Financial markets & investing jul'10

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FINANCE MARKET AND INVESTING

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  • 1.Way2Wealth making investing simpler, more understandable and profitable. Financial Markets & Investing July 2010

2. Agenda Why and How to Invest in equity Indian Capita Markets - History, Exchanges & Performance Other Derivatives Regulator Research Outlook Indian Financial Markets Financial Markets Rationale, Players & Structure 3. Financial Markets Rationale & Players Economic System Surplus Money Generators Households Deficit Money Holders Corporate Government Financial Markets Savings Function - Channelize funds from -those who save to -those who needed -for productive purpose Liquidity Function Payment Function Risk Mitigations - Provides opportunities to various class of individuals and entities Policy 4. Financial Markets Broad Structure Financial Assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend. Provided resources needed by medium and large scale industries/individuals Purpose for these resources Establishment of New Business Expansion Investments Mergers and Acquisitions Deals in both short term & long term instruments & funds 5. 5 Firm commodities and return of the financials led FTSE score among the matured economies, closely followed by Dowjones Hit by exports, firm currency and weaker domestic demand leave Nikkei 225 remain under performer among matured economies Buoyed commodities Brazil tops the performers list among emerging economies, followed by domestic demand driven India Though rest of Asia perform well, remain laggard in the latest months as exports remain moderate with signs of asset price inflation Late reaction on both fiscal and other policy let Russian equity to be the under performer among the emerging economies Equity Indices - Matured Economies 30 60 90 120 7/11/07 3/11/08 11/11/08 7/11/09 3/11/10 Dow FTSE100 CAC DAX Nikkei 225 Source:Bloomberg Equity Markets - Emerging Economies 0 20 40 60 80 100 120 140 160 180 7/9/07 3/9/08 11/9/08 7/9/09 3/9/10 Sensex Kospi Shanghai Hangseng Bovespa Russia Source:Bloomberg Financial Markets Global Snapshot 6. Financial Markets Global Snapshot Equity Market Capitalization (bln USD) Exchange 2009 2008 % Change Key Indice NYSE Euro next (US) 11 838 9 209 28.5% Tokyo Stock Exchange Group 3 306 3 116 6.1% Nikkei NASDAQ OMX (US) 3 239 2 249 44.0% Nasdaq Composite NYSE Euro next (Europe) 2 869 2 102 36.5% NASDAQ London Stock Exchange 2 796 1 868 49.7% FTSE Shanghai Stock Exchange 2 705 1 425 89.8% Shanghai Composite Hong Kong Exchanges 2 305 1 329 73.5% Hangseng TMX Group 1 608 1 033 55.6% BM&FBOVESPA 1 337 592 125.9% Bovespa Bombay SE 1 306 647 101.9% Sensex Source: WFE Exchange at US and Europe continue top the total market capitalization But the growth in capitalization is higher among Asian and Latin American countries Key global indices are DJIA, Nasdaq Composite, FTSE, Nikkei, Hangseng, Sensex etc 7. Indian Financial Markets Derivatives Performance Top exchanges by number of stock index futures contracts traded Exchange 2009 2008 % Change 1. CME Group 703 072 175 882 432 628 -20.3% 2. Eurex 367 546 179 511 748 879 -28.2% 3. National Stock Exchange India 195 759 414 202 390 223 -3.3% 4. Osaka Securities Exchange 130 107 633 131 028 334 -0.7% 5. Korea Exchange 83 117 062 66 436 912 25.1% Source: WFE Top exchanges by number of stock index options contracts traded Exchange 2009 2008 % change 1. Korea Exchange 2 920 990 655 2 766 474 406 5.6% 2. Eurex 364 953 360 514 894 678 -29.1% 3. National Stock Exchange India 321 265 217 150 916 778 112.9% 4. Chicago Board Options Exchange 222 781 717 259 496 193 -14.1% 5. Taifex 76 177 097 98 122 308 -22.4% Source: WFE 8. Indian Financial Markets Derivatives Performance Top exchanges by number of single stock futures contracts traded Exchange 2009 2008 % change 1. NYSE Liffe Europe 165 796 059 124 468 809 33.2% 2. National Stock Exchange India 161 053 345 225 777 205 -28.7% 3. Eurex 113 751 549 130 210 348 -12.6% 4. Johannesburg Stock Exchange 88 866 925 420 344 791 -78.8% 5. BME Spanish Exchanges 37 509 467 46 237 747 -18.9% Source: WFE Largest growth by total value of bond trading in 2009 Exchange % change 1. Amman Stock Exchange 316.4% 2. Irish Stock Exchange 252.2% 3. Colombia Stock Exchange 105.0% 4. Egyptian Exchange 98.0% 5. Bombay Stock Exchange 86.6% 6. Oslo Bors 82.8% 7. Tokyo Stock Exchange 73.2% 8. National Stock Exchange India 69.9% 9. Shenzhen Stock Exchange 53.4% 10. TMX Group 52.5% 9. Agenda Financial Markets Rationale, Players and Structure Indian Capital Markets - History, Exchanges & Performance Other Derivatives Regulator Research Opportunities & Challenges Outlook What and How to Invest in Equity Indian Financial Markets 10. 