Indian stocks to see soft opening: Thursday Market Preview

A cut in the US growth forecast, although in line with expectations, resulted in the global markets edging lower

The Indian stock market is likely to witness a soft opening on the back of negative global cues. Also, the weekly food inflation numbers, which will be released around noon today, will give the market some direction as trade progresses.

Wall Street ended its four-day winning streak to end lower overnight as the Federal Reserve tapered its economic growth forecast for this year and the next and kept silent on any new stimulus package. Tracking the developments in the US, markets in Asia were trading mostly lower in early trade on Thursday. The SGX Nifty was 13 points lower at 5,270 against its previous close of 5,283 on Wednesday.

The market which opened in the positive on Wednesday, riding on the optimism from Greece, stayed range-bound for the whole trading session and closed flat in the absence of any domestic triggers. The Nifty resumed trade at 5,305, up 29 points, and the Sensex opened 99 points higher at 17,659. The indices soon touched the day's high with the Nifty touching 5,311 and the Sensex at 17,679.

However, volatility from the opening bell and the India Meteorological Department's report that the monsoon this year will be slightly below normal, made investors nervous. This is another dampener, in addition to continuing high inflation and successive rate hikes by the Reserve Bank of India, the most recent effected only last week.

The market hovered on both sides of the neutral line in post-noon trade, following mixed trade by key European markets in the early session. It fell to the day's low, the Nifty fell to 5,263 and the Sensex to 17,492. The indices witnessed a flat close with a mixed bias; the Nifty added two points to 5,278 and the Sensex shed 10 points to finish at 17,550.

The US markets snapped their four-day gains to settle lower on Wednesday as the Fed cut its economic growth forecast for this year and the next and failed to make a mention of any new stimulus package as the $600 billion QE2 ends next week. The central bank, at the end of a two-day meeting, lowered the its gross domestic product (GDP) forecast for 2011 to a growth rate of a mere 2.7% to 2.9%—down from an April projection of 3.1%-3.3%. The Fed also reduced its 2012 GDP growth forecast to a range between 3.3% and 3.7%.

The Fed estimates that unemployment will still be around 8.6% to 8.9% by the end of the year. However, Fed chairman Ben Bernanke said the slower recovery are expected to be temporary. He also said that the case for a third round of quantitative easing just isn’t there yet.

The Dow declined 80.34 points (0.66%) to end at 12,109.67. The S&P 500 shed 8.38 points (0.65%) to 1,287.14 and the Nasdaq fell 18.07 points (0.67%) to settle at 2,669.19.

Tracking the decline in the US markets on account of the cut in growth forecast by the Fed, markets in Asia were mostly lower in early trade today. While the developments were in line with expectations, it ignited fresh worries about the pace of the global recovery.

Meanwhile, the Iwate prefecture in northeast Japan on Thursday reported an earthquake with a preliminary magnitude of 6.7. The region was among those devastated by the 11th March earthquake and tsunami. However, reports of damage or injuries have not yet been reported.

The Shanghai Composite declined 0.38%, the Hang Seng fell 0.89%, the Jakarta Composite was down 0.44%, the KLSE Composite decreased by 0.32%, the Nikkei 225 declined 0.37%, the Straits Times lost 0.36%, the Seoul Composite fell 0.71% and the Taiwan Weighted was 0.59% lower.

Oil rose 3% on Wednesday, supported by a fall in US crude and gasoline stockpiles. ICE Brent crude for August delivery settled at $114.21 a barrel, gaining $3.26. US August crude gained $1.24 to settle at $95.41 a barrel, dropping down to $94.54 in post-settlement activity.

Back home, the Securities and Exchange Board of India (SEBI) yesterday asked the asset management industry to look at having presence in the pension funds, as retail investors would prefer the route.

“There is a good potential here (pension funds), which perhaps we are missing,” SEBI chairman UK Sinha said at the CII summit on Mutual Funds.

Mr Sinha said in the US 68% of the households own mutual fund products through the pension route, perhaps through the pension reforms that took place in the US. He said in India, the asset managers classified each investor alike, which according to him was a mistake.

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Share prices still struggling to rally: Wednesday Closing Report

Nifty’s resistance is at 5,330

The market which opened in the positive, riding on the optimism from Greece, stayed range-bound for the whole trading session and closed flat in the absence of any domestic triggers. Markets across the world now await the outcome of the two-day US Federal Reserve policy meeting later today, for further direction.

