A review of the new plan -- Jeevan Saral

Recently in the market a life insurance policy has made sensation due its uniqueness. What is the uniqueness is all about? When I went to a my old client he told me that he recently took the new plan of LICI that gives him 250 time sum assured. I really shocked. I thought why not other companies at least mine can’t produce a plan close to this. 

The client even told that it is far better than the plan he took from BSLI named saral Jeevan From me. I argued with him but he was just fanatic about the new plan he took. He told, we private players are only interested to sale the product wrongly because he thinks if we state the client the right scenario he /she will not take the policy….. .Crazy does not it sounds? Let’s find what is Jeevan Saral is all about?

Under a life insurance policy there are two types of Sum Assured. The Sum Assured payable on maturity and the Sum Assured payable in case of death claim.

Under most of the Plans both are equal. Under some plans (ex: Jeevan Mitra Double Cover) the sum assured payable on death is twice the sum assured payable on maturity. It is thrice in the case of Jeevan MitraTriple Cover.

 Once the customer chooses the Plan and the Sum Assured required on maturity. Sum Assured payable on death gets automatically determined, whatever be the age and policy term. The Premium Rate can then be obtained from the agent’s manual, on the basis of age and policy term. 


Under the Jeevan Saral Plan, the customer has to first decide the amount of premium he wants to pay per year. Once the Premium is chosen, The Sum Assured payable on death gets automatically determined, whatever be the age and policy term. This is called the Sum Assured under the policy. 


The Sum Assured payable on maturity can then be obtained from the agent’s manual on the basis of age and policy term.

Suppose a person decides to pay a premium of Rs.1200 per year. The Sum Assured payable on death will then be Rs.25000, whatever be the age and policy term. The Sum Assured payable on maturity can then be obtained on the basis of age and policy term. 

Why this odd amount, 1200 per year?

It is the same as Rs.100 per month. In other words, by paying Rs.100 per month, a person can get a Risk Cover of Rs.25000, whatever be the age and policy term.

What is the advantage of starting from the premium and finding the Sum Assured payable on maturity, instead of starting from Sum Assured and finding the Premium?

The advantage can be seen when we come to Surrender Values. A Unique Feature There is also a Unique Feature under Jeevan Saral. In case of death claim, in addition to the Sum Assured payable on death, All Premiums Paid, (excluding the first year premium, extra premiums and premiums for rider benefits), will be refunded. This is the first time that such a feature has been introduced. The result is a continuously increasing Risk Cover from the second year onwards. 

Is Jeevan Saral a With Profit Plan?  

 YES. But bonus will not be declared each year as under other plans. Only “Loyalty Addition” will be given. The Loyalty Addition is payable only if premiums have been paid under the policy for at least Ten Years and Ten Years have been completed since the date of commencement. This Loyalty Addition is payable even when a policy is Surrendered and also under Death Claim, Paid-up and Surrenders. 

A policy will acquire paid-up value provided premiums have been paid for at least three full years. Once a policy acquires a paid-up value, it can be surrendered. 

But there is a unique feature when it comes to Surrenders. Provided premiums have been paid for five full years, Surrender will be treated as a maturity for a reduced policy term.

 What does this mean? 

 Take for example a policy for term 20, being surrendered after premiums have been paid for 12 years. This will be treated as if the policy was originally taken for a term of 12 years, and the maturity value corresponding to term 12 will be paid. Since premiums have been paid for 12 full years, the Loyalty Addition corresponding to term 12 will also be paid

 What is the significance of this novel provision?

 It is quite simple. A policyholder need not decide the policy term at the time of completing the proposal. He/She can first opt for the maximum permissible term corresponding to his/her age, and postpone the decision on a suitable term to a convenient date in future. 

How does this work? 

Take, for example, a person aged 30. He can initially opt for the maximum term permissible, 35 years. If, after 17 years, he decides that the policy term can be 17 years, he can surrender the policy. He can even decide to have a term of 17 years and six months. Since the Risk Cover (Sum Assured Payable on death) is independent of age and term and policy surrender will be treated as policy maturity, there will be NO LOSS due to the postponement of decision. In this sense, Jeevan Saral can be called a Flexible Term plan. One can now appreciate the advantage of starting from premium and going to the sum assured payable on maturity. 

Can a person have multiple terms for the same policy?

The answer is YES. Let us see how this is possible. Consider, for example, a person paying a premium of Rs.700 per month (i.e. Rs.8400 per year) under his Jeevan Saral policy and initially takes the maximum term permissible (say, 30 years). 


The initial Risk Cover will be for Rs.175,000, increasing by Rs.8400 each year from the second year onwards. Later, he decides to have a term of 12 years under One Seventh of the policy.


It will be presumed that there were two policies originally, One with the annual premium of Rs.1200 for a term of 12 years and another for an annual premium of Rs.7200 for a term of 30 years. 


At the end of 12 years, the Maturity Value, along with Loyalty Addition, will be settled under the portion for term 12 years. Under the balance policy, the annual premium will now be Rs.7200, Risk cover Rs.150000 and Term 30 years. If death claim occurs at any time later, say during the 14th year, the claim amount payable will be, [Rs.150,000 + (14 - 1) x 7200 + Loyalty Addition for term 15 years). 


After another 3 years, he decides that under another Two Seventh of the original policy, the term should be 16 years. It will be presumed that there were three policies originally, One with the annual premium of Rs.1200 for a term of 12 years (which has already matured), another for an annual premium of Rs.2400 and term 16 years, and another for an annual premium of Rs.4800 for a term of 30 years. At the end of 16 years, the maturity value corresponding to annual premium Rs.2400 and term 16 will be paid along with the Loyalty Addition.


Under the balance policy, the premium will be Rs.4800 and Risk Cover Rs.100000. If death claim occurs during, say 20th year, the claim amount payable will be, [Rs.100,000 + (20 - 1) x 4800 + Loyalty Addition for term 20 years). Later he decides that under the balance policy, the term should be 26 years. 


At the end of 26 years, the policy will be closed and the maturity value along with loyalty addition, corresponding to annual premium of Rs.4800 and term 26 years will be settled. 



It can thus be seen that the decision regarding policy term need not be taken at the outset. Take the maximum permissible term first and take the decision, in installments, at later dates, without any loss. 


It is like Partial Surrenders, with the surrender being treated as maturity. It can also be said that with this facility, Jeevan Saral is almost like a Flexible Money Back Plan, with the customer choosing the dates of survival benefits and the amount of survival benefits. Only almost, not exactly equal to. 


Under the Money back plan, the Risk Cover remains the same throughout. But, in this case the Risk Cover reduces with each maturity benefit taken. This can however be compensated by taking a suitable Term Rider along with the main policy. The agents dealing with high-end customers can readily appreciate the value of this flexibility. But, one word of caution. 


It may also be a source of confusion in the case of customers not much interested in such flexibility. So, use this feature with utmost caution while talking to a prospective client. 

Are there any Restrictions on such Partial Surrenders?

Yes. But only a few and very reasonable restrictions. These are, the reduced annual premium after the partial surrender, excluding rider and extra premiums, should not be less than Rs.3000, where the admitted age under a policy is less than 50 and, Rs.4800 when the admitted age is 50 or above and should be a multiple of 600 (i.e. the equivalent monthly reduced premium has to be a multiple of 50).


The amount by which the annual premium can be reduced for the purpose of a partial surrender has to be a multiple of 600 and should not be less than Rs.1200. A minimum waiting period of one year is required between successive surrenders. 


When a partial surrender is made and the Sum Assured payable on death gets reduced, the sum assured under Accident and Term rider benefits, if any, will get correspondingly reduced. Before making a partial surrender, any outstanding loan under the policy has to be repaid in full. Rider Benefits Accident and Term cover can be availed of as rider benefits. 


