IIM Shillong Niveshak April 2013

THE INVESTOR VOLUME 6 ISSUE 4 April 2013

Niveshak

BRETTON WOODS SYSTEM AND ITS

IMPACT, pG. 19

Economics of

development, PG. 08

Is Gold on a

Thrill Ride?

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsoever.

F R O M E D I T O R ’ S D E S K

NiveshakVolume VIISSUE IV

April 2013

Faculty MentorProf. P. Saravanan

Editorial Team

Anchal Khaneja

Anushri Bansal

Gourav Sachdeva

Himanshu Arora

Ishaan Mohan

Kaushal Kumar Ghai

Kritika Nema

Neha Misra

Nirmit Mohan

All images, design and artwork are copyright of

IIM Shillong Finance Club

©Finance ClubIndian Institute of Management

Shillong

www.iims-niveshak.com

THE TEAM

Dear Niveshaks,

The month of April opened with plunging prices of Gold hugging the headlines across newspapers. Gold considered as one of the safest investments by most Indian families received a big jolt as prices plunged throughout the world. The Eurozone country of Cyprus rumoured to dump their gold deposits is believed to be one of the reason; the other widely believed reason is the signs of improvement that the US economy is showing. Investors are looking to exchange their gold securities for dollars as dollar appreciates and gold depreciates. This speculation is having wide ranging effects that is beiing seen across sectors such as jewelry, gold loan companies and most importantly for India’s current Account Deficits. In this issue of Niveshak, we have tried to analyze all these aspects while suggesting some pointers as to what the investors should look to do with their gold securities.

This month we also bring to you some interesting reads such as the Article of the Month “Economics of Development”. It talks about development and inclusive growth. It brings out the problems faced by India in its journey towards inclusive growth and also suggests some good solutions. Fingyaan on the other hand talks about where our Indian stock markets are headed i.e Hedge Funds. The article very crisply states and explains the various strategies that the hedge fund investors use to maximize returns, also what all techniques are used to measure the returns. Our historical section, on the hand talks about the Bretton Woods system and its impact. The Finistry section this year covers the year of 1944 and is an extremely delightful read as to how this Bretton Woods has been instrumental in shaping our financial world today. Moving on to FinSight which describes the crisis in Cyprus and why it occurred. The article talks about what are the possible ways ahead as well as the pros and cons of each of them. This is piece of work which is sure to give all you readers a lot of fodder for the mind.

We would also like to thank our readers for their constant support through wonderful articles and appreciation. It is your endless encouragement and enthusiasm that keeps us going. Kindly send in your suggestions and feedback to [email protected] and as always,Stay Invested.

Stay invested. Team Niveshak

C O N T E N T S

Niveshak Times04 The Month That Was

Article of the month 08 Economics of Development

Cover Story

11 Is Gold on a Thrill Ride?

FinGyaan 16 Hedge Funds: The Future of Indian Capital Markets

Finistory 19 Bretton Woods System and Its Impact

Finsight23 The Economic Crisis in Cyprus and the Way Ahead

CLASSROOM25 Dead Cat Bounce

APRIL 2013

Gold loses shine: Witnesses biggest decline in last 30 years

Gold prices witnessed its biggest one-day drop since 1983 on April 15 as the selling frenzy that began in start of April picked up speed. The metal prices plunged by $140.30 to $1,361.10 an ounce, a decline of 9% crossing the February 2011 low. The bearish run began when the U.S government reported a drop in inflation. Also, the selling by Cyprus to support its banks, leading them to worry that Spain, Italy and other weak European countries might flood the market. The slowing growth in China has also pushed down industrial metals and the price of oil and other commodities.

Gold is many a times considered as a safe-haven investment, a commodity to temporarily park money when investors are fearful of turmoil in other markets, inflation, weak economic growth or depreciation of the American dollar. In view of above it rose sharply in the past year to the peak of $1,900 an ounce in August 2011 during the market turmoil that followed a downgrade of the U.S. government’s credit rating. Part of the rise was also attributed to the speculation that the price will continue to rise.

Apple India sales rose 223% in 2012

Apple India registered an exponential rise in the

i-phone sales in the year ending March 2013. The sales rose by 231% to 2003 crores from 620 crores a year ago, whereas the profit shot up by 431% from 58.6 crores to 311.5 crores. Many analysts

expect the company’s topline to be over $1 billion in the current fiscal. The increase is attributed to aggressive marketing strategies adopted by Apple India in the past 6 months especially the buyback option offered on smart phone (floored at Rs.7000) and i-phone 4S priced at 26,500 targeted at users of rival brands. Earlier, India never made it to high-priority market list of Apple but in late 2011, the company began to expand its India team and introduce new models closer to their global launch. It also changed its sales model by appointing two retail distributors, began an advertising blitzkrieg, and launched an EMI scheme for smartphones.

Indian economy to grow at 6.4 percent in 2013-14: C.Rangarajan

The Prime Minister’s Economic Advisory Council Chairman C.Rangarajan said “The economy has bottomed out and we will achieve higher growth of 6.4 percent in the current financial year”, against the estimated 5 percent expansion registered in the previous year. The council estimates for agriculture sector, manufacturing sector and service sector growth rate were pegged at 3.5 %, 4% and 7.7% as compared to 1.8%, 3.1% and 6.6% respectively in last fiscal. Inflation was estimated to be around 6 % in the current financial year as compared to the estimated 5.96% at the end of the financial year 2012-13 and thus giving scope of rate cuts to RBI in coming months.

Government approved six FDI proposals

Last month the government approved 6 FDI proposals, totalling over Rs. 732 crore. The Foreign Investment Promotion Board (FIPB) headed by Economic Affairs Secretary Arvind Mayaram, cleared the proposal of SIDBI Social Venture Trust, to allot Class A units of the Fund to bring foreign investment worth Rs. 285 crore. The Rs 80.98 crore proposal of M/s AirAsia Investment Ltd, Malaysia, to set up a Joint Venture company to undertake the business of operation of scheduled passenger airlines, was also given approval. The biggest proposal that was cleared was that of Hyderabad -based

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Navayuga Road Projects Pvt Ltd plan to act as an investing company and to make downstream investments in its Special Purpose Companies worth of Rs 357.60 crore. Other proposals that got cleared were Hyderabad-based AET Laboratories Pvt Ltd’s proposal for induction of additional foreign equity in a pharmaceutical company worth Rs 5.34 crore and a proposal of Bharat Electronics Limited, Bangalore. Other than these six proposals, the board, however, deferred seven proposals and rejected one.

Airtel acquires WaridTel’s Uganda arm

The country’s largest mobile services provider Bharti Airtel announced acquisition of rival Warid Telecom Uganda for an estimated figure of $100 million. This deal will result into a combined market

share of almost 40% in the African nation. Airtel is present across 17 African countries through its $10.7 billion acquisition of Zain’s continental unit in 2010. Airtel’s current move is meant to consolidate its position in the African country,

a strategy that may be replicated in other parts of the continent as well. Airtel’s combined African subscriber base stands at 62 million.

