Its earnings growth leading indicator forecasts a dip in broad market earnings growth for the fiscal year 2010-11
Is the Indian economy likely to see stunted growth for the coming year? The research arm of global financial services firm Morgan Stanley anticipates a slowdown in broad market earnings growth. The earnings growth leading indicator (EGLI) points to a substantial drop in rate of earnings growth for the fiscal year 2011. However, other macro-indicators point to a reasonably healthy period of growth for the overall economy.
From March 2009 onwards, the EGLI witnessed a sharp spike, which saw it climb steadily to around 65% by mid-March 2010. Since then, the EGLI has witnessed a sharp correction, and MS forecasts the growth to slow down to sub-zero levels by the end of this year.
However, this is in sharp contrast to Morgan Stanley’s overall prospects about the Indian economy. The research report maintains Morgan Stanley’s view that India is one of the best structural growth stories in the region. MS expects GDP growth in FY2011 and FY2012 to be at 8.5% and 8.4% respectively. However, the report indicates that there are upside as well as downside risks to India’s growth estimates.
“We believe there are two key factors that will influence India’s growth outlook in FY2011 and FY2012. The most important among them will be the global growth trend. This will be reflected in global risk appetite and capital inflows in the country, as well as external demand. Second, we believe the pace of structural reforms from the government can also swing the growth outlook.”
The research report points out that uncertainties over Europe will continue to weigh upon the markets. ”The sovereign debt concerns in the EU and its implications on the global financial markets remind us of the potential downside risks to India’s cyclical growth outlook. If sovereign concerns cause any major dislocation in global funding markets, capital inflows into India will be affected despite its attractive growth outlook ex-ante.”
When Moneylife asked Chetan Ahya, Asia-Pacific economist, Morgan Stanley about the chances of a second recession in Europe and the possible fallout on the Indian economy, he replied, “European risks are certainly meaningful, but we believe there is lot more awareness among institutions this time around. We are not in the same situation as when the credit crisis occurred in 2008. This time, there is an aversion to risky credit instruments that were being floated earlier.”
MS also points out that investors should watch out for risks of a further rise in inflation expectations and widening current account deficit. However, the firm regards these risks as purely cyclical rather than a major structural challenge. “We expect the current pickup in investment to start being reflected in the form of commissioned capacity in 12 months’ time, reducing the inflation pressures and current account deficit risks.”
Other exchanges feel that it would be very difficult for them to offer such kind of transaction fee waiver or revise connectivity charges by more than 50%
The National Stock Exchange (NSE), has decided to waive transaction charges pertaining to trades generated from leased lines in semi-urban and rural areas to the extent of the annual leased line connectivity cost of about Rs1 lakh. According to industry experts, other exchanges will not be able to match such kind of a 'lavish' bonanza offered by NSE.
"NSE is flush with funds and is under pressure to show 'lower profits', since there is a ‘hue and cry’ about its huge profits. That may be the reason why NSE, which has shied away from the media in recent past, is spending abundant money on advertising as well as giving discounts to members," said one official from an exchange who does not want to be quoted.
The NSE has also revised the connectivity charges to Rs1 lakh from Rs2-Rs2.5 lakh per leased line for members connected through points of presence (PoPs) at Rajkot, Jaipur and Kochi. "It would be very difficult for other exchanges to offer such kind of transaction fee waiver or revise connectivity charges by more than 50%," said official from another exchange.
NSE's infrastructure can support more than 2,000 very small aperture terminals (VSATs) and 3,000 leased lines. At present, more than 9,000 users trade on the real time-online NSE application.
According to Divya Malik Lahiri, spokesperson, NSE, the transaction waiver scheme will be applicable on annual recurring basis and the members can avail the benefit of this scheme every year or until further notice. Similarly, for POP locations at Rajkot, Jaipur and Kochi, the annual recovery charges (ARCs) and interest free deposits (IFSDs) are revised to Rs1 lakh each, she said.
In October 2009, in a similar move, NSE had waived transaction charges equivalent to the annual VSAT charges levied by the exchange. The waiver was capped to the annual VSAT charges levied by the exchange for the respective year or part thereof with effect from 1 October 2009. The general annual VSAT charges fixed in April 2005 was Rs1.10 lakh a year.
However, despite offering the waiver scheme for VSAT, members from semi-urban and rural areas were not happy due to pricing differences compared with leased lines. They felt that a leased line would be a better bet for their operations in certain cases compared with high costs of VSAT.
