financial markets & investing jul'10
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FINANCE MARKET AND INVESTINGTRANSCRIPT
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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%
3.National Stock Exchange India
321 265 217
150 916 778
112.9%
4.Chicago Board Options Exchange
222 781 717
259 496 193
-14.1%
5. Taifex 76 177 097 98 122 308 -22.4%
Source: WFE
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%
2.National Stock Exchange India
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
Indian Financial Markets
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
Financial Markets – Concept Of Investing
Systematic Investing
Equity markets are synonymous with uncertainty and volatility. The average investor invariably suffers from such market gyrations. Systematic investing is a strategy of not only preserving capital but also translating into substantial creation of wealth in long run
It simply means investing ‘Fixed Amount’ every month
A method of investing regularly to benefit from the stock market volatility
The first step towards achieving financial goals and objectives.
To imbibe financial discipline
To eliminate the need to time the markets
To successfully achieve the financial goals and objectives
To harness the power of compounding by investing with a long term perspective
14
Financial Markets – Concept Of Investing
Rupee Cost Averaging
4772.50500
205100
1010100
812.5100
520100
425100
Units bought
Purchase Price
Systematic
Investing
5065500
520100
1010100
205100
1010100
520100
Units bought
Purchase Price
Systematic
Investing
4480500
425100
520100
520100
1010100
205100
Units bought
Purchase Price
Systematic Investing
Fluctuating Markets
Declining Markets Rising Markets
Avg NAV : Rs 13.00 (65/5)Avg. Unit Cost : Rs 10.00 (Rs 500/50)
Avg. NAV : Rs 14.50 (72.50/5)Avg. Unit Cost : Rs 10.64 (Rs 500/47)
Avg. NAV : Rs 16.00 (80/5)Avg. Unit Cost : Rs 11.36 (Rs 500/44)
15
Financial Markets – Concept Of Investing
Power Of Compounding - Rs 5000 invested per month
33,42,53413,76,0854,42,8732,25,57815%
24,97,90111,50,1934,08,3482,15,38412%
20,72,35210,24,2253,87,1852,08,90910%
Value at the end of 15 yrs
Value at the end of 10 yrs
Value at the end of 5 yrs
Value at the end of 3 yrs
Rate of Return
Golden Rules Of Investing
Invest early, regularly and systematically for a longer period
Ensure adequate liquidity for contingencies of life
Ensure adequate diversification by investing across asset classes and time horizons
Do not attempt to time the market. Patience is the key
Be realistic in expectations of returns
Balance investments in accordance with your risk-return framework
Agenda
Financial Markets – Rationale, Players and Structure
Why and How to Invest in Equity
Other Derivatives
Regulator
Research
Opportunities & Challenges
Outlook
Indian Capital Markets - History, Exchanges & Performance
Indian Financial Markets
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
Financial Markets – Rationale, Players and Structure
Why and How to Invest in Equity
Indian Capital Markets – History, Exchanges & Performance
Regulator
Research
Opportunities & Challenges
Outlook
Indian Financial Markets
Other Derivatives
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
Financial Markets – Rationale, Players and Structure
Why and How to Invest in Equity
Indian Capital Markets – History, Exchanges & Performance
Other Derivatives
Research
Opportunities & Challenges
Indian Financial Markets
Regulator
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
Financial Markets – Rationale, Players and Structure
Why and How to Invest in Equity
Indian Capital Markets – History, Exchanges & Performance
Other Derivatives
Regulator
Opportunities & Challenges
Outlook
Indian Financial Markets
Research
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
Financial Markets – Rationale, Players and Structure
Indian Capital Markets – History, Exchanges & Performance
Other Derivatives
Regulator
Research
Opportunities & Challenges
Indian Financial Markets
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
Mar-06 Jan-07 Nov-07 Sep-08 Jul-09 May-10
Net FII (Mln USD)
Source:RBI
External Commercial Barrowings - Monthly
0
1000
2000
3000
4000
Mar-06 Jan-07 Nov-07 Sep-08 Jul-09 May-10
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
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