Newsletter Dated: 15-09-18

Newsletter Dated: 15-09-18

International Snapshot:

Crude oil (Brent) hit new highs of 80.13$ per barrel on Wednesday and cooled by 2% after the OPEC trimming its forecast for 2019, global oil demand growth. OPEC now assumes oil demand next year would rise by 1.41 million barrels per day (20,000 bpd less than last month). In our opinion the current elevated level of oil is depicting the fear post November 1, 2018, when the sanctions are implemented on Iranian oil imports.

Peace trade talks between China & US does not seem to be going anywhere and it seems that Donald trump is keen to proceed with tariffs on about $ 200 billion more of Chinese products. Till today Asian equity markets are not aping Chinese indices which are hitting new lows and treating this trade war as only a country specific issue. But in our mind, it can have a rippling effect, through debt markets.

i.e. China has added 8.68 trillion $ to its GDP in last decade but with $ 33 billion debt.

Amongst other Major developments

• Turkish central Bank’s MPC raised, one week’s repo rate to 24% from 17.75% to curb fall in lira; following which lira rose 5 percent.
• Yield on 10 year US treasury yield rose, to climb back above 3 percent, broadly indicating rise in interest rates by 25 bps in forthcoming  September fed meet.
• Russian Central Bank also lifted interest rates by 25bps to 7.50 percent for 1^st time subsequent to Dec 2014.

Domestic Snapshot:

“Rising oil prices and appreciating $ a deadly combination”

Last fortnight would have been hectic for the PMO and MPC (Monetary Policy Committee), with Rupee depreciation giving them sleepless nights, rising crude oil is just adding fuel, to the fire. Rupee depreciated further 4% to inch closer to 73/$ on Wednesday 12-09-18 & saw a sharp reversal from that level, thanks to RBI intervention & good retail Inflation data that cooled to 10 months low of 3.69% in the month of august Vs 4.17 in July. Rupee has fallen close to 12% in current financial year & rise in crude oil, if not contained will result in downward revision on earning and consequently cap the stock market rallies. Inspite of comforting inflation numbers experts opine on a rate hike in our October policy meet by MPC.

Last week Bond Markets were rattled when ICRA downgraded IL&FS debt to BB from AA+ i.e. to non-investment grade. Just to make one understand what implications this has; the SEBI circular says that “all non-government, non-investment grade performing debt securities would be valued at a discount of 25% to the face value. What was more shocking to us was the sudden downgrade from AA+ to BB (9 notches down) in just a month (by ICRA). A lot of debt, insurance and pension funds had investments in its papers. Lot of HNI’s had been holding the perpetual Bonds. Bond funds are not as popular as equity amongst the retail public mainly because the returns are low compared to equity funds over a longer period of time. However they are extremely popular amongst the HNI’s. This should not be a surprise for those who were tracking it. It was known to all in the industry that the debt was mounting on the group, with deteriorating profitability. Still most of them invested, just looking at ratings agencies grades.

  Retail investors interested in putting money in debt funds can follow the following guidelines

1. Try to go with existing debt funds rather than NFO’s , as in NFO’s you may not be aware of the paper’s bought by them (though may be stated AAA rated, but you may not be comfortable with it)
2. Go for funds with higher AUM.
3. Monitor periodically.
4. If one is going for NCD’s or Fixed Deposits check the interest coverage ratio. (3 to 4 is comfortable)
5. Don’t go for very high duration,

       In our opinion this will be more than enough to save retail investors from falling into trap in such funds.

There were lot of marquee Mutual Funds who got trapped here and so just going by name of the funds is not going to help here.

                                                 - 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.