Wednesday, December 30, 2015

Investment Strategy 2016 - 8: Investment Strategy

We wish all the readers a great year ahead!
 Thought for the day
"When I told the people of Northern Ireland that I was an atheist, a woman in the audience stood up and said, 'Yes, but is it the God of the Catholics or the God of the Protestants in whom you don't believe?"
—Quentin Crisp (English, 1908-1999)
Word for the day
Wing-Ding (adj)
A noisy, exciting celebration or party.
(Source: Dictionary.com)
Malice towards none
Rahul Gandhi is on leave, but this time with due permission of the Twiterrati!
First random thought this morning
Reportedly, 30 students in Kota have committed suicide in 2015, supposedly for failing to cope with the pressure to succeed in professional examinations.
Three things are worth pondering: (a) No one is crying for these children as they would normally do for farmers committing suicide; (b) To make matter worse, the government is considering to reverse "no hold till class eight" policy so that even younger students feel the pressure; and (c) 3 Idiots was highly overrated as a movie with social message - students have learned to take a leak at teacher's door, drink alcohol; commit suicide, and make fun of a language but parents have not learned to let children live their life!


Investment Strategy 2016 - 8: Investment Strategy

As discussed in one of my earlier posts, I believe that Indian investors are most likely entering once in five year phase when the return prospects on most asset classes are frustratingly low. Fortunately though the return of investment is not under threat as yet.
On YTD basis benchmark equity indices have given a negative return of ~4%. Given the poor earnings growth, slowdown in global flows and moderation in optimism over economic reforms, the outlook for 2016 continues to be clouded. Save for a major re-rating of Indian equities (no reason to foresee that today) the benchmark indices may return a moderate 10-12% return in 2016, with a reasonably higher degree of risk and volatility.
So what should be the investment strategy going into 2016?
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%). I would like to deploy this cash fully in equities over next 3months. 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 and not waste my time looking for risk where none exists.
I would target 7% post tax return on my debt portfolio.
Equity investment strategy
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:
(a)   Target 10% price appreciation and 1% dividend yield from my equity portfolio;
(b)   Normalize overweight on global pharma and IT;
(c)    Normalize underweight on financials mostly by adding NBFCs catering to LIG and MIG borrowers;
(d)   Continue NIL weight on pure commodity plays;
(e)    Increase exposure to domestic cyclical businesses through solution providers, technology leaders and innovators rather than pure product or construction companies;
(f)    Overweight luxury discretionary consumption;
(g)    Continue to avoid PSU in general. However, I may consider some of the top PSU banks if stocks prices correct irrationally from the current levels.
Equity trading strategy
(a)   I would like to trade frequently in at least one third of my equity portfolio and use 'buy & hold' strategy for the remaining part.
(b)   I see strong pair trading opportunities in differentiated performances within same arena, e.g., private banks, consumers and exporters.
(c)    I also see strong trading opportunities emerging in commodities' space. Though I would mostly like to trade in this space on the short side after each technical bounce.
(d)   I would actively look for shorting opportunities in PSU space, especially those who will see (a) material rise in wage bill due to implementation of 7th Pay Commission recommendation; or (b) lose out to foreign competition as government opens up more areas to global competition.
Miscellaneous
(a)   I would not consider precious metals for financial asset allocation.
(b)   I assume a relatively stronger USD and weaker EUR & CNY in investment decisions. Therefore I would be discreet in choosing exporters and foreign currency borrowers for investments.
What will change my view?
1.    Full blown recession in US.
2.    Surprise recovery in Europe and Japan.
3.    Hard landing in China.
4.    INR breaking and sustaining over 70/USD.
5.    Full blown economic crisis in middle east led by lower energy prices.
It is critical to note that short selling and derivative trading involves materially higher risk. These require much higher level of technical expertise and knowledge and therefore not suitable for all investors/traders. The readers should seek expert advice before making any investment or taking a trading call.
Also Read

Tuesday, December 29, 2015

Investment Strategy 2016 - 7: Market outlook

"There is no need to do any housework at all. After the first four years the dirt doesn't get any worse."
—Quentin Crisp (English, 1908-1999)
Word for the day
Abdominous (adj)
Having a large belly; potbellied.
(Source: Dictionary.com)
Malice towards none
Akhand Bharat, as apolitical entity was created by whom and when? And it stayed so Akhand for how long?
First random thought this morning
After South India, now cities in north England and South America face unusual floods. Mother Nature is certainly happy with the way this world is growing. We shall continue to face Mother's angst, if we do not mend our ways ASAP. If past five years are a trend 2016 should see even worst of Mother Nature.
I guess, Paris climate agreement needs to become a substantive accord to please Mother Nature and not just remain a piece of diplomatic hypocrisy.

