Keep Global Watch

The index has held steady and only gone higher in 2017.  Corrections haven’t even lasted beyond a day or two. But, at the same time, several traditional index movers have tended to be weak. IT and pharma majors have remained weak and every rally in bellwether stocks in these sectors has been sold down.

The index is being held together mainly by a small basket of favoured stocks. These stocks are already richly valued and are factoring in most of the potential good news. This makes one wonder what new drivers will be coming into play for the indices.

Mergers and acquisitions are a strong factor and could become market drivers. We have little visibility except the clear expression of intent by managements in the IT sector. We should see several M&A deals across IT, pharma, telecom, and banking. These could become the new market drivers.

The market needs fresh levers to move forward. Flogging the existing overvalued index movers in private banks, consumption, and automobiles will only put the indices at greater risk. A more measured onward movement of the indices with wider participation from the ignored parts of the market, is the best bet for a sustained rise in our indices.

For now, we should closely watch the global market which seem to be entering a phase of turbulence. We shouldn’t make the mistake of thinking that India is decoupled. We never really were.

 

“Great investing requires a lot of delayed gratification.”- Charlie Munger.

BE DRIVEN BY VALUE

What is going on in the market now?

Most people are wondrously looking on. The anxiety to invest remains high. The index seems infallible despite company-level bad news periodically hitting the street. The interest has shifted​ towards larger companies. Midcaps seem to be taking a momentary pause. Global ETFs seem to like the Indian markets a lot. Investors, both domestic and foreign, are clearly eager to participate in larger economy plays that they believe will deliver over the long term.

The bigger QIPs are going through smoothly. Institutional Investor appetite for placements is at an all-time high. The SBI QIP is clearly evidencing that trend.This is making the Index movers even more expensive. As the markets become expensive, the government is trying to push the RBI for a rate cut. That is not working either as the RBI’s monetary policy committee, a brainchild of the current government, simply refuses to oblige.

So, the wait for growth to return seems to be getting excruciating as GST gets ready to roll out. Will GST deliver the economy its much needed magic potion?  The economy should most certainly see a shift in a number of businesses from the informal, un-organised space to the formal organised space. We don’t know how soon the headline numbers will perk up. But, clearly, the cause for gloom advocated by the GDP critics seem to be a bit stretched and imaginative.

A more pragmatic approach would be to invest in parts of the market where valuations are modest, risks are controllable, and drop in uncertainty can significantly alter public sentiment. Typically, these will only be in the domain of value investing. Finding such opportunities should be every investor’s priority.

 

“Markets can remain irrational longer than you can remain solvent.”- John Maynard Keynes

When it rains, it pours.

“When it rains, it pours good news on markets”. The prompt arrival of the monsoon has eliminated one chapter in the investor’s worry book. The market’s monsoon worry got eliminated even before it began. With the monsoon arriving on time, the stage is set for the best year of sowing in Indian history. This is possibly one of the most bullish economic signs since demonetization brought gloom and worry to the investor community. When sowing is better than ever, a regular progress of the monsoon can lead to a historic high Kharif output. With the government’s support prices, this could lead to one of the best years for the rural economy. The markets seem to have already sensed this and the moves in consumption stocks clearly indicates this influence. The markets will always be hungry for more good news. This brings us to a situation where both good news and bad news are flowing thick and fast. The problems of groups embroiled in defaults are also heading towards a climax. But, the markets have little time for bad news and are simply dumping these groups and moving on. This shows an overwhelming tendency to focus market energies only on good news. The markets then look only for more good news. This is typical bull market behaviour. So, what next? The poor GDP data and the better than expected inflation data could possibly create a positive surprise from the monetary policy committee at the RBI next week. A cut in interest rate is currently not on the market’s agenda. If the RBI obliges the longstanding demand of the Fin Min, we could see the markets break out into a song. GST is set to be implemented from July1. This sets the stage for more good news and firms will crank up production from July1. The narrative on GST will change once it has a formal start. Markets will start viewing the benefits more clearly and companies will offer greater clarity. When good news rains, it can only pour money into markets. Domestic flows seem to be the best indicator of how the markets are seeing the emerging narrative.

Stay Contrarian

The stock market is the only place where heightened optimism and extreme pessimism actively coexist. The same investor who is overly optimistic about one set of investments is strongly pessimistic about another. The majority view is also prone to holding both judgments at the same time. It is only a small subset of people within the market who hold a view contrarian to that of the majority. This minority differs clearly from the majority. The majority thinks very much like a herd. To go against the majority is seldom easy. Everybody will vehemently disagree with you. Even to put forth a contrarian view in a public domain requires enormous courage. Contrarian conviction will be virulently challenged. Such challenges will be born out of the insecurity of the majority rather than superior conviction. Often, weak conviction makes a more virulent challenge. Such virulence is surely not born out of logic or basis. It is merely born out of the necessity to manage the insecurity of a large section. The majority fights contrarian opinion with its might. Typical tendency is to put forth short term investment performance to bolster one’s own position. The majority always fails to realise that short term investment performance is often the outcome of their own irrational behaviour. Such times are usually testing for the contrarian minority. Staying together and keeping faith is never easy. But, that is what it takes to tide over periods of extreme investment behaviour.

Every once in a while, the market does something so stupid it takes your breath away.”- Jim Cramer

Maintain Vigil

The Indian markets have rallied continuously from January 1, 2017. The Indian markets moved towards making new highs post-election results in Uttar Pradesh, India’s largest and politically significant state. Sentiment among Indians towards equity remains high. There is a sense of urgency to move money from other asset classes towards equity.
 
A similar sentiment prevailed in 2014, after the results of India’s general elections. The indices made new highs in 2014, only to lose momentum as corporate performance could not keep pace with the market’s moves. The current rally is also going to be tested by domestic corporate performance. Most Indian investors seems to be underestimating the impact of the Trump rally on global markets. Investor confidence has been driving global flows. And, that confidence has a Trump connect. From what is evident, the Trump rally will meet the same fate as our own Modi trade did in 2014. This would change global investor sentiment. Global flows can become volatile. This volatility will further be fuelled by economic instability in commodity dependent nations. The collapse of the Brazilian markets and its currency, the Real, is an ominous sign of things to come. Investors must re-calibrate their strategy to a potential shift in global sentiment.

The good news is that Indian corporate earnings revival seems far more imminent that ever before.

 

Opportunity is not always at an opportune time.- Diane Hendricks