China's export numbers and Arbitrage story

Eversince Chinese Govt pushed RMB for internationalization  in 2010, Chinese punters started betting on various arbitrage within as well as across border. Chinese just like Indian are very JUGADO JUNTA (people who can work around regulations and can develop Good quick fix solutions for big problems) hence practical implications of regulations may differ from intended ones. Chinese Govt realized this when their Exports to HK differed considerably from actual import figures reported by HK. Difference is due to fake trade happening on account of easy arbitrage across:

1. CNH/USD vs CNY/USD swap rates, borrow CNY 600 in mainland which say is equivalent to USD 100.0 in mainland, deposit this with mainland bank and open an LC to HK. In HK, get LC discounted and swap it back to CNH (this will be say 615 CNH) and then remit these funds back to mainland.
2. Interest rate arbitrage , borrowing cost in offshore USD is much lower than CNY borrowing cost in mainland
3. CNY appreciation - Currency has seen northward movement for long time since currency is still artificially controlled by Chinese Govt. 

Double Indexation Benefit (India)

Was rushing through an old magazine and was stuck with an article on double taxation. Out of curiosity searched a bit more and found this interesting enough to share.

What is this about?

It is a way to save tax in two fiscals on same investment. Through Double Taxation, one can save tax on gains that one makes on mutual fund investments as well as on Fixed Maturity Plans (FMP). Benefit is applicable on all DEBT Instruments since Long-term CAPITAL GAINS TAX is applicable on Debt Instruments if sold after a year.

Secret is that in order to account for inflation, Govt allows you to inflate cost price of product once every year if you hold on to investment for more than a year. Be careful with pros and cons 'coz though normally long term capital gain tax is 10.33% but if you adjust for cost inflation you may end up paying 20.6% capital gain tax

Example

Say you invest 1 lakh in a 14 months fixed maturity plan in Feb 2013 with maturity due in April 2014. In this case though tenor is 14 months but investment is across 2 fiscal years hence we can inflate cost price twice.

Let us assume that as per Govt. inflation index inflation for year is 8% then cost of 1 lakh investment considering 8% YOY inflation will be Rs 1.17 lakh this cost inflation of Rs 17000.

Assuming interest rate of 9% pa. on FMP instrument, total interest earned over 14 months on FMP will be Rs 10635. Since interest earned is less than inflation in cost hence tax is not deductible on this instrument.

Ques: Can I selectively inflate cost for instruments or should it be same across the reported investments?

Gold - Sudden Love Lost, Does it Hurts?

Why had Gold risen so far and why such a sudden lost of love with yellow metal?

Since 1999, gold has appreciated 6x. Just before 1999, Asian tiger economies went bust and 1999 onwards we saw infamous Dotcom bust and 2008 financial crisis all of which led to inflation that led to major currencies losing its value as Central banks kept printing Dollars and Euros. Gold has inverse correlation with US$ or direct correlation with supply of money i.e. printing of currency that causes monetary debasement.

Gold pays no interest but bonds do hence rising bond yields will make Gold unattractive. Hence Gold has inverse correlation with bond yields and hence interest rates.

Gold is a bet against inflation since appreciation in Gold beats lowering interest regimen on fixed income instruments such as fixed deposits. Over last 6 months commodity prices including those for metals, energy as well as agricultural commodities have come down by 20%-30% globally due to either better supply, improved supply chains or lowering demand thus reducing inflation (except in India L). Since inflation fears started waning away, investors shifted their portfolio from yellow metal. [It’s a pity that during same time India is still facing strong headwinds due to high inflation. WPI has never come below 6 over last couple of years and CPI led by food inflation has broken the backbone of middle class.]

Usually, Gold should have moved up considerably on news such as Japanese Government huge financial stimulus and instability in Europe induced by Cyprus but Gold prices hardly moved. I believe that’s because above mentioned indicators were playing contrary. Hence final blows came when Cyprus said that it will sell Gold reserves to meet shortfall. 