Investment Strategy 2016 - 7: Market outlook

Unlike past couple of years, this year portending a clear market outlook is much tougher. In December 2013 the greed was a dominating factor as the market was well supported by rising global liquidity and ZIRP and pregnant with hope of a new dawn. In December 2014 the fear was clearly overpowering greed. Global weather was wet and windy as QE began to taper, China's slip became conspicuous and indubitable leading commodity world to crumble; and in domestic arena also skepticism began to grow as the things did not appear working out as expected.
Today as we stand at the exit point of 2015, most fears have come true. The markets, especially commodities, seem to have mostly adjusted to the worst case scenario. Given this, normally the greed should be the dominating factor. Looking at internals of the domestic market movement in past quarter or so, it indeed appears to be so.
However, the global narrative continues to be worrisome. The entire commodities' space looks rather hopeless. There is general consensus that USD strength consequent to end of Fed's ZIRP regime and likely CNY devaluation will add to deflationary pressure. The Eurozone yields and ECB and BoJ stance also appears to be subscribing to this likelihood.
Seesawing between hope of recovery gathering some steam and fear of a global meltdown, outlook for 2016 remains sketchy. In my view, we will have intermittent phases of grey and sunshine during the year and trading short term cycles will be the dominant theme.
The forces of Fear are likely to get fresh ammunition during 2016 with the disinflationary impact of stronger USD and higher Fed rates taking roots, EU and Japan continue to flirt with recession, commodity universe continuing to sink and the impact of fall in commodity prices begins to reflect on global financial system.
Like before, many battles of this ongoing global war will be fought in India too. Indian politicians continue to side with the Fearful, providing them with enough ammunition and food to survive.
The forces of hope may get traction from the policy reset in India becoming tangible. The investors’ sentiment at present is positive about the cyclical recovery. Investor positioning and market internals are clearly pointing towards that. The market implied volatility, volumes and breadth continues to remain low. The volume concentration in top 25 traded stocks is close to all time high.
I am not too excited about a conventional cyclical recovery in 2016. Cost efficiencies, productivity gains and ground breaking for some of the prominent FDI projects in manufacturing area would create excitement in market. Staple consumption could be supported by higher urban wages and normal rural income (assuming a normal monsoon). Export demand may continue to remain sluggish.
Also Read

Monday, December 28, 2015

Long equities - short gold

Thought for the day
"The formula for achieving a successful relationship is simple: you should treat all disasters as if they were trivialities but never treat a triviality as if it were a disaster."
—Quentin Crisp (English, 1908-1999)
Word for the day
Munificence (n)
Generosity, benevolence
(Source: Dictionary.com)
Malice towards none
Shocked by the PM Modi's Lahore surprise, Indian opposition leaders make demented comments.
First random thought this morning
In past senior political leaders from other States, especially UP, Bihar, Haryana and Tamil Nadu have used much vulgar language than AAP leaders in Delhi.
It would therefore be inappropriate to credit AAP for lowering the level of political discourse.

Long equities - short gold

Over a 10yr timeframe Indian equities have outperformed most financially tradable asset classes, except gold. Apparently gold has outperformed, but adjusted for duty element, gold would also underperformed equities.
The point of interest here is whether over next couple of quarters, this outperformance will continue or we may see commodities or USD outperforming Indian equities.
From the following chart of relative performance it appears that it might be little early to initiate long commodities short equities trade, but a relative trade might still exist in short gold vs long equities.
 
 
 

Thursday, December 24, 2015

Investment Strategy 2016 - 6: Corporate earnings & valuations

"We sometimes congratulate ourselves at the moment of waking from a troubled dream."
—Nathaniel Hawthorne (American, 1804-1864)
Word for the day
Schmuck (n)
An obnoxious or contemptible person.
(Source: Dictionary.com)
Malice towards none
Imagine the bedlam (intolerance) that would ensue if some Indian male politician uses Trump's language for a female politician!
First random thought this morning
The indignation over release of the juvenile culprit in infamous Nirbhaya rape case if baffling. The unmindful social media 'forwards' imply that the public is manifestly agitated and anguished. It is not only challenging the primary tenets of classical jurisprudence but also holding a distinct preference for the savage "eye for an eye" law.
The moot point is that if we completely reject the reformative aspect of punishment, we may need to isolate (or eliminate) all sentenced criminals for whole life, irrespective of the severity of their crime. And what about those who could not be sentenced due to poor evidence or inefficiency of prosecution.