The sum assured under rider benefits has to be the same as the sum assured payable on death under the main policy. 

Loyalty Addition- A policy will be eligible for loyalty addition only after payment of premium for full 10 years and after completion of 10 years from date of commencement. A loyalty addition is payable on death or maturity or when a policy is surrendered. If a death claim occurs in the 10th year of a policy, provided the policy is in force at that time, it will be eligible for loyalty addition even if the premium for the 10th year has not been paid in full.

 When will the Loyalty Additions be declared?

 The loyalty additions will be declared after each actuarial valuation. It will be based on policy term. In the case of death claim & surrenders, and in the case of policies under paid-up condition, the period for which premiums have been paid will be taken as the policy term. For example, suppose a policy taken in the year 2004 becomes paid up in the year 2015 after payment of premiums for 11 years. 


It is then surrendered in January 2017. The loyalty addition under the policy will be that corresponding to term 11 as declared in the valuation results declared in September 2016. That is, the valuation just preceding the date of surrender. 

What will be the surrender value?


The surrender value as on the date of lapse (i.e. due date of first unpaid premium) will be equal to the maturity value corresponding to the policyholder’s age at entry and Term 11. Suppose the period between the date of lapse and date of surrender is 1 year and 9 months. Interest (compounding yearly) will be paid on the surrender value for a period of 1 year and 9 months. To this will be added the loyalty addition. The rate of interest to be used each year for this purpose will be declared at the start of the Financial Year. 

Why only Loyalty Addition and not the Conventional Regular Bonus?

It is technically difficult to combine regular yearly bonus with the flexibility built into the product. So, the concept of Loyalty Addition has been introduced instead of the regular bonus. Some may feel, going by the experience of recent years, that amount given by way of loyalty addition may be negligible.


It will not be so in the case of Jeevan Saral. Actuarial analysis will show that the actual loyalty addition that can be paid will not be less than the total regular bonus payable on death claim, surrender or maturity. It is only a change of concept. 


The policyholder will be the ultimate gainer by this change of concept. One has to keep the policy in force only for ten years, and not till maturity, to be eligible for loyalty additions. Freedom has been given to surrender the policy at any time after 10 years without any loss.

 In the case of surrenders within ten years and death claim within nine years, there will be no terminal bonus. In the case of the latter, since all premiums except the first year premium are being refunded along with the sum assured, paying also loyalty addition will be difficult.

In the case of death claim after nine years, after refunding all premiums (except the first year premium) along with the sum assured, expenses are being met and payment of loyalty addition becomes possible.


Miscellaneous Issues


a) In all the examples given under “Surrenders”, the number of years for which premiums have been paid was taken as integral number of years. Suppose a person desires to surrender the policy after paying premiums for 11 years and 3 months. Then find the maturity values corresponding to terms 11 and 12. 


For term 11years and three months the surrender value can be obtained on pro-rata basis from these two maturity values. That is, it will be equal to Maturity value for term 11 +one fourth of the difference between the maturity values for terms 12 and 11 +Loyalty addition corresponding to term 11. 



b) If premiums have been paid for three full years, then surrender value will be equal to 80% of the maturity value corresponding to term 3.


c) If premiums have been paid for four full years, then surrender value will be equal to 90% of the maturity value corresponding to term 4. 


d) The minimum term under this plan is 10. But, for the purposes of calculating the surrender value, the Sum Assured payable on maturity has been given for terms 3 onwards. 


e) There is no rebate for high sum assured. But, rebates of 1% and 2% are given for half yearly and yearly modes respectively.

Term Plan of Birla Sun Life Insurance

Birla Sun Life Insurance Term Plan is beneficial for those people who want to avail the benefits of life insurance at low cost. It is a low premium plan with pure risk coverage and it takes care of your financial commitments towards your family or dependants, if anything unfortunate happens to you. Benefits: . Riders: 1)Accidental Death and Dismemberment Benefit Rider: It provides additional amount of cover in case of death due to accident or loss of more than one limb or sight in both the eyes and partial coverage in case of loss of one limb or sight in one eye. 2)Critical Illness Rider: It provides a cover in the event of life insured being diagnosed as suffering from any of the specified critical illness (i.e. heart attack, stroke, cancer and surgery to coronary arteries). 3)Waiver of Premium: This rider waives payment of future premiums on the happening of any of the unforeseen events as covered under this rider. You can even avail of riders even in the case of Single Premium Policy. . Favourable Term: Favourable Premium Rates for Female Clients. . Age Benefit: Maximum age for maturity is 70 years. . Face Value Rebate: Attractive Rebate for Face Amounts equal to or greater than Rs.5 lakhs for regular pay and for face amount greater than or equal to 7 lakhs for single pay. . Free Look Period: You can review your decision for 15 days from the date of receipt of the policy document. . Tax Benefits: You can avail the tax benefits under Sec 80C and Sec 10 (10D) of the Income Tax Act 1961. Eligibility: Entry Age: 18-55 years Minimum Face Amount (Sum Assured): Rs.2,50,000 in case of single premium and Rs.2,00,000 in case of regular premium for a person fulfilling the eligibility criteria. Benefit Period: As per policy terms 5,10,15,20 or 25 years. Premium Paying Period: Single pay or over the duration of the plan. Premium Payment Frequency: Annually, Semi-annually, quarterly, monthly or one time payment. Grace Period: Pay your premium within 30 days after the premium due dates. Amount due to nominee in event of death of the Life Insured Face Amount (Sum Assured)

Birla Sunlife Insurance Money Back Plus Plan

Birla Sunlife Money Back Plan, a non-participating endowment plan offers you the Power of Guarantee with Safety and Liquidity. Your family comes first for you and so does their future. Your dreams for your family require strong financial planning. Your savings today may not be enough to power those dreams of tomorrow. Birla Sunlife Money Back Plan helps you to fulfill your dreams. Benefits: The Birla Sunlife Money Back Plan offers: 1)Growth and Liquidity: This plan offers you a chance to earn survival benefit at the end of every policy year from the 3 years onwards. The Survival Benefit can be withdrawn by you or may be used to pay the premium dues. 2)Assurance on Maturity: At maturity, your policy returns you an amount equal to your Guaranteed Maturity Benefit, plus your survival benefit. 3)Increasing Safety: Every policy anniversary, the plan increases your existing cover by an amount equal to the annual base premium. As a result, your cover increases with successive year, thus offering you increasing safety. 4)Survival Benefit: At the end of every policy year starting from the 3 year, you will earn a survival benefit calculated as your total base premiums paid till date multiplied by: . 5% + 60% of any excess of the GSec rate over 7.50%; or . 5% - 75% of any excess of the 7.50% over the GSec rate. Eligibility: 1)Age: 60 years of age or younger. The plan cannot be sold to less than 30 days old babies. 2)Term: Looking to invest for more than 10 years. The maximum term for this product is (70 minus your current age) subject to maximum of 40 years. 3)Amount of Investment: Looking to invest at least Rs.9600 per annum. While there are no limits on the amount you can invest in this plan. You can choose your annual base premiums only in multiples of Rs.1200 per annum over the minimum premium of Rs.9600.

Where will India be if the Dow breaks 7500?

The Dow Jones has hit its lowest level since November as stocks started the week off on a sour note. It finished the session down 298 points, Nasdaq lost 64 and the S&P 500 shed 38 points. India did not exactly lose as much in today's trade, probably because of short covering, which in turn was the fallout of relentless selling for the past two days following diappointment in the Interim Budget. The 30-share BSE Sensex closed at 9,015 points, down 19.82 points after swinging 191.61 points during the day. The 50-share NSE Nifty swung nearly 70 points before closing at 2776, up 5.65 points. Experts, however, feel India cannot escape the wrath of US meltdown for long because the gap between the events in the US economy and the rest of the world is narrowing. Some experts have predicted Dow can break the crucial support level of 7500 and can go as low as 6000, paving the way for India's devastation. Infact, Shankar Sharma of First Global feels the Indian markets may hit new lows of 7,200 by February or March. The main cause behind US crash: There has been a record contraction in New York manufacturing, which spurred concern that the government's stimulus package won't be enough to curb the deepening recession. The road ahead: For the Dow Dow Jones is on the verge of breaking 7500, which would lead to 6700 quickly and eventually down to 6200. 7449 is the key support level on the Dow with a target of 6000 points on the downside. As for the S&P 500if it breaks 740, it may go down to 540. That the Dow will touch 6000 seems to be the general consensus among experts.

