"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)
(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.
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