Vol 6 - Issue 6 | October 2012 | Rs.3.

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Where do they stand?

Over the past five years,The Wise Investor has brought to you the views of persons who saw the global financial and economic crisis coming and articulated approaches that could prepare investors for what has followed since the official onset of the crisis in August 2007. Zero interest and negative interest rates are likely for a protracted period and this is never a good sign of the state of the real economy. The U S Fed and the ECB have no idea of how to exit from the gargantuan balance sheets that they have in place. The monetary policy pursued will eventually lead to hyperinflation. It is tough to predict the timing of how and when this crisis ends. The situation in Japan gets direr by the day despite 20+ years of fighting deflation. Be prepared for long-lasting lifestyle changes, though it may be slow to come about. Equities are deeply overvalued in the developed world. In emerging markets, equities must be rented by smart trades and not be pursued as a buy-and-hold asset class. Gold remains a preferred asset class. Do not be wary of staying in cash too. Capital Preservation must be a key investment objective for investors in this macro environment. QE Gangnam Style

Perspective
There has been much action by the governments and central banks in the developed world both throwing several trillion dollars as so-called solution to the crisis. The size of balance sheets of the U S Federal Reserve and European Central Bank, which had a combined size of under a trillion in 2007, today is in excess of $ 6 trillion and set to mount further. Nothing that caused the crisis has been solved by the actions of the central banks and governments.Where do the fairly long list of persons (for the best among them, check out our preferred blogs and books published in The Wise Investor of September 2012) who saw the crisis stand now? The sum and substance of the views of this group is: We are a long, long way from a genuine solution to the problems in the developed world. Be prepared for long periods of low and slow growth. Throwing more debt (even if the source changes) is no solution to the problem. The worst is yet to come in the Eurozone. U.S situation is dire but for now has taken a backseat to the Eurozone, which is in the limelight. The focus of policy makers still continues to be to safeguard big banks and private bond holders. Periods burst of deflation is likely. Any recovery in the economy is unlikely to be of a sustainable nature. Unemployment remains a far bigger problem than what is suggested by the official numbers. Sundaram Asset Management
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Image of the Month

Source: Colonel Flick (via The Williambanza17 Blog http://williambanzai7.blogspot.in/), September 2012 The Wise Investor October 2012

India View

Equity

India View

Bonds

Flow & Volatility

Indian markets have delivered about 22% in 2012, making most pessimists go back to the drawing board. But it is important to note that much of this return was in brief spurts causing fear and trepidation as to whether these returns are ephemeral. When sentiment is poor, investment cycle will not pick up on low interest rates alone. There has been a massive shift of money from risky assets to bonds to protect money from volatility, which pushed bond yields lower, sucking in more money. That appears to have ended now and money will now have to look for value deals in overseas markets as well. Further, countries with global trade surpluses are also investing into emerging markets as they find US bond yields too low.

Liquidity eases, but...

Outlook: The change of guard at the finance ministry has set the ball rolling for the much needed fiscal consolidation this bodes well for the bond markets. The markets are likely to take this with cautious optimism, as a lot needs to be done to rein in the fiscal deficit to 5.3% as estimated by the finance ministry. The game plan focuses on the meeting the divestment targets and selling 2G waves. Lowering the expenditure of the government and augmenting the revenues can only resolve the interplay of current account deficit and fiscal deficit. In 2012 so far, we have had $ 21 billion inflows on equity and deb, which helps in addressing the current account woes Liquidity in the market looks comfortable with the central banks

