Nov 2, 2017

A Note on Our Present Investment Strategy

We have the equity markets touching record highs every day. The Sensex presently stands at close to 33,400 and the Nifty close to 10,400. What are we expecting going forward and how are the portfolios positioned?

The Sensex trail PE ratio currently stands at 25. The median trail PE for the Sensex is 19. By that yardstick the markets are over-valued. We now look at the historical 3 year returns for different PE Bands.

As mentioned above there is a possibility that markets can continue to go up even at the PE Ratios (the highest 3 year return for the band 24-26 is 12% annualized). However, the average 3 year return in the price band is -9%. Caution is therefore advised.

Accordingly we have, on all portfolios, reduced the allocation of equity. We continue to hold on to only a very small portion of equity in the portfolio. (This
equity allocation is mainly in large-cap funds. We have in some portfolios made some tactical allocations to certain sectors).

We hold a substantial amount in liquid funds and Ultra Short Term funds (close to 30% of the over-all portfolio). These debt funds are generally meant for short-term parking. The idea is that if the markets were to correct these moneys will be used to re-enter in to equities at ‘better price points’.

The 10 year G-Sec is trading close to 6.8% at present (up from around 6.1% 7-8 months back) following the Government’s announcement of re-capitalization of PSU banks. The yields have moved up (on expectation that the Govt will crowd out the debt market) which means prices of debt instruments have come off. This will be reflected in returns on debt investments over the last six months. There is no reason to make too many adjustments on the portfolios at this point. However, if the G-Sec moves above 7.2%, we will use it as an opportunity to buy in to debt again. Our general view on interest rates is that they will tend lower over the short to medium term.

Gold is currently trading at $1276/oz. Price of gold continues to remain stable in the international market. In India Gold is trading at around Rs 30,000/- for 10 grams. It is expected to continue to remain stable.

Brent crude has finally crossed $60 to the barrel. This indicates growing confidence in the Global Economy. However, it could be a source of worry to the RBI since it could directly affect the Current Account Deficit as well as inflation.    

Politically the Gujarat elections seem to be an event that we have to keep an eye on. Economic data such as GST rollout and GDP growth will need to be continuously monitored. The RBI is expected to reduce rates but it will be interesting to see if they really do so after the Govt’s Bank Re-Cap announcement.    

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