Tag Archives: equity

Oil, The Dollar and The Rupee

Rising oil and dollar mean only one thing for the Indian economy – trouble in the near-term. Business fortunes and purchasing power are closely intertwined with oil and the dollar. Inflation could rear its ugly head if both oil and dollar become difficult to manage for the government.

Stock markets are clearly underprepared for a shock on the macro front. The belief that these trends will recede and macros will stabilize is more wishful than objective. Rupee bulls hope for swift government intervention in the form of NRI deposit schemes or bond issuances. Meanwhile, exporters pray for an even weaker rupee. The reality probably lies somewhere in between. Further currency depreciation will create a sharp policy response in the form of stabilization moves.

The coming weeks look choppy and need to be navigated with caution. Choppy times could throw up interesting opportunities. With weakening macros, debt presents a more compelling case. Astute investors must be sensitive to opportunities and swiftly capitalise upon them. Debt books should be built in a measured and staggered manner. Equities will need to be played selectively with caution. The consequences of high oil, a weak rupee, and high inflation on businesses must be factored into decisions.

Seek Balance

If an asset class is hitting multi-year lows, then we tend to move away from it. On the contrary, when an asset class is nearing multi-year highs, we see the most clamour for it. Investor behaviour tends to shun risk exactly when valuations are very much in favour.

The current investment setting is seeing this happen across asset classes. Gold is near multi-year lows. Equity is near multi-year highs. Several metals and commodities are globally trading at multi-year lows. Yet, investor interest is mostly focused only on equity.

Why buy something when it is near peak valuations? Even if we choose to prefer equities, is it not possible to buy beaten-down parts of the market?

Investors must ponder over these questions carefully and work on improving asset allocation. Clearly, the pendulum has swung from one extreme to another. A decade ago, investors had owned too little equities and too much of other assets like gold and real estate. That balance has shifted significantly swinging predominantly towards equity. A more balanced approach is needed now.

Building portfolios which give due weight to different asset classes will work much better now rather than following an equity-heavy approach. Adjusting the weight is a smart way to adjust risk to more manageable levels.

So What Really Is Good Advice?

 

 

Podcast Transcript

 

The markets are hitting new highs. But my advisor says, “Think long term”. I asked him if we need to book some profits. He says  “Do nothing, just let the investments stay.”

Friends, keep bringing up these conversations more frequently these days.

The problem with giving advice in the best of times is that it may actually alter the financial well being of advisors. Actually, it can destroy the advisor’s incomes if what is good for you is actually done.

So there is a tendency to actually give you advice which is innately conflicted. The advisors interests and yours tend to be in deep conflict. Ironically, as your investments start to perform to their peak potential, this conflict only worsens.

The most simple thing to do is to sell and go away. But, the advisor won’t tell you to do that. Instead, he would most likely make you sit and watch your portfolio fall. The advise every advisor fails to give you at the right time is the very advise that every investor would have most badly needed.

Selling and going away is just one way. It is not the only way to do it. There are better and smarter alternatives. But before we judge the smarter options, let us understand what not selling out at the right time would mean to you and your advisor.

So what is the advise likely to turn out for both parties?

 

Here is my best case argument.

The best case verdict is Good for the Advisor. And not all that bad for you.

The worst case is obvious. Good for the advisor. Very bad for you.

 

If you invested on good advice and were early to the tech boom of  2000 or the infra boom of 2008, and the advisor simply failed to make you sell when your profits were swollen and peaking, you fell under the worst case scenario.

Valuations will always be the markers. The markers must drive decisions. When the markers warn you, you have got to sell.

The long-term can wait. The immediate response is to advise you to safety. Remember, the long-term has never been as good for tech or infra since 2000 or 2008. I am sensing a similar mood in two spaces in the current market. The marquee private banks and financials is an obvious one. The not so obvious space in the midcap space. The valuations have long been running above the long-term sell markers.