Gold Run

Gold is trading at a seven-month high above USD 950 per ounce. The yellow metal has hit record high above Rs 15,000 per 10 gram in India. It is trading near record highs in currencies such as euro, pound, Canadian dollar and Swiss frank. In India, gold touched a high of Rs 11,500 per 10 gram on February 17, 2008 vs Rs 15,000 per 10 gram today. There are speculations that it may go up to a high of USD 965 per ounce and then, USD 1,165 per ounce. Gold has gained 30% over the last one-year. Gold prices are moving up due to a lot of newsflows on the currency front. Yen is at a five-week low compared to the dollar. Pound has also declined and is at a 2-week low, ahead of UK inflation data today. Asian currencies have also declined, Korean won is trading at 2-month lows. There are also speculations that exports and regional economies will contract further. Political scenario in Japan is further aiding the rise. Finance Minister of Japan has said that he will resign after budget bills are passed in Parliament. Other factors like an unstable global economic scenario, low interest rates, weak equity markets and depreciating rupee are also pushing the prices much higher. Factors - Unstable global economic scenario - Low interest rates - Weak equity markets - Central bank buying - Depreciating Rupee

LIC lifeline for lapsed policies

Tardy policy-holders have time till February 28 to revive their lapsed insurance policies. The Life Insurance Corporation (LIC) has given clients who haven’t paid their premia for up to seven years the opportunity to win back their risk covers by forking out a small penalty. “This is the first time that we are offering our clients the opportunity to revive policies that lapsed seven years ago,” said D.K. Ghosh, general manager (customer relations), eastern zone, LIC. The insurance giant has offered to revive these policies by charging 20 per cent less on the penal interest rate. LIC charges 8 per cent annual interest as penalty for not paying premium within the grace period from the premium due date. The penal interest becomes applicable from the premium due date till the time the premium is paid. The insurer allows customers to revive policies that lapsed for shorter durations. “However, there is a restriction in the case of policies that lapsed seven years ago. Such policies should have acquired the surrender value, that is the premium should have been paid for the first three years after the policy commenced,” said Ghosh. It is estimated that for an insurer, a life insurance policy achieves breakeven if the premium is paid for three years. The insurer begins to make profits on premiums paid after three years. Hence, a life insurance policy acquires a paid-up value — or a surrender value — after premium is paid for three years. “Policies which have lapsed for more than five years (but up to seven years) will be revived with a fresh underwriting, which means that the policy-holder will have to submit all documents and undergo a fresh medical check-up,” Ghosh explained. In the case of lapsed policies up to five years, a medical check-up would be required only for those who are above 50 years of age. “People who are below 50 years won’t have to undergo any medical test provided their policies lapsed five years ago,” Ghosh added. “In fact, we are mailing policy-holders all the forms and documents required to revive their lapsed policies in addition to public advertisements about the campaign,” Ghosh said. The ongoing campaign offers a 20 per cent discount on penal interest. However, the discount is capped at Rs 10,000. This means that if the penal interest amounts to Rs 60,000, the policy-holder will have to pay Rs 50,000 plus the outstanding premium to revive his/her lapsed policy. “In earlier offers, the lapsed period was capped at five years and restricted to some specified life insurance plans,” he added. The current campaign, in contrast, covers almost all plans launched by the public sector insurer. When a policy lapses, the contracted benefits become non-payable to the policy-holder. Till November last year, LIC used to treat a policy as lapsed if the premium was not paid within six months from the due date. The Insurance Regulatory & Development Authority (IRDA) came up with a uniform definition of lapsed policies for all insurers. The insurance regulator capped the grace period to one month for quarterly, half-yearly and yearly and 15 days for monthly premium payments and if the premium is not paid within the grace period, a policy is considered lapsed. However, the regulator said a lapsed policy could be reinstated by paying the due premium with penal interest in two to five years. “Till now, lapsed policies for more than five years could not be revived,” said Ghosh. “However, if a policy-holder has paid the premium for the first three years and then discontinued the payment but holds on to the policy for its full term, he or she would get back the premium paid on maturity,” he added. According to data available with IRDA, the total number of lapsed policies in the industry at the end of March 2007 stood at 86.57 lakh. The aggregate sum assured of these policies was Rs 79,300 crore. As for LIC, the total number of lapsed policies as on March 31, 2007 was 77.73 lakh and the aggregate sum assured of these policies was Rs 63,206 crore. Ghosh agreed that in the last few years the lapsed policy revival campaign was not done in such a large scale. “In fact, lapsed policies entail losses for both the insurer as well as the policy-holder,” he said. The insurer loses premium income and hence profitability when policies lapse, while the insured person loses the risk coverage and the financial benefits from the policy. Courtsy:The Telegraph,Kolkata,05/02/2009

Strike a balance

It’s that time of the year again: the financial year is drawing to a close while you are yet to chalk out an investment plan to save tax. There are many who choose to make tax-saving investments towards the end of the financial year. This is why life insurance companies get 40 per cent of their total annual business in the January-March quarter, while there’s a mad rush among mutual funds to launch products under the equity-linked savings scheme (ELSS). Given the bear run on the bourses since January last year, the investment scenario is different this time. What every investor is worried about now is the ‘return of capital’ and not the ‘return on capital’. Hence, unlike the last few years, people are wary of taking risks and would rather prefer to play it safe. The right mix So, how can one assure capital protection along with a decent return? There are instruments such as NSC, PPF and tax-saving fixed deposits (for a minimum of five years) with scheduled commercial banks or post offices that give assured returns as well as tax relief under Section 80C. However, the interest earned on all these instruments, except for PPF, is taxable. Banks will deduct tax at source (TDS) on the interest income at the rate of 10 per cent. Depending on the tax bracket, any additional tax liability will have to be paid by the depositors themselves. TDS is not applicable to NSC or a five-year post office fixed deposit. The onus of paying tax on the interest income is entirely on the depositor. Also, each instrument offers different rates of interest. Moreover, the calculation of interest is different for different schemes (see table 1). So, while all these instruments offer assured returns and same tax benefits under Section 80C, the effective return differs significantly from one another — PPF is the best followed by bank fixed deposits. But a PPF has a lock-in period of 15 years compared with five years in tax-saving bank fixed deposits and one cannot invest more than Rs 70,000 a year in a PPF account. Balancing act However, there is another way in which one can assure capital protection and yet look for a higher return. This involves a simple strategy of splitting one’s investment corpus between bank fixed deposits and equity-linked savings schemes of mutual funds. While the fixed deposit assures capital protection, ELSS promises a higher return as well as lower tax liability on the overall portfolio — investments in equities are tax-free after one year. Let us explain this. The maximum deduction one can claim under Section 80C is Rs 1 lakh. If you plan to invest Rs 1 lakh, split it between a bank deposit and ELSS. You choose a tax-saving deposit with a scheduled commercial bank that offers the highest interest rate (see table 2). After the latest round of reduction in deposit rates, some public sector banks are still offering an interest rate of 8.5 per cent on their tax-saving fixed deposits. At an interest rate of 8.5 per cent compounded quarterly, you need to deposit Rs 66,000 for a period of five years to get a maturity amount of approximately Rs 1 lakh. While you are left with Rs 34,000 more to invest, the bank deposit ensures protection of your entire investment of Rs 1 lakh. However, you will have to pay an income tax on the interest income of Rs 34,000 (maturity amount of Rs 1,00000 — the original investment of Rs 66,000). Assuming that you are in the highest tax bracket (30 per cent), your income tax liability on the accrued interest will be Rs 10,200 (30 per cent of Rs 34,000). Your interest income after tax will be Rs 23,800 (Rs 34,000 — Rs 10,200). After five years, your maturity amount after tax will be Rs 89,800 (Rs 66,000 principal+Rs 23,800 interest). Equity link The next step would be to find an ELSS that has a good performance record over a period of five years and invest the remaining Rs 34,000 in that scheme. In the past five years, tax planning schemes of mutual funds have given an average annualised return of 11.39 per cent — the best fund gave a return of 24.71 per cent and the worst fund generated 0.94 per cent. These returns take into consideration the recent mayhem in the equity markets. It is to be noted that none of the tax-planning schemes that are around for five years gave a negative return. Even the minimum annualised return generated by diversified equity schemes over the last five years was zero — that is, neither gain nor loss on the original investment. Thus, the probability of a capital loss on an investment in an ELSS is almost zero if you invest the money for five years or more. Let us consider three situations. n You get a 10 per cent annualised return on your ELSS investment. In this case, your investment of Rs 34,000 will grow to Rs 54,757.34 (compounded return) in five years. Taking into account the investment in a bank fixed deposit, your initial capital investment of Rs 1 lakh grows to Rs 1,44,557 net of tax (Rs 89,800+Rs 54,757). The effective return on investment thus works out to over 7 per cent. n Your ELSS investment doesn’t grow. In this case, your investment at the end of five years will be Rs 1,23,800 net of tax (Rs 89,800+Rs 34,000) and the rate of return will be over 4 per cent. n Your ELSS investment suffers a capital loss of 20 per cent, which is Rs 6,800 (20% of Rs 34,000). Post loss, the amount will come down to Rs 27,200. At the end of five years, your investment will stand at Rs 1,17000 (Rs 89,800+Rs 27,200) — a 3 per cent rate of return. The way many stocks have been battered on the bourses may prompt most to stay away from equities. But, remember, equity as an asset class generates the highest return. The markets are sure to make a U-turn. Hence, plan a judicious mix of fixed deposits and equities to save the maximum and reap the highest return.

