Dec 29, 2015

Market Update 28/12/2015

Before we begin analyzing the markets we would like to make clear the following-

1. The attempt of these market updates will be to look at the market in easily identifiable quantitative terms that should help in bringing about more informed investment decision making.
2. These posts are not going to assign reasons for short terms trends. They would rather look at long term trends based on quantitative parameters and this writer's macro-analysis.
3. There will be a mix of technical (study of graph patterns) as well as fundamental analysis used in these studies.  
4. We will also look back at past market updates to 'check' on how we've been doing.

The markets are up slightly from the last post (dated 23/11/2015). For the month however the Sensex is down slightly by about 0.4%. The Sensex is currently at around 26,000. It came close to 25,000 in early December before bouncing back. 

The momentum indicators suggested a small bounce back in the last update. Right now the momentum indicators are in equilibrium suggesting that the market might have found some "short-term" stability. 25,000 on the Sensex is a clear technical 'support'. 26,300 seems to be a short-term resistance. The technicals suggest that the markets look 'range-bound' for the near term.

The Sensex trail PE ratio is at 19.8. This is down from 20.47 in last month's update. It is still, however, above our long-term average of 18.5. The Return on Equity (RoE) for Sensex companies is 15.58% and the Return on Capital Employed (RoCE) is 7.8%. The spread for RoCE vs the 10 year G-Sec is marginal. 

From the technical and fundamental readings of the equity markets we believe that the markets are still 'over-valued'. We would recommend that we continue to prune the allocation to equities. The over-all allocation to equities for investors with a very long-time frame should be brought down  slightly below their risk-profile based allocations to the asset class.

The benchmark 10 year G-Sec is at 7.76 currently. Up slightly from the last market update. It was a very volatile period in the debt markets with the US announcing an interest rate hike in early Dec. The benchmark went up all the way to 7.8 before prices recovered slightly. 

There still is a comfortable spread between the inflation rate and the repo rate (nearly 110 basis points). This will give RBI the opportunity to reduce rates going forward. We will still continue to remain slightly over-weight in duration strategies in our portfolios. 

Crude prices continue their free-fall. Brent crude is currently trading at $37 per barrel. This could imply concerns over weakening global growth as well as a strengthening of the US dollar (in the wake of interest rate hikes). 

Gold continues to remain at around $1070/oz. While fall in crude as well as gold prices are sort of giving out contradicting signals regarding the global economy we would like to believe that the indicators are that the general sentiment is weak but the worry is not of catastrophe for the global economy.