10 Financial Markets Concept Of Equity Equity Claim on the (profits) company Why Company issue Shares To rise capital Equity Vs. Debt and Equity comes with less cost To enhance the current business activity, acquire new or venture into a new area of business To manage working capital To gain the market share and increase the presence Increase the visibility of the company 11. 11 Financial Markets Concept Investing What is Investing? Identifying and translating all the financial needs of an individual to monetarily measurable goals. Why do we need to Invest To fund our future needs To protect our future from unforeseen contingencies To maintain the same standard of living even after retirement To mitigate risk through diversification To choose assets commensurate with the investors life and wealth stages To beat the ravages of inflation 12. 12 Financial Markets Concept Of Investing Objectives Of Investing Identify requirement for money for different purposes and prioritise the same Converting requirements into need & in terms of money and time Take stock of current financial position to ascertain, net worth & income/expenses Plan savings and investments in a manner that enable one achieve the pre-determined goals Optimise returns through adequate diversification in sync with the ones riskreturn Can one individually chart Investment Plan? Are you & your family are financially secure with the investments you have made Do the cash flows arising from your investments be sufficient to match the expected expenses & are tax efficient? Have you made adequate provisions for special purposes (Childrens education & marriage) If your answer is NO to any one or all of the above questions, you need a specialist to handle your finances and that is where the W2W helps your investments to grow 13. 13 Financial Markets Concept Of Investing Systematic Investing Equity markets are synonymous with uncertainty and volatility. The average investor invariably suffers from such market gyrations. Systematic investing is a strategy of not only preserving capital but also translating into substantial creation of wealth in long run It simply means investing Fixed Amount every month A method of investing regularly to benefit from the stock market volatility The first step towards achieving financial goals and objectives. To imbibe financial discipline To eliminate the need to time the markets To successfully achieve the financial goals and objectives To harness the power of compounding by investing with a long term perspective 14. 14 Financial Markets Concept Of Investing Rupee Cost Averaging 4772.50500 205100 1010100 812.5100 520100 425100 Units bought Purchase Price Systematic Investing 5065500 520100 1010100 205100 1010100 520100 Units bought Purchase Price Systematic Investing 4480500 425100 520100 520100 1010100 205100 Units bought Purchase Price Systematic Investing Fluctuating Markets Declining Markets Rising Markets Avg NAV : Rs 13.00 (65/5) Avg. Unit Cost : Rs 10.00 (Rs 500/50) Avg. NAV : Rs 14.50 (72.50/5) Avg. Unit Cost : Rs 10.64 (Rs 500/47) Avg. NAV : Rs 16.00 (80/5) Avg. Unit Cost : Rs 11.36 (Rs 500/44) 15. 15 Financial Markets Concept Of Investing Power Of Compounding - Rs 5000 invested per month 33,42,53413,76,0854,42,8732,25,57815% 24,97,90111,50,1934,08,3482,15,38412% 20,72,35210,24,2253,87,1852,08,90910% Value at the end of 15 yrs Value at the end of 10 yrs Value at the end of 5 yrs Value at the end of 3 yrs Rate of Return Golden Rules Of Investing Invest early, regularly and systematically for a longer period Ensure adequate liquidity for contingencies of life Ensure adequate diversification by investing across asset classes and time horizons Do not attempt to time the market. Patience is the key Be realistic in expectations of returns Balance investments in accordance with your risk-return framework 16. Agenda Financial Markets Rationale, Players and Structure Why and How to Invest in Equity Other Derivatives Regulator Research Opportunities & Challenges Outlook Indian Capital Markets - History, Exchanges & Performance Indian Financial Markets 17. Indian Financial Markets History History of Indian Stock Market From Scattered and small beginning in the 19th Century, Indias stock market has risen to great heights By 1990, we had 19 stock exchanges (national + regional) in the country As a move towards integrated national level exchanges BSE & NSE became prominent by late 1990s BSE has the roots at Native shares and stock brokers association established in 1875, later recognized by GoI in 1956 The launch of SENSEX in 1986 was later followed by BSE National Index (Base: 1983-84 = 100) Jan 1989 BSE National Index was renamed as BSE-100 Index from Oct- 1996 (taking into consideration only the prices of stocks listed at BSE) The BSE has deployed an Online Trading system (BOLT) on March 14, 1995 National Stock Exchange (NSE) got its recognition as a stock exchange in July 1993 under Securities Contracts (Regulation) Act, 1956 NSE's leading index is Nifty 50 or popularly Nifty and is composed of 