It’s 3AM – too late to sleep and little early to wake up
While we are confident that next 6-9months will provide a great
opportunity to build an equity portfolio that will outperform most asset
classes in next five years, we continue to suggest investors should not lower
their guards as yet.
The way the events in Cyprus (population 1.1mn and GDP USD28bn)
have caused panic in global markets, shaving billions of dollar in asset value
in matter of couple of days, it is clear that at the moment the global economy
is nothing but “fragile”. The fabled economic recovery at best is shallow and
confined to pockets.
Moody’s Investor Services yesterday said that China’s
local-government financing vehicles face greater risk of default, as regulators
warn 20 percent of their loans are risky. Australian and Russian governments
are also facing serious fiscal challenges.
US Fed in the FOMC meeting beginning today is also likely to
emphasize that the economic recovery is much weaker than anticipated and
therefore stimulus needs to continue till the recovery shows some strength.
Indian government also appears to have resigned to the next
general election. The almost threatening advertisement blitz by IT department
indicates that the government is bothered least about business confidence as of
now. Any businessman will tell you that no income tax refund has been processed
in past four months and many of them have been arm twisted to pay higher
advance tax.
NTPC and Coal India dispute is worsening, suggesting a summer of
discontent ahead for power consumers. The discordant notes coming out from UP,
Bihar, West Bengal, Tamil Nadu, Andhra Pradesh, Maharashtra et. al. are
suggesting that not much efforts is being put in to building political
consensus on critical economic issues.
The feeling we get rather points to an active effort by Congress
Party to encourage the supporting parties to cause the government to fall so
that they can claim the status of martyr and thus become eligible for a
sympathy vote in next election.
The market is looking up to RBI governor for a rescue act. He
may oblige by 25-50bps repo and even 25bps CRR cut. But at this point in would
help only the struggling infra players and stressed SMEs to sail through the
rough weather. It would not be a catalyst for igniting an investment cycle in
the short term. Historically, a pre-election year does not see many large
private sector projects getting initiated. Everyone likes to see the new
government and their priorities before making large commitments.
On a satisfactory note, InvesTrekk model portfolio has
significantly outperformed the markets in past two months. Our underweight
equity, OW cash call has done really well. Even the big bet on gold seems to be
turning positive. We are not proposing any change as yet. However, as suggested
early this month we plan to restructure portfolio in next couple of months to
factor in our macroeconomic and strategy view.
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