Happy New Year'2009

Wish all the viewers & Followers of " Sweet Monet" a very happy & prosperous new year'2009 in all respect.

Words of Hope

The government in its mid-year economic review said we should be prepared for growth of about 7% in FY09, while it expects declining trend in inflation to continue. However, it feels that outlook on economy continues to be one of cautious optimism, and macro-economic fundamentals also continue to be strong. Meanwhile, on commodities front, Indian government sees that commodity prices will fall further on global slowdown and this fall will offset impact of falling exports. The government said FY09 additional fiscal stimulus is seen at 2% of GDP and we need to push pending reforms for 8.5-9% growth, adding that it sees higher non-tax revenue from spectrum allotment. “We may have to forego fiscal consolidation aim for FY09.” However, foreign direct investment or FDI inflows are seen strong despite growth slowdown." “There are signs of slowdown in growth across sectors and the financial crisis will moderate capital inflows and export growth,” it added. The government said fall in rupee is stronger in offshore non-deliverable forward or NDF market and huge short sale in rupee in offshore market is impacting the spot rate. “Money market situation continues to be fluid.” It feels that the final figures of fiscal, revenue deficit may top budget aim. Commenting on the banks, the centre said, the Reserve Bank of India or RBI will keep a track that tight liquidity doesn't hit credit availability. It said that cut in reverse repo may help increase liquidity; also there is a need to check parking of funds by banks in reverse repo. Also there has been no proposal to ban futures in more commodities. However, global financial crisis impact is seen higher than what the International Monetary Fund or IMF had estimated. But a positive ray of hopes comes in as job losses due to global financial crisis will be limited in India. Meanwhile, the statistics show that banks' exposure to five failed global financial companies stands at USD 1.08 billion as on September 30. Public sector unit or PSU oil retailers' FY09 interest burden is seen at Rs 8,100 crore, while the borrowing of the PSU oil retailers came in at Rs 1.15 lakh crore at November-end. On similar lines, C Rangarajan, Chairman, PM's Eco Advisory Council, said, “It is true that the Indian economy is not exposed directly to the toxic assets and the distressed assets of the developed world. Therefore the impact is not direct and the indirect effect is through trade and capital flows, which will lead to a slowdown.” Arvind Virmani, Chief Economic Advisor, said won't be suprised if growth falls to 7% in FY09 economy will see effect of stimulus measures in last qtrthis particular mid-year review. Meanwhile, Suresh Tendulkar, PM Panel Head, said, pressure on rupee is 'abated' and foreign exchange reserve position is comfortable, while FX capital outflows seem to have stabilised. He said, PM is closely monitoring micro, small and medium enterprises or MSME problems as high rates last year accentuated MSME problems. “However, current account gap may widen versus previous year and export-linked sectors are bound to be affected much more than expected,” he added. Tendulkar said “Inflation can fall to 4-6% by March-end and RBI can cut repo, reverse repo rates by 100 bps each.” He said a next fiscal stimulus package is based on feedback and the panel is assessing response of first fiscal stimulus package. Here is a verbatim transcript of Abhijit Neogyy’s comments on CNBC-TV18. Also watch the accompanying video. We had the Prime Minister and the Finance Minister in the recent past talking about scaling down the growth targets from a high of 9% to 7-7.5% - that was the kind of range. Today the government has informed Parliament in the official mid-year review of the Indian economy and the growth is likely to be at the bottom of that range around 7%. And that is completely understandable given the slowdown in exports; we have seen the dip happening in October and also the dismal Index of Industrial Production (IIP) figure, which is reflected in manufacturing growth all around. I think what is going to happen and we have seen first stimulus package accompanied by monetary policy, we are of course expecting a second stimulus package. What we do understand is that the impact of that stimulus package on the fiscal deficit would be 2%. If there was a base target of 3% of fiscal deficit, and 2% is added on that, which means that we are going to end up this year with about 5% fiscal deficit. But, then fiscal deficit is not an issue in the days of a slowdown, a package to prop up economy is something, which is going to be expected. The big question is that will monetary policy also accompany it. The economic survey or the mid-year review sort of indicates that aggressive monetary policy action will continue to be the RBI’s policy stance, in fact the mid-year review growth, so far is to say that the cost banks are parking a lot of their liquid cash with the RBI, there is a definite case for cut in the reverse repo right away. So, yes the macro economic fundamental, the savings and investment rates right now seem to be okay more than 35%. But if this state of the economy continues to be like this, even the savings rate and investment rates could actually come down. So, it is a state where infrastructure spending, as well as a stimulus package could prop up the economy. That is accent of emphasis of this particular mid-year review.