Manoj Kohli, MD and CEO (international), Bharti Airtel, said, “This happens to be the first in-market acquisition in Bharti Airtel’s history. We believe this market consolidation offers great synergies by bringing together the best of Airtel and Warid to drive forward our vision of offering affordable best in-class services in Africa.”

Airtel had earlier bought Warid Telecom’s Bangladesh operations in 2010.

WPI inflation eases to 5.96 per cent in March, lowest in 3 years, raising hopes for policy cut

Low vegetable prices pulled down inflation to over 3-year low of 5.96 percent in March, raising hopes of rate cut next month by the RBI to boost economic growth. This is the lowest level

of Wholesale Price Index (WPI) inflation since December 2009 when it was 4.95 percent. In February the WPI based inflation stood at 6.84 percent and in March last year the figure was even higher at 7.69 percent. Food inflation, which has 14.34 percent share in the WPI basket, declined to 8.73 percent in March from 11.38 percent in February. Easing of food inflation was on account of a sharp drop in prices of vegetables. Commenting on the inflation numbers, Planning Commission Deputy Chairman Montek Singh Ahluwalia said inflationary pressure is coming down gradually and is slowly coming under the government’s control. The 5.96 percent March-end inflation is much lower than the Reserve Bank’s projection of 6.8 percent. The decline in inflation and a slowdown in industrial output growth to 0.6 percent in February have both raised expectations of rate cut by RBI to boost growth. RBI will announce its annual policy on May 3.

FM says current account deficit could be halved in 1-2 years

The current account deficit has emerged as a big problem for the Indian economy since last year. It is expected to have hit about 5 percent of GDP in the fiscal year that ended in March, but a fall in gold and oil prices along with the increase in exports since January should take some of the pressure off. The three months of this year have been good. Exports rose 6.97 percent year-on-year in March to $30.84 billion, while imports fell 2.87 percent to $41.16 billion, driven by lower spending on oil purchases during the month. That reduced the trade deficit in the month to $10.32 billion. Finance Minister P. Chidambaram said on Wednesday that if exports continued rising and the oil prices also soften more, the current account deficit could be contained at 2.5 percent even by next year, which would be half of where it stands today. Since more than 1 year the government has been worried about the impact of falling exports on the overall economy, which likely registered its weakest growth in a decade in the last fiscal year.

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MARKET CAP (IN RS. CR)BSE Mkt. Cap 6,567,729Index Full Mkt. Cap 3,149,072Index Free Float Mkt. Cap 1,646,473

CURRENCY RATESINR / 1 USD 54.29INR / 1 Euro 70.68INR / 100 Jap. YEN 55.05INR / 1 Pound Sterling 83.88

POLICY RATESBank Rate 8.50%Repo rate 7.50%Reverse Repo rate 6.50%

Market Snapshotwww.iims-niveshak.com

RESERVE RATIOSCRR 4.00%SLR 23%

LENDING / DEPOSIT RATESBase rate 9.70%-10.25%Deposit rate 7.50% - 9.00%

Source: www.bseindia.com www.nseindia.com

Source: www.bseindia.com

Source: www.bseindia.com23rd March to 26th April 2013

Data as on 26th 2013

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arket Snapshot

BSEIndex Open Close % changeSensex 18735.6 19286.72 2.94%

MIDCAP 6079.79 6275.12 3.21%Smallcap 5772.93 6023.86 4.35%AUTO 10115.33 10848.28 7.25%BANKEX 12866.93 14343.35 11.47%CD 6825.22 7288.34 6.79%CG 9123.58 9756.89 6.94%FMCG 5853.3 6116.45 4.50%Healthcare 7952.69 8624.83 8.45%IT 6787.91 5614.92 -17.28%METAL 8625.34 8636.85 0.13%OIL&GAS 8422.26 8691.77 3.20%

POWER 1637.7 1732.5 5.79%PSU 6377.08 6837.6 7.22%REALTY 1781.36 1892.92 6.26%TECK 3847.2 3413.32 -11.28%


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Why economic and societal development are entwinedWhenever I pore over the national dailies of our nation, there is an ostensible brouhaha over the much needed development at the grass root level. Financial Inclusion, Social Inclusion, macroeconomic and microeconomic development have now become buzzwords in each quarter of the society. It is evident that containing inflation while sustaining growth is an essential attribute of a developing economy. Being a developing economy, catering to such a colossal population is a daunting task. Recent ruckus in media over the trade off between growth and inflation aptly portrays the grave situation. Development has to be inclusive so that our society can be benefited from that. To gain larger benefits which not only take into consideration the corporates but also the common Diaspora, we need inclusion at every division of the society. Economic

development is incomplete without the emancipation of whole society. It is quite clear from figure 1 that development is patchy in our nation. On one hand, a certain section of society is satiating its luxurious fads, while the other one is tumbling to square off just two meals a day. If a section of society is neglected in development then the social and economic indicators show a dismal growth. Especially, in our nation as 70% of our population is living in rural areas, it becomes extremely important for policymakers to give a considerable attention towards secluded society. For example, our GDP per capita comes out to be paltry as compared to other nations. If we glance through other economic and societal indicators also, we see a gloomy picture of India’s progress. Whether it is Life expectancy,

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Fig 1: India’s standing among the poorest nations Fig 2: Our states’ GDP is lower than most of the backward African states


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literacy, Human Development Index or education enrolment, we fare poorly in each of them.Hence we can conclude that development is not broad or wholesome and most importantly, we need to cut this clutter by taking concrete and

effective measures.Elixir for our debilitated developmentThere is no ultimate panacea for this miasma. But as every cloud has its silver lining, we must implement certain imminent indispensable steps to tide over these circumstances.• Sanitation and portable water facilitiesUnfortunately we have one of the poorest sanitation facilities in rural areas. In urban metros also, this contagious disease is spreading. For example we have Mumbai, which has the biggest slum in

Asia. And in rural areas, the condition is already at the verge of brink. As rightly quoted by our cabinet minister Mr. Jairam Ramesh that we don’t have enough toilets but we have abundant number of mobiles. In order to plug the loopholes in our sanitation system, government must earmark an adequate proportion of GDP towards the sanitation facilities. It must also form a union high level committee to look into the causes and solutions of shabby sanitation facilities. Government must incentivise people for adopting good sanitation practices. Scarcity of potable water poses an alarming threat to our society. This malaise can be removed by increasing the infrastructure of water amenities

to hinterlands. In this case also government must provide capital to NGOs working in those far flung areas to alleviate the situation of dearth of portable water. Enhancement of viability gap funds to small scale industries operating in remote areas can introduce sizeable outcomes.• Financial InclusionFinancial Inclusion is

the most vital task for the government. It must increase the penetration of banks and NBFCs