This is the only thing both advisors and investors must respect. MARKERS don’t lie,  especially valuation markers. I am convinced good advice must walk you out of extremely overvalued parts of the market. If not, you will be a spectator during the bad times.

And it is not as if there are no alternatives. There are plenty of alternatives good advice can offer. If an advisor says there is no alternative to owning extremely expensive equities, then it possibly is just one of the two – lethargy or ignorance. The worst case is, that it can be both. Surely as an investor, you can’t afford to let your future be affected by both.

This is a time when we need to call our investing to sensible action. Good advice needs to call those actions of you. If it is dormant or passive, you need to question whether that is actually good for you. If you fail to question such advice, you will sow the seed of serious regret.

Good advice is simple. Investments which are seen as worth holding now must be GOOD FOR YOU. GOOD FOR THE ADVISOR.

Sadly, a whole lot of such investments which looked so in 2014, actually don’t look good for you anymore. So you need to know what good advice is and actively seek it out. Mediocrity can hurt all the good work you did in the past few years.

Debt Markets Work In Cycles Too

In good years, defensive investors have to be content with the knowledge that their gains, although perhaps less than maximal, were achieved with risk protection in place, even though it turned out to be not needed.
– Howard Marks

 

 

 

Every investor scrutinizes the relationship between risk and reward before entering an investment. The risks associated with equity investments are well understood – over time, risks even out, while rewards accumulate. But, what about debt?

Markets work in cycles. People often ignore that debt works this way too. The monetary policy determines the trajectory of interest rates in an economy. Interest rates could trend downwards, bottom out and move upwards again until they peak and begin to descend. The interest rate cycle is what makes debt markets cyclical. Typically, when inflation is benign, and growth looks dull, interest rates are cut to stimulate the economy. On the other hand, when inflation rises and liquidity increases, interest rates are raised to cool the economy. Clearly, the interest rate cycle is linked to economic growth and inflation.

We can expect interest rate cycles to shorten. The RBI has a mandate to target inflation and keep it at 4% (+/- 2%). So, inflation is clearly range bound. In a growing economy like ours, inflation is the key determinant for interest rates. Consequently, even interest rates will be contained within a band.

Playing a shorter cycle requires an altogether different approach and can be quite challenging. Mitigating risk should be at the core of the investment strategy. Constructing a sensible portfolio takes time and involves a significant amount of preparation. The current market scenario may be more favourable to debt investments in terms of the risk-reward metric. Sensible allocation to debt could help construct a well-rounded portfolio.

Our focus has always been on quality. This helps us effectively manage risk. We offer solutions customized to our investor’s risk appetite and investment horizon. Our strategy involves analysing trends in the debt market and taking advantage of market volatility to construct a layered debt portfolio.

Explore your asset allocation options by fixing an appointment with our team.

Dealing with Valuations

 

Podcast Transcript

When we find valuations at extremes, it usually is at the most difficult time. We struggle to decide how to deal with them. Mostly, amongst us, the risk averse find it convenient not to deal with them. We find it natural to do nothing. We avoid them. Our natural discomfort with difficult decisions stops us from approaching them. So, we simply stay away.

Alternately, if we are risk takers by nature, we may actually deal with them wrongly and end up hurting ourselves. Risk takers believe it is their will that brings outcomes. But that is completely dependent on the context. Most risk takers fail to acknowledge that when the going is good. We believe more in our risk taking that we ignore the context. But, the context is so important. And, how we deal with the context means everything to the outcome.

But the moment tends to overwhelm risks takers. We don’t want to be left out of a moment. So, we simply stay put in the game when we should have withdrawn to safety. We often fail to take a rational view of things.

Here, our understanding of risk and our acceptance of the limitations matter.

Firstly, risk taking is more of an art. It is a personality trait. It is an attitude. It is a way of life.

