Do it yourself

Yesterday’s post ( No margin for error ) evoked a multitude of thoughts. Some readers have challenged the premise that the broader markets, especially the small-cap stocks, have sharply outperformed the large-cap components of the benchmark indices. They have argued that — ·          Nifty Next 50 Index (YTD higher by ~21%), which comprises the top 50 stocks outside the Nifty50 (YTD higher by ~2.7%) universe, has performed much better than the Nifty Midcap100 (YTD higher by ~9%) and Nifty Smallcap 100 (YTD higher by ~10%) indices. ·          If we exclude private banks and IT services stocks from the Nifty50 universe, the rest of it has performed better than the broader market indices. ·          These statistics (index performance) completely fail to present a correct picture of the market. The narrative that small caps have done better than large caps is mostly...

  The benchmark Nifty50 has oscillated in a tight range in the past eight weeks. On a point-to-point basis, it’s hardly changed - remaining mostly in the 19500-19700 range. More importantly, it has weathered a barrage of bad news in this period and stayed calm as reflected in the low volatility index. Some of the noteworthy events weathered by the market include - hawkish commentary from central bankers (including the RBI and the US Fed); downgrade of global growth estimates; poor growth guidance by IT services companies; a truly ominous escalation of hostilities between Israel and Palestine; erratic monsoon season and consequently elevated food inflation & cloudy outlook for the rural demand leading to a sharp rise in global crude oil prices; opinion polls indicating some setback for the ruling BJP in the forthcoming state assembly elections; etc. The bond yields in developed countries have risen to levels not seen in the past two decades. The US benchmark (10yr G sec) bon...

  It was spring of the year 2022. The news flow was worsening every day. The Russia-Ukraine conflict was dominating the global media headlines. NATO-Russia acrimony was at its worst since the cold war era. China committed to a zero Covid policy and implemented strict mobility restrictions, further impacting the global supply chains. Inflation was beginning to spike and most central bankers were ready to embark on an accelerated tightening cycle. Back home, the enthusiasm created by a path breaking budget had not survived even for a whole week. Issues like macroeconomics (growth, inflation, current account, yields, INR), geopolitics (Russia-Ukraine), politics (state elections) and persistent selling by foreign portfolio investors (FPIs) was dominating the market narrative. The trends in corporate earnings also were not helpful to the cause of market participants. By early March 2022, the benchmark indices had fallen substantially from their highest levels recorded till then, between...

If we cut the noise and overcome our recency bias, Indian stocks have given a decent return over the past five years; though this period had been particularly eventful. We witnessed the worst pandemic in over a century crippling the world. A variety of economic and geo-political conflicts impeded the global economy. The financial markets witnessed unprecedented liquidity deluge that led to over US$20trn bonds trading at a negative yield; followed by sharp monetary tightening. The world moved from severe deflationary conditions to sharp inflationary spikes. Central banks cut the policy rates close to zero (even below zero in some cases) and then hiked the rates at the fastest speed in five decades. In the domestic economy, we saw macro parameters like inflation, fiscal deficit, current account deficit etc. worsening sharply. We witnessed a monetary easing and tightening cycle. Banks went through a massive credit cycle. The benchmark Nifty50 has yielded an 11.4% CAGR over the past fi...

  Strategy review 1HFY23 Market performance For the Indian markets, the first half of the current financial year (1HFY23) has been noteworthy in many respects. While the benchmark indices have remained boringly range bound (not unexpectedly  see here ), the shift in sector preferences has been material. Also as expected volatility has remained low to moderate and market breadth has narrowed down. Some key highlights of the market performance in 1HFY23 could be listed as below: Equity Markets ·           Benchmark Nifty lost 2.1%, sharply outperforming the peers from emerging as well as developed markets. For example, S&P500 (US) lost ~20% in this period; while STOXX600 (Euro Area) was down over 15%. ·           The foreign flows were majorly negative in 5 out of 6 months. Overall foreign portfolio investors sold ~US$20bn worth of Indian equities. Most of this selling was absorbed by d...

After almost a decade the Indian financial sector seems to be out of troubled waters. Almost all significant banks are beyond solvency concerns and set to progress in the path of growth. The asset quality has shown steady improvement for most banks despite Covid disruptions. The loan growth has improved from historic lows seen in the past few years. Earning growth is strongly aided by healthy recovery from the bad accounts. Moreover, the loan books of most tier 1 and Tier 2 banks are tested for stress and provisions are adequate to meet most foreseen adversities. These institutions have come a long way from the first announcement of Dirty Dozen (the largest 12 non performing accounts) in the summer of 2017. Eight of the notified 12 accounts have been resolved with more than 50% recovery. Resolution is under progress for two accounts and the other two are under liquidation. As of the end of FY22, no major potential stressed account has been reported that can materially alter the curre...

The debate over whether “equity investing” is an art or science is never ending. There are arguments on both sides, but none of these appear strong enough to settle the debate. Almost all episodes of this debate usually end with the compromising statement - “Equity investment is both an art and a science.” The application of quantitative research and financial models does give it a scientific color. But use of quantitative methods and financial models is highly influenced by the personal preferences, experience, estimates and prejudices of the user. Invariably, the forecasts of fundamental analysts vary based on what parameters they have used in forming their respective opinions. For example, a 50bps difference in weighted average cost of capital (WACC) used by two analysts could give dramatically different assessments for the fair value of a stock. As someone pointed out, fundamental analysis of equity stocks is like navigating a car. While all the cars are designed scientifically, th...

What would be the first thought that crosses your mind, when you hear a veteran fund manager betting his shirt on Nifty falling 30-40% in the next 6months! Yes, you heard it right. Last week, a former CEO/CIO of a large AMC, confidently told an audience composed of top bankers and HNIs that Nifty is bound to come to sub 10000 levels in next 6months and gold is the only safe haven under the present circumstances. I am not sure about how many amongst the audience actually concurred with his view, but the first thought that came to my mind was “how would this old man look without a shirt!” In a recent visit to the financial capital Mumbai, I also had the opportunity to meet some senior market participants (bankers and investors). None of them sounded enthusiastic about the markets. The consensus appears to be strongly favoring a slow grind over the next 6-9months. Incidentally, the reference point for most of the senior participants is 2008 market crash, in the wake of the global fi...

 The strong rally in global metal prices, and consequently metal producers, appear to be faltering. Chinese authorities have taken a number of measures to calm down the steel and iron ore market. Iron futures have fallen sharply in past couple of weeks. Besides, steel and base metals like copper and aluminium have also corrected sharply from their recent high levels. A few brokerages who were extremely bullish on metals from midterm viewpoint have also turned little cautious. For example, in a recent research note JM Financial stated that “ The recent spike in the headline inflation in several countries, including in the US, has been led by steep rise in global commodity prices, including metals, soft commodities and crude oil prices….”. “For us the rally over the past 12 months was fairly predictable. But things are not as clear looking forward. We believe that market indicators have run far ahead given the context of the underlying strength of the economic recovery that is...