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Fig 3: Gini coefficient of national income distribution around the world

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to far flung remote areas. Small farmers need cheap loans to expand their farms. Small savings like postal and bank deposits are very important to the people there. Therefore, government must scale up these financial instruments in rural areas to help them grow. Introduction of Regional Rural Banks is a welcome step in this direction. NABARD must be given more teeth and capital inflows to accommodate needs of rural India.• Primary healthcare facilitiesOur nation needs a more strengthened primary and tertiary healthcare facility. Government must revamp its dud policy to contain the issue of shoddy healthcare facilities. The GDP spent on healthcare facilities in meagre. Cashless healthcare facilities like Janani Suraksha Yojana can lead to remarkable results in healthcare. Our government must also increase the iota healthcare facilities such as the number of hospitals and beds, ambulances and especially doctors in these remote areas. Incentives and subsidies must be given to private hospitals operating in those areas so that private health infrastructure can be boosted.• Education The enrolment in education is in tatters. Basic

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primary education is in dire state. The Right to Education (RTE) is a step in the right direction to resolve this issue. This law will buttress the primary education of disadvantaged people. Free and compulsory education given to such people would lead to increased enrolment in education. Reserving seats for secluded people in elite and high echelon institutions will improve the basic level of education at grass root level, though the basis of such reservations need a lot of thinking still to be finally zeroed on.The yawning divide between rural and urban education is worsening due to various reasons. Further, infrastructure required for education has been given a miss in rural India. If we delve deeper into this issue, we would come to know that the number of teachers working in rural areas is not adequate as per demand in education sector. Hence there is a need to enhance the number of teachers in rural India. It goes without saying that the quality of education is also quintessential for development. Government must assign their best talents to these areas in accordance with the rotation policy. SHGs (Self-Help Groups) and NGOs must be given resources in terms of capital and basic infrastructure to appease the level of education at basic levels. Mid day Meal programme has given us favourable outcomes. Other such programmes must be implemented at large scale without any further delay.• Employment Opportunities in the soupIncome disparity is a huge impediment for any nation’s growth. In our nation too, income disparity is a big issue which is peeving many experts. Lack of employment in remote and underdeveloped areas is worsening the situation. As a result, we see astronomical rise in migration of people from rural to urban India. Hence there is an immediate need to give facelift to employment in rural areas. And this brooks no procrastination. The establishment of institutions such as ITI may do an impeccable

Fig 4: India’s growth forecast by various rating agencies


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job in this direction.Lack of effective policy is also a major factor aggravating employment in rural areas. Policies have to be transparent and efficient. Rural employment schemes like NREGA are giving out good results and these schemes must be promoted to the hilt.• Leakages in Subsidy and Distribution structureThe mounting subsidies which government gives to Below Poverty Line (BPL) people in various components such as kerosene, fertilizers, health, education and LPG is not reaching to the intended groups. It is being siphoned off by middlemen and middle class. The poor who don’t even have money to complete the paperwork required to enrol for various subsidised schemes cannot be advantaged out of this structure. Public Distribution System (PDS) should be based on direst cash transfer so that funds cannot be funnelled out of it albeit a lot of groundwork needs to be completed before we can succeed in that direction also. The National Food Subsidy Bill must adopt certain changes in keeping view of such issues. As these subsidies cause ripples in fiscal deficit, Current Account Deficit and trade deficit, they must be utilized judiciously. Subsidies must be based on the consumption patterns prevailing in that region. This will

reduce pressing cost of subsidies and will benefit the targeted people most effectively as per their consumption. So this measure will cause dual benefit to both government in reducing costs and to people as food provided would be in accordance with their respective consumption. • Infrastructure revivalThe basic infrastructure needed in rural India is not sufficient. Whether it is rail, road and other fundamental amenities, rural region is turning to be a laggard. The lagging tele-density and sagging performance of electrification in rural areas bunk all claims of improvement in those areas. Government must expeditiously invest in these regions. • Land Acquisition BillThe recent vociferous protest against draconian law projects this grave issue. Probable solution for this burning and sticky issue would be to make farmers stakeholders in profit made out of their land. Operation of company farmers can be given a fixed compensation for a prescribed period by forming collaborative bargaining. Similar solution goes well for nuclear projects too, viz. Kudankulam nuclear station, industrial sites as Posco project in Odisha and nuclear project in Jaitapur, Maharshtra.Much needed is propitious policy formulation and political will. These are the cardinal components of success in this paradigm.In a nutshellBefore the push turns into shove, we must nip disruptive and regressive proverbial development in the bud itself. If government discharges its due duty in letter and spirit, India would turn into its past glorious form of Golden Sparrow.

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Fig 5: India’s subsidies distribution

Fig 6: India’s rising Subsidies bill

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compounded annual growth rate of 14.2% from $272.5 per ounce (28.35g) to $1,394.09. This upward trend continued through the 2008 global financial crisis that followed the collapse of US investment bank Lehman Brothers, when investors exited dollar-denominated assets and turned to gold to safeguard their positions. By September 2011 gold prices peaked to $1,900.23 per ounce. However, from 2011 till today it has lost 17.6%.

As we see it today Gold prices have declined by nearly 12 per cent to Rs 25,650 per 10 gm., from the highs of Rs. 32,500 per 10 gm., during the last eight months. Thus, one can say without doubt that the year 2013 has been one of a kind for India’s most loved metal.

“India is home to about 20,000 tonnes of gold holdings - more than double those of the U.S. Federal Reserve - much of it with rural households in the form of jewellery or bars.”

“The RBI has said it would consider setting up a special “gold bank” that would buy gold from individuals at much higher rates to help liquidate these idle stocks”

This is actually how much Indians love gold and probably one of the reasons that our country was known as the “Golden Bird” in ancient history.

The Story so far..

The metal’s Bull Run as a safe bet for investors began at the start of the last decade. In the year 2001, international gold prices rose at a

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Fig 1: Variation in Gold returns over time

IS GOLD ON A THRILL RIDE ?


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smuggling with Government lifting tariff from 4% to 6%. While on the other hand, banks that had given out loans backed by gold are reviewing them and are demanding an increase in collateral to cushion for the fall in prices.

Gold and CAD

It may be a field day for people looking to invest in gold but it would be wrong to miss out the huge impact the gold rout will have on India’ current account deficit. Most of the domestic demand for the metal is met through imports which in turn widens the current account deficit. However, with gold prices falling, it will reduce the number of dollars required to purchase the same amount of imported gold, lowering the CAD. One of the reasons being, easing Gold purchases account for more than two-thirds of the deficit, which reached $32.6 billion in the quarter ended Dec. 31, according to the Reserve Bank of India. Thus, the yellow metal’s huge downfall could help cut import costs by almost $7billion.

While, the persistent fall will reduce the CAD and inflation, it will also give RBI the much needed breathing space it needs to ease its monetary policy.