Words from Big Dada's

Investment Guru Rakesh Jhunjhunwala, Raamdeo Agrawal of Motilal Oswal and Sanjoy Bhattacharya, Founder and Partner, Fortuna Capital, spoke to BSE and NSE member Ramesh Damani and tried to find the answer to an important question––Who creates wealth? Who destroyed wealth? Damani introduced the discussion thus - "There is a Chinese symbol that consists of two characters, the top character has danger, and the bottom character has opportunity. Too often, when one focuses on danger, one forgets the opportunities present. The question before the panel and the house today is that in this current fall in the market, one of the great lifetime opportunities to load up on bargain, blue-chip stocks for the next 10-20 years or is the market blinking red and going into a deep freeze. That is the theme – the good, great and gruesome companies that we will select." According to Agrawal, while tapping a company as a good investment opportunity, “What is important with great companies because the longevity of these companies are perpetual - 50-100 years; what is important is not to buy them young or mature, but to buy them at the right price – at an attractive or reasonable price not at a throwaway price. You will never get it. So, it is not important to catch them young. Once it is demonstrated that they are great then later it can be made part of the portfolio at any point if you can find them at a reasonable price.” Bhattacharya is reasonably sure that India will have an aggregate output growth at something in double-digits for the next ten years, unless something goes seriously wrong. “Even if America goes into a recessionary environment for the next 3-4 years, and that is much more than what people think right now –– people don’t think that it is going to last till 2011-2012 and despite that, India will have the ability for a number of reasons, which are very well known- like demographic, domestic, consumption number of things. I see aggregate demand here growing at 12-13%. It is given that it is going to grow at 12-13%; I don’t think there is a need to be obsessed with those. I think the one thing that I would for is cash flow.” Jhunjhunwala said, “I always say it is important what you buy and it is not important in what size you buy. India is (one of) those who (would) see humongous growth for the next twenty-five years. So if you pick up some companies who are going to cater to Indian markets and you have some business superiority and you feel available at reasonable valuations, I think this is the opportunity in that time when it is the darkest and everybody is so pessimistic that you get the best investment opportunities.” Here is a verbatim transcript of the exclusive interview with Rakesh Jhunjhunwala, Raamdeo Agrawal and Sanjoy Bhattacharya on CNBC-TV18. Also watch the accompanying video. Q: Great, good and gruesome as you put it. What are the characteristics of great companies? Agrawal: A great company, to put very aptly, is like a bank account where you get very high rates of interest, and that is say 55-60%. That is the kind of productivity of capital, which is very high. Once it starts with that, over the years, it keeps increasing. So the entry barrier or competitive advantage or popularity of the product keeps increasing over a period of time, and doesn’t remain static. That is called a great company. So, profits are high and profitability keeps growing over a period of time. That is a great company. Q: But great companies have to be caught young otherwise they give mediocre returns. For example buying Lever in 1993? Agrawal: What is important with great companies because the longevity of these companies are perpetual - 50-100 years. What is important is not to buy them young or mature, but to buy them at the right price – at an attractive or reasonable price not at a throwaway price. You will never get it. So, it is not important to catch them young. Once it is demonstrated that they are great then later it can be made part of the portfolio at any point if you can find them at a reasonable price. Q: But the fall as such that we have had globally and in India, you would be able to find a lot of great companies now, because stock prices are down 60-80% on average? Agrawal: The first thing is, great companies are not that many that you can come across every day. There are I would say, out of 500 companies about 50% on tangible assets not on their declared return on networth. There are only 10 companies that are more than 50% return on tangible assets. So, going by Buffett’s example of See’s Candies, there are only 10 companies that can be today be called as acknowledged great companies. So, all those companies where I have looked at their valuations are definitely much more reasonable than what they used to be 10 years back, but are nowhere at a throwaway price at which we could buy See’s Candies at about 7-8 P/E multiple or 20% earnings on his purchase price. Right now you get dividend at best 3 or 4%. I think the best you can get is – Hero Honda is about 13 times, which is 7-8% earnings yield, and Glaxo at about 5%, HUL at about 4%. Q: One thing that startled me about the study was that growth is not necessary for a great company, it is the cash flow, it is the dividend, it is the return on equity. Agrawal: Yes because once you have started a great machine of earnings and dividends because what happens is whatever is earned for example 1,000 crore is earned or 500 crore is earned, it doesn’t need even a penny of that to grow into the future. Even if it grows at 10%, entire 500 crore can be given back to you by way of dividend like Hero Honda. It doesn’t need any capital for growing. So all the profit they make 1200-1300 crore, technically they can pay it out to the shareholders. What more you want, why do you need the growth? The issue is that the extreme of dividend – it literally becomes a growing bond maybe growing at 8-10%. The issue is, are you able to buy it at a reasonable price. Q: So the trick is to find a great price? Agrawal: Yes. Q: You were talking about how you visualize great companies, can you summarize them for us? Jhunjhunwala: I think the first thing is that there should be huge untapped market because I don’t agree that – See's Candies would be one example out of 1,000 companies which have given great returns to investors I think 999 would have grown. Second thing I feel is that the great companies are very much returned to the capital profile of a company what is the capital investment - the capital investment they need everyday in order to grow their earnings and also their working capital profile because Nestle and Lever have partly been able to get this kind of return on capital employed because they are able to squeeze their suppliers and they are able to sell everything on cash. So the working capital profile. Secondly, I think that every great company has some kind of a business superiority, it could be a brand - I think in Bharti’s case it is marketing, so there is some kind of a business superiority - from title also it is marketing. So there has to be entry barriers into that business. See's Candies is selling for forty years because See's Candies has some loyalty from its customers and that loyalty cannot be recreated by another client otherwise there would have been a capital society or where somebody will compete and some will create it. I always say it is important what you buy and it is not important in what size you buy, so it is not great buying of bond at 25 times earnings 4% yield and I personally feel that maybe it is three-four or five or fifteen-twenty years but India is (one of) those who (would) see humongous growth for the next twenty-five years. So if you pick up some companies who are going to cater to Indian markets and you have some business superiority and you feel available at reasonable valuations, I think this is the opportunity in that time when it is the darkest and everybody is so pessimistic that you get the best investment opportunities. When I bought Titan, its marketcap was above 125 crore and its debt was 600 crore. Today its turnover will be 4,000 crore this year and its debt will be less than 600 crore and I envisage it everybody is going to buy watch ten years later, everybody is going to buy jewellery and everybody is going to wear these things. So there is going to be huge demand. So I think this is a real time and it is very easy to read about Mr Warren Buffet and his great accomplishments which undoubtedly are but to find those circumstances in which we can recreate what he has done is extremely dismal because those circumstances will not exist and secondly we don’t have the discipline. What Indian investor lands up doing is buying multinational companies who have the worst corporate governance in this country, Satyam is nothing. Q: What would you look for in a great company? Bhattacharya: It is very difficult to add to what they said and to directly address your question, he made this point - we live in a country where growth is bound to be there, why this obsession with growth in a country where nominal GDP is growing at 12.5-13% anyhow and will grow. I think there was and the will there is an interregnum here and that interregnum should not be treated as hanging permanently. So, I think yes you are right that this year it may not but if you look at a broader sweep of India’s economy- we can argue about the numbers. But I am reasonably sure that this country will have aggregate output growth at something in double digits for the next 10-years, unless something goes seriously wrong, which I simply cannot visualize right now. Q: Globally also you do not visualize anything wrong? Bhattacharya: Which affects India- I don’t think that even if America goes into a recessionary environment for the next 3-4 years, and that is much more than what people think right now. People don’t think that it is going to last till 2011-2012 and despite that India will have the ability for a number of reasons, which are very well known- like demographic, domestic, consumption number of things. I see aggregate demand here growing at 12-13%. It is given that it is going to grow at 12-13%; I don’t think there is a need to be obsessed with those. I think the one thing that I would for is cash flow. To answer your question there must be a tremendous focus on cash flow. I think the lesson of 2008- if I may and have never able to expect it, as well as Mr. Jhunjhunwala would have expressed it but I'll give this a shot is to focus on cash flow rather than newsflow - I think that is the big difference. People I don’t think they have ever looked at cash flow. I think the other thing, which is very important and I am surprised it hasn’t been brought up so far. But to my mind it has primacy- if you want to buy great companies and being reflective of the Indian investor this is not something important, we keep on paying tribute to Buffet and great investors but we don’t seem to recognize this. It is very important that capital allocation is rationa -- if capital allocation is irrational; then no matter how good the business, no matter how much cash flow it generates, it is not going to be a great investment. I don’t want to get into specifics but there is a business in this country; it is a fabulous business, first in the country to get into it, absolute money machine, doesn’t require any incremental capital employed, had a great start, they generate a large amount of free cash flow but they just blow it up. They buy fixed assets, they buy a building for themselves to live in rather than rent it. They invest in bonds and debentures, they find ways to deal with the cash flow rather than pay dividend and that is what has prevented that company from achieving great business. It has greatness thrust upon it but could not get there. Q: A stock you have often mentioned – Bharti – good, great or gruesome? Agarwal: It’s at the high end of good and yet it hasn’t achieved greatness, because they have not