Corporate profit growth will remain muted for some more time on the back of higher provisioning cost in the banking system, and the oil and gas sector having issues of their own. Capex cycle, especially power, looks very weak and will impact equipment suppliers. Consumption sectors are also slowing down on account of the high growth that we had in the past few years and a delayed monsoon and festive season, but does not concern us as much as the infrastructure space. The flow data seems positive and that should help equity inflow into some of the leveraged sectors such as power and infrastructure improving confidence significantly. This should help grease the wheels and increase the velocity of money. Equity assets have been shunned by all investors and will come back in favor for want of alternatives and a willingness to increase risk levels. Riding the volatility through by buying the dips is an attractive option, and a systematic investment plan a simpler option. Midcaps may be viewed as risky assets, but still outperform large caps by a wide measure. Volatility is more apparent in equity markets, while the bond markets may appear to be an oasis of calm. Equity assets do, however, have the potential to earn more and if one can reduce the lumpiness through a SIP, then one can take advantage of volatility. Satish Ramanathan Head - Equity A detailed view is available at www.sundarammutual.com Sundaram Asset Management
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1% NDTL not breached and capital account flows also improving can relieve pressure on liquidity alongside the lower credit growth the incremental credit growth from March 2012 at 96.2% has declined to 72.6% now. We expect the central bank to act pro--actively to contain the deficit within the 1% NDTL band if liquidity tightens in the busy season. We are also wary of the Rs 20000 to 30000 crore per month cash leakage in the festivities for the nest 2 to 3 months. Going forward, inflation looks to escalate on account of revised electricity prices and diesel price hikes. In this backdrop it will be difficult for RBI to cut rates yet in the upcoming monetary policy at the month end but any further government action towards fiscal consolidation may provide it room to ease rates. Strategy: With the current regulation of the liquid funds securities being marked to market with over 60 days and sector allocation limited to 30% of the fund size, it becomes imperative to maximize the yield of the 30% of the portfolio with adequate credit in the money market funds. On the longer-bond case for yields moving lower further looks stronger than before and we would look to remain invested for the fiscal 2013 and maintain duration with only switching securities. Dwijendra Srivatsava Head - Fixed Income A detailed view is available at www.sundarammutual.com The Wise Investor October 2012

The Mish Take

Chart of the Month

Correlations (2007-12 vs 2000-03)
Managed Futures Global Equities Long/Short Equity Absolute Return Inv. Grade Bonds Corp. High Yield Commodities Gold

Concerns? What Concerns?

Even though the German constitutional court gave its blessing to ECB president Mario Draghi's OMT (Outright Monetary Transactions) program, Concerns Mount that ECB Bond-Buying Program Is Illegal. Concerns? What Concerns? Concerns are in the eye of the beholder. Moreover, I have no doubt that German Chancellor Angela Merkel knows full well that not only is the ECB's program in violation of ECB mandates, it is also against the German constitution. Had Merkel made objections against the OMT, the court would likely have struck it down. However, Merkel does not want the disintegration of the euro on her watch and that is all that matters. There was no vote by German citizens. And as expected, the German constitutional court bowed to her majesty Angela Merkel. She was willing to sell her soul for her political beliefs and to preserve her legacy. Merkel sold her soul alright, its her legacy that is in question. Concerns by the German central bank do not matter either. The same thing happened with Fed actions in 2008 and 2009. I wrote about this well in advance (on April 03, 2008 to be precise), and it is one of my personal favourite posts. I have referred to it often enough but in case you missed it, please consider the Fed Uncertainty Principle, specifically corollary number four. Uncertainty Principle Corollary Number Four: The Fed [ECB] simply does not care whether its actions are illegal or not. The Fed [ECB] is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking. Politicians in high power as well as central banks do not give a damn about concerns, nor do they care about obvious illegalities. They do what they want because they consider themselves to be above the law. Concerns about legalities are for peons, not the royal court. In the end, it does not matter what the concerns are, or even what the popular vote total is. All that matters is who gets to vote, and more importantly, who gets to count the votes Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com

1.00 -0.44 -0.01 -0.19 0.05 0.10 0.04 0.45 0.05 -0.30 -0.17 0.34 0.19 0.14 0.27
Mgd. Futures

1.00 -0.79 0.93 0.20 0.51 -0.33 0.14 0.46 0.80 0.05 0.69 -0.15 0.17
Global Equities

1.00 0.21 0.62 -0.04 -0.04 0.59 0.81 0.12 0.76 0.07 0.26
L/S Equity

Mar 00-Mar 03 Oct 07-Jul 12 1.00 0.19 0.06 0.50 0.50 0.21 0.64 -0.09 0.23
Abs. Returns

