financial markets & investing jul'10

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Financial Markets & InvestingFinancial Markets & Investing

July 2010July 2010

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

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

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

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

DowFTSE 100CACDAXNikkei 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

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

Indian Financial Markets – Derivatives Performance

Top exchanges by number of stock index futures contracts traded

Exchange 2009 2008%

Change

1. CME Group 703 072

175882 432

628-20.3%

2. Eurex 367 546

179511 748

879-28.2%

3.National Stock Exchange India

195 759 414

202 390 223

-3.3%

4. Osaka Securities Exchange 130 107

633131 028

334-0.7%

5. Korea Exchange83 117

06266 436

91225.1%

Source: WFE

Top exchanges by number of stock index options contracts traded

Exchange 2009 2008%

change

1. Korea Exchange 2 920 990

6552 766 474

4065.6%

2. Eurex364 953

360514 894

678-29.1%


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

Indian Financial Markets – Derivatives Performance

Top exchanges by number of single stock futures contracts traded

Exchange 2009 2008%

change

1. NYSE Liffe Europe165 796

059124 468

80933.2%


161 053 345

225 777 205

-28.7%

3. Eurex 113 751

549130 210

348-12.6%

4.Johannesburg Stock Exchange

88 866 925

420 344 791

-78.8%

5. BME Spanish Exchanges37 509

46746 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%

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


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

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

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’ risk–return

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 (Children’s 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


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


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


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




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

Agenda


Why and How to Invest in Equity

Other Derivatives

Regulator

Research


Outlook

Indian Capital Markets - History, Exchanges & Performance


Indian Financial Markets – History

History of Indian Stock Market

From Scattered and small beginning in the 19th Century, India’s 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 1990’s

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

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

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 athighest sensex value

every year

Fixed investment atlowest 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

Agenda



Indian Capital Markets – History, Exchanges & Performance

Regulator

Research


Outlook


Other Derivatives

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 BM’s, 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

Agenda




Other Derivatives

Research



Regulator

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

Agenda




Other Derivatives

Regulator


Outlook


Research

Indian Financial Markets – Research

Other’s 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

Agenda



Other Derivatives

Regulator

Research



Outlook

27

Indian Financial Markets – Funds Flow

As indicated earlier the capital flows remained stronger with FDI, FII and ECB turning positive since Q1 - FY09-10

Though FDI and ECB remained below the previous peaks the hot money FII scaled close to the Sep’07 highs

Until the matured economies signal rate hike the capital flow remain intact thereby pushing the benchmark indices higher

Foreign Direct Investments - Monthly

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Mar-06 Jan-07 Nov-07 Sep-08 Jul-09 May-10

FDI (Mln USD)

Source:RBI

Net Foreign Insti Investments Monthly

2000

1500

1000

500

0

500

1000

1500

2000

2500

3000


Net FII (Mln USD)

Source:RBI

External Commercial Barrowings - Monthly

0

1000

2000

3000

4000


ECB (Mln USD)

Source:RBI

28

Indian economy – GDP & Other Estimates

2008-09 2009-10 2010-11 F

Real GDP 6.70 7.40 8.30

IIP 2.75 10.3 10.8

WPI 8.46 3.17 6.50

CPI 8.93 11.9 10.0

PLR 12.8 11.8 13.0

91-181 TB Yield 7.09 - 7.15 3.53 - 4.33 4.5 - 5.5

10 Yr G Sec Yield 7.6 7.2 8

Source: RBI, W2W Estimates

Generous rise in investments and emphasis on infrastructure led IIP growth bode well for the Indian growth momentum move from cyclical to structural

However, normalizing GoI incentives, monetary policy amid muted private consumption expenditure may call for moderation in the Q2 & Q3 of FY 2010-11

Steady progress of monsoon, revival in the job market amid steady up tick in interest rates are expected to drive the private consumption to pick up as the FY 2010-11 progress

Despite ease in Food inflation (largely statistical) pick up in demand, limited capacity in short term, firm commodity prices globally expected to keep the inflation higher in the current cycle

Contagion of European crisis and untimely policy/inability to balance inflation/growth momentum are the key risk to the above outlook

Indian GDP

9.6

9.0

6.7

7.4

8.3

2

4

6

8

10

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 E 2010-11 FSource:RBI, W2W Estimates

Thank you

Research Department

Premise A, 15th Floor, Chandramukhi Building, Backbay Reclamation, Nariman Point (near Inox Theatre), MUMBAI : 400021

Phone: 022 4019 2900, Fax: 022 40192939

financial markets & investing jul'10

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