Some food for thought
"Do not trust your memory; it is a net full of holes; the
most beautiful prizes slip through it."
—Georges Duhamel (French Novelist, 1884-1966)
Word for the day
Jubilate (v)
To celebrate a joyful occasion.
Mid-year review - Market Outlook and
Strategy
Market outlook
Since I shared my
market outlook for 2019 in December 2018 (see here) and
last reviewed it 3 months ago (see
here), a few things have changed. I find the following changes noteworthy
for assessing my market outlook and see whether these entail any change in
investment strategy.
(a) Most of the global central bankers have
acknowledged that the slowdown in global economic activity is serious and might
require monetary policy support. Central bankers like FEd, ECB, BoJ, PoBC, RBI
etc have moderated their policy stance to be more accommodative. The risk
appetite that has been shrinking for past many months, as reflected by-
(i) Severe underperformance of mid and small cap
stocks in most global markets;
(ii) Underperformance of emerging markets;
(iii) Sharp rally in developed countries' treasuries
leading to negative yields in over $13trn worth of treasury bonds;
(iv) Rise in cash held by global fund managers to
the level not seen since global financial crisis,
(v) Rally in gold prices as central bankers
resume meaningful buying after a long hiatus; etc.
may see some
recovery in coming months, as liquidity improves and global fund managers again
set out in hunt for yield.
(b) The trade negotiation between US and its
major trade partners have been quite erratic. The actual policy actions by all
negotiating parties like US, China, India, EU etc have so far been negative for
trade growth. The global trading activity has been materially impacted by hard
positioning of all the parties involved in tariff related disputes. The top
level talks at G-20 Summit last week have been congenial and raise hope of an
amicable solution, but given the past experience, would be better to wait for
the actual policy announcement and to react to mere good intentions and sweet
talk.
(c) BJP led NDA has returned to power with much
stronger mandate and visibility of gaining majority in upper house of the
Parliament in near future. This has removed political uncertainty and provided
visibility for continuity and stability of policy. The final Union Budget for
FY20 to be presented later this week may further clarify how serious is the
government on its promises made in the election manifesto, specifically
material rise in the fresh investment in infrastructure, agriculture and
housing sectors.
(d) Lower yields, resilient INR and improving GST
collections have created some fiscal space for the government and we might see
some tax concessions and targeted subsidies to aid both private investment and
consumption.
(e) There have been material developments
regarding regulation and functioning of non-banking finance companies. These
developments when juxtaposed to the peaking of NPA cycle for banks and
visibility of further capitalization and consolidation, suggest that the credit
growth in banks may substantially outgrow the NBFC growth.
(f) The deflationary
pressure on commodities has increased due to a variety of reasons, prominently
being China slowdown, trade disputes, inefficacy of easy monetary policy in
stimulating demand.
(g) The threat of El
Nino has subsided materially, implying that the delayed start to monsoon may
not impact the farm sector substantially and sowing should pick up as rains
normalize in the months of July and August.
(h) Sharp correction
in broader markets has made valuations reasonable in many pockets of the
market, even though the benchmark valuation stay elevated.
In light of the above, my investment outlook for Indian markets
for next 6-12months is as follows:
(1) Macroeconomic
environment - Stable to positive
(2) Global markets
and flows - Positive
(3) Technical
positioning - Neutral
(4) Corporate
earnings and valuations - Neutral
(5) Return profile
and prospects for alternative assets like gold, real estate, fixed income tec.
- Neutral
(6) Greed and fear
equilibrium - Positive
(7) Perception about
the political establishment - Positive
Overall market outlook - Marginally Positive
Market strategy update
Asset allocation
I continue to maintain the following asset allocation as
outlined in my last strategy post in May 2019 (see here)
(1) Out of 75% equity
allocation, I had been holding 30% in tactical cash. As stated my earlier
strategy note (see
here), I had decided to maintain this tactical cash level till April 2019
or 9200 Nifty level whichever happens earlier. I have invested this cash in May
and June and I shall now continue to stay fully invested. In my view, presently
the risk in "not investing" is much higher than
"investing".
(2) I am inclined to
invest half of my debt allocation in credit funds, leaving the balance in
accrual products.
Equity investment strategy
My present equity portfolio mostly comprises of quality mid cap
stocks.
I am overweight on Construction, Capex, Real Estate, Healthcare,
PSU Banks, Specialty Chemicals and select NBFCs. I am underweight consumer
staples, except high income discretionary consumption like alcoholic beverages.
In healthcare, I have pure API manufacturers and CRAM players. Avoiding large
pharma companies for now. I am also evaluating some auto ancillaries which have
corrected beyond reasonable. However I would avoid auto OEMs for now.
I had allocated one third of my equity allocation for active
trading which is to be gradually increased further. I prefer trading in large
banks and liquid cyclical.
I am mindful of the possibility of a significant global market
correction and consequent major correction in Indian equities. I would like to
hedge against this possibility through quality of stocks in portfolio rather
than buying a put.
Equity trading strategy
(a) I shall continue
to trade actively in next 6-12 months.
(b) The trading
strategy shall remain "buy on declines". I would continue to prefer
large cap stocks for trading.
Miscellaneous
I continue to assume a relatively stronger INR (Average around
INR70/USD for 2019), stable crude prices (Brent crude average below US$67/bbl)
and stable rates in investment decisions. Any change in these assumptions may
lead to change in strategy midway.
What will change my view?
1. Full blown
recession in US.
2. Total tech melt
down in US markets.
3. Hard landing in
China, forced by escalation in trade war.
4. INR breaking and
sustaining over 74/USD.
5. A full blown war
in the Korean peninsula.
6. A no deal Brexit
I shall review my strategy and outlook in last week of
September.
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