Gold and Jewellery Stocks

In addition, there has also been a major rub-off effect on stocks of jewellery with most losing to the tunes of 5% to 6%. This is rather surprising as lower gold prices should increase the demand for jewellery and thus boosting jewellery stocks.

Now the reasons behind this may not be as straightforward as a simple supply demand match. According to the World Gold Council and some brokerage estimates, a little more than half the demand for gold jewellery in India is for marriages,

Following the downtrend, analysts worldwide revised their gold price forecasts with Goldman Sachs lowering it to $1,545 an ounce from $1,610 and 2014 price view to $1,350 an ounce from $1,490. The bank cited rising expectations of acceleration in US economic growth and the metal’s poor performance as reasons for the revision. This is the first time that the average gold price has been forecasted to fall on a year-on-year basis since 2001, when the metal’s 12-year Bull Run began.

There are many aspects that have and will contribute to determining the gold prices globally:

1. European Union: The country in focus here is Cyprus which is rumored to sell about 400 million euros (around Rs.2, 845 crore) to rein in its fiscal deficit. And if such a sale does take place, it will possibly be the largest disposal by a euro zone central bank since 2009 (when France sold 17.4 tonnes).

2. United States: The US economy’s recovery process and the continuation of quantitative easing by the US Federal Reserve will be major determinants of the metal prices worldwide.

However, when it comes to India, the above factors along with the movement of the Indian rupee against the dollar will play a decisive role on gold prices in India.

At present, the bearing on India of this sharp fall in gold prices however is expected to be two fold with the gold markets not only expecting to see a spike in demand by nearly 12% but also an increase in new players entering the market. The result being that India is expected to import more gold in 2013 than it had in 2012. Nonetheless, one of the major fears the importer’s body harbor is

Cover Story

Fig 2: Demand for Jewelelery acroos the countries

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the part which is relatively more inelastic. It is mostly this segment of consumers who are still buying gold. The rest is discretionary demand, for which this may not be the best of times owing to a weak macroeconomic environment in India. Thus, investor concerns center on the sharpness in the gold price fall. The volatility in gold prices makes the consumer hesitant about immediately buying ornaments. Typically, consumers will wait for some stability in gold prices before they commit to a purchase.

Secondly, gold making charges are typically linked to prices of the metal. Falling gold prices could potentially eat into the margins of jewellery makers.

Thirdly, sharply falling rates of the yellow metal also lower the value of ornament inventories. This is especially true for smaller jewellery makers while the big firms like Titan Industries Ltd hardly have any inventory costs because they lease gold.

The net effect is that it’s the sharp fall in gold prices that is the demand killer for jewellery sellers. While that would mean lower gold imports and thus, some succor for the country’s current account deficit, the underperformance for jewellery sellers will continue for some more time.

A Reserve Bank of India (RBI) committee, also in January, proposed increasing the gold leasing rate to 9% from 3-3.5% for jewellery retailers such as Titan and lowering the gold lease period to 90 days from 180 days. Currently, Titan leases most of its gold requirements from banks in India at 3-3.5% for 180 days and directly imports the rest. The duration of the lease is important because Titan usually takes 90-120 days to sell the entire quantity of gold leased. If the lease period is cut to 90 days, Titan would have to pay for the gold it did not manage to sell, straining cash flow and exposing it to volatile gold prices.

Gold Loan Companies

Meanwhile, according to rating agency India Ratings, any sustained fall in gold prices can significantly impact the asset quality of gold loan portfolios of non-banking finance companies (NBFCs) and banks.

The sharp fall in gold prices makes a large part of the gold portfolios vulnerable hugely impacting companies with large exposure to gold loans. The loan to value (LTV) ratios, which are high due to intense competition to gain market share owing to lowering of prices,

along with largely bullet r e p a y m e n t s t r u c t u r e s (both principal and interest paid together) in the industry, leave limited cushion for c o r r e c t i o n in the value of security. Though the Reserve Bank of India had capped the LTV for gold loans at 60 per cent of the value, liberal interpretation of the LTV (including making charges) had moved it to over 80 per cent in some cases.

However, it is important to note that the south India-based private banks were likely to be impacted more within the banking space due to higher proportion of gold loans in their books. Muthoot Finance and Manappuram Finance are two large NBFCs which give loans against gold.

Taking the case of Manappuram which had lent some Rs.10,500 crore in the quarter ended December 2011. A portion of these loans were one-year bullet payment loans but have turned bad. In Manappuram’s case, about 15% of loans disbursed in the third quarter of the fiscal year are under stress because of high loan-to-value ratios. The management has estimated an Rs.50 crore loss in the March quarter. If auctions worth some Rs.1,000 crore are pushed into the next financial year starting April and gold prices fall further, the under-recoveries could be higher than the budgeted Rs.250 crore and lead to more income reversals.

Recently Manappuram Finance had declared falling gold prices would mean it faced reversals of interest and it would book a one-time quarterly loss in the

fourth quarter of 2012-13. In fact, a further 10% correction in gold prices could result in a majority of Gold Loan NBFCs and banks recording losses. However, despite similar LTVs

at the time of disbursal, gold loan NBFC’s are more vulnerable.

For that matter, Gold loan NBFCs could also see pressure on business growth, as

banks will become cautious in lending to them, creating liquidity pressures if the fall in gold prices is sustained.

Fig 3: Manappuram Finance Stock returns

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Reason

Perhaps one of the most well-known relationships in currency markets is the inverse relationship between the U.S. dollar and the value of gold. This relation occurs because gold is typically used as a hedge against inflation through its intrinsic metal value. While the dollar’s value is at risk of fluctuation through shifts in monetary policy, gold’s value is largely determined by supply and demand, without interference from shifts in monetary and corporate policies. The argument goes that as gold is traded primarily in dollars, a weaker dollar makes gold cheaper for other nations to purchase and increases their demand for the yellow metal. This increase in foreign demand then drives up the dollar price of gold, giving gold and the dollar their negative relationship.

The main reason for gold’s short-term weakness has been the rise of dollar. The outlook for the US dollar in 2013 is extremely strong. Already this year, the greenback has hit a 33-month high against the pound. Also, it’s hit a 4-month high against the euro. The dollar has moved up on the hopes that the US economy is emerging from its crises, which could nudge the Federal Reserve to withdraw the stimulus package earlier than expected. The U.S. economy may be sluggish, but it has grown for 14 straight quarters since the recession ended in mid-2009. US factories are reporting more business and the US labour market is showing signs of life. The unemployment rate fell to 7.7% in March 2013, the lowest since December 2008. The US housing market is recovering. New home sales surged 15.6% in January 2013, the highest rate since July 2008. By contrast, the Eurozone economies shrank last year and are expected to contract further this year. Moreover, two of the most troubled countries are Italy, which just had an indecisive election, and Cyprus, where the parliament rejected a plan to levy a one-time tax of up to 10% on bank deposits to raise money for a Eurozone bailout deal. These recent developments are prompting investors to shift cash from Eurozone to US.

