Sunday, November 29, 2015

Nifty: Fear and greed indicator peaking

Thought for the day
"If you want to be happy, be."
Leo Tolstoy (Russian, 1828-1910)
Word for the day
Gormandize (v)
To eat greedily or ravenously.
(Source: Dictionary.com)
Malice towards none
Besides PK, Arun Jaitely, Amit Shah, Satish Mishra, Jairam Ramesh, et. al. have all enjoyed the status of master election strategists in past one decade.
First random thought this morning
To fulfill his poll promise, Nitish Kumar has expressed his intention to ban consumption of alcohol in the state of Bihar from next fiscal year. Gujarat has prohibition in force since the formation of the State in 1960. Nagaland enforced complete prohibition in 1989. Manipur and Lakshdweep have enforced prohibition in select parts of the respective states. Kerala government has also proposed similar law. Andhra Pradesh, Tamil Nadu, Mizoram & Haryana have implemented but later repealed prohibition laws.
It's a noble thought. I hope Bihar government will learn from the mistakes of other states and enforce an effective law. To test the waters he should prohibit GA legislatures and all seniors officers of the State from consuming alcohol with immediate effect.

Nifty: Fear and greed indicator peaking

Historically, one of the most successful, though intuitive indicator of greed overtaking the fear in market is outperformance of small cap stocks over large cap stocks. On this parameter market is ripe for a major correction.
In past an outperformance level of 25-35%, in a given period has marked the cycle peak for the market. The correction thereafter have been sharp, painful and very broad based. In one year post peaking, the broader market corrected much more sharply as compared the benchmark indices.
In last instance the outperformance peaked in January 2008 and broader markets corrected over 80% in the following one year as compared to ~60% for the benchmark indices.
 
The outperformance of BSE small cap Index during past 24months is not as sharp as it was during 2006-08, but if we adjust it for slower economic growth this time and substantially poorer corporate earnings performance, the outperformance might not only look sharper but ominous also.
 
 
I therefore sincerely believe that it is reasonable to raise guards against a potential sharp correction in broader markets in next few months. 
 

Friday, November 27, 2015

Shaken not stirred!

" Realists do not fear the results of their study."
—Fyodor Dostoyevsky
(Russian, 1821-1881)
Word for the day
Uxorious (adj)
Doting upon, foolishly fond of, or affectionately submissive toward one's wife.
(Source: Dictionary.com)
Malice towards none
Who is bigger enemy of Congress Party?
(a) Manishankar Aiyer
(b) Rahul Gandhi
(c) Digvijay Singh
(d) Salman Khurshid
(e) Other (Pl specifiy)
First random thought this morning
Amir Khan enjoys a serious love hate relationship with right wing activists. First came Sarfrosh (1999) and Lagaan (2001) - Amir was a top nationalist and patriot. Then he decided to sit on dharna with Medha Patkar Narmada Bachao Andolan during promotions of Fanaa (2006) - he was suddenly an anti national, obstructionist and traitor. With 3 Idiots (2006) - Amir again became a youth icon, everyone wanted to emulate Rancho. In 2014 PK made him blasphemous. His decision to share with public a byte of his bedroom talk with his wife has now turned him a top rated traitor. In the meantime he has made a lot of people cry with him on his TV show Satyamev Jayate.
Quite a roller coaster! What the heck!!!

Shaken not stirred!

Post Paris attacks, the hostilities in Europe are rising by the day. This is developing into, inarguably, the largest geo-political crisis since Iraq invasion led by US led allied forces in 2003.
The economic data in US is encouraging for Fed hawks. December 4 non-farm payroll report (NFP) is widely expected to provide final thrust for the eventual Lift off on December 16. (see here)
The recent report of virtual crash in Australia's private capex (long considered a proxy to Chinese hunger for raw material) suggest that despite all assurances, all might not be well with China. (see here)
These three factors may be sufficient to stir a perfect storm for global markets in next three months, likely causing sharp correction in almost all assets, and a deep cut in risk appetite.
At this point in time it is rather difficult to assess the potential damage as the conditions are quite different from 2008. For example consider the following:
·         The market participants are more prepared and well bunkered for a disaster as compared to 2008-09. In 2008 the storm struck when most participants were drunk and partying in the open.
·         The central bankers are much more experienced in handling the liquidity crisis as compared to 2008 and perhaps enjoy more credibility insofar as disaster management capabilities are concerned.
·         The global economy is much weaker after a persistent struggle with deflation for over five years.
·         The global economy is estimated to be burdened with over US$200tn of debt, a large part of which could be perpetual and may never be repaid. QE may therefore not be as potent a weapon this time as it was in 2008-09.
·         The engine of global growth in 2008, viz., BRIC, is out of steam and perhaps backfiring.
·         The political cooperation seen during 2008-09 may not be seen in 2016 due to a variety of reasons.
·         The disaster will impact much larger governments as compared to smaller PIGS in 2008.
These thoughts do shake me but I am not stirred. I continue to believe that the world is not entering any major war. The threat of ISIS in its present form may get neutralized sooner than later. US liftoff will be smoother than most anticipate, much like tapering. China perhaps has already landed hard, though official data may not admit. Commodity super cycle is over and prices may hit the rock in next few months.
For me the recovery in Indian corporate earnings is the foremost concern.