paid a single penny, yet. There is huge cash flow; operating cash flow is more like 15-20%. But they have huge capital expenditure ahead and it’s a debt free company. In fact take pride that they don’t pay dividend so. Q: Telecom same business, Bharti becomes a great company and TTML you say is a gruesome business why? Agarwal: TTML is a gruesome company, the underlying business is mobility and both of them have same business underlying. Q: What did TTML do wrong? Agarwal: We have seen it all in the last five years. But they missed the first mover advantage, they got into wrong technology. Jhunjhunwala: Bharti paid no price for the Delhi license. They paid a heavy price for the Bombay license. Agarwal: TTML has only one circle which is very limited access which is Maharashtra and Goa, so they have very limited access and they have Sigma which is a handicap technology at least to start with. So everything went wrong with that company and this business requires a lot of capital, they kept on pumping capital and one good thing is that they had the Tata name. Jhunjhunwala: So it was a bad thing that they would go and keep pumping capital. Putting good money on a bad thing. Agarwal: They are so nice that they kept pumping capital we were so good that when they asked for a rights issue at Rs 21, we again gave them. So instead of getting dividends, we have been giving them money. And I wished them all the best. Q: The macroeconomic environment in India is improving considerably, isn’t it? Jhunjhunwala: Improving? I don’t know maybe next year there will be no oil subsidy, I don’t know what the government is saying. As per my calculations if today Oil is 45/bbl, Indian Basket is 40/bbl, oil companies today are making a profit after providing for subsidy of at least Rs 50,000 crore at 47 to the dollar. What was said in June that there was a loss of Rs 2.45 lakh crore. So, Rs 3 lakh crore is going to come in, this country is going to be saved, this has such consequential effects, sulphur has gone from USD 800 to USD 90. I don’t think there will be a fertilizer subsidy more than what they have provided for in the budget in this year. Cumulatively they estimated at the peak fertilizer and fuel subsidy was going to be about 3 lakh and eight thousand crore. Next year it maybe not needed at all. This will have a very big effect on the value of the rupee, on government finances, it will have a very big effect on liquidity because someone in the country had to pay this 3 lakh eighty thousand crore. The government may not have included in the budget but IOC had to get that money from somebody, if they don’t get from government bonds then from government banks. So if you don’t pay out Rs 3 lakh eighty thousand crore out of this country what will happen to the liquidity? After that there are interest rates, one thing is that you have reduced excise duty across the board by 4%, commodity prices have halved. If I say that commodity prices constitute 50% of every product sold in this country, even if you pass on 40% of the benefit that is going to come to the producers, if commodity prices will sustain you will see a reduction in prices between 20-25%. And no manufacturer in his right mind today is going to look at volumes, at price he is going to look at volumes. After that if interest rates crash and I am buying an asset with interest rates, it will give me a cushion of 5-7% to 10% over the life of the asset in any asset that I buy. This is not Japan nor is it America. Q: This is not a corporate holiday for profits. If commodity prices, interest costs going down why should there be a holiday for corporate profits? Agarwal: I am not talking about individual group of companies. In aggregate, when you talk about India Inc, in 2003 the India Inc made – I am talking about all listed companies –about Rs 30,000 crore. In 2007-08, they made 3 lakh 11 thousand crore on a GDP of about Rs 40 lakh crore. This year say Tisco made a profit of about 10,000 crore, last quarter itself they made about Rs 5,000 crore. To replace Rs 10,000 crore you need many midsize companies. Jhunjhunwala: In your study for earnings growth, you said you had 17% compounded growth over the last 15 years. But you have 12% normalised GDP growth. So to expect the corporate sector not to have growth of more than 5% and in between you have to exclude the companies who have been newly listed. In 1993, ONGC was not listed; today ONGC’s profits are Rs 15-20,000 crore. So as a percentage of GDP the profits have also gone up because of the newly listed companies. So the profit growth that we have had over a period of time has not been anything out of the extraordinary. When you have 12% normal GDP growth and it is the efficient and large companies which are listed. So I don’t think it is anything exemplary which is not sustainable. Agarwal: 17% is not a problem but in the last five years you had more than 25% of earnings growth for the entire India Inc, 10 times in 5 years, at aggregate level. I am not disputing what Titan can do.Q: Commodity prices are going down; globally we are heading into deflation – what are the risks of that?Bhattacharya: I don’t think that people will produce oil if it stays at USD 25 per barrel. I don’t know why it is taken for granted that oil will remain at this price for ever. Q: Because Saudi Arabia and Venezuela need money to finance their own budgets?Bhattacharya: But it is cartel. Q: And cartel as we know has never worked. Bhattacharya: But in oil if the OPEC decides for some reason and this is a recessionary environment, the demand for oil is coming down and let’s not forget that United States of America is the largest… Jhunjhunwala: But no one is predicting. 88 million barrels is the daily consumption and they are going to cut 4 million, no one is predicting a fall of more than one million next year. So it’s peculiar we don’t know anything of the commodity market we should ask the Mr. Jim Rogers, he knows best. Bhattacharya: I think all predictions are a complete waste of time, neither of us knows what is going to happen in the next 6 months. So I don’t think we should get too carried away with forecasting. The value of forecasting is mainly to provide entertainment which is the part of the reason we are here but I don’t think we should get carried away with the idea of forecasting. Mr Agrawal has a very valid point and this is proven across economies, across the world, across economic environment there is mean reversion in corporate profits. This is a truth, nothing grows to the sky. If profits are grown at 25% for the last 5 years and taking Jhunjhunwala’s point if that they can grow at 17-18% because you have a nominal GDP growth of 12%, that 25% to grow for 25 years we will have to have a period when it grows at 5% for the next 5 years and that is the period we are unfortunately looking at because they have grown 25% in the last five years. So its like heads and tails, it is very unlikely though you can have it.. Q: Are you predicting? Bhattacharya: No, not predicting I am pointing out something that people learn in statistics which sadly in this country people have not had much exposure to, useful statistics. You can have 10 heads in a row equally you can have 10 tails in a row but the distribution of heads and tails, suggest that those are outliers, so we shouldn’t bank on outliers to make our judgment come right. Q: So flip a coin since you don’t like prediction - 7,700 on Sensex will hold?Bhattacharya: I think that is completely irrelevant to what you need to do today. Q: Which is what?Bhattacharya: Basically buy, There are bunch of really high quality companies and even Rakesh has made this point, a bunch of really good companies available at very attractive prices, unless you are thinking about next 3 months what is the scare about buying these companies? If you have a 12-18 to 24 month outlook, you can buy high quality, really great businesses. And I will get to the level because I am no where near greatness, so I will talk about less great companies which are available at stunning prices. Take a company like Blue Star it is available at a stunning price in relation to what it has done - contracting, project, core air conditioning, heating etc it has compounded seven years return on capital employed of 37%, it has grown profits in excess of 27%. It has never had in the last 10 years a year in which absolute profits have grown and there has been no dilution in the last 10 years. Q: Just for disclosure of Sebi you have an ownership? Bhattacharya: Yes I do have a ownership. Q: Will 7,700 on Sensex hold?Jhunjhunwala: I don’t know about 7,700 because if commodities dip, we have very high weightage for the commodities but I think the broad market is going to hold and that is what the bond market is showing for the simple reason that I have never seen such pessimism in my life, I have never seen such depression in my life. Q: Have you seen such optimism like we saw in January? Jhunjhunwala: I have seen the 1992s one – this one is nothing. In 1992 it was worse. 1992 was 60 times earnings and fortunately there was no scam this time. That was the only difference. There optimism in 2001 – McKenzie said Indian software industry will grow 100%. Infosys profits will double every year. I have never seen such kind of optimism. I don’t think we are anywhere near that kind of optimism and the Indian economy and India as a nation and we as a market had far greater places for this bull market in 2008 although there was a lot of excesses then what we had in 2000 or 1992. Q: 50 Indians own 40% of the GDP – that’s pretty optimistic in terms of valuation. But your call is 7700 will hold – that’s what you said in your study? Agarwal: I am pretty certain to the extent that’s why I have put the word probably because still one could be wrong 5-10% but 90% probably 7700 as a bottom. Q: Is that generally in historical terms – great periods of wealth creation are followed by wealth destruction? Agarwal: This has been characteristic of Indian stock market. I though a year or two back that this particular bull market is the first bull market led by earnings growth. So the foundations are solid. But again the story is the same because this time though you have solid earnings but the PE multiple came back all the way down from 30 to 10. The masses look at the price and not the value and that’s where the problem is. Jhunjhunwala: People talk about deflation, lower inflation – they compare us with Japan, America, and Europe – they’re all over 80s, we have just had puberty, we are young economy. Here my driver if he gets something cheaper, he increases the amount of shirts he buys or he increases the amount of foods he eats. So price deflation in India according to me is going to be a big spur to consumption. One of problem Q: Jim Rogers was quoted on television saying that equities is going to be an impaired asset class over the next 5-10 years. What would you say to that?Bhattacharya: I think he was referring to the western world. But I read Mr. Rogers’ comments in the light of what is happening in Western Europe and America because there your fundamental problem is that demand has been seriously impaired. The ability to stimulate demand is the challenge.Q: So, India will be an island?Bhattacharya: I don’t think we’ll be an island. But I think what is very important, very fundamental and I would say it applies to large parts of Asia – I wouldn’t say even India – I would venture to say there are many countries in Asia and that includes countries like China, Korea, I think what is going to happen is that increasingly we are going to see these countries become far more competitive in terms of their abilities to displace other manufacturers and providers of services. That increased competitiveness is what is going to lead eventually to a change in the way that these companies prosper in terms of their corporate profit, in terms of their ability to gain dominant positions and eventually the way they are valued.

