Policy gap stops investors from expanding power grids in rural India

bgr electric

Lack of clarity on policy governing privately-owned renewable energy-based mini-grids is preventing investors from expanding their network in the hinterlands of north India.

Husk Power Systems, which was formed in 2007 and operates over 70 mini-grids in several districts of Bihar, is one such company that is unsure about its investment if the state government decides to install centralised grids in the areas of its operations. Each of the company’s mini-grids is connected to a 25 kW biomass power plant.

“The policy isn’t clear for players like us and while the Electricity Act, 2003, allows us to put up mini-grids
without securing any licence, it doesn’t deal with the situation where centralised grids eventually come in our area of operation,” Manoj Sinha, co-founder, Husk Power Systems. He added that centralised grids jeopardise the viability of mini-grids as consumers prefer power from state discoms which have a dubious distinction on billing efficiency.

The issue was raised with the authorities by California-based SunEdison, when it announced it would install 241 kW of solar PV micro-grids with battery storage in 54 remote Indian villages, providing electricity to 7,800 off-grid individuals. The company had, in September, said it will build, operate and then transfer the facilities to the public within five years.

However, the company had maintained that policy uncertainty would affect its expansion plans in the absence of an investment protection mechanism.

Husk Power uses rice husk as the source of power to cater to nearly 15,000 households in 400 villages, including commercial installations like rice mills in power-starved Bihar. In the last seven years, Husk Power has established a business of selling power to villages for six hours daily at Rs 160 per month but the company, in October, tied up with a US-based photovoltaic maker to install solar power plants to double the capacity of their installments, thus enabling them to offer 24X7 power supply to each household.

“We will convert three more of our installations into hybrid (rice husk and solar) ones and study the data to ensure its economically viable before we convert all our installations into hybrid,” Sinha said. He added that policy uncertainty will continue to be an overhang as the company has already had to shut at least three of its installations after consumers moved to a centralised grid that was installed in their area of operation. Each of these hybrid installations cost nearly $80,000 or over Rs 50 lakh.

Although the firm says the government has assured them of a policy framework to deal with the gray area, the current amendments pending in Parliament do not address the lacunae. “We have proposed several solutions to the authorities to safeguard investments in distributed, mini-grid solutions. One of them is allowing mini-grids to feed in power to a central grid at a fair feed-in tariff. The other option could be of discoms entering into power purchase agreements with us,” Sinha said.

Despite the threat of uncertain policy, Husk Power is looking to raise $10 million for expanding operations in India and Africa. Another US-based solar power producer, SunEdison, which has been developing mini-grids for villages around Lucknow, has raised the issue with the government.

Market Wrap: S&P 500 Scores Best Week in Nearly a Year

Financial Markets Wall StreetNEW YORK — Wall Street racked up a solid week Friday, with health care, technology and consumer stocks making gains and investors looking beyond a widely expected December interest rate hike.

The S&P 500 ended its strongest week in almost a year, while the Dow Jones industrial average erased its year-to-date loss, led by a 5.5 percent jump in Nike (NKE), which announced a $12 billion share buyback and a 2-for-1 share split.

The sporting goods-maker helped send the consumer discretionary sector up 1.2 percent, making it the top gainer among the 10 major S&P sectors.

There’s more risk now that if they don’t raise in December, then people will worry that we’re still not out of the woods.

Health care rose 0.7 percent, led by Allergan’s (AGN) 3.5 percent increase. The drugmaker rose on reports that the U.S. Treasury’s new tax inversion rules were unlikely to thwart its proposed deal with Pfizer (PFE).

Minutes from the Fed’s October meeting, released Wednesday,hardened expectations of a December interest rate hike and hinted at a cautious approach after that.

Many on Wall Street believe that raising rates next month will be interpreted as a sign of confidence in the U.S. economic recovery.

“There’s more risk now that if they don’t raise in December, then people will worry that we’re still not out of the woods,” said Jerry Braakman, chief investment officer at First American Trust, in Santa Ana, California, which manages $1 billion.

With little inflation on the horizon, the Fed is likely to raise borrowing costs only gradually next year, which should help keep Wall Street content, Braakman said.

The Dow Jones industrial average (^DJI) rose 0.5 percent to end at 17,823.81 points and the Standard & Poor’s 500 index (^GSPC) gained 0.4 percent to 2,089.17. The Nasdaq composite (^IXIC) added 0.6 percent to 5,104.92.

The S&P gained 3.3 percent for the week, its best showing since December. The Dow rose 3.4 percent for the week and the Nasdaq added 3.6 percent.