Thursday, November 26, 2015

Investment Strategy 2016 - II


"There are things which a man is afraid to tell even to himself, and every decent man has a number of such things stored away in his mind."
—Fyodor Dostoyevsky
(Russian, 1821-1881)
Word for the day
Sang-froid (n)
Coolness of mind; calmness; composure
(Source: Dictionary.com)
Malice towards none
If you are NOT an expert on tolerance or otherwise of India and Indians - please raise your hand!
First random thought this morning
If the debate on social media is any indicator - I find my fellow countrymen deeply frustrated, highly agitated, bursting with energy to change things and dedicated to embrace the change.
But when I stroll down the street - I see no door open, no glimmers of light leaking through tightly shut windows, no shadows of human figures on the damp, dark, silent alley.
I shout in anger and fear but my voice comes back like a missile to hit me. I run back to my home, not forgetting to tightly shut the door behind before retiring in the comfort of my warm white quilt.

Investment Strategy 2016 - II

In line with my assumptions for 2016 (see here), my investment strategy would look like as follows:
Asset allocation
Since I do not expect much fall in interest rate, I would maintain equity overweight in my portfolio (65%). Presently I am holding a material part of my equity portfolio as tactical cash (25%). In case a substantial correction in stocks prices I would like to deploy this cash fully in equities. My target return for overall financial asset portfolio for 2016 would be ~9%.
Debt investment
I would like to largely confine my debt investments to accrual products only; strictly avoiding search for capital gains in my debt portfolio.
However, I may consider debt funds with very long duration if benchmark yields rise over 8.25% due to some global event.
I would avoid undue credit risk in my debt portfolio to make few bps additional return. Though I would not like to be paranoid about the credit risk. I would not be wasting my time looking for risk where none exists.
I would target 7% post tax return on my debt portfolio.
Equity investment
I would maintain a balanced stance on my equity investments and consider entire spectrum of companies rather than focusing on large caps only. I would:
·         target 10% price appreciation and 1% dividend yield from my equity portfolio;
·         normalize overweight on global pharma and IT;
·         normalize underweight on financials. Adding NBFCs catering to LIG and MIG borrowers;
·         continue NIL weight on global commodities;
·         increase exposure to domestic Cyclicals; preferring solution providers, technology leaders and innovators rather than pure product or construction companies;
·         overweight luxury discretionary consumption;
·         continue to avoid PSU in general. However, may consider top PSU banks if stocks prices corrects irrationally.
Miscellaneous
·         I would not consider precious metals for financial asset allocation.
·         I assume a stronger USD and weaker EUR & CNY in investment decisions. Therefore I would be discreet in choosing exporters for investments.

Tuesday, November 24, 2015

Binary solution won't work for me!

"Man, so long as he remains free, has no more constant and agonizing anxiety than find as quickly as possible someone to worship."
Fyodor Dostoyevsky
(Russian, 1821-1881)
Word for the day
Gratulation (n)
A feeling of joy.
(Source: Dictionary.com)
Malice towards none
The school dropouts completely dominate the cabinet of Nitish Babu.
Who is the strategist behind this move?
First random thought this morning
It took gruesome killing of 150 innocents in Paris to wake up global superpower to unite against the menace of ISIS. I am sure ISIS will be neutralized or substantially weakened in 2016 as all the military might of US, Russia and France operates together against them.
However, the sheer number of destitute this battle will leave in Syria (and elsewhere) will keep the threat alive, as was the case with the battles fought in Afghanistan, Iraq, Yemen, Lebanon, and Libya etc.

Binary solution won't work for me!

