5-yr Nifty options from May 28, experts caution retail investors

By Rajesh Gajra May 18 2010 , FC Research Bureau

Taking a long-term view on the broader market beyond three years will get easier from May 8 when the National Stock Exchange (NSE) introduces three more semi-annual month option contracts on the S&P CNX Nifty index going as far into the future as June 2015.

There will be eight semi-annual contract months instead of the existing five, encompassing June-end and December-end contracts for 2011-2014 and June-end contract for 2015.

But as a retail investor, should you make use of such long-term investment instrument? The views in the market are mixed, although the recent trend in existing long-tenure Nifty options, with tenure going up to three years, seems to suggest decent demand for such contracts (see table).

The Securities and Exchange Board of India (Sebi) on May 4 permitted stock exchanges to go for long-tenure index options, going up to a maximum length of five years. It was in January 2008 that Sebi had allowed exchanges to trade index options for tenures beyond the existing ones of less than a year but up to a maximum of three years.

Market experts do not recommend long-tenure options for retail investors. Bajaj Capital research head Alok Agarwala said, “These options should be used for hedging rather than making directional calls on the market.”

He said investors seeking exposure to Nifty can go for exchange-traded funds (ETFs) on Nifty or Nifty index funds. “ETFs are preferable as they have lower fund management charges,” he said.

However, there are two attractive benefits for the investors taking a long-term view on the overall market. In buying a Nifty call option, one is protected from unlimited losses in case the index crashes, something that is not possible in a Nifty ETF or index fund.

The other benefit is one can take a long-term bearish view by purchasing Nifty put options but one can’t go short on a Nifty ETF or index fund.

However, investors would need to watch out for the amount of premium they pay for a five-year Nifty option contract. In options trade, the premium includes intrinsic and time value of the option. “The longer the time to expiry, the higher will be the premium,” says Agarwala.

Benchmark Asset Management executive director Sanjiv Shah said, “If you have to pay a premium that is 20 to 25 per cent higher than the spot index, then you are giving away a lot of the gains on the index.”

You could go for long-tenure Nifty options, but be alert for such stumbling blocks.

rajeshgajra

@mydigitalfc.com

Bulls may bail out of emerging markets

 

Source :19 May 2010, 0513 hrs IST,Deeptha Rajkumar,ET Bureau

MUMBAI: The dream run of emerging market stocks may be coming to an end, with risk-averse global investors pulling out funds as the world stares at the spectre of sinking back to economic contraction with troubles brewing in Europe and China.

International investors have pulled out $890 million from India this month, the highest since January 2009 following the collapse of Lehman Brothers, in what could just be the beginning if global economic problems persist.

Shaky markets and the possibility of policy actions such as interest rate hikes to stave off inflationary threats may be a drag on emerging stocks for some months to come. Indian shares may fall as much as 10%, say investors.

“Emerging markets have had a great run, but now investors are taking a breather,” said Jyotivardhan Jaipuria, managing director and head-India research at BoA Merrill Lynch. “Our fund manager survey indicates that they have become more cautious about investing in emerging markets.”


The MSCI Emerging Markets index is down about 9% from last month’s highs and China is down more than 20%. Indian stocks are down 6.5% from their peak, after climbing 81% in 2009.

International markets have been see-sawing as some believe the $1-trillion European Union aid package to save economically troubled nations such as Greece and Spain may not be enough to prevent another credit crisis. Rising fears about China’s growth faltering due to government attempts to cool down the economy have exacerbated investor concerns.

“The European crisis will impact India flows negatively in the near term as risk taking gets cut back,’’ said Pankaj Vaish, managing director and head-equities at Nomura.

Emerging market equity funds had a second straight week of redemptions, according to EPFR data for week ended May 12.

China equity funds posted their second straight week of outflows. Emerging Europe, Middle-East and Africa funds also lost $350 million. As investors flee to safe-haven assets such as the US treasury and gold, Indian stocks could fall further, investors say.

“There could be continued short-term selling in emerging markets and Indian equities. Markets could fall another 5-10% from these levels,” said Sam Mahtani, director, emerging market equities, at F&C Asset Management. “There will be no upmove till such time fears recede over global issues.’’

US assets such as the treasury, shares and gold are preferred as they are seen as safe, at least for now. Shares in the US are up 2% this year. The US dollar has once again emerged as a safe-haven asset even for central banks. Central banks across the globe raised their holdings to $2.7 trillion in March, from $2.67 trillion in February. Gold prices are near record highs.

Emerging market growth, which has been higher than the developed world in the last decade, is also under threat given that most central banks are poised to raise interest rates to temper inflation. China’s inflation rate may touch 3% soon, prompting a rate increase, and in India it is already above the central bank’s target.

“Systemic risk has reduced for the moment but investors know it has not vanished,” said Munish Varma, head-global markets India at Deutsche Bank. "That has prompted investors to liquidate some of their risky holdings and move into safer assets as seen from the demand for US treasuries last week and record high price of gold.”