While the global outlook for gold is decidedly bearish in the short term because of the strengthening dollar, the situation could reverse if the US economy

does not recover as expected.

As the dollar gains value leading to international gold price crash, rupee simultaneously falls against major global currencies giving buoyancy to domestic gold prices. Therefore, the local investors need not worry at least in the short-term. There are high chances that gold enters into a multi-year bear market but the chances of a total collapse are low due to jewellery demand from emerging economies like India. Technically though gold is oversold and is poised for a bounce in the near term. Also, Central bank buying may support gold prices in the near term. The forces which have propelled gold returns higher over the past decade, namely a weakening US dollar, falling real interest rates and a rising US equity risk premium have all moved into reverse

since the end of last year.

Investor Options:

1. It is too early to dump gold from your portfolio: The drop is primarily a panic reaction of investors, both in international and domestic markets, which might extend by another 10% in the short term, after which

prices will consolidate. A sharp drop in gold prices triggered by speculation that Cyprus plans to sell its reserves of the metal to tide over its financial crisis may continue in the short term, but does not signal a permanent change in the story of the yellow metal in Asia’s fourth largest economy. India’s appetite for the precious metal will eventually prove to be immune to price movements.

2. Start investing in new and innovative financial instruments: Plans to introduce inflation-linked bonds may further cool demand for gold in India, providing an alternative to the metal as a hedge against inflation.

3. Lock in your money in long term fixed deposits: Fall in gold prices and oil prices have made many experts speculate on a possible fall in bank fixed deposit rates in near future. The banks too are expected to reduce the interest rates on fixed deposits. Banks may cut 25 basis points in the interest rates payable on short term fixed deposits that mature in less than one year and 50 basis points in interest rates payable on long term fixed deposits with maturities between one to three years.

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Hedge funds are a portfolio of funds which uses different strategies to maximize the return. Hedge funds are high risk, high return investment vehicles. They are just like mutual funds; they pool the money taken from the investors and invest in a portfolio of funds which they seem to be profitable. Initially, hedging had been evolved as the technique to protect the securities against the price variations of different securities due to volatility in the markets. Hedge funds are different from mutual funds in the way they use different types of strategies which we will see below.

In mutual funds there won’t be any option for going short. But, in hedge funds, fund managers have the option to go short on some securities in their portfolios. They use different strategies and pool the stocks accordingly. Mutual funds are highly regulated ones where as hedge funds are very least regulated ones.

Strategies in Hedge funds

Most of the hedge funds managers won’t reveal their strategies to the outsiders to maintain their competitive advantage. Hence, the success of hedge funds is mostly assigned to the manager of those funds. The following are some of the strategies which have been revealed by some of the successful fund managers in the Wall Street.

1. LONG/SHORT STRATEGY

In this strategy, the fund manager will maintain both long and short positions in his portfolio. The stocks which he thinks as undervalued and would have scope to rise in the future will be taken for long position. Similarly, the stocks which he

assumes as overvalued and would fall in the near future will be taken for short positions. Thus, his portfolio contains both long and short positions (Need not necessarily to be equal in amounts of both short and long positions).

2. MARKET NEUTRAL STRATEGY

In this strategy, the main objective of the fund manager is to reduce the market exposure on the portfolio. This could be done by maintaining an equal amount of long and short positions in his portfolio. In his portfolio, he needs to hold 50% short positions and 50% long positions which implies that the amount to be invested in long positions should be equal to the amount equal to the short positions. Hence, either way the market moves, the net exposure of the market on the overall portfolio will be negligible.

3. PARIS TRADING

This is the most famous hedge fund strategy which capitalizes on the market inefficiency. Suppose, consider two securities or two indices which shows a near to 1 correlation in their movements. Then, the ratio of their share prices over a period of time in the history gives a constant value. But, due to market inefficiencies, this may not occur at each and every moment of time during the trades in the stock markets. Observing this, the hedge fund managers buys the stock present in the numerator and sells the stock present in the denominator , if the ratio found to be less than the constant value which they got due to past observations. Similarly, if the ratio is found greater than the historical constant, it implies that

BITS PIlanI

Kali Prasad Bhogaraju

FinG

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Hedge Funds

The future of Indian capital

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the share corresponding to the price present in the numerator is trading at higher price and the share present in the denominator of the ratio is trading at a lower price. Hence, numerator shares need to be sold and the denominator shares to be bought. These securities need to be held until the inefficiencies have been corrected.

4. EVENT DRIVEN STRATEGIES

These strategies are widely used ones during the times of certain events like Mergers and acquisitions. During the times of M&A, suppose, if company ‘A’ acquires a company ‘B’, usually, the share price of company ‘A’ will go down and share price of the company ‘B’ will go up. Hence, most hedge fund managers will buy the company B shares and sell company ‘A’ shares. Thus, they could get higher returns.

Mathematical aspects of Hedge funds

Hedge fund managers should be exceptionally good at mathematics. Even though strategies vary across different fund houses, the usage of statistical tools is almost same in all Hedge fund companies. Usually, they use statistical tools like SPSS, R programming, MATLAB etc.,

The analysis of results is relatively complex in hedge funds compared to other similar investment vehicles like mutual funds because hedge funds yields asymmetric expected results.

a. Performance returns

There are two kinds of performance returns:

1. Absolute returns: This gives an idea on whether the fund is high risk, high return or low risk, low return and informs investor to make a decision regarding where this fund can be substituted either in fixed income segment or in equity segment.

2. Relative returns: This compares the hedge funds to other benchmark indices and informs investor on the performance of this hedge fund Vis-à-vis the benchmark index. This informs the investor to choose better investing vehicle.

b. Standard deviation

For most investments, we calculate the risk by using the standard deviation as they follow normal distribution. But, in the case of hedge funds, due to asymmetric expected returns, the calculation of standard deviation will be complex. If the calculation is done simply as we would do for a normal distribution, it could cover more risk inherently present in the hedge funds.

c. Value-at-risk (VAR)

VAR tells us the amount an investor going to lose in the extreme worst case (usually, it would be the highest amount that the investor is going to

lose with 5% probability). That calculation is easy considering the normal distribution funds like mutual funds or other investment vehicles. But, in case of Hedge funds, due to asymmetry in returns, the calculation of VAR is also complex.

d. Skewness

Skewness is a measure of asymmetry of returns. A skewness of approximately zero indicates normal distribution of expected results. But, Hedge funds shows negative skewness which implies that there is little amount of probability for the hedge funds to yield highly negative results which would be very higher when compared to other investment vehicles.

High frequency trading (HFT)

High-frequency trading uses complex algorithms to analyze multiple markets and execute orders based on market conditions. Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds.