Investment Strategy 2016 - 6: Corporate earnings & valuations

The Indian businesses are passing through interesting times, and there is nothing to suggest that the conditions will change in next couple of quarters at the least.
A multitude of challenges and opportunities present for Indian businesses makes the task of forecasting a trend in earnings extremely difficult. In particular, the following factors appear to be creating material uncertainty for Indian businesses:
(a)   The policy environment is in state of flux. Ideally, the direction will be towards further opening of the economy to global capital, technology and competition. Save for a total failure of political establishment (not likely), we may see more and more global players dominating the Indian industrial space in near future. Influx of foreign competition in services sector may be rather gradual and partial. This may make many large Indian corporates operationally uncompetitive, financially unviable and technologically redundant. On the other hand many smaller niche businesses that can potentially play a supporting role to global players can see substantial growth in their businesses.
(b)   The global competition may materially impact the margins of domestic businesses, for example due to (a) erosion of pricing power; (b) higher investment in technology and therefore lower ROCE; and (c) higher compliance cost due to adoption of best global business practices.
(c)    If the rout in global commodities continues, the earnings of many businesses would be impacted, at least in nominal terms. Moreover, economic turbulence in commodity economies, which incidentally happen to be largest export destinations for Indian businesses, may impact the export demand also.
On the positive side, the structural reforms initiated by the government may lead to lower cost for many businesses. For example, the success of Jan Dhan and DBT schemes could materially lower cost of funds for banks.
Easier FDI and ease of doing business norms could bring in unprecedented capital and intellectual property igniting a virtuous cycle of economic growth that would be much stronger and sustainable than the easier credit led growth cycle of 2000's.
For limited purpose of ST (one year) investment strategy, I would assume 10-12% earnings growth for CY2016, and believe most of it will be back-ended.
At this point in time there is little argument for re-rating of Indian equities, as these still enjoy premium (deservedly so) over EM peers. However, the premium may grow larger in later part of the year if execution improves and domestic demand pick up post a good monsoon.
Also Read

Wednesday, December 23, 2015

Investment Strategy 2016-5: Investment, savings & consumption

"Religion and art spring from the same root and are close kin. Economics and art are strangers."
—Nathaniel Hawthorne (American, 1804-1864)
Word for the day
Schmooz (v)
To seduce with flattery
(Source: Dictionary.com)
Malice towards none
Ratan Tata is losing his heart to UP!
Does it mean Gujarat is also losing to UP?
First random thought this morning
The chill in Delhi's air is rising forcing people indoors early in the evenings. The Winter session of the Parliament is ending today.
The government has two months, before the Budget session begins, to set its house in order, sort out priorities, work out floor strategies, reach out to opposition and showcase its achievements. Alternatively, it could escalate confrontations and vitiate the environment further.
Either way, no winter vacations for the government!

Investment Strategy 2016-5: Investment, savings & consumption

Private investment & consumption, public spending and exports are four primary drivers of economic growth of any nation.
·         Private consumption is in turn a function of private income and borrowing.
·         Private investment is a direct function of domestic consumption and export demand and is materially influenced by credit conditions.
·         The government spending is a function of private income & consumption (direct & indirect taxes) and government borrowing.
·         Exports in simplistic terms a function of global demand and relative terms of trade.
In simple terms, the price performance of various economic assets primarily depend on economic growth and liquidity (demand-supply equilibrium), I find it easy to portend as follows:
(a)   Private consumption has remained sluggish for past couple of years, led by decline in rural income. Real urban consumption has also been under pressure due to persistently higher consumer inflation. 2016 may see partial reversal in this trend, assuming CPI remains under control, El Nino recedes and we have a normal monsoon after two years, and pay commission and OROP disbursements find their way to markets.
Rising income may also see growth in consumer borrowings. Though the household balance sheets have seen rising leverage in past one year, still there is scope for further leveraging, in my view.
However, there is little to suggest that things will improve in 1H2016. So this kicker will come only in later part of the year.
(b)   Given that presently capacity utilization in Indian industry is low, balance sheets of corporates are highly leveraged, export demand is decelerating and real rates are rising, the environment for domestic private investment is expected to remain challenging for better part of 2016. However, a material easing in FDI norms and administrative efficiency in managing foreign investments could support gross private investment. Again do not expect material improvement in 1H2016.
(c)    Current equity market conditions (little divestment potential), high real rates (expensive borrowing and debt servicing for government), likely lower growth in indirect taxes, and desire to maintain fiscal discipline do not augur well for material pick up in public spending as well. As it appears today, only a global collapse will only spur government stimuli.
(d)   As discussed yesterday, the global growth, especially in major trade partners of India (except US) is not likely be encouraging. So no material improvement expected at export front. In fact, a serious CNY devaluation (not unlikely) could hamper exports further.
Also Read

