had to hike full 150 basis points(1.5 %) more to contain inflation. Now, RBI is delaying cut in interest rates, in result RBI will have to slash it more than expected earlier, giving birth to new bubble.

Let me also say that if RBI would have managed rupee well, we would have not landed in economic uncertainty, we are passing through now. RBI explicitly said time and again that RBI will not intervene and will let market forces decide the price of rupee. Managing rupee around 50, RBI would have ensured 10-12 % cut in inflation, as we depend heavily on Oil imports. I have observed many Central Banks of the world, just talk down or talk up the market sentiment in their favour and thus buy the time for the action or correction.

Let us look at present situation of our economy

Source: Economic Times

Car sales fall 20% in March despite record discounts

After a free fall in February, car sales in India for the month of March hit another record low, leading to the overall car sales moving into a negative territory for the entire fiscal, the first in a decade.

Top 50 large-cap companies may report worst aggregate top line growth in two years

Source: Economic Times

India’s 50 most frequently traded large-cap companies are likely to report the worst aggregate top line growth in two years in the quarter to March on lower spending by consumers, although operating margins have improved.
According to the ET Intelligence Group’s forecast of these companies, which constitute the popular Nifty 50 Index, aggregate sales are expected to grow by 4% from a year ago while net profit will rise by 5%. Sales are likely to grow at the slowest pace in nine quarters. In the previous quarter, at 9.4%, revenue growth fell below 10% for the first time in two years.

Finance Minister said Government to press for lower RBI rates

Finance Minister P Chidambaram expressed that the government will continue to argue for lowering the interest rates of Reserve Bank in the backdrop of softening headline inflation and the need to promote economic growth.

“The RBI has to weigh the fact that headline inflation has come down even though consumer price inflation is sticky…It has to keep current account deficit in mind before it lowers interest rate, he said.

He further added that government is always pro-growth and the government will always argue for lower interest rates.

RBI is scheduled to announce the monetary policy for the current financial year on May 3 during which it will take a call on interest rates keeping in view the inflation and other macro-economic parameters like growth rate, industrial production etc.

Some Good news

All factors mentioned above will weigh heavily on RBI’s policy next week. Yesterday, heads of Banks met with RBI governor and proposed to reduce CRR along with Repo rate in next policy meet on 3rd May.

Inflation will continue to ease further

Dollar has continued to appreciate putting additional pressure on Gold and Oil correction. As I have already written that Gold will continue to correct to below $ 1400 level and possibly to $ 1300 level, this correction will help to ease Gold import demand and in turn current account deficit and rupee. Gold import has 1/3 share of total imports.

Oil is also showing signs of not sustaining at present above $ 98 level(Light Sweet Crude Oil). With continued rise in Dollar Index, Oil is well prepared to fall to $ 84 level. Oil is half of our total imports.

Correction in these two commodities will ease pressure on current account and rupee, resulting in lower inflation. This will pave way for RBI to reduce rates.

In my article dated 9th Feb, 2013, I had depicted GDP picture of major economies of the world. Click to read – https://investmentacademy.wordpress.com/2013/02/09/2013-storm-all-around/

I am reproducing GDP contents from that article

World Economies Experiencing Mild Recovery

From the trough of 2008-09, major world economies recovered till middle of 2012. US GDP growth rate declined from peak of 2.5% to -4.6% towards middle of 2009 and got back to 2.6% in 3rd quarter of 2012. But, last quarter GDP has slipped to 1.5% raising fresh concerns. IF it falls in 1st quarter of 2013 below 1.5%, it can slip well below X-axis to negative zone.

Germany grew at above 3.5% in 2007, declined to -6.8% during crisis period and bounced back to 4.7% in 2011. But, from there it has continued to slip and last quarter GDP growth came at just 0.4% lowest since 2007. It, too, can slip below X-axis. Growth rate for France came at 0.15% and -0.5% for United Kingdom. In nut shell, Europe has started degrowing and hence the much hyped economic recovery stories are befooling investors.

Emerging nations economies did recover well in 2011-12 but are facing strong headwinds from lower demand from west, higher inflation at home and very high currency volatility.

China’s double digit GDP growth rate in 2007-08 had slipped then in single digit and except 3 quarters in 2010, it has remained in single digit. Recent data showed a mild uptick. China’s GDP grew at 7.9% vs 7.4% of previous quarter. Yes, silver lining… India has slipped to 5.3% from high of 9.4%.

Indonesia and Philippines are true exception, their growth rates scaled up to pre crisis levels in 2010 and since then remained there.

It should be noted that among major Asian emerging nation, INDIA has fallen quite more compared to peers. It glorifies the Governance deficit of last 5 years.

A day before, IMF said that India’s de growth is attributed to domestic factors. Foreign factors has less to affect growth to the extent it got reflected in recent statements by Govt.

Japan slipped to 0.5% from 3.9% growth rate in 2012. South Korea fell from as high as 8.7% registered in 2010 to just 1.5% in last quarter.

I believe, you have understood the broad picture. The main stream media is not highlighting that except some Asian nations, whole world is slipping into red again as they did collectively in 2008. If you put together Europe, UK, US, Japan, South Korea and India, they will account for atleast more than 60-70% of world GDP and these nations GDP growth is on continuous decline.

It poses a grave picture for 2013. I again reiterate do not remain heavily invested in stocks.

Equity Market:

Equity market continue to trade sideways to negative factoring in uncertainty and lower growth for next few quarters.

I strongly suggest not to miss the opportunity of investing in secured, once a decade opportunity of earning 17.5 % to in excess of 20 % returns in next 1-1.5 years from Government Bonds.



Dhaval Shah

Blog: https://investmentacademy.wordpress.com/ Cell: 98255 28815

Disclaimer: This is a free investment newsletter published by Investment Academy. This publication does not provide individual, customized investment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. Author might have open positions in the stocks and Indices recommended above.


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