Friday, July 20, 2018

Market outlook and strategy for next 12months

" I'm not a genius. I'm just a tremendous bundle of experience."
— R. Buckminster Fuller (American, 1895-1983)
Word for the day
Cheville (n)
A word or expression whose only function is to fill a metrical gap in a verse or to balance a sentence.
Malice towards none
Finally @RahulGandhi will get an opportunity to speak for 15min in Lok Sabha. We wait eagerly to see how he makes @narendramodi bite the dust as he claimed once.
 
First random thought this morning
The nomenclature of key central socio-economic schemes started by the incumbent NDA government is intriguing.
Some scheme have chaste Hindi names like Uday, Sashakt, Ujjawala, Pahal, Kaushal Vikas, Mudra, Sukanya Smruddhi, Amrut, Indradhanush, etc;
Some are named in simple English like Make in India, Digital India, Accessible India, Stand Up India, etc.,
Some have the words "Prime Minister prefixed to them like Pradhan Mantri Awas Yojna, Pradhan Mantri Jeevan Jyoti Bima Yojna, Pradhan manti Jan Dhan Yojna, etc.; and
Some other have names of RSS/BJP stalwarts' names prefixed like Atal Pension Yojna and Deen Dayal Upadhaya, Gram Jyoti Yojna, etc.
What could be the algorithm behind determining the names of schemes? If you apply Shakespearean maxim, then waht was need to change the names of all existing schemes?
 
An Investor's Diary
As promised, I share my market outlook for next 12months and investment strategy that I shall be following to be in congruence with my market outlook.
Market outlook for next 12months
At beginning of the year, I had presented, in detail, my market outlook for the year 2018 (see here). Six and half months later, my market outlook for next 12months remains mostly the same.
I may reiterate in brief:
(a)   The market may continue to remain volatile in next 12months. Implied volatility has so far remain stuck in lower range. We may see episodes of sharp spikes in India VIX in next 12months.
(b)   The overall returns from Indian equities may be very low single digit or negative in next 12months.
(c)    Small and midcap may continue to underperform the benchmark. But total divergence in the direction of benchmark and broader market indices may end. Expect a sharper fall in benchmark indices in next 12months.
(d)   Financials, consumer non-discretionary, and capex themes may suffer more than others. Global commodities may suffer badly, before any recovering sets in.
(e)    Indian equities may suffer de-rating as political chaos clouds growth outlook.
(f)    INR may continue to be supported by higher yields and RBI intervention. INRUSD may stabilize around 68.50, after witnessing some volatile moves in the interim.
(g)    Bond yields may touch a high of 8.30%, and average above 7.5% in next 12months.
(h)   Real estate prices may stabilize in most geographies and continue to recover in select geographies.

My investment strategy for next 12months is summarized below:

Asset allocation
I continue to maintain a strategic 65% equity and 35% debt asset allocation. However, since I expect a fall in both equity and bond prices, presently I am keeping 50% of equity allocation as tactical cash in my portfolio, which shall be deployed as and when the anticipated correction in the prices occurs.
My overall target return from financial portfolio for next 12months is ~6%.
Debt strategy
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 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.
Equity strategy
Presently, I am mostly focused on large cap stocks, with strong balance sheets and superior return ratios. I am getting increasingly circumspect about the extreme valuations and over ownership in this space. I shall actively search for opportunities in second tier companies and invest there.
(a)   Target 5% price appreciation and 1% dividend yield from my equity portfolio;
(b)   Reduce the current overweight on global IT and look for opportunities amongst real estate, infra developers and real estate ancillaries like appliances and construction materials. Continue to own select pharma companies. I shall also be actively watching financials (ex top 5) for an opportunity.
(c)    Underweight on consumer staples, agri input and agri commodities.
(d)   Continue overweight high income discretionary consumption;
(e) I shall look at commodity producers selectively towards mid 2019.
Equity trading strategy
(a)   I shall continue to avoid trading in next 12months and focus on building a portfolio for the following 3yrs perspective at least.
(b)   I would actively look for shorting opportunities in financial and richly valued consumption space.
What will change my view?
1.         Full blown recession in US.
2.         Hard landing in China.
3.         Sharp earnings recovery in India led by higher investment demand
4.         INR breaking and sustaining over 70/USD.
5.         A full blown war in the Pacific.
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Thursday, July 19, 2018

Quality Bubble

"There is nothing in a caterpillar that tells you it's going to be a butterfly."
— R. Buckminster Fuller (American, 1895-1983)
Word for the day
Magesterial (adj)
Of, relating to, or befitting a master; authoritative; weighty; of importance or consequence
Malice towards none
Like the monsoon outside, will the monsoon session inside the parliament also end deficient?
 
