Friday, February 7, 2014

What to do? - II

Thought for the day
“Men in general are quick to believe that which they wish to be true.”
-          Julius Caesar (Roman,100-44BC)
Word for the day
Farceur (n)
A joker; Wag
(Source: Dictionary.com)
Teaser for the day
We all know that it’s anarchy when AK does it.
Will Kapil Sibal tell us what it is when KKR does it?

What to do? - II

The bad things are easier to believe. Haven’t you noticed that?
-          Vivian to Edward in movie Pretty Woman
Continuing from yesterday, I would like to admit that answering the real question honestly is extremely difficult, especially knowing that I will be judged every day for my answer.
It is much easier and convenient to use the jargon like “long term”, “bottom up”, “stock-picking”, “value investing”, etc. and have a rather simplistic large cap defensive portfolio. However, given that ‑
(a)   we are at junction where 5yr normalized CAGR of Sensex is close to peak of 16% and appears as a warning if you juxtapose it to declining real growth and elevated inflation and hence interest rate levels;
(b)   we had one of the best year in 2013, in terms of foreign flows (both FII and FDI), a scenario that may likely not repeat itself considering the US tightening its monetary policy and conditions in Europe again taking a turn for the worst;
(c)   the “high quality” and “global stability” (read exporters) trade is so crowded and exploited that the risk-reward in this sphere might have turned negative;
(d)   the optical “deep value” in “financial” and “domestic investment pick-up” may not be deep enough to warrant a jump as of now;
applying most of these principles may not actually be gratifying for most investors.
The positives at this stage are all derivatives of hope, compulsion and continuity. Rationally, it is difficult to find some positives which are self sustained, definitive and confirmatory. For example, consider the following rays of hope.
·         The domestic inflation and therefore rates have peaked as the vegetable prices have fallen. Core inflation rise despite lower capacity utilization is seasonal.
·         CAD is now under control (<2.5% of GDP), as gold demand has been successfully curbed; exports to developed countries have picked up; NRI flows are strong; Fx reserves have been augmented to US$295bn from a low of US$274bn; imports have fallen; fuel demand has slowed due to higher prices.
·         Fiscal deficit is under control (<5% of GDP) as government expenditure is cut; subsidy payments have been successfully rolled over; disinvestment targets have been accomplished through cross sale; service tax amnesty.
·         China is just soft landing. The concerns over the stress in financial system are overblown to mythical proportions.
·         ECB’s “whatever it takes” commitment will continue to be an effective back stop for all concerns, including France falling into recession.
·         Fed’s QE tapering underscores the strength of US economy. EM collapse will not impact US and Japan. Tighter liquidity will not strengthen the deflationary trend rather lower commodity prices will aid the growth.
…to continue on Monday

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