Though Santa is yet to ring the bells and draw curtain over the 2015th year of the Christ, the urgency to foretell the market trends in 2016 is conspicuous amongst analysts. Most of these prophecies are coming with material contingencies, e.g., US Federal Reserve decision to hike and the trajectory of the lift thereafter; China crash landing; escalation of Europe refugee crisis; etc.
As a small investor I find it hard to think of a strategy, other than sitting largely in cash (USD), with these contingencies. This binary solution may be perfectly workable for a hands-on global traders; but may not work for a small domestic investor like me.
Given this constraint, I would like to make necessary adjustments to my investment strategy.
For next year or so I would like to work with following assumptions:
Domestic macro environment
Though not fully convinced, I would still like to build in marginal deterioration in India's macro fundamentals. In particular,
·         India's average economic growth may be lower at 7-7.2% (new series) in next four quarters.
·         Private consumption and savings may not accelerate materially.
·         Public sector investment may stagnate.
·         Private sector investment may see some acceleration due to higher FDI in manufacturing.
·         Fiscal balance may deteriorate. Consequently, the rates and bond yields may not ease much from current level.
·         INR may weaken against USD, but may remain stronger on trade weighted basis as EUR, CNY and currencies of other trading partners depreciate more.
·         Manufacturing inflation may bottom out in 1H2016 and see a sustained rise in 2H2016 on base effects and bottoming of global commodity prices and weaker INR vs. USD. CPI may also rise as food and electricity prices remain high.
·         Current account may see some deterioration as exports fail to pick up, non-oil imports rise, and remittances and FPI flows slow down. BoP condition may remain comfortable as FDI flows remain comfortable.
Corporate earnings
·         Corporate earnings may see a 5-7% growth in 2016. Most of this growth will be back-ended in 2H2016. Domestic businesses may better than exporters.
·         FY16 Sensex EPS are expected to be in the Rs1425-1450 range. FY17 earnings therefore could be 1575-1600.
Indian markets
·         We may not see any material re-rating of Indian equities from the present level.
·         I assume 2016 end Sensex level of 28800-29200. Therefore return expectations in 2016 should be moderate at 10-12%.
·         I assume average 10yr bond yields to remain around the current 7.7% level. Though, a sharper fall in INR due to global events may lead the yields higher in 1H2016.
Global economy
·         Global growth environment may remain challenging. Europe and Japanese economies may continue to flirt with recession and deflation.
·         US growth may decelerate marginally.
·         US Fed may begin hiking rates and reach 1% by end 2016. US 10yr bond yields may be above 2.75% by end 2016.
·         Emerging markets growth may decelerate materially in 1H2016 as commodity prices fall further and USD strengthens.
·         Chinese economy may continue to struggle. CNY may be devalued further.
·         Reserve unwinding by commodity producers and China may continue, pressurizing global yield. However, ECB and BoJ QE programs may prevent any major run on global bonds.
·         Geo-political conflicts may intensify in 1H2016 and may even create a liquidity condition in global financial markets. Panic thus created may trigger a major temporary correction in all financial asset prices.
Global commodities
·         I assume a material correction in global commodity prices from the current levels in 1H2016.
·         Gold could fall below US$1000/oz and WTI crude could fall below US$38/bbl. LME copper could fall below US$4500/t.
·         The global trade volumes may continue to shrink and accordingly the freight rates may remain low.
I find my investment strategy mostly aligned to these assumptions. However, in my next post I will share whatever adjustments that may needed in 2016.

Monday, November 23, 2015

Nifty: Rajan-Modi rally under threat

Thought for the day
"The formula 'Two and two make five' is not without its attractions."
Fyodor Dostoyevsky (Russian, 1821-1881)
Word for the day
Devour (v)
To consume destructively, recklessly, or wantonly
(Source: Dictionary.com)
Malice towards none
With rise of two "sons" in the east, will the debate over dynastic politics in India go to slumber?
First random thought this morning
When Arvind Kejriwal hugged Lalu Prasad Yadav everyone commented that political baptism of Arvind Kejriwal is now complete. He has learned all the rules of the game and also decided to play the "game" by the rules.
The people who supported "the change" with great expectations appear distraught and deeply dismayed. But the problem is that these very people were neither happy when he refused to learn the rules of the game and declined to play the game by the established rules.

Nifty: Rajan-Modi rally under threat

The current bull market in Indian equities that started with change of guards at RBI in September 2013 and gathered more pace with change of government at the center is under serious threat of termination.
Nifty flirted with the lower bound of the rising trend line last week and barely survived. The upper bound in the meanwhile is declining sharply.
Traders should watch for the closing low of last week (7731 on Nifty) carefully. A close below that level may indicate termination of the rally that started with a series of fiscal and monetary reforms and consequent improvement in macro indicators. The hope created by the change in regime at the center fueled the rally adequately.
A close below 7660 may trigger a short term bear market in Indian equities and hence would be a shorting opportunity.
The premise does not change until Nifty manages to close above 8330 in a sustainable manner.
I would hedge all my long positions. Hold short positions with a strict stop loss of 8036, and initiate aggressive fresh shorts below 7660 Nifty close level