Nov 22, 2016

Market Update- 22/11/2016- Trump, Demonetization et all

Equity markets have wiped out almost all of their gains of the last calendar year.  Most investors are wary of  market movements. We look at this as a positive development.

As we've been saying continuously in these updates for the past few months the markets have been over-valued compared to historical averages. This gave us enough reason to lower our over-all asset allocation towards equities in-spite of the run up of nearly 30% from their recent lows in February. We bought more in Feb but held on to the Asset Allocation based on our models.

We now view this current fall in markets as an opportunity to "invest more" in to equities. Accordingly we will be increasing (albeit slowly)  the over-all exposure to Equities in our portfolios.

For sometime now we have been telling our investors to come out of the Mid & Small Cap space. This is based on our models that have been telling us that the space has been 'red-hot'. Accordingly, client portfolio exposure to mid & small-caps have been pruned in order to reflect our views.

The Trump presidency will be viewed as a disruptive force in the World Economy. We will have to wait in order to understand if this will be a positive or negative effect for the economy. But there will be increased volatility that should offer opportunities to the patient and prepared investor.

Demonetisation has had a deflationary effect whenever it has been applied in economic history. There is good reason to expect similar effects on the Indian economy. This could mean that corporate profits will be less than expected in the next few quarters (which will give us an opportunity to add more to equities as sentiment will be depressed). It also implies that bond yields can be expected to fall. (Home loans rates will continue to drop.)

In the bond space we took a call on duration (i.e. we bought in to investments that were expected to do well in a falling interest rate scenario) around 3 years ago. (The 10 year G-Sec was at nearly 9% and it currently stands at 6.35%. This translates to an absolute gain of 13%). This has paid of well to our investors. We expect interest rates to fall further. However, 'the juice' has dried up a bit (considering historical averages) and we will be a little more cautious in adding to duration going forward. Accordingly allocation to duration strategies have been brought down in portfolios.

Investments in credit opportunity (accrual strategies) funds have increased in the last few years. We expect some volatility in the space on the account of all the economic upheaval. Investors need to remain cautious. We have been very select in the funds in which we invest.

The US Dollar can be expected to grow stronger in the short term. It has a long-term resistance of Rs 70/-. It can be expected to test this in the coming months. This is on account of pending increase in Federal Reserve rates and also also the slow-down in the Indian economy affecting the value of the Rupee.

Gold has seen a spike recently before settling again. Brent crude has come back down below $ 50/barrel. We expect both these to trade within a narrow range going forward. Inflation can therefore expected to remain stable.



Sep 16, 2016

Market Update- 11/9/2016

Writing financial reviews is, as I'm learning, fertile ground for upper management and even politics. You need to learn the art of tact. You need to 'seem to be taking' a position based on a lot of thought. When in actuality you  are ensuring that you are covering your backside with the option to swing which ever way the wind blows.

However, even the seasoned politician and manager knows that he should be prepared to be surprised. And so it is with the financial reviewer.

Technically, the charts are saying that we are testing a key resistance of around 29,000 on the Sensex. The markets have so far not been able to sustain themselves beyond this. The markets are sometimes like the kid on the basketball court trying to reach for the hoop. He's managed to reach the hoop a couple of times but it still isn't easy or natural. But, someday it will become easy and then it becomes the norm. Then the good coach that the market is will raise the hoop even higher and higher and so on.

Fundamentally, the markets are like Rajnikanth's 'Kabali'. It's managed to do business (i.e. deliver returns) while the verdict is still out on the quality of the content. There's a lot of noise regarding earnings growth of India Inc. Compared to base rates we know that the markets are over-valued presently. But FII money is driving the markets. And if the Japanese/ European guy can borrow money and get paid for it (read negative interest rates) and then invest in something that gives you 5-6 bucks for every 100 invested (read sensex companies) it still seems like a good deal. How long this party is going to last is anyone's guess.

Our decisions are on base rates (i.e. historical averages) and therefore we will be pruning our over-all allocation to equities. Within the equities space the small & midcap sectors have done phenomenally well. We've managed to capture the run-up but now we believe that the space is being over- valued. We are therefore reducing allocations to the small & midcap space in a phased manner.

In the debt space we have seen the Indian Bond slowly settle at around 7.1 (i.e. 10 year G-Sec). We've played the game rather well this far (notice the pat on the back and the 'this far' as we know markets have a tendency to surprise us). For the short-term we're seeing conflicting signals coming from the Govt (repo rates and inflation numbers) vs the markets (interest rates tending down). We will need to be cautious now if we're playing an interest rate fall.

Gold seems to be steady at $ 1300/oz. All we can say is that house-wives and central bankers seem to be happy with that. 

Central banks will be watching what the Fed (US) has to say on interest rates. We expect the dollar to strengthen steadily (against other currencies) as US economic data continues to improve. As NRI's we would advise 'not to wait' to transfer money back to India. The differential in interest rates and the currency should be negligible. Also, with a falling interest rate scenario in India it might be wiser to lock in the higher rates while they are available. We expect the Rupee to trade in the range between 65-70 dollars for the short term.

