The consensus is that by the end of 2022, interest rates will jump by 2.5-3% in a series of further interest rate hikes. The dollar has gained great strength due to this development and is attracting a substantial flow of capital from other geographies and currencies. Risky assets have experienced punishment in the form of ‘risk-off’ as investors look to move to the safer dollar and US treasuries, and asignificant sell-off in equity markets and currencies has been witnessed.
Investors who want incremental US exposure are at sea. Though Sebi has allowed overseas investment through the mutual fund (MF) route, it has maintained the February 1 overall investment limit of $7 billion. Many MFs are continuing with the ban on fresh investments. For instance, Motilal Oswal MF continues to prohibit fresh investment in its five international schemes. In a note to investors, it said that it has not seen any major redemptions in the past few months since these restrictions were applied, resulting in no additional room for accepting fresh investment in any of the international funds.
Many investors are continuing to invest through the overseas exchangetraded fund (ETF) route. ETFs generally deliver market performance at a reasonably lower cost in normal market conditions. However, a key factor often ignored while investing in ETFs is the premium or discount to the net asset value (NAV). This happens when ‘normal’ conditions are replaced with ‘fast’ market conditions or other external factors (such as breaching of Sebi limits).
While ETF traders are mindful of how to play premiums or discounts, investors need to be aware that ETF is not as simple as a low-cost MF. ETF prices can be distorted from the underling NAV. The other matter of concern is the tracking error — the difference between the performance of the ETF and the index it tracks.
Many funds investing in ETFs face this challenge because of the cash they hold. If not invested in a timely manner, it becomes a reason for the tracking error, or cash drag. Also, the indices that ETFs track undergo a periodic rebalancing, in which some stocks are added to, and some removed from the index. This rebalancing adds to the ETF’s additional cost, which adds to tracking errors.
Fortunately, there is an alternative. RBI allows individuals to remit up to $250,000 a year under the liberalised remittance scheme (LRS) for various purposes, including investments.
Boutique fund managers run niche investment strategies with a focused approach and well-defined investment criteria. These strategies are usually characterised by a concentrated portfolio of companies that have a high return on equity (RoE), no or little leverage, consistent growth in profitability and generate high free cash flow.
LRS limits can be used to invest in such strategies that offer investors active management, a quality investment portfolio and little chance of leakage of returns due to discounts or tracking errors. Moreover, investors can plan to use LRS limits for investment throughout the year by staggering the investment in monthly remittances, which can create the impact of dollar-cost averaging. One can use LRS to remit a fixed sum, around $10,000 every month, to create asystematic investment mode that helps in overriding the exchange rate volatility along with the opportunity to invest at different market levels, giving a better averaging of investment at cost.
Investors need to be cognisant of two things — costs and size. While ETF costs are at 0.5-1.0%, boutique investment firms come with fund management fees of 1-2%. Also, investors with small ticket sizes may prefer the ETF route, as specialised fund managers may not accept small investment sizes, or it may be an expensive proposition.
Also, smaller LRS transfers are unviable due to attached forex costs. So, in a nutshell, using the LRS route gives advantages on three fronts:
It creates a dollar asset that can be used for any future dollar expenses towards education, healthcare and travel.
One can use some niche strategies to make benchmark-beating returns.
It offers the benefit of staggered investments like a systematic investment plan (SIP) that helps in volatile times.
Efficient investing is risk management. By managing the risk of downsized returns attributed to tracking errors, one would help the portfolio to do well.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