There are two different aspects of why NSE is resorting to such methods. One, it want to maintain its dominance, given that there are some new players waiting in the wings to enter the market. Second, NSE used to have a monopoly in equity and currency derivatives segment. Post February it is losing its market share in currency derivatives to new entrant MCX-SX. (read more http://www.moneylife.in/article/8/5094.html ).
Not one to take things lying down, NSE had already made a predatory move, typical of its aggressive mindset, by making membership to its currency derivatives segment free. This waiver meant that MCX-SX could also not charge the fee from its members. Incensed, the MCX-SX filed a complaint with the Competition Commission of India (CCI), which ordered an investigation into the alleged misuse of the dominant position by NSE.
With the Manner of Increasing and Maintaining Public Shareholding in Recognised Exchanges Regulations (MIMPS) compliance in place, MCX-SX is all set to enter the equity trading space dominated by two warring bourses—the NSE and the BSE. Other points that work in favour of MCX-SX are that most of the traders use a software (ODIN) developed by its parent Financial Technologies. According to sources, about 30% traders use the trade software provided by exchanges such as BOLT from BSE while 70% of traders use software like ODIN, Omnesys and FasTrade. ODIN holds majority share in trade terminals.
NSE also allows members to provide internet-trading facility to their clients through a shared web infrastructure called as NSE on web (NOW). There are about 900 users who use NOW, said the NSE official.
The other new player waiting in the wings is United Stock Exchange (USE), promoted by 21 banks, including state-run and private lenders, BSE and companies such as Jaypee Capital Ltd, state-run MMTC Ltd and Indian Potash.
Earlier, TS Narayanasami, managing director and chief executive, USE, had said, “Trading membership of USE is initially free with nil transaction charges to begin with. It is envisaged that since almost the entire banking system is a stakeholder, USE will gain significantly by the volumes traded by them on the exchange. USE has tentatively planned to commence operations in June 2010.”
Last year, in an attempt to capture volumes from NSE’s vastly superior derivatives segment, BSE slashed transaction costs for its equity futures and options (F&O) segment. It hoped that the revised fee structures would substantially lower transaction costs for all market participants and improve depth and liquidity in its equity derivatives segment.
According to reports, both NSE and BSE earn over 80% of their revenues from trade charges. Other such charges contribute little to the kitty of exchanges compared with trade charges. For FY09, NSE's total revenues declined to Rs1,024 crore from Rs1,038 crore, however its net profit increased to Rs576 crore from Rs543 crore, a year ago.
The market regulator has found that liquid and debt schemes change their expense ratio numerous times during a month and has proposed to limit it to 5 basis points on a daily basis (or 0.05%) in a day or 0.5% in a year
Market watchdog Securities and Exchange Board of India (SEBI) in its recently held mutual fund advisory committee meeting has observed that fund houses were frequently changing the expense ratios of liquid and short-term debt schemes. It was changed 18 times in a super institutional liquid scheme ranging from 0.25%-1.15% in a month.
"It is mainly done to accommodate high net-worth individuals (HNIs). Fund houses are doing this for the last one year. Investor's interest cannot be protected by increasing the expense ratio. If they (AMCs) reduce it then it is done to pass on the benefits," said a top official of a fund house.
Fund houses are of the view that such frequent changes in expense ratio is done due to fluctuations in the market and to protect investor's money. The regulator has proposed to limit the expense ratio at 5 basis (0.05%) points on a daily basis or 0.5% in a year.
According to SEBI, Reliance Money Manager Fund short-term institutional plan had revised the expense ratio 15 times (from 0.39%-1.49%) while in the non-institutional category it was changed 11 times (from 0.45%-1.69%). Most of the schemes highlighted by SEBI were of debt and liquid fund category.
"An institutional liquid scheme had revised the expense 13 times in the range of 0.35%-1.35% in January 2009. Most of these schemes have been only increasing their expense ratio," said a CEO of a leading fund house.
Apart from this, SEBI has given the leeway to MFs to have different expense structures for different schemes of a fund. It has also suggested MFs to either have a flat structure at 1.5% for equity funds, 1% for debt funds and 0.75% for index funds including exchange-traded funds (ETFs) and to do away with different expense slabs.
Currently MFs are allowed to charge 1.25% as investment and management fee for the first Rs100 crore of assets under management (AUM), and 1% for the subsequent amount. For the first Rs100 crore of AUM, a fund house can charge a total expense of 2.50% under an equity scheme and 2.25% for a debt scheme. As the corpus increases, the maximum permissible limit the MFs can charge is 1.50% for debt schemes and 1.75% for equity schemes annually. According to sources, the frequent expense ratio changes are aimed to smoothen the net asset value (NAV) movement.