Impact of China's Slowdown on India

While Indian have been grappling with the volatility in Indian equity markets; where the broader segments  / markets have seen corrections, with even leading large caps down by 25% - 30%; our immediate neighbour, China, has already lost $3 Trillion in market value since January 2018 with 7.9% drop in Shanghai Composite Index.

While a layman, would infer that trade war with USA being the reason; however, this is just one factor. As we saw IL&FS defaulting on its repayment obligations in India; China's deleveraging campaign led to bond defaults of unseen magnitude. The whole scenario is further impacted by rising interest rates and strong US Dollar.

Many investors are thinking and interpreting the fall in Chinese equity market and economy as whole, being advantageous to Indian markets. However, this is not as simple and straightforward as it seems. Arun Jaitley, the Finance Minister, had stated that India is not a part of Chinese Supply Chain and Indian could become the "additional shoulder", supporting the global economy.  However, Dr. Raghuram Rajan differed from the opinion of the Finance Minister. 

Trade Aspect : 

India primarily exports chemicals, raw cotton, petroleum products & spices. Any slowdown in Chinese growth rate would result in the slowdown in demand for such products in China.

India majorly imports oil & other minerals; and slowdown in China means cheaper commodity prices. While on one hand this would benefit India; however, on other goods it might resulting in dumping of goods as slowing China means, more low prices of imported goods; as inventories would be building up in China due to slowdown.

Statistical Evidence :

As per Centre for Policy Research, India, the long - run elasticity of India's GDP to China's GDP is around 0.4, i.e., 0.5pp decline in Chinese Growth  would wipe off 0.2pp from India's Growth. Regression & Scenario Analysis led to startling fact; if China slows by 150bp, India's GDP Growth  would be negatively impacted by 80bp. 

It is a remote possibility that India would replace China as the manufacturing hub. Infact, India missed the bus during the tenure of NDA, led by Late Shri Atal B Vajpayee, who infact wanted to change the archiac labor laws, which he had to shelve the plans, as there was serious opposition from within and outside the coalition government.

Thus, while slowdown in China would impact us, but not to the great extent; however, it would not result in any such gain in terms of productions being shifted to India from China. The slowdoen in China would not be something to be cheered about, as it would deeply impact those countries whose trade relations are deeper with China.

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Does Your Financial Advisor / Agent follow SEBI Circular on Risk Profiling..?

When was the last time your agent / or financial adviser conducted your Risk Profile...?
Do you know SEBI has issued guidelines for financial advisers and advisory firms..?
Is your bank or agent following those and educated you abut those guidelines..?

Financial Advisory is going a sea change in India, with SEBI having come up with new guidelines and refining of the existing one. There are separate guidelines for banks and Independent Financial Advisers and Wealth Management Firms.

The regulatory body had to take strict decisions in reference to the wealth management services being provided by agents, brokers and bankers. The backdrop of this could be found in our blogpost here.

The key changes have recently been done by SEBI is in KYC (Know Your Customer) norms, that would impact your savings and investments, if your adviser or agent is not adhering to the same.

So, What Does SEBI Guideline Say..?

This is in reference to SEBI Circular No. CIR/MIRSD/11/2012, and it says that:

• Intermediaries shall strictly follow the 'risk based due diligence' approach as prescribed by SEBI Master Circular on AML No. CIR/ISD/AML/3/2010 dated December 31, 2010.

• Also, Intermediaries will conduct on-going due diligence  based on Risk Profile and Financial Position of the client as prescribed in the master circular.

• These guidelines are applicable for both new and existing clients.

What does risk profiling actually mean..?
Each individual has different perception and appetite for the risk he can take in his investments. While as, some are aggressively investing in equities or stocks of companies, others are
only comfortable in fixed deposits or government bonds.

So, it is imperative that a process is followed that enables to determine the investor's preference to investing in the type of securities.

What agents are currently doing...?
Currently, it has been widely observed that investor invests in funds or securities as recommended by their agents, brokers and bankers. Now, there had been cases where regulators have noticed that certain products were sold to investors that were totally against the need of the client. These were the cases of mis-selling. And there was no way to prove the same. Now, client has to fill the risk profile and sign the dotted line.

What does it mean for client...?
As clients have to fill in the risk profile, they are now more aware as to whether they are conservative, moderately conservative, balanced, moderately aggressive or aggressive client. While client finalises his investments with his agen, he can cross check as to whether the fund or security he is investing in actually falls in line with his risk profile.

How are clients safer now...?
As per the guidelines, risk profile has to be documented and the same process has to be done once every year. If at any given point in time it is found out that the funds or securities recommended to the investor didn't fall in line with the risk profile or if there is the case of mis-selling; client grievances can very easily be resolved now.

This is the one step more in the direction of investor protection and in regulating the intermediaries. There are a whole set of guidelines that have to be adhered to in the investment management space; and those agents and firms who will not change are surely be moved out of the market by the regulator and the competition alike.



 

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Dwarka sub-city residents prefer moving to larger homes within locality

The article was published at MagicBricks.Com and can be accessed at: here.

 
Dwarka sub-city is mainly an end-user driven market with the whole infrastructure up and running. It is well-connected with Metro Rail and airport, and a destination of choice for home buying.

