Wednesday, December 16, 2015

Strategy 2016-1: Adapt to lower return on investments

"If women were particular about men's characters, they would never get married at all."
—George Bernard Shaw (Irish, 1856-1950)
Word for the day
Telluric (adj)
Of or relating to the earth; terrestrial.
(Source: Dictionary.com)
Malice towards none
...and the parrot stays caged, happily eve rafter!
First random thought this morning
A US town has recently rejected a proposal for a solar farm following public concerns. Public in Woodland, North Carolina, expressed their fear and mistrust at the proposal to allow a Solar Company to build a solar farm off Highway. Jane Mann, a retired science teacher, said she was concerned the panels would prevent plants in the area from photosynthesizing, stopping them from growing. (see here)
This reminds me of the opposition to India's first hydro-power project in Punjab (Bhakhra-Nangal at Satluj river) when farmers protested that their fields will get de-energized water from the project and therefore impact their crops adversely!

Strategy 2016-1: Adapt to lower return on investments

As we approach the end of 2015th year of Christ, it is time to light awhile, reflect back, make necessary corrections and plan for 2016.
This time last year (see here) I felt that the forces of fear were overpowering the forces of greed. I find it painful to claim that most of my anticipation came true. The market moved in the projected range of 7450-9400 and is ending the year close to lower bound.
I see the forces of fear continuing to dominate the scene in 1Q2016. I have been sharing my opinions on the likely market scenario in my recent posts (see here and here). The primary idea is to posit an appropriate strategy.
Many readers have pointed out that my views have come in bits and pieces and it would be appropriate that I consolidate my views and present in a more cohesive manner. Over next few days, I shall be sharing my outlook about likely trend in performance of various asset classes and the strategy I would adopt under the assumed circumstances. There of course will be some repetition, which I request you to bear with me.
Strategy 2016-1: Adapt to lower return on investments
Investors in Indian assets are most likely entering once in five year phase when the return prospects on most asset classes may be 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 ~8%. Given the slower earnings growth, likely slowdown in global flows and moderation in optimism over economic reforms, the outlook for 2016 is not very encouraging. Save for a major re-rating of Indian equities (no reason to foresee that today) the benchmark indices may return a moderate return in 2016, with a reasonably higher degree of risk and volatility.
Despite 125bps reduction in repo rates, benchmark yields have fallen by just 5bps this year. The best in class debt funds have given ~10% return over past twelve months. However given that both economic growth and consumer inflation might have bottomed, the scope for a further reduction in rates from the current level may not be great.
Save for a global crisis requiring larger monetary stimulus, one should not expect the rates to fall materially from the current level. On the contrary, a material spike in consumer prices; precipitous fall in INR and/or major sell off in Indian bonds may actually warrant some hike in policy rates. This would essentially mean that the debt investment also may not offer more than 8% return in next twelve months.
Gold funds have yielded a negative -6% return in past 12months. Going by the most forecast, 2016 may not be a good year for gold investors also.
Leaving apart very high priced locations e.g., South Mumbai, and areas with huge oversupply hang, e.g., NCR and Central Mumbai, real estate prices in many areas may bottom out in next twelve months. Lower rates and stability in employment conditions may spur decent demand in LIG/MIG segment. However expecting any material rise in home prices in next twelve months would be bit unreasonable at this point in time....to continue

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