Crude oil (brent) seems to have bounced back from it's resistance of $50/barrel. We know the Arab Sheikhs are getting nervous (most budgets in Gulf countries are designed on $80/ barrel and therefore we will see significant fiscal deficits in these countries). This could also mean that China (which has been a significant importer of crude oil in the past few years) is slowing down. The commodity space looks to be in a bearish phase. This doesn't augur well for the over-all health of the global economy.


Aug 8, 2016

Market Update- 8/8/2016- (Post GST Bill)

The equity markets are edging towards their 52 week highs. The 1 year market graph looks almost like a perfect 'V' as the last time the markets were at these levels was exactly 1 year ago.

The markets have risen a mere 400 points since the passing of the much touted GST bill. Much hype & hoopla was created around the passage of the bill. This once again highlights the nature of markets to "price-in" information much before events have actually taken place. Very rarely is a 'delta' created on the basis of such plays.

The Sensex PE ratio is currently close to 21. This is above the median valuations of 19 for the Sensex (past 25 years data). While we will not add to our equity positions we will continue to hold on to our asset allocations. It is likely that, under the liquidity driven infusions from global central banks and the deflationary trends that persist in the global economy, the markets will have a new median going forward. However, we will need to be cautious in approaching this 'new-normal'.

Our debt-market strategy has played out wonderfully well . We've been envisaging a falling interest rate scenario for the last couple of years. The G-Sec has fallen from 9.1 seen in early 2014 to 7.2 (approx) today. Positions taken in 2014 have given us a significant 'delta'. The added tax benefits of holding debt mutual funds for 3 years will only enhance this 'delta' created. We continue to maintain that interest rates will fall. However, this fall will be gradual, just like what we witnessed for the last 3 years. Investors will have to be patient and treat every jump in rates as an opportunity to add to their 'duration positions'.

Brent crude seems to have settled around $50 to a barrel. Crude has bounced off it's lows of last year and is looking at a settling at these rates. This implies that global investor risk-appetite is improving. But, it also implies that global investor sentiment has changed quite significantly from the days in which crude used to trade at close to $ 80.

Gold also seems to have bounced of its lows and is now settling in a range of $ 1300-1400/oz. This could be an indication that liquidity infusion is finally making its way back in to gold again. However, commodity markets in general are yet to recover from their recent bear falls. We don't read too much in to the price of gold at this moment.



May 20, 2016

An Interesting Parable on How to Go About Creating Wealth

Just after college I had tried my hand at many different job profiles which included a brief interlude with 'Network Marketing'. Through it I was introduced to this wonderful story that has since formed a philosophy basis on which I advise my clients and also look at creating my own wealth. I thought I'd share the same with you.

A long time ago there were two boys who had just finished schooling and were ready to start work. They lived in a village and the head-man made them an offer of bringing buckets of water from the river located at some distance from the village. They had to fill all the tanks in the village and they'd be paid basis each bucket of water that they brought in.

The boys jumped at the opportunity and within a few days they were making good money. They spent it on clothes, accessories and parties and they were having a good time. Young, healthy and rich they made the most of this present moment success.

One day one of the boys ended up with a severe back spasm because of all the lifting. He was advised bed-rest for a month. Being good friends the other offered to take care of him and share his earnings with him. The sick boy was grateful for his friend's generosity but the long period of idleness got him thinking of what would happen if there were no friends. How long would or could he continue lifting buckets? And suddenly an idea sprouted in his head.

That same evening, when his friend returned, the boy put a proposal forward. "What if we build a pipeline from the river to the village?", he enquired with his friend. The friend scoffed at the idea. "That would take way too long and we'd be losing out on earning money today and spending it on good times now"- he said. This was true but the boy saw the potential in his idea and wanted to follow through with it. His friend didn't want to participate in the project and so once they boy got fit again he began spending only half his time in lifting buckets and the remaining he would use to work on the canal to lay the pipeline from the river.  

His friend in the meanwhile continued to lift the old quantity of buckets and so his earnings and consequently lifestyle were twice as good as the other boy's. He began to mock his friend publicly for chasing his elusive pipeline dream. It was a very long-term project and made much tougher because he had to work on it on his own. And initially it didn't look like anything great was going to come from these efforts. But, slowly and surely, the boy kept up his efforts in building his pipeline.

The friend continued to lift buckets and fill tanks. Though the pay was good, with the passing of time he could feel his hands and back getting sore with all the lifting. He didn't really look forward to each day's work. But he had no choice because if he didn't lift he wouldn't get paid. 

After a long time they day finally came when the boy's pipeline was ready. Water came gushing through the pipeline and filled all the tanks in the village. Not only was the boy a hero but he was also getting rich as he was getting paid for each bucket of water that was being filled. And this was only going to continue from now on forever without any efforts going forth. His friend was left flabbergasted. 