First random thought this morning
For a common citizen of India, conditions are quite challenging. One sees good things only in political and governments' official claims made through social media and public speeches. Otherwise, media reports are full of depressing or frivolous news. Talking to people these days is also not a good experience. The discussions invariably turn violent on slight disagreements. Unfortunately, people are taking political stands on mythical grounds rather than ideological basis.
We urgently need a leadership that can shift the paradigm and turn the narrative to optimism and positivity!

Quality Bubble

A cursory search through the market news headlines in past one month will throw, inter alia, the following items:
(a)   HDFC Bank becomes the most valuable bank in emerging markets outside China.
(b)   Reliance Industries tops US$100bn in market cap making Mukesh Ambani the richest Asian.
(c)    Nestle India market cap crosses Rs1trn.
An analysis of current portfolios of top 25 mutual fund schemes shows that their portfolios are highly concentrated in a handful of stocks, irrespective of the original mandate of the fund or expectations of the investors.
The "Quality" has become unsustainably over-owned and unreasonably expensive. While it is matter of debate whether the "reasonable valuation" is an essential parameter for judging quality of a stock, nonetheless "crazy" is not a characteristic of quality.
I sincerely believe that the so called "quality basket" is treading in the bubble territory and is avoidable for any fresh investment. I am rather inclined to take out some money from this and put in the stocks that have become quality due to undue price correction.
The following is an illustrative list of "quality" stocks, which find favor with most institutional investors these days.

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I shall share my investment strategy in the current market scenario tomorrow morning.
 
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Wednesday, July 18, 2018

Anatomy of current market cycle



"Don't fight forces, use them."
— R. Buckminster Fuller (American, 1895-1983)
Word for the day
Coeval (adj)
Of the same age, date, or duration; equally old:
Malice towards none
BSP says, it will be Mayawati vs. Modi in 2019!
What do you think?
(a) It's a smart preemptive move by BSP;
(b) Mayawati is playing for BJP;
(c) BSP is despearte to get attention of potential grand alliance partners.
First random thought this morning
In past four years we have seen a variety of religious men, of all hues and colors, in the dock. The charges vary from rape, physical exploitation, child abuse, sodomy, cheating, drugs, sedition, land grab, adultery, etc.
It could be a topic of interesting research to discover whether this phenomenon is due to deep social reform taking place in the country, which is exposing these pseudo religious men; or the government is targeting these manipulators who exploit the gullible people behind the facade of religion; or the religion has degenerated so much that these so called religious men are targeting their "rivals" and helping law to catch them; or it is something else.

Anatomy of current market cycle

To evaluate my investment strategy in light of the current state of affairs in the Indian equity market, I find it pertinent to note the market behavior in past five years, i.e., since late August 2013, when the current bull market did actually start.
In particular, the following trends (based on top traded 1111 stocks on NSE) are worth noting:
(a)   Nifty has returned a CAGR of ~17% in past five years. ~56% of Nifty constituents have outperformed the benchmark, with top 20% accounting for most of the returns.
(b)   At top end of the market we see a distinct sectoral trend. However, no such trend is visible in the broader markets. At top end, financials (ex PSBs) and auto have led the gains, while energy, pharma, and telecom have underperformed notably.
(c)    In broader market both top outperformers and laggards are random stocks with no distinct business trend. Though, with the benefit of hindsight one can say that worst performers are dominated by NCLT cases.
(d)   An analysis of broader market's return profile shows that active investment had almost equal chance of providing more returns than passive investments made in Nifty, with just about 58% stocks returned more than Nifty.
There was an equal probability of hitting a jackpot (return over 50% CAGR) as was the probability of losing capital. 175 stocks returned over 50% CAGR during past 5yrs, while 236 stocks returned negative returns. Large cap funds mostly mirrored Nifty returns.











To put things in perspective, Gold ETF returned close to 3% CAGR and Debt Funds returned ~9.25% CAGR during past 5yrs.
...to continue tomorrow
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