Market Update- 28/3/2017

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 26^th) 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.

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.