India with 190 billion of CAD (current account deficit) should be happy with lowering gold prices as it will reduce the import bill which along with stabilization in crude oil will reduce burden on burgeoning CAD which in turn reduces pressure on currency devaluation and recent credit rating concern. However, over last week Indian household’s investments in gold depreciated by more than 20% but since we don’t invest in gold for short term hence this should not be a concern.

Going by majority of economist’s view, Gold prices shall remain subdued for majority of 2013 and shall go back again next year. In my view, we should keep a close watch and should start investing incrementally from June onwards distributing investment over next 12 months. After all we Indians will have to part with Gold during our kid’s marriage which is still few decades away (for me :) ) and currencies will always depreciate with growing demand for food and fuel hence as far as gold can beat inflation we should be good.

Happy investing!

Update
Few weeks have gone by since I originally published above post on 20 April 2013 and today is 17 May 2013.

Markets have aligned with my predictions:

This is longest losing streak for Gold since 2009
Gold investments have almost halved in first quarter
Gold per ounce is trading at 1374.99 (Spot)
Gold ETF investment has shifted to Equities (in US market)
Inspite of Akshaya Trithya and Strike by Jewellers in Mumbai, Gold prices in retail market have gone down
Why? US economic numbers are strong indicating they won't go for another quantitative easing which means lesser dollar will be printed which in turn strengthens the currency and reduces inflation risk. Remember Gold is strongest hedge against inflation if equities are not up, by reverse logic Gold had to come down.

Don't forget to accumulate Gold from here...remember we have to marry of our kids.

Regulatory Climate will remain Dynamic and Adaptation is only option for Banks

 

World is facing dual challenge of depression hit growth and fragile banking environment in developed economies which are slowly but surely engulfing growth engines of BRICS nations. Banks are facing near perfect storm of challenges and conflicts in an uncertain and volatile environment both locally as well as globally. Since 2008, its strongly felt that financial industry is needed to restore investor's , customer's , economy's and nation's confidence. Internal competition within financial industry as well as external competition from outside is adding to pressures in financial sector across nations. Investment banking units of 'too large to fail' banks have fallen from echelons and has added to the gloom so much that banks such as UBS and Credit Swiss have been restructured drastically. Restructure in Swiss banks with pedigree of several centuries is a strong indicator of competition and macro-environment, drastic steps have added emphasis on operating efficiency as well as on derisking of portfolios. Profile of Risk and compliance functions have grown significantly as banks are driven to re-balance systems, processes and business models to meet stringent policies by central banks and Global financial support system.

While some banks have decided to concentrate on core strength by winding off non-traditional units some other banks target to de-risk the portfolio by expanding further across the globe in developing economies. These Global banks will be needed to adapt their Global models according to central bank's policies of nation in which they expand but adaptation will remain challenging since national policies remain fragmented across continents and nations.

Developed vs Developing Economies

 

In near future, World Banking index (if such index exists) shall lag World Stock indices since banks will bear major expense to adapt for new regulatory environment which will put pressure on RoE as well as RoCE. Though numbers might appear skewed since many private (India) as well as state owned banks (China) in developing economies are showing strong growth and healthy bottom line. However if we consider broad based numbers across the banking industry in India and discount for risk due to  shadow banking system in China then two economies don't stand that far away from global economy.

Wondering if this is right time to quit banking industry for good? What do you think?

Tax Planning Section 80C

 

Mandatory EPF, Voluntary PPF and the lesser know VPF

 

Though all salaried class are well aware of PF or EPF which is mandatorily deducted from their salaries but not many are aware of VPF. Here I list down few points to do a quick comparison between PPF and VPF and why one must put some money in VPF instead of PPF.

PPF

Interest - PPF rates are now market linked, ppf rate will be 0.25% above market rate of 10 year Govt securities. Currently its 8.8% though next year its expected to be lower around 8.5% pa. Interest is compounded annually though its calculated on monthly basis. Hold on to PPF till maturity to maximize compounding effect.
Frequency - Can submit 12 times a year

Always submit premium before 5th of a month to earn interest for that month as interest is applicable on minimum balance in account b/w 5^th and 30^th of that month.
Tax benefit - No tax on interest earned, withdrawls or maturiy Best part of PPF is one can also take a loan against it, but loan cannot exceed 25% of the balance in the preceding year. Interest charged on loan is 2% till 3 years and 6% for longer tenures.

