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.