In US & UK, it is estimated that around 40% of the trading is being done by the high frequency traders. In India also around 16% trading is being done by the high frequency traders. These figures are expected to grow very rapidly and could reach to a significant level by the end of 2015. To do high frequency trading, one needs to have strong knowledge in computer science in writing algorithms and also should be good at mathematics, especially in statistics. It also

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requires a strond IT infrastructure like robust servers, processors and the systems need to be connected to the modules present in the exchanges directly through OFC (Optical fiber cables).

Hedge fund managers charge a fee of around 1-2% for maintaining the funds and also 20-30% of the profits that were earned by the investors. Thus, the more profit they made to their clients, the more incentives they can take. Typically, to start a hedge fund, one needs to have minimum investment of $1 million.

Maximizing Alpha Component

The other buzzing word in Hedge funds is Alpha component. Most of the hedge fund managers aim to maximize the alpha component of the funds. To understand this, first we should know what is Alpha and what is Beta.

Beta explains the part of the returns generated by the funds that can be attributed due to the returns generated by the markets. Whereas, alpha component is the value of returns that are generated independent of the market returns. Most of the hedge fund managers aim to maximize the alpha component. But, one should be aware on when one should go for Alpha maximization. In bear markets, the funds which are maintaining alpha funds are more profitable because the fluctuations in the market will least bother the securities present in the portfolio since most of the funds have higher alpha component. But, in bull markets, alpha fund managers could probably lose in competing with the markets.

Careers in Hedge funds

Most of the US hedge fund firms are outsourcing the research and trading activities of hedge funds to the Indian firms due to the availability of talent and skill in India. Also, after the government has taken decision to regulate hedge funds, most of the brokerage firms and investment banks started doing hedge fund trading. Hence, there is a great demand for Finance, Computer sciences and statistics graduates in the field of Hedge funds.

FinG

yaan

FIN-Q SolutionsMARCH 2013

1. Black Tuesday

2. Poison Pill

3. Sucker Rally

4. State Bank (Associate Banks of State Bank of India)

5. J P Morgan Chase

6. Muppets

7. David Rockefeller, JPMorgan Chase (Chase National Bank then)

8. Momo play

9. TIC (Tenants in Common)


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1944Finistory

730 delegates from 44 countries gathered in Bretton Woods, New Hampshire (USA) from 1st – 22nd July, 1944. After prolonged deliberations, all the participating nations signed an agreement to form an international monetary system in order to reconstruct the global economy after World-War II, which was viewed as an attempt to maintain world peace. The system laid down the foundation for establishment of rules, i n s t i t u t i o n s and procedures for commercial and financial relations among the world’s major industrial countries. The obligation for the countries was to adopt the monetary policy so as to maintain the fixed but adjustable exchange rate by tying its currency with US dollar. U.S. dollar was pegged against gold at $35 per ounce and hence replaced gold to become the new reserve currency. This resulted in countries having a mix of gold and U.S. dollars as their assets.Need of Bretton-Woods SystemThe Great Depression that lasted from 1929 to 1941 had serious implications on world trade and its effect could be seen in every country. The power

was concentrated in the hands of few nations. The situation further got intensified due to the exclusion of some of the major nations because of the ongoing World War II (1939-1945). Trade and exchange controls (bilateral agreements) of Nazi Germany and practice of imperial preference system by Britain also prompted

po l i c ymake r s to design a m u l t i l a t e r a l system. Cordell Hull who served as the United States secretary of state during 1 9 3 3 - 1 9 4 4 believed that e c o n o m i c discrimination and trade warfare led to two world wars in three decades.

U.S. planners were of the view that an

international liberal economic system would help curbing such practices and reduce the hostility among nations in future and thus, help in maintaining peace in the post-war era.In order to mitigate all these problems, Bretton-Woods system came into existence in 1944 and its basic functioning included:* To maintain the fixed but adjustable exchange rates between U.S. dollar and other currencies* To facilitate short-term lending to nations suffering from balance of payments problem

IIM ShIllong

Ishaan Mohan

BRETTON-WOODSSYSTEM ANDITS IMPACT

Bretton Woods Conference, 1944

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without devaluing their currency* To help devastated countries in rebuilding their economy and to provide funds to the less developed countries for their development* To develop a mechanism for easy conversion of one currency into another which is very important for international tradeThis led to the creation of three organizations –International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD, later known as World Bank) and International Trade Organization (later transformed in GATT and through further negotiations into WTO in 1995). Since then, these organizations have played a major role in shaping the world economy.Two World Wars within a span of 30 years brought 180 degree shift in the world economic order. The U.S. evolved as one of the richest country by the end of First World War and was about to become the World power. When countries at Bretton-Woods conference agreed upon setting the U.S. dollar as a reserve currency, the situation got clear and new world power was born.On Europe: Two World Wars had mostly impacted the European nations including Germany, Great

Britain, and France. Most of its industries had wiped off during the war. These industries were mainly responsible to pay for half of its imports including food and all of its resources except coal. John Maynard Keynes, the British economist wanted to set up a new international bank, which will issue its own currency and this currency would serve as a reserve currency but the proposal was rejected by U.S. He was of the view that countries with trade deficit should devalue their currencies and countries with surplus should revalue their currencies in order to balance the payments.Britain soon realized that it would need immediate financial assistance in future, which

compelled it to ratify with the policy framework (U.S. had a higher say) which was being laid down. Europe Recovery Program (ERP, 1948-1952) finally triggered when the United States provided loan to Britain (Marshall Plan). This was a historic event for the U.S. as well as

U.K. since World Bank failed in this endeavor.

The deliberations at Bretton-Woods conference came as a blessing in disguise for the European countries. Under the newly introduced Bretton-Woods System, U.S. was helping the European nations in building their economies through

Fig 1: U.S Gold Reserves and Liabilities to Foreign Central Banks (Source: IMF)

Payment of initial quota subscriptions

John Maynard Keynes speaking at Bretton-Woods


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Finistoryvarious initiatives such as ERP and with the help of IBRD. On the other hand, the countries themselves managed to recover from the devastating effect of war and achieved surplus of $2 billion by mid-50s because of favorable trade policies and increased competition with US firms. Only thing which haunted Britain was the shift of World’s Financial Center from London to Newyork.On United States: U.S. entered late into World War II and its economy remained insulated from war effects because it was not being fought in USA. Countries such as Britain, Nazi Germany-Italy-Japan Coalition which entered early in the war lost all of their resources and industries during the war. U.S. used this opportunity and contributed heavily to dominate the proceedings at Bretton-Woods conference. After the Bretton-Woods conference, U.S. was obliged to sell and buy gold with dollars at a fixed rate. Till late 50’s and early 60’s, there was no economic problem in U.S. but they were moving towards the end though slowly. The gold reserves were falling and its liabilities towards other nations were increasing at a much higher rate. In 1960, total gold reserves with U.S. were $20 billion which was nearly 60 percent of total world reserves.

