Thursday, October 30, 2014

Conventional wisdom

Thought for the day
"We hear only those questions for which we are in a position to find answers."
-          Friedrich Nietzsche (German, 1844-1900)
Word for the day
incommunicado (adv or adj)
Without the means or right to communicate.
(Source: Dictionary.com)
Teaser for the day
The color of money is never black.
Money in fact has no color of its own.
It usually acquires the color of hand holding it.

Conventional wisdom

I have been insisting for past many months, rather annoyingly to some, that given the uncertainties that underscore the present global financial and macroeconomic conditions, it is critical to anticipate and understand the risks – evident, potential and unforeseen; and calibrate the investment strategy and portfolios accordingly, without losing the sight of the opportunity waiting on the horizon to be seized.
"Easier said than done" - yes it is.
Nonetheless I would like to offer some tips.
Be conventional
The current market rally started last summer with change in leadership at RBI. The event coincided with the government taking a series of measures to control the worsening balance of payment, inflation and fiscal balance conditions. Some measures were also taken to stabilize the rising stress in the financial system.
Most of these measures succeeded in achieving their immediate objectives. Consequently, global investors reposed faith in Indian markets. However, it took a change in government for the domestic investors to come back to the markets.
The market rally since last summer however has many peculiarities. For example, the rally was a very narrow one - confined largely to the stocks of companies with global linkages. Subsidiaries of global corporations, domestic companies with sizable global presence, and exporters were prime target of the buyers.
This group of stocks were given an unconventional and unsubstantiated nomenclature, viz., "quality". The traditional classifications like "growth", "values", "defensive", and "cyclical" etc. were ignored. The conventional criteria like valuations, growth outlook were also ignored in many cases.
The consequence, mostly inevitable, is a price bubble as per the conventional valuation norms, and a seriously crowded ownership.
A large part of my fear is emanating from this peculiar situation. Many of these stocks could correct or underperform in substantial measure (a) in case a global risk off is triggered due to any global  liquidity or solvency event or (b) a risk on is triggered in domestic market due to pick up in investment and consumption activities.
In my view, therefore, it is time to seriously consider and calibrate investment strategy to the conventional theories - valuation, growth and earnings momentum. I believe many outperformers of past 13months may fail the test and warrant an immediate exit.
It is pertinent to believe that the bull market in Indian equity market is yet to commence. What we have seen in past 13months is just influx of few dollars chasing yield arbitrage opportunities.
...to continue tomorrow

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