Cash Level & Markets

It could well be, if you go by the widespread pessimism among institutional investors. The Merrill Lynch survey of 213 global institutional investors is excessively gloomy. Some 60% of them see the global economy weakening. It happens to be the most negative reading in the survey’s history. As happens in financial markets, the mood change has been sudden and sharp. In April, only 5% of respondents expected the economy to weaken. The reason for the sudden gloom now? Rising energy prices and a lagged effect from higher interest rates.

As a result, 27% of the respondents reported that they were taking lower-than-normal risks with their investment strategies or portfolios, compared to their benchmarks, up from 23% in June. One way to reduce risk is to increase the cash position. A net 31% of institutional investors are now overweighted in cash, up from 29% a month ago and only 10% in April. The Merrill survey said that this is the second highest reading for this position in five years.

Now, if institutional investors (who can move market with hundreds of billions of dollars under management) are so pessimistic, why would we say that the market is about to surprise us on the upside? Because excessive emotion among institutional investors is usually a contrarian signal. When pessimism is high, money moves into cash or safe assets like government bonds. It is precisely at that time that a light bit of good news can produce a huge market rally. So, high cash position can be a contrarian indicator.

For instance, it was in March 2000 that the US fund managers recorded their maximum optimism in 30 years - the exact month that the Nasdaq index started its 80% decline. Often, fund managers are fully invested at the top of the market, and have tons of cash at market bottoms.

There are no studies based on Indian data, but according to a US study, when fund managers have lots of cash on hand, typically more than 9.5% of the fund’s assets in cash, stocks actually do extremely well. Between 1970 and 2005, fund managers were scared of stocks and therefore held more than 9.5% of their funds in cash roughly 20% of the time. During these 20 instances, on an average, the stock market was up by an astounding 18% just 12 months later. And when fund managers had less than 6% of assets in cash (27% of the time), then 12 months later, on an average, stocks were up only 1.2%.

During the 1990-1991 recession, instead of buying, fund managers were scared. They had 12.9% of their assets in cash. They should have been buying, not holding in cash because the market continuously rose thereafter. As the market rose through the 1990s, fund managers got bolder and complacent. By March 2000, fund managers held only 4% of their assets in cash, the all-time low, corresponding with the all-time peak in Nasdaq.

In the middle of June 2005, fund managers had just 4% of their assets in cash. The subsequent performance has been poor. Jason Goepfert, who scientifically analyses market sentiment (, took this finding forward and added short-term interest rate to the picture. After all, if short-term interest rates are high, fund managers should hold more cash. Following this logic, Goepfert found that 55% of cash holdings of mutual fund managers could be explained by the level of interest rates. So he came up with a formula for how much cash a fund “should” have, based on the current level of interest rates, which he calls Mutual Fund Cash Premium/ Deficit. This is worked out based on the dataset that goes as back as 1956.


Bharti plans to prepay up to $900 mn of debt

New Delhi: Sitting on a good amount of cash flows, Bharti Airtel today said it will consider prepaying up to $900 million of the debt it raised while acquiring African operations of Zain telecom in June this year, reports PTI.

The company is looking at prepaying a part of the debt.

It would be in the range of $800-900 million, Bharti Group chief financial officer Manik Jhangiani said.

The total cost of the Bharti-Zain deal that was signed in June was at $10.7 billion. This included an equity value of $9 billion and $1.7 billion of consolidated debt obligations.

Bharti had borrowed $7.5 billion from different banks to finance the acquisition of Zain.

According to Mr Jhangiani, flexibility of prepayments has always been part of the loan agreement and Bharti has the option of prepaying based on its cash flow.

The company had seen significant free cash flows over the past few quarters.

Bharti’s results for the three months ended 30th September show the telco’s cash balance on the books at Rs1,737 crore.

Originally, 11 banks led by Standard Chartered Plc, had underwritten the $7.5 billion loan.

Besides, the company could also look at an initial public offer for its tower unit, although there is no definite plan, Mr Jhangiani said.

Bharti Infratel is one of the tower units of Bharti Airtel. It is a wholly-owned subsidiary of Bharti.


Cheaper funding sources can help reduce microfinance interest rates

New Delhi: Amid sharp criticism over high interest rates, India's microfinance veterans have said that cheaper sources of funding can further bring down the rates charged by microfinance institutions, reports PTI.

“Interest rates are an issue that concerns the entire industry, which is subject to combination of issues like scale, cost of availability of funds and market forces,” Vijay Mahajan, president of the Microfinance Institutions Network (MFIN) that represents 44 leading microfinance lenders, told PTI.

Mr Mahajan, who is associated with rural economic development for nearly three decades and also heads the microfinance institution Basix, further added that the high cost of funds available to microfinance institutions (MFIs) was one of the major problems in the microfinance sector.
The loan book size of domestic MFIs, which cater to about 2.7 crore poor people, is about Rs33,000 crore. MFIs extend loans in rural areas, mainly unbanked areas.

"As MFIs, we have always stated that the growth of the base (of customers) will be critical to the reduction of costs. In addition, we can reduce costs if cheaper source of funds are made available to us," he said.

Sajeev Viswanathan, CEO of Bharatiya Samruddhi Finance, a microfinance firm promoted by Basix, said, “Yes, it is possible to reduce it (interest rates). One way to reduce it is by reducing the operating costs, and second way is banks reducing their interest (rates charged) from MFIs.”

Microfinance players raise funds through various sources including equity, term loans from banks/financial institutions, securitisation, rated securitisation, non-convertible debentures and commercial paper.

Out of the Rs33,000 crore loan book size, about Rs5,000-Rs6,000 crore comes from private equity, capital market while around Rs27,000 crore comes from banks, which is the only sustainable source of funding, Mr Viswanathan said.

In September, the finance ministry had asked state-owned banks to ask MFIs to cap their lending rates in the range of 20%-24% as a precondition to access bank finance.

Leading industry player SKS Microfinance recently said it would reduce interest rates across states to 24%.

Earlier this month, the top five microfinance companies including SKS Microfinance, Basix, Spandana, Share Microfin and Asmitha Microfin agreed to reduce interest rates they charge from borrowers to 24%.

"If all the stakeholders like the government, bankers, the regulator and key decision makers realise the importance of financial inclusion which can be achieved only by a robust micro finance industry we believe the microfinance industry has a very bright future," Mr Mahajan added.


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