The economic well-being of the nations across the world was the main aim of U.S. while designing economic policies during those days. Initially, the foreign holding of dollars, current account deficits were seen as favorable because of the revival in international trade. The situation did not last too long because of many structural problems.

Under the new system, the countries could devalue their currency by 10 percent if balance of payments moves away from its equilibrium position by again pegging their currency at a new rate. As a result of which, U.K. devalued

their currency by 30 percent in 1949 followed by 29 percent devaluation by France. The United States could not devalue their currency which was pegged against gold because of the commitment to a fixed nominal gold price.The total world reserves left unchanged with the conversion of dollars into gold but the gold reserves, which backed the reserve currency were continuously declining. The conversion of dollars into gold at fixed exchange rates could not be followed any more after 1960s because of the inadequate gold reserves held by U.S. The breakeven point reached somewhere near

1965 and the pol icymakers s t a r t e d q u e s t i o n i n g the viability of the system. In 1970, the total liabilities were nearly double to that of total gold reserves held by the United States. Finally in 1971, US unilaterally ordered the suspension of system under the leadership of President Nixon. The dollar was d e v a l u e d against gold and the system

of floating exchange rates came into existence, where the exchange rates would be determined by market forces.It is true that trade imbalances increase with growth of international trade. Countries such as Netherlands, United Kingdom and Belgium had already built the large dollar reserves by this time. This prompted the countries holding the dollar reserves to resort to the conversion of dollar into gold. The economists were of the view that US would not be able to clear its foreign liabilities through its remaining gold reserves. In 12 years, total gold reserves of United States fell to a little over 11 percent in 1971. The cost of Vietnam War and growing trade deficit also had a negative impact on the U.S. economy. The situation was somewhat similar to that of Britain post-World War II. This brought United States at

The countries had to pay subscrip-tion amount relative to its economic size to become a member of these or-ganizations. The fund thus generated was to be used to develop the mem-ber countries during the hard-times. In return, the member countries got voting rights in policy formulation in proportion to their contribution in the fund. The break-up of initial quota subscription is given in the figure. The country was supposed to pay 25 percent of fee in gold and 75 percent in its own currency.

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the brink of “Balance of payment crisis”.

Europe vs. US during Bretton-Woods periodIt is clearly evident from the above figures that the foreign exchange reserves (dollars) and gold reserves for the European countries such as UK, France and Germany have consistently increased between 1961-1973 whereas in case of the United States, it declined drastically. The condition of almost all the economies of the world except the US had improved during this period.

Impact on Today’s World EconomyIt has been four decades the Bretton-Woods system was abandoned but most of its effects are still prevalent. The trade deficit of US did not decline rather it has grown close to $14.5 trillion. Much of the credit for present situation goes to US consumers whose appetite for goods produced abroad have always remained high as compared to others (resulting net imports).

The industrial growth and cheap export-oriented sector of China, India and other BRICs countries in the past few decades have made these countries attractive to the foreign investors.

China is sitting on the huge pile of reserves exceeding $1.7 trillion. Any strategic move by China could turn the global economy upside-down and can provide potential risk to the economies across the globe, majorly the US. The credibility of US dollar as a reserve currency has been consistently questioned in the past and voices are being heard to accept other currencies such as Euro, Yen, Yuan as a new reserve currency but the experience of Eurozone crisis has put a question mark in this regard too. Had the proposal by John Maynard Keynes of new reserve currency (bancor) being materialized during Bretton-Woods conference, the situation could have been different from what it is today.

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Fig 2: European Countries vs US during 1961-1973 (Source: IMF)

banking system still exceeds seven times the GDP of the country. The core problem of Cyprus seems to be in its lax banking regulations and its unreasonable appetite for risk. The Cypriot banking system is famous for being an offshore money laundering arm of many rich Russian oligarchs. The Russians used to pour money into the country’s banking system to evade taxes

and the banks induced by high interest rates invested the money in Greek g o v e r n m e n t bonds to a large extent. When Greek sovereign bonds collapsed in value the Cypriot banks suddenly found a hole in their balance sheets. Because of the large scale of the problem, C y p r i o t g o v e r n m e n t

could not rescue the banks and turned to its European partners for a bailout.

Cyprus’s Plea For Bailout

The “troika” ultimately agreed to a bailout proposal but with a condition that roughly 6 billion euros of the total 16 billion euros would

Cyprus is a tiny nation of about a million people. Its per capita GDP which averages around $30,000 puts it among the richest nations of the world. The economy of Cyprus was declared as a high income economy by World Bank and it was included in the list of advanced economies by the International Monetary Fund in 2001. But this tiny island nation has taken the center stage of all economic discussions at present. This is because it is another Euro zone economy which is grappling with financial problems and might be the starting point of yet another financial crisis.

How The Crisis Took Shape?

Like many other European countries Cyprus has a problem of huge debt But Cyprus has put all its eggs in one basket i.e. the banking industry. It has a very large banking system compared to its economy with total assets of 896% of GDP as of 2010. Even if one excludes the overseas operations of the domestically owned banks the size of the

IFMRSiddhartha Banerjee

The economiccrisis in CYPRUS

and the way AHead

NIVESHAK 23Finsight


be paid by the depositors i.e. the people having savings account in the Cypriot banks. This seemed to be a terrible precedent and faced resistance from everyone including officials of European Central Bank like its President Mario Draghi. He condemned this proposal to make “insured depositors” pay for the bailout as unreasonable, since it was obvious that investors would pull their money from any risky Eurozone bank leading to a bigger economic debacle. Hence the plan was promptly revised. According to the changed bailout agreements Laiki bank, one of the largest banks of Cyprus has been terminated and the senior bondholders had to bear the losses. Cyprus receives 10 billion Euros from the Eurozone and IMF and it needs to curtail its dominant banking sector in return. Although, the bank deposits below 100,000 euros are safe, the deposits more than this amount would take the shock. In addition to this Cyprus has imposed strict capital controls to prevent a possible bank run. This means a Euro in a Cypriot bank is worth less than a euro in a bank of any other Eurozone country because of its lesser mobility. This implies that in a sense, Cyprus is gradually moving out of Eurozone because of the formation of these multiple Euros.

Implications Of The Crisis

Since banking sector plays a vital role in Cyprus’ economy, contributing about 9% to the GDP and accounting for 5.1% of jobs this fallout of the banking sector will give a heavy blow to the country’s economy. Deficit target as negotiated between the Eurozone and Cyprus in a MOU implies that the country’s economy will contract by nearly 8% in 2013-14.Apart from this direct impact on GDP from the destruction of the existing banking model, the economy is likely to suffer from a ripple effect across various sectors including tourism. But the crisis has implications beyond its borders. The crisis of Cyprus is more than just Cyprus’; it’s about Europe as a whole and through Europe the rest of the world. The crisis may spill over to other European countries like Malta and Luxemburg which like Cyprus have

banking sectors several times bigger than their economies. Big investors may become anxious of losing money and might withdraw money from the second tier European banks. These countries might also find it harder to get access to international bond markets. This can only lead to further troubles for the Eurozone economies.