See 20-30% sell-off in mkts in few months: Shankar Sharma

Shankar Sharma, Vice-Chairman and Joint Managing Director, First Global, does not expect the current rally to continue for more than a week. “The market would see a huge sell-off by mid-December, which may continue till January end.” He estimates a 20-30% sell-off in markets during the next few months and sees a durable rally only after the next fall. Sharma foresees an earnings downtrend in FY10. “We see that fiscal year being worse than FY09 for the markets. Sharma feels the monetary easing would not boost the market significantly and said the markets may at best rally for 1-2 days. He added that the fiscal package under discussion was too little to make a difference. He believes the elections could compound the current situation and would be a dampener. Here is a verbatim transcript of the exclusive interview with Shankar Sharma on CNBC-TV18. Also watch the accompanying video. Q: One of you recent reports was talking a pullback or a temporary pullback in equities. Has that come and gone with that five-six day rally that we saw just a few days back or do you think its still pending? A: We issued this report a week before the last and globally markets did rally about 10-12% from the lows India however, didn’t participate and that’s in partly due to the terror attacks. There’s probably a week more for the rally to continue. From the middle of December the markets will begin to go back into the realization that this quarter will be an absolute washout quarter for any company anywhere in the world. So, whether you take a company in technology or in retail or a company in metals or infrastructure or automobiles or anything almost across the board you will see completely washed out earnings. Markets will not discount this substantial slowdown in advance so I reckon somewhere in the middle of the month i.e. this month the market will begin to get a sense of how bad their numbers are going to be. I wouldn’t be surprised if a few major companies across the world came out and issue earnings warnings that they are not going to be able to meet the numbers that they had forecasted for this quarter. Therefore we see the market beginning to sell-off probably in the middle of December and this could continue I reckon to the middle of January or end of January. This month could be as ugly as October because I do not think the markets have factored in how bad the numbers in this quarter are going to be, globally. The October sell-off was largely due to the Lehman bankruptcy and how it affected the credit market. But the credit market effect on the real economy will now be visible once these numbers begin to come out and we all know anecdotally how bad numbers in India will be for large industries and how bad they will be for many international companies. So I think the rally probably has a few more days to go. Beyond that it will be very brave to conjecture as the rally continues. Q: What is your sense of how ugly it could get in December-January? Do you think it is a revisit of the October lows or could it get worse than that? A: India is pretty close to that, not on the intra-day basis but on a closing basis. We are about 7-8% away from the lows that we saw recently. So the October lows have gone on a closing basis. Looking at the way the world is shaping up, I wouldn’t be surprised if markets witness a 20-30% sell off in the next couple of months. That leads me to believe the markets will probably see a more durable rally because one of the strange things about this bear market has been that the rallies have not been durable, they haven’t even lasted for 30-45 days, they are over in 5-10 or 15 days. A durable rally will probably succeed a pretty severe fall which begins in the next few days time. The markets have not fully discounted the bad numbers anywhere in the world. Analysts’ estimates are still way too high and I think this quarter will knock some sense into all those numbers. Q: In the short-term, how high would you rate the chances that the market actually settles into a range is very boring for the next few weeks does nothing? A: I don’t think any range has lasted more than a few days. The markets have been very strongly trending markets this year as they were in the last four-five years. The trading ranges have been in consolidation phases before markets breakout in whatever direction they have been trading in. So when there was a bull market, the consolidations were very short. There were very sharp, short pullbacks and then markets would continue going up. This time, while pullbacks may not have been that sharp, there have been few pullbacks of a few days duration and then they continue going down. So, I don’t think there is any trading range or any such situation developing at all. Merely because the markets don’t do much for three days, it starts to build theories that it is in a trading range. However, I don’t think that is a real possibility. Q: There is the promise of course now of fiscal action and monetary action coming together. How much does that translate into for the market in real terms you think? A: Maybe a day’s rally, maybe two days. One should remember this is like a morphine shot. You need greater and greater morphine shots in order to kill the pain and that is the way this thing works. The first one will lead to greater euphoria and each successive injection whether it is monetary or fiscal – in economics they call it the Law of Diminishing Marginal Utility and that is the way markets look at such stimuli packages. So globally, the first ones (packages) did a lot of good in terms of market action and then successively markets say that nothing is working and it is just another stimulus package. In India, we haven’t seen anything on the fiscal side yet. So that may help for a couple of days maybe three days but it is just very little – A USD 10 billion packages is nothing. I don’t think it conveys a very good picture to the world. China is putting up a USD 550 billion package and here we are announcing a USD 10 billion package. It doesn’t seem right. They may as well not announce it and on a subterranean basis — keep doing what you are doing on a slightly accelerated basis — why make a big song and dance about something which is like 2% of what China is doing? So it’s better not talk about it. Q: How are you reading 2009 now if there is a big fall or big leg down coming around the January numbers after that how do you see the rest of 2009? A: The numbers in FY10 will be substantially worse. The slowdown has accelerated post the middle of the calendar year 2009. So we have had more or less five-six months of reasonable earnings growth and reasonable GDP (Gross Domestic Product) growth coming and that’s not going to be replicable for the rest of the financial year and the calendar year of 2009. FY10 will definitely be a down year in terms of earnings for India. I cannot see which sector would lead the earnings growth. On an aggregate basis there might be a few sectors which will deliver positive earnings growth. But you will not see the entire market deliver that largely because big companies like Reliance or the auto pack or the metal pack none of those companies are going to have earnings growth. You can only debate on how much lower the earnings will go but growth is going to be very dim for a large part of the market. Some of the companies like telecom may grow but that’s not going to be enough to offset the decline in earnings we see from a lot of the cyclical companies. So I am pretty certain and it's early days to start making definitive forecasts in FY10. But our take is, you will definitely see a down earnings in FY10. Globally, it will be pretty much the same case; corporate earnings that was strong for the last five years will be decimated. Sector wise; semiconductors are hurting, retail is hurting, banks are obviously gone. The world’s earnings composition also changes in every phase of a bull market. The last five years the global market was driven largely by the commodity cyclical and they became large part of the indexes worldwide and they became even larger part of earnings growth worldwide. Now that sector is gone, oil is at USD 45 per barrel and it can easily hit USD 20 per barrel in the next six-eight months time. Exxon Mobil, iron ore or steel were all the big drivers of earnings growth but those are not going to come back for many years in terms of earnings growth. You might well see a situation where they might make losses 12 months from now because it is our view that commodity prices will breach the lows of 2002. I am talking about the absolute commodity prices, which means that the stocks of those commodities