The equity markets, Sensex and Nifty, are trading at close to their two year highs. The Sensex has moved from 25,807 (close on Dec 26th) to 29,237.15 (today’s close) in a period of 3 months. The market absolute return over the last 3 months has been 12.3%. Demonetization has not really had too much of an effect on the economy. The market is all gung-ho with the GST bill expected to be passed shortly and the results of the UP elections indicating that the current government remains strong and popular. We evaluate to see if this rally is sustainable and what needs to be our strategy in the coming days and months.
29,500 on the Sensex is an important long-term technical resistance. If the markets cross this and close above this for a sustained period we could be looking at historical highs for the markets. The indicators are all extremely bullish. However, this suggests that we should be cautious in ‘adding equity’ at this point of time.
Valuations wise we are way above long term average valuations as per trail Sensex and Nifty earnings. Earnings growth has not picked up. Accordingly we have pruned allocations to equity. This is contra to what most of the market seems to suggest but is in line with our investment philosophy of being fearful when others are greedy and being greedy when others are fearful. While GST will be a net positive for the economy, we believe that like with demonetization, there are bound to be implementation hic-cups which the market may not be pricing accurately.
ULIPs, PMS products and small & mid-cap funds have found favour with many clients and advisors basis last 3 year returns. Our call as always is to ask the investor to be cautious and do thorough research on ‘risk’ as well as return before selecting any product.
Debt generally seems to be out of favour in the market which is why we are more allocated in to the asset class at this point of time. Repeated policy flip flops by the RBI has sent the debt markets in to a tail spin. Despite this, we believe that debt will give decent returns over the next 3 years as interest rates should continue to drop. We are cautious here in indicating the time-frame. We are not suggesting a drop in the coming quarter or the next few quarters. But, the indications are that over the medium term interest rates will continue to fall considering the interest rate cycle and the general economic structure.
However, we are not going extremely bullish and putting all money in to long-duration. In fact we believe the ideal play is in short term income funds. And this is where most allocation has been made over the last few months.
‘Accrual funds’, the market term for credit opportunity funds, seem to have found favour in the market (as an alternate to the perceived volatility of income funds). Here, we will advise clients to be cautious as the Indian debt markets are not deep enough and with more money chasing higher yields there are bound to be compromises in portfolio quality. Even one default can adversely affect portfolio performance and clients will have to be very cautious. We are currently staying away from credit opportunity portfolios as we believe that over a 3 year time frame (when these investments become tax-effective) there is too much risk considering the economic scenario.
The Rupee has gained in strength over the last few months indicating strong inflows from FIIs. Technically the Rupee has reached a resistance of 65 to the dollar. It will be interesting to see if the Rupee could break this resistance. However, it is our belief that the Rupee will not sustain above this for too long and will trade in between 65-70 for some time.