Expert Opinion: (By Pranay Kumar)
As far as aiming at a particular company like ‘JM Financials‘ in your case is concerned, you should be very strong in the domain of your interest. Take up whatever opportunities come in your way to gain experience in the area of investment Banking and Equity Research. Then, develop a good network of friends in the field of your interest and apply for a job whenever they advertise or you can always submit your resume to their HR through their web portal if they have such a provision. Keep your eyes and ears open to suitable opportunities from that Organization. Alumni could be of help to you.

Question: Going forward what is expected from Gold Future as currently the Consumption demand has reduced and improvement in US Economy will reduce investment demand, as Investors will again prefer US Dollar?

Expert Opinion: Gold has been a good investment for many years. This statement is unanimously accepted but very frankly it is only moderately accurate. Gold has been a good investment if measured in any other currency apart from the US dollars. If you reside outside USA Gold has always been a very good investment for you. The ancestral gold reserves of every Indian household will vouch for this assertion. Similarly Investors around the world have mammoth faith in Gold investments and will continue to do so despite rising prices. Gold is the only form of money which has maintained its purchasing power over a long period of time. It is headed only in one direction on a longer term chart and that is northwards. Moreover it has always fared better than any form of government controlled money.

As far as consumption demand aspect is concerned you will appreciate that unlike other commodities gold is accumulated and not consumed. The future commercial demand and supply for gold forms a very small part of the whole equation. Since it is held for monetary purposes it is readily available source of supply, preferably at higher prices. Since dollar and gold are competing form of money they tend to replace each other and considering the size of markets they represent, even a trivial shift in the holders portfolio leads to a magnified change in the prices of gold.

Gold is maintaining its traditional role as an asset to avoid risks like weak dollar, inflation and volatility in equity markets. Apart from that gold has also attracted demand from commodity traders who seek short-term capital gains. The inverse relationship between gold and the dollar has been reasserting itself. The recent Gold rally is mostly due to the dollar weakness and the possibility of inflation. The Wall Street rally amid optimistic US economic data prompted investors to buy riskier assets such as commodities/equities and to dispose safe-haven dollar holdings in US Treasury bonds. On the contrary recently Gold has been heading northwards taking a clue from other commodities and the US dollar, rising when the economic outlook has shown positive signals rather than playing its traditional role. But a market always gets its traditional theories approved in the longer run. One more historical fact which many readers miss is that the biggest percentage moves in Gold prices have taken place when the dollar index has been relatively stable. Consider the following years on a dollar vs. Gold chart and you will see for yourself – 1973-1975, 1978-1980, 1985-1987, 2005-till date. Now, even if you think that the worst for dollar is over, the rest is left for you to understand.

On a short term basis, technically, Gold had closed last week on a positive note at $953 at COMEX. The precious metal tried the down side early this week but found good support near $931. Top side resistance is found at $960 which was the high of last week at the COMEX. It will be worthwhile mentioning that last year August saw the high of $971 at COMEX which seems to be the next big resistance in the near future.

Question: Could you please explain me the difference between Mortgage backed securities and Asset backed securities with example?

Expert Opinion: An asset-backed security (ABS) is a security whose value and income payments are derived from and collateralized (or "backed") by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually. Pooling the assets into financial instruments allows them to be sold to general investors and allows the risk of investing in the underlying assets to be diversified because each security will represent a fraction of the total value of the diverse pool of underlying assets. The pools of underlying assets can include common payments from credit cards, auto loans, student loans and of course mortgage loans, to more specific like cash flows from aircraft leases, royalty payments and movie revenues.

A mortgage-backed security ( MBS ) on the other hand is an asset backed security or debt obligation that represents a claim on the cash flows from mortgage loans, most commonly on residential property. So MBS is a subset of ABS. Firstly, mortgage loans are purchased from banks, mortgage companies, and other originators. Then, these loans are assembled into pools. This is done by government agencies, government agencies and private entities. Mortgage-backed securities represent claims on the principal and payments on the loans in the pool, through a process known as securitization. These securities are usually sold as bonds, but financial innovation has created a variety of securities that derive their ultimate value from mortgage pools. Residential mortgages have the option to pay more than the required monthly payment (curtailment) or to pre- pay off the loan in its entirety. Because of curtailment and prepayment affect the remaining loan principal, the monthly cash flow of an MBS is not known in advance, and therefore presents an additional risk to MBS investors.