As expected, the market opened with small gains on the back of supportive cues from the global arena, following easing of debt problems in Greece. The Nifty resumed trade at 5,305, up 29 points, and the Sensex opened 99 points higher at 17,659. The indices soon touched the day's high with the Nifty touching 5,311 and the Sensex at 17,679.

However, volatility from the opening bell and the India Meteorological Department's report that the monsoon this year will be slightly below normal, made investors nervous. This is another dampener, in addition to continuing high inflation and successive rate hikes by the Reserve Bank of India, the most recent effected only last week.

The market hovered on both sides of the neutral line in post-noon trade, following mixed trade by key European markets in the early session. It fell to the day's low, the Nifty fell to 5,263 and the Sensex to 17,492. The indices witnessed a flat close with a mixed bias; the Nifty added two points to 5,278 and the Sensex shed 10 points to finish at 17,550.

The advance-decline ratio on the National Stock Exchange was 434:975.

The broader indices were badly bruised today as the BSE Mid-cap index and the BSE Small-cap index both declined 0.84% each.

In the sectoral space, BSE Oil & Gas (up 0.28%), BSE Capital Goods (up 0.24%) and BSE Bankex (up 0.06%) were the notable gainers, while BSE Consumer Durables (down 3.83%), BSE Realty (down 2.29%) and BSE Fast Moving Consumer Goods (down 0.67%) were the top losers.

Mahindra & Mahindra (up 2.39%), ONGC (up 2.05%), Cipla (up 1.99%), Bajaj Auto (up 1.68%) and Tata Power (up 1.60%) were the best performers on the Sensex. The laggards were led by Hindustan Unilever (down 3.42%), Maruti Suzuki (down 2.39%), Bharti Airtel (down 2.32%), TCS (down 1.86%) and Jindal Steel (down 1.46%).

The top Nifty gainers were M&M (up 2.29%), Tata Power (up 2.13%), Cipla (up 2.03%), Bajaj Auto (up 1.79%) and ONGC (up 1.56%). HUL (down 3.61%), Ranbaxy (down 3.11%), Bharti Airtel (down 2.45%), TCS (down 2.25%) and Maruti Suzuki (down 1.90%) were the top losers on the index.

Markets in Asia closed mostly higher, as optimism from Greece lifted investor sentiment in the exports-dominant region. Value-picking after the recent decline helped the Hong Kong market end higher. Japanese automakers rose as Citigroup raised their outlook to 'neutral' from 'bearish', following a quicker-than-expected recovery in supply chains.

The Shanghai Composite gained 0.09%, the Hang Seng added 0.04%, the Jakarta Composite 0.71%, the KLSE Composite rose 0.42%, the Nikkei 225 jumped 1.79%, the Seoul Composite was 0.77% higher and the Taiwan Weighted settled 0.27% up. Bucking the trend, the Straits Times lost 0.35%.

Back home, foreign institutional investors were net sellers of stocks worth Rs563.36 crore on Tuesday, whereas domestic institutional investors were net buyers of stocks worth Rs430.41 crore.

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Corporate bonds turn extremely attractive for retail investors

If you want to invest Rs10 lakh and above in a fixed-income product, consider listed corporate bonds. Some safe ones can yield returns as high as 12%

With interest rates shooting up, bank fixed deposits are attractive now. For the more adventurous, there are corporate fixed deposits, about which we had written last week, on 14th June, (Corporate fixed deposits offer higher rates than banks. But is it safe and smart to go for them?).

But if you have an investment plan of Rs10 lakh or more in fixed income, corporate bonds are also a great option for you. Many of the new bonds even offer you a higher rate of interest as compared to fixed deposits, postal savings or similar investments. Some bonds floated by the Tata group currently yield more than 11% per annum. Many of these bonds are listed on the BSE (Bombay Stock Exchange) and the NSE (National Stock Exchange) and can be bought through stockbrokers who have a presence in the debt segment, who immediately transfer them into your demat account.

Since these instruments are listed, you need not be stuck with them; you can sell them in the secondary market before maturity. The bonds that are currently worth buying are: IRFC 12.90% 2012 (S-15M) from the Indian Railway Finance Corporation earning around 13%; CitiFinancial Consumer 9.48%, 2013 (Series-320) yielding around 12%; PGC 6.10% 2010 S-XIV STRPP-H from Power Grid Corporation of India earning around 12% and IDBI 8.90% 2017(IDBI Omni Bonds yielding around 11%). Then there are higher-yield bonds from builders which are riskier—Vijay Associates Wadhwa Cons 16% 2013 (Sr-B) from Vijay Associates (Wadhwa) Construction Private Limited yielding 16%.