Next week is likely to see tepid trading volume, with many investors taking time off for the Thanksgiving holiday.

Movers and Shakers

Alphabet (GOOGL), Google’s parent company, rose more than 2 percent after Reuters reported the company was planning to launch the Chinese version of its Google Play smartphone app next year. The stock was the biggest influence on the S&P 500 and Nasdaq.

Abercrombie & Fitch (ANF) surged 25 percent. Its quarterly profit more than doubled and same-store sales fell less than expected.

Sprint (S) tumbled 5.4 percent after the wireless carrier said it would raise about $1.1 billion in cash through a sale and lease-back deal with a company backed by Japan’s SoftBank.

Tesla Motors (TSLA) lost 0.8 percent after it said it was recalling 90,000 Model S sedans to check for a possible seatbelt defect.

Advancing issues outnumbered decliners on the NYSE by 1,819 to 1,249. On the Nasdaq, 1,751 issues rose and 1,014. The S&P 500 index showed 32 new 52-week highs and nine new lows, while the Nasdaq recorded 76 new highs and 81 new lows.

About 6.9 billion shares changed hands on U.S. exchanges, below the 7.2 billion daily average for the past 20 trading days, according to Thomson Reuters (TRI) data.

Will Santa Claus Deliver a Year-End Rally for Investors?

Santa Peeking Over Money FanIt turns out Santa Claus doesn’t just deliver gifts under the Christmas tree. Traditionally, November and December are positive months for the U.S. stock market as well.

Chalk it up to year-end catch-up buying or positive seasonal holiday cheer, but history shows that investors can expect stock market gains into year-end, particularly because of the trend known as the Santa Claus rally. But this year’s wild card is the Federal Reserve, which is considering an interest rate hike in December. Let’s take a look at what could lie ahead for Wall Street as well as opportunities for investors now.

What is the Santa Claus rally? The Santa Claus rally phenomenon is a short but respectable upward move in stock prices over the last five trading days of the year and the first two days of the new year — a trend identified and popularized by Stock Trader’s Almanac publisher Yale Hirsch in 1972.

Over this seven-day trading period since 1969, the Standard & Poor’s 500 index (^GSPC) has averaged a 1.4 percent gain in the Santa Claus rally. One of the factors driving stocks higher is buying action by portfolio managers who are chasing stock winners and gains in an attempt to “window dress” their portfolios for year-end statements, says Jeffrey Hirsch, Yale Hirsch’s son and the current editor at Stock Trader’s Almanac.

Significantly, the Santa Claus gains can be used as a warning signal for stock market action ahead. “The significance of the Santa Claus rally is really when it does not occur. If Santa Claus should fail to call, bears may come to Broad and Wall,” Hirsch says, referring to the streets. Over the last 21 years, the Santa Claus rally has failed to emerge only four times, which preceded flat overall performance years in 1994 and 2005 and down markets in 2000 and 2008, he says.

October’s gains may keep Santa away. Looking at the bigger picture, there is a general seasonal tendency for positive stock market performance in November and December. “Over the last 10 years, on average, the S&P 500 has gained 0.38 percent in November and 1.29 percent in December,” says John Canally, investment strategist and economist for Boston-based LPL Financial.

However, Santa Claus and his reindeer may run into some trouble, as this year offers conflicting headwinds for the seasonal bullish performance period. “We had an extraordinarily strong October, and that likely ate into a little of the gains that we normally see in November and December,” says Hank Smith, chief investment officer, at Philadelphia area-based Haverford Trust.

Analysts point to the Federal Reserve as a potential spoiler for the traditional Santa Claus rally action. Smith highlighted the widespread uncertainty over how the stock market might react to a Federal Revere rate hike. “Assuming we get a rate hike in December, we might be looking at markets that trade relatively flat between now and year-end,” Smith says.

The Fed is widely expected to raise interest rates at its December meeting, which would mark the first increase since before the global financial crisis began in 2008. Analysts will be watching closely for clues on how far and how fast the central bank might raise rates in 2016, and this could be the key to the stock market’s reaction, Canally says. “If the Fed raises rates in December and says we will only do three or four more hikes next year — in that environment, we will get the Santa Claus rally,” Canally says.

For active investors looking to jump on seasonal trends, another well-documented phenomenon is the January effect, in which small-capitalization stocks tend to outperform large-cap stocks. But investors should take note: The January effect has been occurring earlier in recent years. “Nowadays, most of this so-called January effect takes place in the last two weeks of December. This is likely due to the anticipators trying to take advantage of this trend and getting in earlier,” Hirsch says.