so whether it is BHP Billiton, Rio Tinto or Exxon Mobil, Companhia Vale do Rio Doce (CVRD) or Indian metal companies should all trade lower than their prices of 2002-03, in terms of the absolute stock price. When the commodity price breaches the lows of 2002 the stocks of those companies will trade even lower because these companies have upped their risk in the last five years. They have gone and made acquisitions, they have leveraged their balance sheets up. Rio Tinto has got USD 46 billion of debt and that is a lot of debt built up in the last few years and about USD 8-10 billion is coming due in the next 12 months time. These companies are far riskier than they were at the trough of the commodity cycle. So when you hit another trough, these stocks will go down even lower and therefore the earnings will obviously be linked to the trough. I don’t see how that earnings growth is going to be replicable out of the same pack. So may be some other pack has to emerge. It is too early in this bear market to start talking of the sector, which balances out the negatives of the commodity cyclical. Q: At the very start of the conversation, you mentioned autos, what would you do with that whole pocket? A: Autos are symptomatic of what the real problems are. So, as far as the real economy is concerned, these numbers are mind-bogglingly terrible numbers and I don’t see how this thing will revive or turnaround that quickly. Companies like a Hero Honda or a Maruti don’t have much leverage. They are not going to be in a financial stress if the market continues to be as bad as it is. But you have other leveraged auto companies and I just fear that leverages with these kind of poor numbers, interest cost, interest burden none of those things are a good cocktail. They are a very lethal cocktail and the sector is in deep strife. Q: There is one view which is the optimistic view that maybe June-July 2009 onwards as we get into Q2 or Q3 FY10, you see the economy rebounding in a bit or earnings probably hitting some kind of a trough and the markets probably starts some kind of a recovery. Is that too optimistic a view in your eyes? A: I do not think that’s too optimistic. It only depends on what the trough is and what the trough for the market is. If the market goes to 5,000 and rebounds to 8,000 or 9,000 which is where we are now would you call that a rebound or would you call that as nothing move on point to point basis. So all of this will depend on where we are at that point in time when the so-called recovery starts. I am not even sure it will be that easy to achieve because we are still in the deceleration mode and economies do not necessarily have that big swings in their growth rates as corporate earnings do. It’s like a super tanker; they will start climbing and they will start coming down. They can go down for 18 months or 24 months before maybe another leg of the upstream in GDP growth starts. But what I don’t think people are getting especially in India is how serious this whole global problem is. Across the world in every single country people have understood the depth of the problem and they understand the contours and magnitude of the problem the world facing is. We still do not understand that this has nothing to do with India. There is huge global unwinding going on, it’s an unwinding of the excesses build over many decades and to say that those excesses can be purged and now the excess are being purged in fact you are putting excesses upon excesses. Governments are printing money. So basically you are borrowing from the people to give to private hands. There is no equity left in the world; you cannot build Debt Empire without having equity and the only people in the world who have any equity or the sovereign wealthy fund from West Asia and with oil at USD 45 per barrel their fiscal balances are just going to go because the last man standing was Saudi. Saudi Arabia needed USD 50 per barrel to balance their book. At USD 45 per barrel they have also gone. Russia went at USD 65-70 per barrel. In most other countries the cost of production was far higher and their quality of crude was lower. Therefore, they need higher crude prices for them to break even. There is a huge global problem. This is not a garden variety walk in the park recession. So there no point talking about Tata Steel or Bharti or Reliance Industries or any of our stalwart companies when there is such a huge problem across the world. I have been trying to figure out what’s the end game to this and I have been speaking to a lot of very intelligent folks across the world in the last three-four months, meeting them as well and nobody can figure out where the light at the end of this tunnel is. So India is a small part of whole equation its not the whole jigsaw puzzle. Just looking at the way the world is going, you have pretty much the entire world in recession now. Looking at the China output numbers, looking at India CMIE (Centre for Monitoring Indian Economy), everything is pointing to a contraction of industrial activity. To hold out hope that the markets will have a great second half of 2009, lets get through 2008 first, lets get through the next three months of 2009 first and we will start worrying about 2009 end. There are plenty of more things to worry about now than to worry about second half of 2009. Q: There is that fear though on how long this pain is going to last. Just on the subject of global recession the fear now is it goes all the way into 2011 and who knows the kind of body blows things like our currencies might have to take a side from the equity market? A: You are absolutely right, the dollar continues to decimate most currencies. You can see how badly the GBP (Great Britain Pounds) is faring and it is our view that the doomed currency tag now belongs to the GBP rather than to the dollar because we see the GBP going to 120-125 against the US dollar. If that happens on the same lines you will see the euro trade at parity against the dollar and euro zone has its own problems. You needed a good recession in the euro zone for the internal differences to come out and you can hear so many discordant notes, Ireland wants to breach all fiscal norms, Spain and Italy will be shouting from the rooftops now. So specially the southern European nations and Ireland, the new entrants, they will all start to feel huge pain, the populations there will start to feel huge pain and they will all demand to ease the stifling policies of the ECB driving their internal economics. At that point what happens to the Euro? The US is in deep trouble but just because others are in deeper trouble relative to the US - because US’s problems are known others are not that well known - we just see the US dollar strengthening which means that emerging market currencies will also follow in tandem. You don’t just have an equity market problems, you have a currency problem as well. Across the world, very few currencies will be able to hold against the dollar maybe the Swiss Franc and the yen might and maybe one or two others but by and large that is the other big problem, a strong dollar helps nobody. That is the worst news we could have on top of an already bad situation but whether we like it or not we have to live with a strong dollar for the next few months if not a few years and that seems paradoxical but that is the way markets are. Unless you have the dollar weakening and weakening substantially, there is going to be no bull market and emerging markets. That is a simple one line, simplistic way of looking at emerging markets. Through the '90s the dollar was more or less the strong currency and there was only one market to play which was the US market. EMs went nowhere, India went nowhere, Russia was a dog market, Asia went through some degree of upswing between '94 and '96 and then they all got crushed. From 2002 when the dollar weakened, EMs did well. The dollar strengthens, EMs don’t do well. It is as simple as that. Q: In the next few months we will also have elections out here, is that a sideshow or do you see that having any material bearing on our market performance? A: It could compound an already uncertain situation because policy making then just freezes up – it freezes up in a best of times in India but before election obviously by law you cannot take too many big policy decisions, you cannot give out too much business and I think that time probably will come by January and February. After two-three months into the new government’s tenure, there will be the same kind of paralysis of policy making. So overall the elections will be a big dampener. courtsy: moneycontrol ;Thu, Dec 04, 2008 at 10:05 , Updated at Fri, Dec 05, 2008 at 18:22 Source : CNBC-TV18