You can download the details of the listed bonds from the NSE website at http://nseindia.com/.

Unfortunately, there is very little awareness of these bonds and their products among retail investors and so they miss out on the opportunity. Corporate bonds are issued by corporations in need of capital for their regular operations and also for projects. Most corporate bonds offer semi-annual fixed-rate coupon payments. Others offer floating coupons. When a company decides to sell bonds to raise capital, it negotiates deals with investment bankers and large institutional investors to place those bonds in the market.

After that, the bonds are listed on the secondary market. This market is open to all investors, but caution is warranted. The secondary market is almost entirely an over-the-counter market. Most trades are conducted on closed, proprietary bond-trading systems or via the telephone.

The only way the average investor can participate is through a broker who would be willing to locate small lots and sell them to him. More importantly, the pricing of bonds on the secondary market can be difficult to track and understand.

Follow the yield-to-maturity (YTM) figure which is available on the NSE website. One way to invest in corporate bonds is through off-market purchases. Take an example where an institution has Rs1 crore worth of bonds while you want to buy Rs20 lakh worth of bonds. You can approach the broker, negotiate the purchase price, pay via cheque and the bonds get transferred to your demat account.

Corporate bonds are mainly secured—backed by assets of the issuing company. Theoretically, they do carry an inherent risk of default, though it is hard to see that Tata Power of TISCO would default suddenly. Companies move slowly towards default following significant deterioration of their finances, over a long period due to adverse fundamentals, competition, and poor or unethical management practices. Bondholders will get plenty of time to exit when the deterioration is palpable.

Another form of corporate bond issuance that is now becoming popular is perpetual bonds. These have been issued by Tata Power and Tata Steel. Perpetual bonds pay interest forever. They are never redeemed and so have the characteristic of equity shares with a fixed dividend. This instrument made its entry into the financial markets in 2005. The issuers of perpetual bonds are primarily scheduled commercial banks. In January 2006, RBI allowed banks to shore up their capital through issuance of perpetual bonds and another instrument called 'Upper Tier-II Bonds'. In March this year, Tata Steel was the first private sector company to have issued perpetual bonds.

The unique features of these securities are that they are perpetual in nature with no maturity or redemption and can be called only at the option of the company. They are not redeemed, unless the issuer wishes so, after a few years. Perpetual bonds give the issuer access to long-term capital and it is mostly insurance companies and pension funds which subscribe to these bonds. For instance, the Tata Power offering is for a period of 60 years with a call option of 5 years.

Some of the perpetual bonds yielding more than 10% include: Tata Steel RESET Perpetual from Tata Steel having a coupon rate of 11.50%. Interestingly, if Tata Steel does not call the bonds after 10 years from the date of allotment, the rate of distribution would be revised upwards by 300 bps (basis points) i.e., to 14.50% per annum payable semi-annually. Tata Power issued a perpetual bond of 11.40% coupon which can be bought at Rs104 now, leading to an effective yield of 10.96%. Other such bonds have been issued by Punjab National Bank, Oriental Bank (yield of around 10.50%) and State Bank of Travancore which offers yield of around 10%. Shriram Transport has also announced plans to raise money through 11.50% bonds.

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COMMENTS

BRIJMOHAN ASAWA

4 years ago

TATA BONDS ARE UNSECURED BONDS

hemant kotak

6 years ago

Rate of 11.40% Tata Power Perpetual Bonds as on September 30,2011

RAKESH SHAH

6 years ago

WHAT IS U R OPINION ON sRHEE RAM TRANSPORT ON GOING NCD ISSUE

REPLY

vipul shah

In Reply to RAKESH SHAH 6 years ago

Shree Ram Transport NCD Is good for invesment. Since it is on first come first basis and the issue size is also small chances of allottment would depend .Overall the response for this NCD is very good. I would recommend to apply for NCD upto Rs 5 lacs.

