Newsletter Dated: 06/07/2018

Newsletter Dated: 06/07/2018

 

International Snapshot:

         On June 15th, the white house confirmed that 25% tariff on up to $50 billion of Chinese imports would soon go into effect. 3 days later china proposed to retaliate and Trump proposed as much as 400 billion worth of goods to face tariff if China retaliates. America buys from china at least 4 times more than what he sells.

         This trade war may be contained, but not to the benefit of world economy. Such tensions cause more damage to emerging market currencies and may result in widening of trade discrepancies. E.g. Chinese Yuan depreciated by more than 2% in last 15 days.

         A strange thing that happened in last fortnight was that the spread between Nymex & Brent Crude came down significantly from as high as 9$ per barrel to as low as 3 $. Interestingly Trump took very good advantage of tension between gulf region. While OPEC meet successfully agreed to enhance production, being unclear on quantity, US warned India & China on purchase of crude from Iran, or sanctions will be imposed on them post November 4. This not only pushed Brent up but gave more boost to nymex crude as understandably, this will create demand for nymex from Big Asian economies i.e China and India. Trump is already looking for markets for growing American shale production. We have been stating that China & India will have to take this opportunity as this will bring down their own trade surplus with America & shall be win win for all 3.

 

Domestic Snapshot:

         Good news in our own country is country is coming out of GST shock & collection from not only GST but also direct tax are going up. For the month of June GST collection was Rs. 95610 cr Vs Rs. 94016 cr in May. FM is hinting on rationalizing GST rates if the collection continues to surge. If we can consistently achieve this figure, we can kind of control our deficit (due to rising crude oil price) & thereby come out of this vicious circle of rising crude, rising dollar and consequent foreign money outflow.

 10yr yield surpassed 8% on 2/7/2018. However PMI rose from 51.2 in May to 53.1 in June, registering fastest improvement since Dec 2017.Its 11th consecutive month of above 50 point mark. Looking at this it does not really seem that we are going to enter any recession and therefore a significant correction below 10000 on nifty looks a grim chance to us at least.

         The Government on Wednesday increased MSP on various crops. On Kharif crops it has been fixed at ,at least 50% more than the cost of production. While everyone knows that this act is to secure rural votes, good thing is it was declared in budget 2018 & so can be assumed that its fiscal implication were taken into A/c while preparing budget. If its implementation is done properly, it can really create wonders to rural economy, rural consumption & of course votes.

 

NFO MYTH

There are some investors who want to start SIP in equity fund but have an illusion that NFO’s (New Fund Offer) are best to start with. Today we would like to educate readers on NFO’s & some myth’s attached to it.

NFO’s (New Fund Offers) generally come with RS.10 as NAV, but if the buyer has made his mind on allocation of X money, it doesn’t matter whether the NAV is 10 RS or 100 Rs & whether its NFO or existing fund. Percentage returns would be same on both if the fund constituents are same and with same weight.

  • Advantages of NFO vs. Existing Fund.
  • Many times AUM of funds are so big that XX exposure to a company would look small for it and will not result in meaningful up-move in the fund even if the company performs very good.

         E.g. In a Multi-cap fund of say 20,000 cr AUM; if a small cap company’s 10 percent stake is bought worth 200 cr, its just 1                   percent of AUM and so    even if the company performs very good, it will not result in significant jump in NAV. However for an           NFO which are generally of smaller size say 2000 cr and in them 200 cr of exposure may be 10% of the fund & it May result in           substantial jump in NAV of NFO. Why 10 percent in example? Mainly because a fund will be really reluctant to buy more than             10 percent of a small cap company, as getting out in adverse condition will be really difficult otherwise.

  •  Disadvantages of NFO vs. Existing Fund.
  • Since the fund is new, there is no track record & so the fund manager’s profile becomes very important.

 

To us it really does not make much difference whether you put money in NFO’s or existing funds. What matters the most is fund managers style and your own temperament.

 

While one might have got into SIP's at wrong time, since the markets have tanked in last 6 months especially mid and small caps, but we are still advocating to continue on SIP's.

 

 

  •                                                                                                                                  - CA Jayesh Gandhi

 

Disclaimer: This is an informative document and opinions expressed in it are our own and not any advice. We are not SEBI registered investment advisory or research analyst. We are AMFI registered MUTUAL FUNDS DISTRIBUTOR.

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