1.00 -0.04 0.22 0.09 -0.05 0.14 0.39

IG Bonds

1.00 0.02 1.00 0.54 0.01 0.28 1.00 0.13 0.34

Corporate Commod. HY Gold

Source: MPI Stylus, Absolute Return Partners LLP

In the chart, I have compared correlations during the 2000-03 period (bright blue) with correlations in the current environment (dark blue). As you can see, with one or two exceptions, correlations are generally much higher now. Now, you could quite reasonably confine this observation to the academically interesting but why should I care? category, if it wasnt for the fact that most investors around the world continue to manage money in a way that is deeply rooted in the Modern Portfolio Theory school of thought even when facts suggest that a different approach to asset allocation and portfolio construction is warranted. Nowadays, only a handful of sovereign bonds are considered safe haven assets. Pretty much all other asset classes are now deemed risk assets and they move more or less in tandem. Even gold looks and smells like a risk asset these days. In the 2000-03 bear market commodities were an excellent diversifier against equity market risk with the two asset classes being virtually uncorrelated (+0.05). Nowadays, the two are highly correlated (+0.69). It follows that we are not only in a low return environment at present, as evidenced by the paltry return on equities since the end of the secular bull market in early 2000, but we cant rely on the ability to diversify risk either. Niels Jensen, Absolute Return Partners (www.arpllp.com)

The views presented by the author (s) do not necessarily represent that of Sundaram Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram Asset Management

The Wise Investor October 2012

The Outside View

Investment Quiz
1 How many mutual fund houses are there in India now? 2 What is name of the German central bank? 3 What does PIIGS denote? 4 Who is the author of Big Short: Inside The Doomsday Machine? 5 Name the person in the accompanying picture? He too has played a key role in altering the shape of equity markets in India by donning key roles over the past decade and a bit.

Going for Gold

This historical evidence also highlights the sheer conceit of Billyboy (Ben Bernanke, US Federal Reserve Chairman). His ideological faith in monetary quackery, otherwise known as quantitative easing, assumes he can torpedo the entirely natural human desire to deleverage in the wake of a debt bust by forcing economic agents to take on ever more risk. And he continues to cling to this belief despite the fact that the evidence since 2008 is that QE does not help the real economy, even though GREED & fear will admit there is evidence that it does give short-term support to financial asset prices, primary to the benefit of the well-off. Still if the Fed chairman does go formally in this open-ended direction, it means that the relative ugly trade between the US dollar and the euro has become a much harder call. It also means that the yen faces renewed upward pressure for the reasons discussed here last week unless the Bank of Japan responds with a radical initiative of its own, and that would seem unlikely so long as Masaaki Shirakawa is in tenure. All of the above is, obviously, mega bullish for gold bullion as GREED & fear continues to view gold bullion, as well as its precious metal appendage silver, as the key beneficiaries of the bull market in Western central bank balance sheet expansion, which has been under way since 2008. GREED & fear will, therefore, add another ten percentage points to the weighting in physical gold bullion in the global portfolio for a US-dollar denominated pension fund by removing the longstanding investment in Asia ex-Japan physical property, which has been in the portfolio since November 2003. While Asian property has been a good investment since then and will be a beneficiary in US dollar terms of more QE in America, the reality is that it has become a much more complicated story in recent years than it was back in 2003. By contrast, gold bullion remains a much purer play. It will now account for 45% of the global portfolio. Christopher Wood, Managing Director & Strategist of CLSA Asia-Pacific, an independent research outfit and author of the weekly report GREED & fear. Source: www.clsa.com Sundaram Asset Management
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Answers for September 2012 Quiz 1 If a fund is treated as equity-oriented, what are the tax benefits? No tax on long-term capital gains and dividend 2 What is the key benchmark index in Brazil? Bovespa 3 Who is the author of Exorbitant Privilege? Barry Eichengreen 4 This Web site started off as `Jerry and David's Guide to the World Wide Web'. Name the website? Yahoo! 5 Name the person in the accompanying picture? He has played a key role in altering the shape of equity markets in India? Ravi Narain, Managing Director & CEO. National Stock Exchange Disclaimer
Mutual fund investments are subject to market risks, read all scheme related documents carefully. The Statement of Additional Information of Sundaram Mutual Fund and Scheme Information Document of Schemes of Sundaram Mutual Fund, which are available at www.sundarammutual.com. Risk Factors: All mutual funds and securities investments are subject to market risks. There can be no assurance or guarantee that a scheme's objective will be achieved. NAV may rise or decline, depending on factors and forces affecting the securities market. There is risk of capital loss and uncertainty of dividend distribution. General Disclaimer: The Wise Investor, a monthly publication of Sundaram Asset Management, is for information purposes only. The Wise Investor is not and should not be construed as a prospectus, scheme information document, offer document, offer solicitation for an investment and investment advice, to name a few. Information in this document has been obtained from sources that are reliable in the opinion of Sundaram Asset Management. Opinions expressed by authors do not necessarily represent that of Sundaram Mutual Fund or Sundaram Asset Management or Sundaram Trustee Company or Sundaram Finance, the sponsor. Statutory: Mutual Fund Sundaram Mutual Fund is a trust under the Indian Trusts Act, 1882 Sponsor (Liability is limited to Rs 1 lakh): Sundaram Finance Limited; Investment Manager: Sundaram Asset Management Company Limited. Trustee: Sundaram Trustee Company Limited. Past performance of Sponsors/Asset Management Company/Fund does not indicate or guarantee future performance