50 diversified benchmark Indian company stocks Although late than BSE, National Stocks Exchange is currently the leading stock exchange in India in terms of total volume traded Further liberalization India expected to see another one or two equity exchanges in the neat future 18. Indian market capitalization has registered a CAGR of 39.7 percent during 2002-2009 Total listed companies in domestic exchanges registered a CAGR of 2.4 percent during 2002-2009 Total New companies listed each year on exchanges registered a CAGR of 6.3 percent during 2002-2009 Globalization, increased domestic retail & institutional participation resulted this phenomenal growth Indian Financial Markets Growth Indian Market Capitalization (mln USD) 0 500000 1000000 1500000 2000000 2500000 3000000 3500000 4000000 2002 2003 2004 2005 2006 2007 2008 2009 Market Cap (mln USD) Source: WFE New Companies Listed on Indian Exchanges 36 77 50 79 337 0 50 100 150 200 250 300 350 400 2002 2003 2004 2005 2006 2007 2008 2009 New Companies Listed Source: WFE Total No.of listed compnaies on Indian Exchanges 6408 5687 5200 5400 5600 5800 6000 6200 6400 6600 2004 2005 2006 2007 2008 2009 Total No.Of Listed Companies Source: WFE 19. 19 Financial Markets Performance Investing in the BSE Sensex 25 years Data source: ICRA MFIE 16.02%02% Fixed investment on 1st day of every month 16.90% 15.07% Fixed investment at highest sensex value every year Fixed investment at lowest sensex value every year 0 5000 10000 15000 20000 25000 9/15/1996 9/15/1998 9/15/2000 9/15/2002 9/15/2004 9/15/2006 9/15/2008 20. Agenda Financial Markets Rationale, Players and Structure Why and How to Invest in Equity Indian Capital Markets History, Exchanges & Performance Regulator Research Opportunities & Challenges Outlook Indian Financial Markets Other Derivatives 21. Indian Financial Markets Other Derivatives Commodity Futures After much debate, commodity futures trading was permitted & exchanges were launched during 2003 -04 Begin with precious metals the domestic commodity exchange offerings extended to all possible commodity segments a la BMs, Softs, Cash crops, Edible Oils, Pulses and Spices Despite various regulatory hurdles the average volumes in the commodity exchanges continued to grow very strongly - CAGR of 73.7 percent (INR 67.7 lakh crores) during 2004-2009 Indian commodity exchanges are monitored and controlled by FMC, Ministry of Consumer Affairs & Agriculture ministry Currency Futures After commodity futures, regulatory authorities have launched currency futures during 2008-09 Started with single USD/INR pair now the currency futures are available in all major trading pairs like INR/GBP, INR/EUR & INR/JPY Unlike the commodity futures, that showed a steady participation Despite various regulatory hurdles the average volumes in the commodity exchanges continued to grow very strongly Indian currency futures are monitored by RBI & SEBI 22. Agenda Financial Markets Rationale, Players and Structure Why and How to Invest in Equity Indian Capital Markets History, Exchanges & Performance Other Derivatives Research Opportunities & Challenges Indian Financial Markets Regulator 23. Indian Financial Markets Regulatory SEBI Securities and Exchange Board Of India Set up by Government of India in 1988, it acquired statutory form in 1992 with SEBI Act 1992 Functions and Responsibilities Broadly, SEBI has to be responsive to the needs of various groups that are part of the financial market namely, The issuers of securities Companies The investors Retail, FII & Institutional The market intermediaries Brokerage Houses SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and quasi-executive Legislative - Drafts regulations Executive - Investigation and Enforcement of Action Judicial Pass various rulings and orders SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and successively (e.g. the quick movement towards making the markets electronic and paperless rolling settlement on T+2 basis). SEBI has been active in setting up the regulations as required under law 24. Agenda Financial Markets Rationale, Players and Structure Why and How to Invest in Equity Indian Capital Markets History, Exchanges & Performance Other Derivatives Regulator Opportunities & Challenges Outlook Indian Financial Markets Research 25. Indian Financial Markets Research Others include derivative analysis (volume, OI and Put/Call ratio) Top down approach tracking economy, sector and company long term investing Bottom up approach company, balance sheet, peer group comparison and industry short term 26. Agenda Financial Markets Rationale, Players and Structure Indian Capital Markets History, Exchanges & Performance Other Derivatives Regulator Research Opportunities & Challenges Indian Financial Markets Outlook 27. 27 Indian Financial Markets Funds Flow As indicated earlier the capital flows remained stronger with FDI, FII and ECB turning positive since Q1 - FY09...