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Thursday, April 19, 2012

Now’s the time for a bond ladder: MW


April 18, 2012, 1:13 p.m. EDT

Now’s the time for a bond ladder

But inflation risk is just one challenge investors face

By Robert Powell, MarketWatch
BOSTON (MarketWatch) — Given what’s likely to happen to interest rates in the coming months and years, now might be the perfect time to use a bond ladder for your portfolio.
That’s according to experts who recently discussed the prospects for fixed-income investments as part of a MarketWatch Investing Insights event in New York.

Rate outlook poses complex risks for bond investors

With interest rates near all-time lows, bond investors are between a rock and a hard place. At a MarketWatch Investing Insights event, bond experts discuss the risks and strategies investors should be thinking about now.
Bond laddering is a technique for generating current income while reducing the effect of rising and falling interest rates on the fixed-income portion of your portfolio, according to William O'Donnell, the head of U.S. Treasury strategy at RBS.
O’Donnell was among the panelists at the MarketWatch event, as was Lee Munson, founder and chief investment officer of Portfolio LLC.
“I look at a bond ladder as a very reasonable and appropriate way to manage your fixed-income portfolio,” O’Donnell said in a recent interview.
In essence, the technique calls for building a portfolio of fixed-income investments (CDs, annuities, bonds, ETFs, and the like) that mature at different dates along the so-called yield curve — the curve that shows interest-rate yields based on maturities — based on your outlook for interest rates.

Interest-rate risk versus inflation risk

If you are unsure whether interest rates might rise or fall in the future, you might put your cash in equal amounts in a number of fixed-income investments — for example, one-third in short-term bonds, one-third in intermediate-term and one-third in long-term bonds. Then you simply roll the maturing bonds back into short-term fixed-income investments.
If, on the other hand, you think interest rates might fall, you would do the exact opposite and invest a larger percentage of your portfolio in long-term fixed-income investments, and a much smaller percentage in short- and intermediate-term fixed-income investments.

Bond investing: risks and strategies

At a MarketWatch Investing Insights panel discussion, William O'Donnell, head of U.S. Treasury strategy at RBS Securities Inc., talks about how investors can best manage their bond investments in a time of ultralow interest rates.
Investing exclusively or largely in long-term fixed-income investments subjects you to interest-rate risk — the risk that the value of your bonds will fall should interest rates rise.
Keep in mind, however, that investing exclusively or mostly in short-term fixed-income investments in today’s market subjects you to inflation risk. That’s the risk that the value of your investment declines as inflation shrinks your purchasing power. (Right now, you’re earning a negative real rate of return on short-term fixed-income investments; the real rate of return is the nominal interest rate minus the rate of inflation.)
With a bond ladder, you are essentially trying to manage many of the risks associated with investing in fixed-income securities, including interest-rate risk, inflation risk, and reinvestment risk. Reinvestment risk is the risk that you’ll have to reinvest in lower yielding investments when your fixed-income investments mature in a falling interest rate environment.

Fed adds to the risk

Managing those risks is made even more difficult given the Federal Reserve and its efforts to bolster the economy.
“The difficulty with the U.S. fixed-income market right now is that it's being heavily manipulated by the Fed and this is all under what the Fed refers to as the ‘portfolio balance’ channel,” O’Donnell said. “They basically want to push base Treasury rates down to levels that force people to go into riskier asset classes in search of more yield or return.”
“And it's worked handsomely well, which is why the stock market keeps going up every week, and why Treasurys are unwilling or unable to sell off in the face of stronger economic data,” he said.
“The Fed is removing the net supply of Treasurys from the market through their quantitative easing, as well as removing duration from the market through ‘Operation Twist,’ keeping real rates negative in many cases,” he said.
Here’s the question that fixed-income investors must answer when building their bond ladder: “When is the Fed going to remove their guiding hand and let the rate markets normalize?” said O’Donnell.
For the record, O’Donnell doesn’t expect the Fed to remove its guiding hand before the end of the year. The Federal Reserve, meanwhile, tipped its hand to the contrary. According to the minutes of its policy meeting in March, members of the Federal Reserve Board are not interested in another round of quantitative easing. Read: Fed less interested in bond buys.
Of course, it’s even more complicated than all that.

Which bonds?