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
The Wise Investor October 2012

Blog Picks

The Fantasy of Debt

Easy, cheap credit has created a fantasy world where everyone "deserves" everything right now, and trade-offs and sacrifice have been banished as unnecessary. Everything can be bought and enjoyed now. In the old days when credit was scarce and dear, buying a better auto required substituting 1,000 brown-bag lunches for restaurant meals: yes, four years of daily sacrifice. Trade-offs and sacrifices were the core of household finances for those families that sought to "get ahead" or purchase things that required substantial cash. Abundant, cheap credit upended the incentives to make adult trade-offs and sacrifice consumption for future benefits. Why eat 1,000 brown-bag lunches when you can buy a new car for $500 down and "easy" monthly payments? Heck, you don't even need to pay for the lunches with cash; just charge them.Want to go to college? Just borrow the money via student loans. Why scrimp and save when Uncle Sam will guarantee $100,000 in student loans? Why choose between a lavish vacation, a year of college or a boat? Buy all three on credit. This mentality has infected the entire nation and culture. Why should we have to choose between $600 billion military spending and $600 billion Medicare spending? Let's just borrow the $1.2 trillion every year to pay for both. I know young families who are "working poor," where the father earns less than $20,000 a year and Mom stays home with the two young kids--yet they own a much nicer and newer car than I do, and the Federal government gives them over $2,000 a month in cash benefits: $500 rent subsidy, $600 in food stamps and $1,000 in free medical care. As a self-employed person, I have to earn $3,000 a month to net the $2,100 this family receives every month, so it's like a magic full-time wage earner slaves away and gives this family his entire earnings. Only there is no "magic worker:" the $3.8 trillion the Federal government distributes every year is two-thirds tax revenues and one-third borrowed. To the degree that our government distributes $1.3 trillion in borrowed money every year, everyone receiving money from the Federal government is living off debt that draws interest and will never be paid. Thus it is an artifice to say that a person collecting money from the Federal government is "debtfree": the debt they are incurring is simply once removed. Credit leverages income. If $10 per month in disposable income can leverage $100 in debt, then if disposable income rises to $20 per month, debt can be doubled to $200. Lowering interest rates increases leverage. If the interest rate is cut in half, $10/month can leverage $200 in debt. We are now at the end-game of these two expansions of leverage: incomes are no longer rising, and interest rates have been cut to near-zero when adjusted for inflation (a.k.a. loss of purchasing power). Relying on credit to fuel "growth" in everything only worked when incomes were rising and interest rates could be cut. Now that incomes are stagnant for 90% of the populace and interest rates have been slashed, there is no way to increase leverage. Adjusted real income has been stagnant for the "bottom 90%" for the past 40 years. The savings rate has plummeted; the brief spike up in savings triggered by the global financial meltdown has already faded. U.S. households save a mere third of what they once put aside. Note that the savings rate is not broken out by income; the bottom 90% probably save very little, and the top 10% is probably responsible for most of the savings. If income is flat and interest rates already near zero, then where is the leverage for additional debt going to come from? The answer is the game of relying on ever-expanding debt is over. You can claim phantom assets and income streams as collateral for a while, but eventually the market sniffs out reality, and the phantom assets settle at their real value near zero. Once the collateral is gone, the debt is also revalued at zero, and the debtor is unable to borrow more. This is the position Greece finds itself in. Living within one's income (household or national income) requires making difficult trade-offs and sacrifices: either current consumption is sacrificed for future benefits, or the future benefits are sacrificed for current consumption. You can't have it both ways once the collateral and credit both vanish. Charles Hugh Smith Source: Of Two Minds (Source: http://www.oftwominds.com/blog.html)

