Curtains to an eventful year in Global markets

Year 2009 will be remembered for the roller coaster ride that saw the fortunes of investor community swaying between 'doom & boom'.  Most global markets rose handsomely from their yearly lows. The broader stock indices in India, SENSEX and NIFTY recovered over 100% from the lows touched in March 2009. The year also marks the end of the most eventful decade in the history of India. From a sleepy economy growing at around 4% p.a. India has been transformed into a vibrant and fast growing economy with the GDP growth touching a high of 9% during the decade.

A large part of the economic turnaround and the equity markets rebound can be attributed to the liquidity overhang, initiated by the Federal Reserve and followed by other Central banks in the shape of fiscal stimulus packages. The first 3 months of the year upto March 2009 resulted in dollar outflows, but since then FII's have pumped in more than US$ 15 billion into our markets. Moderate inflation coupled with low interest rates helped in the turaround of the corporate sector. The economy is now likely to grow at around 7.5% during fiscal 2009-10, despite a poor monsoon. Although volatility continued to dog the markets in 2009, yet risk appetite has returned back to the markets.

The market regulators on their part have played a very positive role in the interest of small investors. The abolition of entry load on Mutual Funds, and reduction of charges on ULIPs are a welcome measure. The regulators have taken measures to improve transparency while selling of financial products. By the end of the year buying/ selling of Mutual Funds through stock exchanges has also materialised. The year also saw unveiling of the draft Direct Tax code, which envisages sweeping changes in the Income Tax structure. The 'Satyam' scam that erupted in the beginning of 2009, encouraged the Govt. to come out with ammendments in the Companies Act to safeguard the interests of minority shareholders. The new pension scheme for individual investors came into force from May 2009.

Year 2009 is ending on a bullish note, a year in which investors would have made money in most financial assets. At this juncture the risk-reward ratio is looking slightly stretched, and investors are advised to tread cautiously in 2010, as making money would not be easy. Portfoilo selection would be a tough task during the coming year, and the role of a matured financial advisor would become more important if money is to be made in the markets. Indian economy continues to be in good shape and the bottomlines of the companies are likely show a decent growth. However, the following negative factors should be watched carefully or else it may spoil your party in 2010:

• Inflation (WPI) has started to rise at alarming levels, it may cross 7-8% by March 2010.
• Withdrawal of stimulus packages may put pressure on the dollar, and may sqeeze the liquidity in the system.
• Political turmoil is feared in the country after announcement of the formation of 'Telengana'.

Future of US Dollar: Implications for the Markets

The foreign exchange market is the largest, and most liquid financial market in the world, with  participation from governments, corporations, institutions, investors, central banks, contributing to  a global turnover in excess of US$3.2 trillion per day. At the heart of this global market is US Dollar, a currency which has retained a ‘monopoly’ position as reserve currency, and serves as the most widely adopted currency of international trade and capital flow. For the last two decades or so, US Ddllar’s share of global reserves has remained around 65-66%. Ever since the financial crisis of 2007-08 questions are being asked about the legitimacy of US Dollar as a reserve currency.

Historically speaking, the Federal Reserve Act was put in place in 1913, since then the value of the U.S. dollar has gone down approximately 96%. Most of this devaluation occurred after 1971 when former President Nixon repealed the Gold standard. For detractors of the Federal Reserve, it is a Corporation of Private Bankers which has nothing 'Federal' about it and it has no reserves. They see Federal Reserve as controlling a Banking system designed to enslave the US Govt. and US citizens. There are enough reasons that despite scepticism US  Dollar continues to dominate the international currency market. In the near term with low interest rates and low inflation in the US there is little threat to the dollar. The term BRIC is only on paper, with India and China at loggerheads on many issues. There are concerns about the decline of US Dollar against Euro and other Europian currencies, but there is no threat to Dollar as a trading currency in Asia and other emerging markets. 

So what is going to be the future of US Dollar in 2010, and its implications for other asset classes that are inversely related to it? There is always a hope for the dollar, that the US economy will recover, or the FED will increase the interest rates that have been pegged at artificially lower rates. However, a majority of the economists feel that the Dollar is on a continuous downward journey due to the wrong policies pursued by the FED. The rebalancing of the global economy would necessisate a lower dollar, as the current strength of the dollar propped up by the foreign Central Banks allows US citizens to import products which they cannot afford to consume. According to experts, unless the FED takes corrective measures the Dollar is headed for a collapse. When this will happen is beyond the calculations of economists, perhaps 'Crystal Gazers' could provide the answer! According to a renouned US astro-expert July-August 2010 may cause a serious collapse of the US Dollar and a crisis within the FED. The asset classes that can protect the investors in such a situation are commodities and specifically a widely traded commodity like 'Gold'. Perhaps, the theme for 2010 could be: "All that glitters is Gold." It makes sense to have 10-15% gold in your portfolio.

Don't fall prey to the greed of your Distributor/ Broker

SEBI has recently announced a few important changes in the way Mutual Funds will be sold. The first change was the removal of entry load on selling Mutual funds, and the second important change has been allowing the buying/selling of Mutual Funds through stock exchanges (which is applicable to those investors who already have a DEMAT account). These changes have been initiated by SEBI for the benefit of the investor community, and are likely to have far reaching consequences on the way Mutual funds will be bought/ sold in the future.

The first step, which is an attempt to reign in the commissions of fund distributors, was expected to have a negative impact on the Mutual Fund NFO's in the short term. But on the contrary, new fund offers opened recently have had a relatively better run as far as subscriptions are concerned. This is because most distributors are advising their clients to offload their holdings in old schemes where they have made profits, and enter the new schemes. The catch is that even after the abolition of the 2.25% entry load which was borne by the investor, most fund houses are offering a higher commision, which could be as high as 4-5% for selling NFO's. On the contrary, the distributors are shying away from selling existing schemes as the commission earned on them is low. Does this make sense for the investor? In one way it temtamounts to mis-selling, as the investor is denied the benefit of investing in an established scheme, where the track record of the Fund House/ Fund Manager is known. From a Financial Planner's point of view, investment in an old scheme with an excellent track record is always preferable over a new and untested scheme.

With effect from 30th november 2009 it has become possible to invest in Mutual funds through a stock broker using NSE platform. This new route for MF investment is hassle free and reduces the cost of transaction. However, most of the brokers may not be in a position to give the best Mutual Fund advice, again due to his greed for earning more commission/ brokerage. There is the lurking danger of Mutual Funds being treated as trading stock, instead of a vehicle for long term investment.

There is an imperative need for independent Financial Advisors to fill in the gap and guide the investor on his investments based on his need analysis, foresaking the lure of selling a product that is not in line with the investor's aspirations for the sake of earning a slightly higher commission. They must appreciate the fact that genuinine investors value good advice, which can more than make up for the loss of commission in the long term. Investors need to be beware of the temptation to treat Mutual Funds as trading instruments, because by doing so they will be falling prey to the greed of others, and will be losing out on an opportunity to create long term wealth.