We have seen a trend wherein, existing residents of Dwarka sub-city look for better and bigger apartments within the Dwarka sub-city itself. These are primarily the ones who are residents of the earliest launched societies in the area and are now looking towards societies with better maintenance and construction quality. In a way they are looking for upgrade. Those who are already residing in a 3BHK with twin car parking, power back-up, etc and are looking towards 3BHK+servant’s room with other things remaining the same.

We have seen good inventory available in Sectors 21 and 22 and now Sector 19B being a hot spot. The price range for the 1,500 sq ft, 3BHK apartment, with parking facility and power back-up in Sector 7, is Rs 95 lakh to Rs 1.15 crore, depending upon location of the society, infrastructure quality, internal maintenance and many other factors.

Is it the right time to buy?
For Dwarka-Gurgaon Expressway, this is the best time for the first-time home buyers, as they will not only get the property at discounted rates, but also may get further discount of 3-6 per cent, in terms of freebies.

The charges like PLC (Preferential Location Charges) and club membership can be waived off, based on the level of negotiation and the type of property.

For Dwarka sub-city, we have seen the prices softening for the past six months, and there is no reason for delaying the decision now.

Is it the time to invest?
For Investors, Dwarka-Gurgaon Expressway still holds a lot of opportunities, provided one can spot the properties under distress. We have been seeing the quantum of distress sales and one can have a great bargain in these times, when short term real estate investors are exiting.

It is not recommended to go for investment in the said stretch as far as the newly launched or already launched properties are concerned as better options are already available. An investor could rather consider other alternative such as Sohna in Gurgaon and also Neemrana.

Neemrana provides the best point of price-entry that many have missed at the Dwarka-Gurgaon Expressway. This is backed by the whole infrastructural development that is coming up to support it, with Japanese city coming into existence along with many other international firms setting up their base.

Rajat Dhar, managing partner, Cogent Advisory

The article was published at MagicBricks.Com and can be accessed at: here.

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BEAWARE & THINK Before You Accept An OPEN OFFER Put Forth By The Company...!

Situation:

 

Imaging a situation that you are holding a 1000 shares of a company at a prices of INR 500 per share. This makes your holdings in that stock of INR 5,00,000/-. Also, Sensex is Trading at around 20,000 levels.

 

All the things seem in you favour and you get a good news that the same company in which you have invested your INR 5,00,000/-, has declared an open offer of a buy back. Your happiness knows no bound, since buy back price is always higher than the trading price. 

 

Now, you intend to have the best of both the world's by tendering to that offer; intended to reap in better returns and realising the profit in the deal.

 

At this juncture you are unaware about the TAX BLOW that is waiting to happen if you execute the deal.

 

Real Life Example:

 

The above situation is best explained with the case of HUL (Hindustan Lever Limited), when the stock reacted the same way when open offer announcement for buyback was made by the firm. The stock price rocketed up by 17% to INR 583.60/-, when HUL announced its intention to buy 22.52% stake.

 

Share Selling Options Available & Tax Implications:

 

Sale In Open Offer: Whenever you make a sale in open offer, you have to pay tax; even if the shares were held in your portfolio for more than a year. You can not escape the tax net in this case.

 

Sale in open offer is just like any equity transaction; but is considered as a debt transaction, since there is no STT (Securities Transaction Tax) on it. 

 

Now, a long term investor who had held shares for more than 1 year and sold under open offer, may take Indexation benefit on it. That means, lower of 10% with indexation, 20 % without indexation.

 

If however, the share sale has been done in less than the year, then the share holder is taxed as per his tax slab. There will be the additional tax of surcharge tax, if the income exceeds INR 1 Crore.

 

Sale In Secondary Market: Sale in the secondary market does not attract tax on the long term capital gains, if shares have been held for more than a year. Only STT of 0.1% will have to be paid in this case.

 

For the sale made in less than a year, the gains are taxed at 15% as short term capital tax gains. This could be beneficial for those who are taxed at the higher tax bracket of 20% and 30%.

 

For Whom it is Beneficial To Go For Open Offer...?

 

Tendering to the open offer made by companies, shareholders who are in 10% income bracket or retirees who have higher taxation exemption limit will have such offers advantageous. For those falling in 30% tax bracket, secondary market sale offer is the only best available alternative available.

 

 

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Bank Loans - No Interest Rate Reduction In Near Future.

Irrespective of seeing a repo rate cut, we may not see reduction in the consumer loan rates; since, banks are still paying higher to depositors. Although, banking fraternity is satisfied the way cuts in repo rates are being done, but banks would not be able to cut lending rates till CRR (Cash Reserve Ratio) rate also cut. Cash Reserve Ratio is the rate at which RBI lends to banks.

 

Why Lending Rates Will Not Come Down In Near Future..?

 

Currently, banks do not have excess cash to lend to borrowers. Thus, they are compelled to provide higher interest rates to depositors, so that they receive higher inflow of deposits, that could be used for lending to borrowers.

 

Now, if a cut is introduced in the reserve ratio, this will release much needed cash for the banks for further lending. Since, in this case, as there is a lower cost of funds; this will in turn reduce the total cost of funds for the banks. Hence, then only can the banks pass on the benefit to borrowers.

 

Another way out for reducing lending rates would be sharp reduction in the deposit rates. But, this step can not be implemented in current circumstances as the deposit mobilisation has been sluggish.

 

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