The views presented by the author (s) do not necessarily represent that of Sundaram Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram Asset Management

The Wise Investor October 2012

Performance Tracker Global

Index Year-To-Date Return S&P 500 Dow Jones Nasdaq Composite Nikkei 225 Dax FTSE 100 S&P GSCI Index Spot MSCI World MSCI Europe MSCI Asia ex-Japan Crude Gold Emerging Markets (MSCI Indices) BRIC Brazil Russia India China Korea Taiwan Singapore Honk Kong Indonesia Mexico South Africa Turkey Top Performer Worstt Performer 4.5 -5.6 7.4 23.6 5.4 14.7 11.7 16.4 18.0 1.7 20.6 8.8 28.9 Turkey Brazil 21 25 18 2 19 8 13 7 6 24 4 17 1 6.2 2.7 5.3 14.6 6.0 7.0 7.2 1.2 7.5 5.2 6.8 3.7 -1.3 India Crude 8 15 10 1 9 5 4 20 3 11 7 13 23 4.5 -5.6 7.4 23.6 5.4 14.7 11.7 16.4 18.0 1.7 20.6 8.8 0.3 Turkey Brazil 21 25 18 2 19 8 13 7 6 24 4 17 1 -23.7 -30.4 -27.0 -19.1 -18.3 -6.2 -10.5 -4.6 -3.0 1.1 3.8 -7.4 5.5 Gold Brazil 23 25 24 22 21 16 20 15 13 8 6 17 5 8.7 1.6 13.9 5.9 13.9 21.4 11.3 14.0 24.5 7.2 31.5 15.5 10.4 Mexico Brazil 21 25 14 24 13 7 17 12 5 23 1 11 18 -7.2 -17.5 9.8 -1.6 -5.9 28.1 9.6 9.4 19.0 45.3 47.9 28.1 33.6 Gold Brazil 24 25 18 21 22 10 19 20 13 5 3 11 9 -31.0 -22.2 -39.6 -21.0 -36.9 -10.7 -15.9 -22.9 -10.1 52.6 9.1 9.1 11.9 Gold Japan 22 19 24 18 23 13 15 20 12 2 8 7 6 14.6 10.0 19.6 12.6 22.3 3.0 3.2 10.9 9.0 13.2 5.3 13.3 One Month Three Months Six Months One Year Three Years Five Years Rank 10 9 5 25 11 14 4 17 21 16 3 1

Rank Return Rank Return 9 15 5 12 3 23 22 14 16 11 20 10 2.4 2.6 1.6 7.7 3.5 0.5 -1.4 2.5 0.7 6.8 -1.9 4.7 18 16 19 2 14 22 24 17 21 6 25 12 14.6 10.0 19.6 12.6 22.3 3.0 3.2 10.9 9.0 13.2 5.3 13.3

Rank Return Rank Return Rank Return 9 15 5 12 3 23 22 14 16 11 20 10 8.7 9.1 12.1 -2.4 2.5 -2.8 -8.3 -1.8 -3.0 -9.3 -3.4 23.7 4 3 2 10 7 11 18 9 12 19 14 1 27.3 23.1 29.0 9.4 31.2 12.0 12.6 18.8 18.1 16.7 8.6 9.1 4 6 3 19 2 16 15 8 9 10 22 20 36.3 38.4 46.8 -6.0 27.2 11.8 43.9 16.4 9.8 13.9 67.4 75.9

Rank Return 8 7 4 23 12 16 6 14 17 15 2 1 -5.6 -3.3 15.4 -43.3 -8.2 -11.2 21.9 -19.7 -29.9 -16.0 42.6 138.3