RAKESH SHAH

6 years ago

HOW 2 BUY SUCH BONDS PLS REFER

REPLY

vipul shah

In Reply to RAKESH SHAH 6 years ago

Bonds can be purchased from intermediaries who has bonds in his books or who can arrange for you .

vipul Shah

6 years ago

Tata Power & Tata Steel are listed on Stock exchange and can be bought from a broker who is dealing into Debt market or can be purchased from person who has bonds in his portfolio.Retail or Senior citizen can buy this particular bonds in his /her portfolio. This bonds are in Demat form and coupon rate is paid half yearly.There is no transaction cost involved in it. The broker gives you a qoute for the bond at which it would be available to you and apart from that you have to pay accrued interest on the bond . eg: 11.40 % Tata power price currently is 101.40 Each bond has a face value of Rs 10 lacs so the rate per bond would be Rs 10,14,000/- plus accrued interest of Rs 7184/- ( 02-06-2011 to 25-06-2011 ). Total cost of the bond would be Rs 10,21,184/-.

Pradeep N

6 years ago

Does any of the Bond Mutual Funds have these on their portfolio?

Udbhav Shah

6 years ago

Could you let me know Where TATA power and Tata Steel perpetual bond is listed/traded? Can retail / senior citizen BUY? What charges/transaction cost will have to bear?

REPLY

vipul shah

In Reply to Udbhav Shah 6 years ago

Tata Power & Tata Steel are listed on Stock exchange and can be bought from a broker who is dealing into Debt market or can be purchased from person who has bonds in his portfolio.Retail or Senior citizen can buy this particular bonds in his /her portfolio. This bonds are in Demat form and coupon rate is paid half yearly.There is no transaction cost involved in it. The broker gives you a qoute for the bond at which it would be available to you and apart from that you have to pay accrued interest on the bond . eg: 11.40 % Tata power price currently is 101.40 Each bond has a face value of Rs 10 lacs so the rate per bond would be Rs 10,14,000/- plus accrued interest of Rs 7184/- ( 02-06-2011 to 25-06-2011 ). Total cost of the bond would be Rs 10,21,184/-.

Nem Chandra

6 years ago

Your statement of rate of bond @ Rs. 104/- in the following sentence is wrong-
"Tata Power issued a perpetual bond of 11.40% coupon which can be bought at Rs104 now, leading to an effective yield of 11.10%. Other such bonds"

REPLY

MDT

In Reply to Nem Chandra 6 years ago

It has been corrected.

J Krishnamurthy

6 years ago

When the higher interest rates of deposits and debentures are mentioned their respective long lock-in periods also should be mentioend equally prominently and very next to the rate. Otherwise, it may result in unintended cheating the gullible investor.
Take for instance the NCDs of Shriram Transport and a few others that your announcement above mention which pay inteest of over 12 % or so. Their lock-in periods are upwards of 6 to 7 years. Union Bank recently has come out with a 7 year deposit which they ssay give an annual yield of 13% plus. If that be so is not investment in Union Bank ( other such banks too) sounder and safer than in the deposits and debentures of companies who may or may not be able to return the principal or continue paying the interest promptly seven or eight years ahead. The case of Quasi-govt organisations is different.since they stand at par with banks. I am objecting only to investments in companies many of which have had a distasteful history in the past.

tushar chhaya

6 years ago

There are no trades in the retail debt segment of most bonds mentioned in your report. These are traded only in the wholesale debt segment. For retail investors a few bonds are traded in the capital market segment of NSE suchas State Bank, Tata Capital, Shriram Transport. The yields are sub 10%.

REPLY

vipul shah

In Reply to tushar chhaya 6 years ago

Bonds can be purchased from intermediaries who has bonds in his books or who can arrange for you . You can buy one bond also from the intermediary who arranges for you.

Moneylife Team

In Reply to tushar chhaya 6 years ago

"The only way the average investor can participate is through a broker who would be willing to locate small lots and sell them to him."

"One way to invest in corporate bonds is through off-market purchases. Take an example where an institution has Rs1 crore worth of bonds while you want to buy Rs20 lakh worth of bonds. You can approach the broker, negotiate the purchase price, pay via cheque and the bonds get transferred to your demat account. "

Vipul Shah

In Reply to Moneylife Team 6 years ago

Bonds can be purchased from intermediaries who has bonds in his books or who can arrange for you . You can buy one bond also from the intermediary who arranges for you.

Sundaram

6 years ago

Can we purchase these Corporate bonds through trading portals like "icicidirect"?If not,how does an ordinary investor locate a broker who is willing to execute the trade?

REPLY

vipul shah

In Reply to Sundaram 6 years ago

Bonds can be purchased from intermediaries who has bonds in his books or who can arrange for you . You can buy one bond also from the intermediary who arranges for you.

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