Building wealth is the process of building pipelines for yourself. This could be through Business, Real Estate, Gold, Equities or Debt. The means maybe different but the fundamental idea is to build pipelines. 

The deeper question for you dear reader is are you only lifting buckets or are you also building pipelines?

*Material from Burke Hedges- The Parable of the Pipeline

You can buy the book here-

Mar 21, 2016

Market Update – On the Global Economic Scenario and the Indian Budget- 21/3/2016

The equity and debt markets have found some stability at the current levels. This is after the extreme bout of volatility witnessed in the months of January and February.

The general global macro consensus is that China is slowing down, along with Europe and Japan. The US is showing some sprouts of economic revival but the Fed cannot formulate policy in isolation and will have to keep tab of the global economic scenario.

After the global financial crisis of 2008-09, most governments in the world eased up on liquidity hoping that this would lead to a revival in the investment as well as consumer credit cycles. What happened instead is most of this money landed in the hands of speculators and financial firms chasing high-returns (on the quick).

China launched a massive fiscal expansion program in the wake of the Financial Crisis. This meant that credit was easy and the world’s largest exporter went in to over-drive in trying to corner the global market for goods and commodities. Other G20 countries also created conditions for a global credit glut thereby creating a massive rally in commodities (including Oil and Gold). Speculators also bought in to this frenzy creating an even larger commodity bubble.

What we are witnessing now is that the world has finally realized not enough people are buying these goods and commodities. So, even at super-low interest rates, many firms around the world are struggling to repay their debts because of ‘lack of demand’.    

This is difficult terrain for the global economy to navigate and we expect that in the absence of any other ideas monetary and fiscal expansion will continue. This means that debt will continue to remain cheap. However, this time money may not pour in to commodities. We believe that some of this money will make its way in to ‘emerging markets’.

In this context it is good the Government has decided to focus on macro-economic stability in this year’s budget. This allows us to attract global capital. We will (over-all) be beneficiaries of the commodity bear market. This has created room for India to be extremely attractive to foreign capital.

India’s primary concern is that we are capital starved. Coming on the back of a high interest rate regime as well as the huge burden of NPA’s, banks will find it difficult to bring down interest rates quickly. What we could instead witness is an expansion of the corporate debt market with significant foreign investor interest. The finance minister has already indicated that he would like to focus and develop India’s corporate bond market.  This should be an interesting space for investors in the coming years.

We also believe that there will be a slow-down (correction) in the domestic business environment. This is on account of both global and local factors. Credit (at present) is hard to come by for Indian businesses. The global slow-down will also affect demand. While over-all regulation and governance has improved, credit- growth is still low indicating a lack of business and consumer confidence. Government spending on infrastructure has been increased. We expect that it will take at least a few years for the ‘trickle-down’ effect of these initiatives to come to fruition.

A stable macro-economic environment also creates room for the RBI to reduce rates. This could create a major fillip for the economy. The debt markets will be the most interesting to watch and will give us good long-term asset allocation indicators.

The equity market is currently trading at 18.85 time trail. This is slightly higher than its long term averages. The market (Sensex) has rebounded quite smartly from 23,000 to about 25,000 today. For our long-term asset allocation we will continue to remain under-allocated to equities.

The 10 year G-Sec has had a tremendous rally post the budget (benefitting from the finance minister’s commitment to rein in the fiscal deficit and the over-all budget’s commitment to macro-economic stability). From 8% in February, yields are now close to 7.5%. Duration plays would have benefitted from the rise in prices of bonds. The macro-economic environment has also created conditions for a slight over-allocation to bonds. We recommend this strategy for our investors.

Feb 2, 2016

Market Update 2/2/2016

We've had a very volatile period in the equity markets between this post and the last. The markets are down nearly 6% in the interim.

Technically the Sensex broke an important psychological support of 25,000. The short-term momentum indicators are now in the neutral area. This makes it difficult to predict in the short-term ( In our last post we'd mentioned that the momentum indicators were neutral but we had a period of extreme volatility immediately post that. We admit to our mistake.)

Fundamentally, the markets look more attractive since the correction. The markets are now close to their long-term median valuations. However, we don't recommend a 'jump-in and buy' yet. We still recommend holding on to the previous asset allocation. If the markets correct quickly or, if the markets remain in this range for an extended period of time, then we will re-visit our allocation.

Corporate earnings remain weak and we could see some downward revisions in expected earnings. The budget will also be announced towards the end of the month. Both events will be watched closely.

The 10 year G-Sec is currently at 7.845. This is marginally above what it was in the last update. Hardening of yields would have had a negative effect on duration plays in portfolios. Inflation has inched up to  5.61. The RBI kept rates unchanged in its policy meet today. While duration is a technical play, we believe that the continuing gap between inflation and repo rates gives the RBI room to reduce rates.

Crude oil continues to remain weak. Gold has jumped slightly and crossed the $1100/oz.  This gives worrying signals about the global economy.