The Tables Turn

Just four months ago, the markets were showing consensus on the end of the extended market run enjoyed by tech stocks. “Where is the growth? What will happen to Indian tech if automation and Artificial Intelligence take off?”. The cynics were having a field day.

People were clearly mixing up job creation and profitability. The fact that Cognizant had guided positively did not convince analysts, fund managers and investors alike. As TCS came out with its annual numbers, there was a numbing silence among all three sections. Few fund managers had bet on the stock.

We could well see a similar state returning in a bluechip company from another sector. The surprises may recur in more sectors. Writing off a great company will always force us to write back our judgements. In the end, Mr Market is the third umpire who can overrule, recall a dismissed player, and change the fate of your investment game.

As this results season progresses, we are not going to stop being surprised. Many judgements may be tested badly and need a quick revision.

Fixed Income Outlook – April 2018

Market Outlook:

Volatility has struck debt and equity markets in equal measure in 2018. Valuations continue to remain an area of concern with respect to equity markets and volatility will continue to persist until earnings match valuations. This is a global phenomenon and is not restricted to domestic equity markets. Meanwhile, investor appetite for debt has reduced.

Our core strategy team has been working on attractive investment options within the fixed income space. Our strategies are expected to outperform traditional investments like fixed deposits (one-year) by 1% to 1.5%. Hedging your portfolio through proper asset allocation will help mitigate risk. To explore your investment options please get in touch with your relationship manager.

Global Sentiment:
Positive growth indicators and tame inflation are facilitating the Fed’s policy to hike interest rates. Globally, advanced economies are expected to follow the same cue. Interest rate hikes across the board could induce volatility in emerging markets like ours. More importantly, threats of a trade war, rising crude oil prices, geopolitical tensions, and protectionist sentiments could further pose threats to stability. Currencies are expected to weaken, as countries compete for exports and try to manage deficits.
Monetary Policy:
 The RBI’s neutral policy implies that a data-driven approach will be followed when it comes to managing the economy. Any adjustments will be made in a calibrated and gradual manner. The focus is on resolving stressed assets, improving transmission of policy rates, keeping inflation within the target range, and fostering an environment for higher economic growth.
Domestic Markets:

Bond yields have remained at elevated levels for a variety of reasons. The government breaching its fiscal deficit led the market to believe that there would be an oversupply of government bonds. Markets anticipated that the government would borrow more heavily in the current year. However, its announcement to restructure the borrowing program by following a more staggered approach using instruments of varying maturities has pleasantly surprised investors.

The recent scheme recategorization has created a more transparent and investor friendly system to understanding the classification of mutual funds.

Strategy:
Risk management always plays a central role in any investment strategy, especially when it comes to debt. A well-constructed portfolio should be able to weather uncertainties and deliver returns. To discuss hedging strategies through asset allocation, do feel free to reach out to our team.

The Results Redux Begins

As tech stocks hit new highs and commodity prices spike upwards, domestic investors seem to be ignoring them for now. On the contrary, they continue to pour money into small and midcaps. Several stocks continue to be benign beneficiaries of mindless investing. The entire small and midcap boom was constructed on the bedrock of low commodity prices. The scarcity of good investable paper was another key factor that fueled the boom in small and midcaps. The power of habit is very visible in investing behaviour. But, the constant challenge of investing is to break the mechanical work ethic.

The coming months will see global commodity markets in an extremely volatile phase. As the commodity prices exert upward pressure, it could lead to operating leverage working favourably for commodity producers and higher input costs beginning to hurt user industries.

Our stock markets do not seem to be adequately factoring this. This result season will catalyse a fresh sequence of investment rotation. We will see money moved around as public investors struggle to get their own investment calculus right. Individual investors and advisors will also need to take fresh guard as India heads into a normal monsoon and election year which will also see a definitive revival of the economy. The reform engine of the government will now run in cruise mode and is unlikely to do much except play of course.
It is important for portfolios to capture the emerging economic recovery in their investment choices. Not getting the mix right can prove to be very costly. This results season will certainly trigger a market rethink.

Capture Emerging Opportunities

India saw the most number of economic reforms in 2017-18. It was a year when the GST was implemented, the IBC gained momentum, the NCLT saw resolutions getting nearer. More bad loans were moving towards resolution than even before. The government decisively moved on, ensuring Make in India works and DBT gained momentum across services.

Yet, we found that few investors were actually betting in sectors which would see greater traction from these reforms. Instead, markets mostly focussed on companies which were agnostic to government policy and showing steady performance. We focussed more on growth and refused to see turnarounds.

With capital goods, construction, steel, agriculture and infra likely to recover sharply on the back of sustained reforms and public investment, the market seems confused about whether it should shift its strategic outlook. The prediction of a normal monsoon has further reinforced the economic recovery theme.

It remains to be seen how market strategies are redrawn to capture emerging opportunities.

A New Financial Year

A new financial year brings along newer opportunities and challenges. A financial year which follows an extremely profitable investment year will always have the challenge of delivering comparable performance. After a good year, we expect the next to be even better.

But, when the year gets progressively tougher, then the closing mood sets the tone for the year ahead. If the mood is glum at the beginning of a new year and the follow-up events promise more uncertainty, then the statistics of the previous year will have little or no meaning for the year in store. We seem to be in that phase where the past year really has no bearing on the upcoming one.

So, we need to put behind the past and pragmatically view the future. The future certainly does not promise to be easy and predictable. Actually, it looks far more complex than the previous year.

The alignment between global and domestic markets worked perfectly last year. Towards the close, we seem to be preparing for a year when this compact will definitively be broken. Domestic investor confidence will be tested in the coming year. Early indicators are not as promising with clear signs of a behavioural crack very much visible among domestic investors. If they further lose their faith in Indian equities, we are likely to see our markets come under severe strain. We already know the stance of global investors. They don’t seem to be inclined towards Indian equities. If the strong domestic appetite weakens, we could see the challenges mount for our markets. The wall of fear to be climbed will look suddenly taller.
The first quarter will set the tone and context for the upcoming financial year. Investors must be ready and willing to see the challenges mount and still be willing to make use of opportunities that come their way. General elections are scheduled for May 2019. Advancing them will make the financial year 2018-19 very eventful, interesting and challenging.

 

“For last year’s words belong to last year’s language and next year’s words await another voice.” – T. S. Eliot

Keep Your Chin Up

When markets correct sharply, where are you looking?  This question assumes special significance as the indices are down 10%+ from this year’s highs. And the lows don’t seem imminently near.

Effectively, we are now in a market where everybody has overplayed their hand. And, when you have overplayed your hand, the day will come when you simply can’t deal. There will be no money left to buy equities. That’s a simple rule of market trade.

We are yet to reach that point in this correction. But, it is almost certain that that point will be hit and even breached. When a breach happens, the pain will be unbearable. Selling will become overdone. The consequences of such breaches will be upon us for an extended period of time. While we warn of such impending pain, it is important to understand that there is a very big opportunity that’s before us.

It is coming at us. Slowly, it will build up and grow. We must learn how to play an opportunity as it grows right in front of our eyes. We must also play it carefully so we are in a position to deal with every opportunity when it presents itself. We should not become helpless spectators on that day when the markets are most irrational. We must keep our hand ready, prepared and willing to deal.

One fine day is waiting to come at us.

 

“Investment defense requires thoughtful diversification, limits on the overall riskiness borne, and a general tilt toward safety.”– Howard Marks