What Are The Options For Cyprus?

Generally when the banking system of a country collapses its currency also weakens. The country’s savers get badly affected and imported goods become very expensive. But there is a brighter side of this too. The country’s tourism becomes cheaper, the exports become more competitive and foreign investors get labors of that country at a cheap cost. This is exactly what happened to Iceland. Iceland experienced a banking collapse in 2008 during which its currency fell from 60 krona to the dollar to 120.It was followed by a terrible chain of events, but the collapse in the krona also led to surge in exports and tourism that kept unemployment contained. In case of Iceland a free floating currency acted as pressure valve for the troubled economy. Apparently this option looks promising; but Cyprus cannot just walk on the same path. To experience the positive effects of weakening of currency it first needs to drop the Euro as its currency. But that is associated with a bigger cost of transition away from a more widely used currency. The geopolitical risk associated with the currency disintegration is also high. Being a member of the Eurozone its citizens can travel and work freely in any of the 17 countries in the zone. Whether a country can drop the common currency and still be in the Eurozone is still an unsettled question. This is clearly a constraint for Cyprus. On the other hand if Cyprus chooses to drop out of the Eurozone, new pressure will be created on other troubled economies like Greece or Spain to make a similar move. This could strain the continent’s financial and political system to an unprecedented level and in that case survival of Euro as a common currency will come under threat. Thus we can see that there are not many options for Cyprus and its economy will have to suffer the due consequences. For rest of the world the real lesson to be learnt from this crisis is that: if you are a small country do not let your banking system grow too large to fail.

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Sir, I am a novice in trading and just heard this new term “Dead cat bounce” from my friends working in the stock market. I would like to know more about this, as it

seems interesting.

Well it indeed is interesting, and very relevant for the investors who are investing in the market. The term “dead cat bounce” comes from the idea that “even a dead cat will bounce

if it falls from a great enough height.” The phrase has long been used on Wall Street and financial trading in general to describe a temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce is a small, short-lived recovery in the price of a declining security, such as a stock. For example, assume the market has been falling over the last ten weeks but there is a broad market rally in week 11. The rally is considered a dead cat bounce if it’s short-lived and the market starts falling again in week 12.

So, basically it means a temporary recovery in a stock price or a temporary market rally after a significant downward trend?

Yes, it means so; Most beginners in trading fail to recognize a dead cat bounce pattern, misinterpreting it as an upward movement and hold their shares or even buy more, only to

watch in despair the prices going further down later.

Sir, what are the reasons for dead cat bounce?

There are several factors that cause dead cat bounce in stocks. Almost every bear market on this planet goes through a time when even the most ardent bears reconsider their situations. With a market consistently

finishing down over a month or two, most bears clear short positions. At the same time, some value investors may think that this is the full fathom five, and momentum investors find oversold readings in their indicators. All these factors make the market go up together by applying a buying pressure, even though only for a while.

Ahh, that’s interesting, but then how can you tell whether it is a dead cat bounce or a market reversal?

That’s a bit tricky! After a long sustained decline, the market can either undergo a bounce, which is short-lived, or enter a new phase in its cycle, in which case the general

direction of the market undergoes a sustained reversal as a result of changes in market perceptions. Therefore there is no particular answer to this question; rather it is difficult to spot the rock bottom level of the market. Although determining the market reversal is difficult, yet one can identify the same by carefully examining the chart available for NAV. You need to check whether there is a downward spiral in the market for at least a quarter. Remain abreast with the latest information on stock market, economy, and international scenario. It will help you to recognize the trend in the stock market.

So, dead cat bounce is always a bad thing?

A dead cat bounce is not necessarily a bad thing; it really depends on your perspective. At one hand, for day traders, who look at the market from minute to minute and like volatility, they would bank upon it.

Given their investment style, a dead cat bounce can be a great moneymaking opportunity. At the other end of the spectrum, long-term investors may not like such stocks. As long-term, buy-and-hold investors, they should practice a well-diversified portfolio that can offer some protection against the severity of losses in any one-asset class.

Thank you very much, Sir.

CLASSROOMFinFunda

of the Month

Dead Cat Bounce

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lassroomIIM ShillongKshitij ghumaria

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F I N - Q1. “A” is an interest rate swap which involves the exchange of two

floating rate financial instruments. Identify “A”?

2. What is responsible for most of the fluctuation in an individual

stock and has little correlation with what actually is believed to be

the reason of such fluctuation?

3. X was born in Hungary and developed the theory of Reflexivity. He

bought a stake in BSE in 2010. He is popularly known as “The Man

Who Broke the Bank of England”. Identify X.

4. In the union Budget 2013, Mr Chidambaram expressed the desire

to open an all women bank. Indeed a welcome move. But it was

way back in 1974 that this organization realized the same need and

it opened an all women bank based on the model “By women, for

women”. Following Mr Chidambaram’s announcement, this bank

looks to expand and become a national bank. Name the Bank and

the city from where the model originated.

5. With more than 150000 branches in India, it is the largest rural

banking system in India. Identify the organisation.

6. X is chairman of a huge financial multinational firm, Y, but (s)he

refuses to use computers. (s)He wanted to work in a prominent

bank, Z, but could not make it there and (s)he is frequently dubbed

as the ‘unofficial crisis consultant’ of the government of India.

Name X, his company Y, and ‘his bank of dreams!’ Z.

7. Which effect refers to the fact that investors are willong to realize

gains but unwilling to realize losses?

8. What is the term for practice by rating agencies of assigning

different ratings to bond of same issuer?

All entries should be mailed at [email protected] by 11th May, 2013 23:59 hrs. One lucky winner will receive cash prize of Rs. 500/-

Article of the MonthPrize - INR 1000/-

Nitin SinghSymbiosis Institute of Management Studies, Pune

W I N N E R S

A N N O U N C E M E N T SALL ARE INVITED

Team Niveshak invites articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puzzles and jokes related to finance & economics. References should be cited wherever nec-essary. The best article will be featured as the “Article of the Month” and would be awarded cash prize of Rs.1000/- along with a certificate.

Instructions » Please send your articles before 11th May, 2013 to [email protected] » The subject line of the mail must be “Article for Niveshak_<Article Title>” » Do mention your name, institute name and batch with your article » Please ensure that the entire document has a wordcount between 1200 - 1500 » Format: Microsoft WORD File, Font: - Times New Roman, Size: - 12, Line spacing: 1.5 » Please do NOT send PDF files and kindly stick to the format » Number of authors is limited to 2 at maximum » Mention your e-mail id/ blog if you want the readers to contact you for further

discussion

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