Besides making the right guess about the direction of interest rates, you have plenty more to consider, including which fixed-income investments work best for you in building a bond ladder. The choices include (but are not limited to) CDs, income annuities, corporate bonds, government bonds, municipal bonds, junk bonds, or mutual funds and/or ETFs that invest in fixed-income securities.
If you plan to purchase individual bonds, consider whether you have enough money to do so. Some experts recommend that you have at least $100,000 to build an adequately diversified portfolio of individual bonds. Also, if you plan on building a bond ladder with individual bonds, you have to consider default risk.
You can reduce the risk of default by building a bond ladder with ETFs or mutual funds. Guggenheim and iShares are among those firms that offer a lineup of target maturity date fixed-income ETFs.

India overtakes Japan to become third-largest economy in purchasing power parity: ET BUREAU


19 APR, 2012 ET BUREAU 

India overtakes Japan to become third-largest economy in purchasing power parity


NEW DELHI: Its economy may be in the grips of a slowdown, its polity paralysed and markets morose, but all this hasn't prevented India from overtaking Japan to become the world's third-largest economy in purchasing power terms.

Data just released by the International Monetary Fund (IMF) shows that India's gross domestic product in purchasing power parity (PPP) terms stood at $4.46 trillion in 2011, marginally higher than Japan's $4.44 trillion, making it the third-biggest economy after the United States and China.

India's share in world GDP in terms of PPP, a measure of relative consumer prices across countries, stood at 5.65% in 2011 against Japan's 5.63%, with the gap expected to widen significantly by 2017. In five years, the IMF estimates the share of India's GDP in PPP terms would grow to 8.09% compared with 4.8% for Japan.

Economists said India's move up the league table was a reminder of the boundless potential the country offered, despite the prevailing mood of pessimism.

"This basically turns the spotlight back on the tremendous opportunity India's growth story has even under the given conditions. If India plays its cards correctly through policy measures we can actually achieve much more in the next 5-10 years," said Saugata Bhattacharya, chief economist with Axis Bank.

Added Samiran Chakraborty, chief economist with Standard Chartered India: "This shows that India is no longer an emerging economy. It has already emerged. But beyond that there are not many conclusions one can take from the data." The PPP system allows GDP comparisons to be made by asking how much money would be needed to purchase the same goods and services in two countries and using that to calculate an implicit foreign exchange rate.

Under this method, a dollar should be able to buy the same amount of goods anywhere in the world and exchange rates should adjust accordingly. It also strips away distortions that come with market exchange rates, which are often volatile, affected by political and financial factors that do not lead to immediate changes in income and tend to understate the standard of living in poor countries.
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The Economist magazine's proprietary Big Mac Index, which takes the price of a McDonald burger across 120 countries to calculate the 'real' price of their currencies, is another crude way to measure PPP. India was included in the index recently. It showed that the Indian rupee was undervalued by 62% against the US dollar in January.

PPP methods help adjust income to prices for a meaningful comparison on quality of life in countries with widely different prices and incomes.

"The PPP comparison is more useful while comparing the standards of living between countries," said Ulrich Bartsch, a senior macroeconomist in the World Bank's India office, adding that while the per capita GDP in PPP terms shows that India still has some distance to go to reach Japanese levels, "the difference is less than the comparison of per capita GDP in nominal dollar terms would indicate".
India, according to the IMF's calculations, was able to overtake Japan in 2011 because its economy grew 7.24% whereas in the case of Japan, it shrank 0.75%, hit by a tsunami that ravaged the country and exacerbated the adverse impact of global economic slowdown.

While India may have beaten Japan under this particular system of calculation, under more conventional methods of measurement, it has to travel a long distance to catch up. Under the regular method of GDP calculation, India's economy is well behind Japan. Even assuming an average economic growth rate of 7.5% over the next five years, the Indian economy will be only $2.9 trillion compared with Japan's $6.69 trillion.

For the fiscal year to end-March 2013, official forecasts are for GDP growth of around 7%, slightly higher than the 6.9% expected in the previous year and much lower than 8.4% the year before.

Economists reckon that India will continue to lag behind when it comes to matching living standards of its population with more developed western and Asian economies.

Yet, with its demographic advantage and prospects of sustainable high growth over the next five years, the country is expected to consistently improve its global economic standing.

India, according to the IMF's calculations, was able to overtake Japan in 2011 because its economy grew 7.24% whereas in the case of Japan, it shrank 0.75%, hit by a tsunami that ravaged the country and exacerbated the adverse impact of global economic slowdown.

While India may have beaten Japan under this particular system of calculation, under more conventional methods of measurement, it has to travel a long distance to catch up. Under the regular method of GDP calculation, India's economy is well behind Japan. Even assuming an average economic growth rate of 7.5% over the next five years, the Indian economy will be only $2.9 trillion compared with Japan's $6.69 trillion.