“Small caps and beaten-down bargain stocks should be positioned to rally again this year in late December. If the market reacts positively to whatever the Fed does on Dec. 16, that would be a bullish sign for the small-cap effect and the Santa Claus rally,” Hirsch says. There are several exchange-traded funds that track small-cap stocks, including iShares Russell 2000 (IWM).

Why Defensive Stocks Aren’t Safe Anymore

Hand holding american dollars against money backgroundNervous investors should think twice before diving into so-called defensive stocks, especially those securities with high dividends. You might end up putting more risk into your portfolio than you realize.
Stocks that have less volatility than the overall market and pay higher dividends than most other stocks are often seen as a way to reduce risk in a portfolio. Traditionally, these are found in the defensive sectors, including consumer staples, utilities and health care.

Given the state of the world, it’s easy to see why investors would want to get defensive. The war in the Middle East is certainty getting hotter. Cities are under the threat of terrorist attacks, and tensions between Russia and Turkey increased when Turkey shot down a Russian warplane on the Syrian border. Meanwhile, the European economy still looks saggy and the once-fast growing Chinese economy is decelerating. And the Federal Reserve looks set to start raising the cost of borrowing money sooner rather than later.

Sectors are trading at high multiples. The problem is that “the defensives are expensive,” says Ramona Persaud, portfolio manager for Fidelity Global Equity Income fund (FGILX), the Fidelity Dividend Growth fund (FDGFX) and the Fidelity Equity Income fund (FEQIX). Many of the traditional stock sectors that might once have helped reduce risk in a portfolio are trading at relatively high multiples.

She warns that investors could easily lose more money from a declining stock price than they gain from a healthy dividend.

In fact, that may already have happened to some investors. The Utilities Select Sector SPDR exchange-traded fund (XLU), which tracks a basket of utility stocks, has retreated around 10 percent this year, while the broader Standard & Poor’s 500 index (^GSPC) of major stocks is up slightly over the same time. Contrast that loss with the current 3.6 percent dividend yield on the fund. Clearly, those holding the fund since the beginning of the year would have resulted in a net loss, not including the effect of taxes.

Over the years, the Fed’s low interest-rate policies forced yield-seeking investors toward dividend-paying stocks like utilities, bidding up prices and valuations, explains Jeff Carbone, senior partner and founding member of Cornerstone Financial Partners, a wealth management company in Charlotte, North Carolina.

That yield seeking effect is now happening in reverse, with investors selling their holdings in anticipation of what Carbone says is an “imminent increase” in interest rates by the Fed. To reiterate, the pullback in dividend stocks like utilities was happening before the Fed has actually done anything. That anticipation of future event is normal in the stock market.

How do you find dividend stocks now? “Let’s find something with a similar yield that is growing,” says Mike Boyle, head of asset management at advisory Advisors Asset Management in New York. It is better to find stocks that are growing their income and will likely use those increased earnings to boost the dividend. “Focus on areas with strong earnings and income growth, like technology,” he says.
A good example of a company that is growing earnings and has a huge potential to grow its dividends is Apple (AAPL).

Using the combo approach also tilts the scales in the investor’s favor in the current market. You pay a lower multiple of earnings for a company that is growing its dividends. For Persaud, the trick is buying quality companies at a bargain. “Dividend growth is just cheaper.”

That’s why she purchased Israeli generic drug company Teva Pharmaceutical Industries (TEVA), which she purchased at a discount relative to U.S. pharmaceutical giants Bristol Myers Squibb Co. (BMY) or Pfizer (PFE).

Know the warning signs. Whenever you invest with the expectation of receiving dividends, you need to be on the lookout for potential problems.

“Usually when the yield gets unreasonably high, that’s a telltale sign something is wrong,” says Eric Ervin, CEO of ETF provider Reality Shares in San Diego.

For instance, if a stock usually yields 3 percent, but suddenly shows a 6 percent dividend, then that could be a sign that investors expect the dividend to be cut in half. Again, investors discount expected future events.

You should also look to see whether the payout of dividends as a ratio of earnings is sustainable. Companies do need to retain some of their income for capital expenditures and to buy back stock. If the payout is too high for too long, then management may be stretching things too far and it could eventually result in a dividend cut.

The average payout ratio of dividends to earnings is now around 40 percent for the S&P 500, Ervin says. Normally, it’s more like 50 percent, he says.