Source: Bloomberg; Analysis: Sundaram Asset Management; Returns is in percentage and in U.S. Dollar terms for each period and not on an annualised basis. Sundaram Asset Management
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Analysis: Sowmya The Wise Investor October 2012

Voices
The New Food Crisis: 10 years ago we entered a new era of rising resource prices after at least 100 years of steadily falling prices. It now appears that about five years ago we also entered a period of sustained food crisis for several of the poorest countries. This situation seems likely to continue for the indefinite future. If it does, it will cause the social structure of several countries to break down, resulting in waves of immigration on a scale unknown in modern times, outside of major wars. In the drive for resources, particularly food but also energy, country relationships are also likely to be destabilized, causing risks to global security. China, more concerned with future resource security than others, will find it particularly tempting to throw its increasing economic and military weight around. This risk also seems to be ignored or underestimated by national governments, although the military arms of several, including the U.S., seem to be exceptions. The vulnerabilities from food pressure can be easily demonstrated and are already beginning to play out. In developed countries, food accounts for only 10 or 12% of our total budget. For several poorer countries, food costs have risen to 40% and above of their total expenditures following the surge in global grain prices since 2002. Global grain prices almost tripled in the last 10 years. If they were to double in the next 20 years it would be painful indeed even for rich countries, but simple arithmetic will show how impossible the situation becomes for those poorer countries that start with a 40% share of food in their budget. Jeremy Grantham, GMO (Source: www.gmo.com)

The Solution is the Problem: On both sides of the Atlantic, the largest contributors to the current crisis are excessive debt and spending.We are now at a point where additional government stimulus measures will have negligible, if not detrimental effects on the economy and long-term growth. Debt has to be reduced, not increased by more deficits. Central planners have demonstrated that they dont have the discipline to implement the Keynesian model of surplus in good times in order to finance deficits in bad times. We have now reached the limit of indebtedness and need to muddle through a painful but necessary deleveraging. The politically favoured option of financial repression and negative real interest rates has important implications. Negative real interest rates are basically a thinly disguised tax on savers and a subsidy to profligate borrowers. By definition, taxes distort incentives and, as discussed earlier, discourage savings. Also, financial institutions, which are traditionally supposed to funnel savings towards productive investments, are restrained from doing so because a large share of their balance sheets is encumbered by government securities. The same is true for pension funds, which instead of holding corporate paper or shares, now hold an ever growing share of public debt. Pensioners, who are also savers, get hurt in the process. The current misconception that our economic salvation lies with more stimulus is both treacherous and self-defeating. As long as we continue down this path, the solution will continue to be the problem.There is no miracle cure to our current woes and recent proposals by central planners risk worsening the economic outlook for decades to come. Eric Sprott, Sprott Asset Management (Source: www.sprott.com)

The U.S. stock market: is simply (and correctly) discounting a much slower rate of economic growth going forward. It is currently in the 13th year of a long-term bear market, the 4th such long-term bear market since 1900. Each one of these bear markets has been defined as a transition from high valuations at the end of a long bull market, back to low valuations. Although valuations today are quite a bit lower than in 2000, the market is still in the middle of a process of becoming cheaper relative to earnings. Just as the valuation of an individual stock goes down when its growth prospects dim, the valuation of the entire market has declined as the economys growth prospects have dimmed. At some point, the markets valuation will be low enough that well be able to confidently invest in stocks knowing the market has already priced in most or all of the effects of our high debt, slow growth predicament, and all the money printing well likely see. In all previous bear markets, that point came at a valuation less than half of what we find today, so our market likely has some ways to go. As with an economy going through a deleveraging process, these bear market cycles take a long time to complete. Fortunately, the benefits for those who wait for end-of-bearmarket valuations are great enough to inspire our patience. The wait will have been worth it when the next opportunity arrives. Until then, we continue to view stocks as an asset to be rented, and only when they are in a very favorable position. Brian McAuley, Sitka Capital (Source: www.sitkapacific.com)

The views presented by the author (s) do not necessarily represent that of Sundaram Asset Management. The article / posts have been reproduced with permission or from reports available in the public domain in order to provide readers access to a diverse range of views on the economy and asset markets.

Sundaram Asset Management

The Wise Investor October 2012

The Wise Investor

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The Wise Investor October 2012