For the fiscal year to end-March 2013, official forecasts are for GDP growth of around 7%, slightly higher than the 6.9% expected in the previous year and much lower than 8.4% the year before.

Economists reckon that India will continue to lag behind when it comes to matching living standards of its population with more developed western and Asian economies.

Yet, with its demographic advantage and prospects of sustainable high growth over the next five years, the country is expected to consistently improve its global economic standing.


Friday, April 6, 2012

India most attractive investment destination: Lord Paul


Fri Apr 06 2012

India is currently the "most attractive" investment destination, London-based industrialist Lord Swraj Paul said today, underlining that retrospective amendment of laws to bring into the tax net Vodafone-type deals will not have any long-term negative impact.

"India at the moment is perhaps the most attractive country for investment... Whenever anything like this happens, people make lot of noise," Lord Paul said when asked whether the controversy over the proposed amendment of the Income Tax Act from retrospective effect would affect investor confidence.
Paul said the investment decisions are not made only by the taxation issues.
"People see the whole package. Is it a friendly country to invest?" he said, however, adding that it may have some impact in the short-run.
The government proposes to amend the Income Tax Act with retrospective effect. The move followed the Supreme Court ruling in favour of British telecom major Vodafone in the Rs 11,000 crore tax dispute arising out of its acquisition of 67 per cent stake in Hutch Essar from Hong Kong-based Hutchison Telecom.
Several global industry bodies have supported Vodafone and written to Prime Minister Manmohan Singh. During his recent visit to India, UK Chancellor for Exchequer George Osborne also raised the issue with Finance Minister Pranab Mukherjee.
Lord Paul, who is on a India visit, said Britain had also made similar changes. "The first time the retrospective tax case came up was in Britain... nobody (investor) holds money. This tax is not the only thing which affects...".
Lord Paul said more than the taxation issue, corruption and scams are more damaging and slowing down policy reforms as the government "is busy sorting out these scams..."
Putting the onus on the industry as well for the scams, Lord Paul said: "Let the business also take the responsibility... This is the responsibility of all people... How can the giver and taker be absolved?"
He reiterated that corruption was not unique to India. In a way the global financial crisis of 2008-09 was also a result of lack of transparency in the banking sector.
Lord Paul said: "(but) India is having too many at the same time... We have to be more transparent."
Asked about his comments on this year's Budget, he said the Finance Minister has done whatever he could, under the difficult circumstances.
"The reason I praised (the Budget) is because Indian economic situation was bad and unless it was a tough Budget, there was no way of solving...," he said.
"From my point of view, under the circumstances he (Mukherjee) has done a good Budget that will solve problems of the country in the longer term," Lord Paul said.
Mukherjee's Budget for 2012-13 had proposed to mop up an additional Rs 41,440 crore through increase in excise duties and hike in service tax.
The tax mop-up measures had come in for criticism from a wide section of the industry.
On the European sovereign debt crisis, the Caparo Group Chairman and Founder said: "Countries were living beyond their means... Lot of countries are in debt that is why the US economy is in difficulty. British economy, European economy are in difficulty."
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Caparo Group looking to more than doubling profits in India

NEW DELHI: UK-based 1.5 billion euro Caparo Groupis looking to more than double its profits from Indian operations to Rs 500 crore by 2013, its Chairman and Founder Lord Swraj Paul said today. 

The group, that has built a strong presence in auto components with 32 manufacturing plants in different parts of the country and also has interests in the energy sector, would be ramping up its production. 

The Caparo Group, which was founded by Lord Paulin Britain with borrowed 5,000 pound in 1968, has profits of Rs 200 crore from the Indian operations. 

Its worldwide operations are spread to Britain, other European countries and the US with the industrial products including steel pipes. 

He said the improvement in bottom-line would come both from scaling up of production with higher cost-efficiency measures. 

The Caparo group has "invested a lot of money in India and we are starting seeing returns," Lord Paul said. 

"I always look at the profits not the turnover. I would like to see Rs 500 crore profit by 2013 (from Indian operations). Today, it is about Rs 200 crore. We will ramp up production and cut cost," he said. 

Stressing that the group's focus would always be on the profitability, he narrated a famous quote, "Turnover is vanity, profit is sanity and cash is the king". 

He said Caparo is one of the largest auto component makers in India and supplies about 30 per cent of the components of Tata Nano among others.