Thursday, February 6, 2014

What to do?


Thought for the day

“If you can talk brilliantly about a problem, it can create the consoling illusion that it has been mastered.”

-          Stanley Kubrick (American, 1928-1999)

Word for the day

Inglenook (n)

A corner or nook near a fireplace

(Source: Dictionary.com)

Teaser for the day

Mr. Murthy, please be informed that politicians, bureaucracy and police in India do work on corporate compensation structure. Low fixed – high variable.

Stock options are encashed by selling coal, spectrum, jobs, roads, Apartments etc.

What to do?



The bad things are easier to believe. Haven’t you noticed that?

-          Vivian to Edward in movie Pretty Woman

In past few trading sessions Indian equities appeared to have lost the momentum seen since November 2013. Renewed concerns over sustainability of global economic growth seen in 2013, QE tapering, further worsening of domestic macro data, and rising stress in financial sector are some of the factors prima facie responsible for current round of sell off. A good (so far) earnings show by companies, perhaps the best in many years, is a consolation.

The mute question now is what should investors be doing in under the current circumstances? Should they be cutting their exposure to risk assets, like equity, and sit on cash or they should use this opportunity to build a risk portfolio keeping the next growth cycle in mind?

I feel before we devise an appropriate investment strategy and asset allocation plan, it is important to comprehend what exactly is bothering the markets and what are the likely scenarios that may evolve during the course of next few months.

In my view, broadly the following three factors are likely to impact our financial markets, especially equities, in next few months:

Domestic macro deterioration

The fiscal slippages ahead of elections, accelerated liquidity tightening, persistent high inflation and therefore pressure on rates, higher credit costs and slower consumer demand are some notable macro headwinds impacting the investors’ sentiments.

Besides, new RBI norms on provisioning (if implemented) might lead to accelerated recognition of NPAs and therefore further tightening of already constricted credit market. This comes at a time when fiscal constraints are anyways limiting the capital infusion in PSU banks.

Political uncertainty

As I expected, the prospects of Modi led BJP getting close to 225 is already causing panic amongst most regional and smaller national parties. This shall lead to united opposition and hence even higher uncertainty about election outcome. If AIDMK, BJD, JDU and SP, etc. join hands, and TMC, BSP, RJD etc. come closer to Congress, NDA would be seen falling short by30-40 seats even if BJP gets 210 seats on its own.

This should keep investors guessing till the results are announced in middle of May 2014.

Global economic conditions0

The global deflationary pressures have risen significantly in past two months. Historically, QE withdrawals have usually led to accentuated deflationary pressures and substantial fall in risk asset prices across the board. EU, China, Australia, LatAM, Russia, South Africa are all giving some worrisome signals. US yields, gold, copper, JPY indicate that perhaps a massive risk off is building.

To my mind, the unusual strength shown by Indian equities post Fed withdrawal is exactly that – UNUSUAL. At some point in time in next few months, the market needs to normalize by showing some fear…to continue

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