From current fiscal onwards i.e. 2012-2013, one can open PPF account even with ICICI as well as IDBI.

VPF

Voluntary Provident Fund (VPF): One can contribute more than PF ceiling of 12% mandated by Govt. VPF enjoys same benefits as PF except that employer is not liable to contribute towards VPF unlike EPF.
Maximum contribution: VPF + EPF must be less than 100% of basic salary
Interest - Interest rate of VPF is same as EPF and withdrawl is tax free. Interest rate for VPF/EPF is higher than PPF (as of Jan 2013)
Investment Period
VPF - Amout paid at time of leaving the job. Can be transferred from one company to another
PPF - Amount can be withdrawn at maturity i.e. after 15 years
Tax implication:
VPF like PPF eligible under 80 C for Tax benefit. No tax on withdrawal

Additionally one can break investment into VPF across months, so one need not invest same amount every month instead one can invest in single shot or once every month or only for a few months.
VPF savings are deposited as part of PF in PF account itself


If you are salaried and have to decide between the two, Voluntary provident fund is better than PPF due to a) Higher Interest rate (compare rates in financial year in which you need to take decision) b) quick process c) Locking period is less

Customer Experience and value of client Retention

Everyone knows  that customer retention is highly cost efficient compared to new client acquisition still companies end up overlooking basic concepts through which they can convert customers to promoters. Promoters through word of mouth marketing can do for companies more than millions spent on marketing budgets.

Customer experiences or interacts with your company through:
1. Product/Offering – product and service characteristics and how your customers use or experience them
2. Brand – Through advertisement, marketing campaigns etc
3. Touch points – such as sale store, customer service, social media etc

Based on experience through above interaction points, either customer will convert into a promoter or detractor. Importance of above factors varies from industry to industry, for example offering is more important for Apple however brand is more critical for Marlboro while touch point is most important for service sector such as in banking industry.

Human Factor

Though customer will always weigh best possible options in the market before making any purchase but given few choices customer may decide to go with company with presentable product that offers excellent customer service compared to one that offers excellent products but not so great service. Human beings like to be given importance and value trust and honesty shown by a company that offers better customer service.

How to convert clients into promoter?

• Inbuilt ‘Customer Satisfaction’ in company’s and employee DNA

• Design experience for customer that cannot be imitated quickly by competition. Weave your service around this concept

• “Make them feel valued”, “Make them feel important”, “Share their values” – In brief listen to customers and respond to their feedback

CVA, Perceived Value and Pricing Power

Winning strategies of companies across the sector and geographies often maintain balance b/w following
• Low cost operations &
• Superior customer value

Some companies specifically innovation driven and in technology domain such as Apple are able to consistently report strong margins. To understand what lets these companies rake in higher margins in this competitive industry we need to understand two terms i.e. Actual Value/Unit, Perceived Value/Unit & Customer Value Added.
Actual Value Per Unit (AVPU) = Perceived Value Per Unit (PVPU) + Delta (∆)
Perceived Value Per Unit = Variable Cost Per Unit (VCPU) + Customer Value Added (CVA)
CVA or Customer Value Added is the additional value provided by the organization and as perceived by the society. Higher the perceived value of a company’s products, higher will be premium that can be added to the product price. Hence strong perceived value or higher CVA value can be driver for stronger financial results and vice versa.

Marketing campaigns, Advertising, Branding, Positioning, Innovation, Quality and other tools that can capture customer’s imagination drive up the perceived value. Though marketing campaigns play major role in branding and positioning of product but marketing teams shall be careful about using their tools due to diminishing returns beyond the inflection point. Managing perceived value and CVA are key to manage brand as well as pricing power hence perceived value as well as CVA should be an input into marketing campaigns. This is more true for consumer goods industry which shows oligopolistic behavior.