Question:- Has the global recession bottomed out?

Expert Opinion:-Recent developments at the global level and in the Indian economy indicate that the recession is bottoming out. The different macro-economic numbers released by the US Federal Reserve and other agencies indicate that industrial activity is expected to rise as the purchasing manager’s index has continuously gone up from Jan ’09 onwards.  Retail sales are stabilizing, while consumer confidence, which turned around in Mar ’09, continues to rise towards normal. Housing showed recovery signs in May ’09. The rising oil price, which hovers now around US$70 per barrel, indicates expectation of picking up of industrial activity.

The Indian scenario has also been comfortable. While Apr ’09 IIP numbers released in Jun ’09 showed positive signs at 1.4% growth, the overall outcome coupled with political stability has been received well by the industry. Housing sales have picked up since Apr ’09. Though on the trade front performance is not comfortable, the large domestic market with higher push for infrastructure gave hopes to the Prime Minister’s Economic Advisory Council (PMEAC) Chairman to put Indian growth estimate for 2009-10 at 6.5%.

Question:-  What are the reasons for the recent surge in the stock market?

Expert Opinion:-The Central banks of the world in a coordinated manner have effected quantitative easing in a big way.  Under this, the interest rates have been taken to almost zero.  Thus, Central banks create new money and use it to buy govt. bonds and treasuries from banks to increase money supply in the market. This money, which has not been neutralized, has found its way to stock markets. Therefore, despite poor business fundamentals, the stock market across the globe surged during this year, especially since Apr ’09.  Iconic investors like Jim Rogers have been very vocal because of this reason.

Question:- Discuss the impact of scrapping entry load on Mutual Fund Investments.

Expert Opinion:-The entry load on the existing schemes of mutual fund was scrapped by SEBI on Jun 18, 2009. The entry load of 2.5% was used by mutual funds to provide upfront commission to distributors for mobilizing retail investments. This was waived for institutional investors. The entry load was thus cast against retail investment, which is supposed to be the mainstay of mutual funds.

Due to the new developments, fund houses fear a fall in mobilization of retail fund in the near term. However, this will result in more transparency with regard to commission paid by the investor, who can now bargain for better services. The mutual fund industry is fragmented. Hence, competition may reduce the commission paid, as has been the case in the equity market.  

Question:- What is the concept of anchor investor? Will it help revive the primary market?

Expert Opinion:-SEBI, at its board meeting on Jun 18, 2009, approved the concept of anchor investors.  As per SEBI stipulations, these are investors who: 

In the present volatile markets, these anchor investors will help in building investors’ confidence. It will help PSU issues slated to hit the market in near future.

On the flip side, the lock-in period of 30 days may help the investment banks having mutual fund arms to make 25% return from the date of allotment. Further, small and medium size IPOs may get hurt due to early exit by bigger investor, leading to suppression of the market price. It is interesting to note that the anchor investor gets firm allotment of shares, as against the proportionate allotment that other QIB participants would get.

Question:- How to value real estate companies?

Expert Opinion:-Real estate investment has always been surrounded by lack of consensus about their valuation metrics. The reason is not far to seek. The size, location of the property and its use are important determinants. The different methods recommended are:

EV/ EBITDA: This is used as a thumb rule for properties in which lease rentals are predictable.
Investment/Income: This takes investment in the numerator and estimated rental value (ERV) in denominator.

Under this, free cash flows are discounted till today to arrive at the property value.

Though discounted cash flow is more intuitively appealing, it also presumes the clarity of business model and cost structure. The thumb rule of EV/EBITDA is used more frequently, but the same is subject to volatility as it is a cross-sectional rather than time series data. Hence, it carries with it seasonality of cash flows.

The other methods include cost method, highest and best use method, and types of ownership like freehold, leasehold, etc. which are employed depending on the purpose of valuation.