Tuesday, December 22, 2015

Investment Strategy 2016 - 4: Global growth and flows

"We must not always talk in the market-place of what happens to us in the forest."
—Nathaniel Hawthorne (American, 1804-1864)
Word for the day
Fortnight (n)
The space of fourteen nights and days.
(Source: Dictionary.com)
Malice towards none
Should PM Modi support Shashi Tharoor's Bill to abolish Sec 377 IPC to send a strong signal to the burgeoning fringes on his side of the political spectrum.
First random thought this morning
Sometimes it feels that history is refuge of losers. Those who are unable to move forward, look back and try to camouflage their failures with the luster of their history. And if their history is also not illustrious, they would flagrantly manufacture one which they could pretend proud about.
Successful live in present and think about future.

Investment Strategy 2016 - 4: Global growth and flows

The consensus at this point in time appears to be favoring a modest pickup in global economic growth during 2016. Most sell side economists are building in a stable US economy sustaining the growth momentum and improving Euro zone economy.
Japan managing to stay out of recession and peripheral Europe benefitting from core Eurozone growth are incidental assumptions. Most economists see China and other major emerging markets continuing to slowdown. The consensus has factored in ~1% rise in Fed rates during the course of 2016.
The global growth is mostly expected to be uneven and skewed in favor of the developed world.
I find it hard to agree fully with these mostly sunny days forecast, primarily for the following three reasons:
(a)   Most of these forecast strongly support marginal rise in inflation (primarily on base effect) and completely ignore the possibility of acceleration in deflationary pressures. I do not see how feeble European and already plateauing US growth will absorb the commodity glut that may actually worsen as the cost of carry rises with stronger USD, higher interest rates and even higher margin requirements as risk rises.
The lyrical 2% inflation, 3% real growth, 4% normalized Federal funds and 5% unemployment sounds too good to my ears. Even if as the end result these targets are achieved, the journey may not be smooth and safe.
(b)   Assuming "no hard landing" in China is ok, given the strong reserves and controlled economy, but underestimating the extent CNY devaluation could be perilous to any investment strategy.
(c)    Most forecast have deftly avoided the probability of Lehman moment reoccurring. Given the expected USD strength, precipitous fall in commodity prices (and currencies) and likely rise cost of capital to me it is more likely than ever in past 6years.
With most central bankers now predictable and fast running out of arrows in their quivers, the bears may not be tamed as easily as these were in summer of 2009.
Therefore, I would like to built in my strategy (a) highly volatile and unpredictable global economic conditions; (b) probability of a global credit and liquidity condition; (c) pick up in global demand only from 2H2016; (d) material rise in global risk premium and lower flows to EMs; and (e) geopolitical strife triggered by economic considerations.
Specifically to India, I feel FPI flows could be lower and volatile. FDI flows may however remain buoyant due to further opening of economy.
Also Read

Monday, December 21, 2015

Investment Strategy 2016 - 3: Technical trend


Investment Strategy 2016 - 3: Technical trend
In strict technical terms, Nifty is poised to begin 2016 with downward bias. On weekly and monthly charts it is weak on most parameters, whereas on daily charts it is marginally weak.
At present Nifty is trading 4% below 200DEMA of 8086. Historically, markets have not sustained at levels more than 10% below 200EDMA. Thus Nifty has strong support around 7200 mark for next 3months. The support level will rise after March when 200EDMA jumps on base effect.
Moreover, Nifty also finds a strong support at 7000 level on the long term rising trend line from March 2009 lows.
Thus, my technical outlook for 2016 is as follows:
(a)   1Q2016: Nifty may mostly trades between 7200-8050 range, with a negative bias.
(b)   If Nifty ends 1Q2015 below 7400, Nifty may peak around 8400 levels in 2016. However, if Nifty ends the first quarter close to 8000, we may see material gains in rest of the year with Nifty likely scaling new highs. At this point in time the later scenario looks less probable (25%) as compared to the former (75%). Anyways, strong buying opportunities will exist below 7400 Nifty level.
(c)    Bank Nifty appears marginally worse than Nifty on charts, suggesting that the down moves will likely be led by banks, whereas the up moves will see more diversified leadership.
 


Also Read