It rarely comes easily to anybody. So, in the world of investing, most of us seek the wrong kind of risks around the wrong hour. And, we then live through the excruciating pain of time. Seeking the right kind of risks at the right time requires a definitive personality.  It is the personality that causes one’s investing to be fashioned in a particular way.

So, when valuations rise to stratospheric levels, selling can happen only if we have the personality to do it. Or, if the decision is made by someone with that kind of personality for us. If everybody is into risk taking when it is the wrong hour, the situation will lead to an “All fall down”.

Strangely, we are in a market where indices are at all time high and most portfolios are down. The active risk takers are clearly badly down. This situation can lead us to an even more difficult place if we don’t deal smartly. A smart mind will not show excess in risk taking now. It may be a while before risk taking will work well again. An intelligent investor must seek the right risks, avoid the higher risks, and strive for return of capital.

Return on capital may anyway not be all that great in the coming months for risk seekers. Pragmatists would rather seek return of capital now. When valuations are not really in favour, one must deal with investments in a clinical, pragmatic, and decisive manner. The time to do it is now.

Making SIPs Work

 

Podcast Transcript:

When markets reach all time  highs we are always told SIPs are the best way to invest in equity. Just starting an SIP is seems as a formula for success. Initially, this works extremely well. But, when markets peak out, the problems begin.

While all of know SIPs are a Great way to deploy money into equities, not all SIPs end up  being successful. The SIPs started in tech in 2000 and infra in 2007 never really did well. They failed to earn positive returns for years and actually may not have compounded enough to beat long term inflation. Investors who stopped them in sheer vexation never returned to markets for many years. What went wrong? Afterall, a good number of investors did well with SIPs during the same phase. What makes some SIPs tick?

While SIPs are good, choices are critical. Choosing in which part of he market your SIP must run is very critical. While it looks simple, it is not easy. The reason is the manner in which we arrive at our choices. We mostly choose the funds which show the highest returns over he recent past.  This often leads to our buying SIPs into funds when their peaking out and then continuing them when they lose sheen. But, does this happen only to us?

Strangely, around market peaks, most Indian investors choose to start SIPs only in the wrongly chosen funds. This Makes them easily disheartened.. Often, investors drop out midway never to return again.

What cause the idea of SIP To fail ? One needs to understand that while SIP is a healthy way to invest, choices must be extremely carefull. We should choose funds that will do well over very long periods of time.

At the time of choosing, you are likely to see several better performing funds. This will tempt you heavily to invest based on past performance. Often, funds chosen this way tend to fade away  conceding most performance gains easily. Often we see these SIPs even dipping into losses.  It is chooses funds which provide a sustainable long term performance. While looking at them we must choose with the intent of ensuring a long relationship and enduring faith.

Placing faith in your investment  is crucial. Placing  faith in the right choices  is critical.

Stay Ahead of the Cycle

Market cycles tend to constantly throw challenges at investors. When markets are at cyclical highs, it is extremely difficult to sell and exit. When markets trade near cyclical lows, taking a bold investment call is near impossible. When the markets trade on an uptrend, we tend to keep buying more as the trend grows to its strongest point. Most buying happens around the strongest point and buying momentum refuses to slow down for a while.

What we have seen in early 2018 typified this behaviour. As we are seeing now, the trend slowly changes or breaks down, but investment behaviour refuses to change or adapt as quickly. When the trend breaks down completely, we usually struggle to adopt newer strategies. Our liquidity may be low and the scope to reorient portfolios is also minimal.

The sensible approach would be to gradually reorient portfolios as the trade turns. The markets will give enough time and there would be enough liquidity to buy as well. When extreme lows are hit, the exercise would be near complete and the portfolio will be forward-looking. Investing strategies need to change towards the future and gradually align portfolios with the emerging scenario. This can work well only with a graded approach.

The Crossroads Are Here

The sharp comeback in pharma stocks, the buyback announcement by TCS, and the sustained weakness in midcaps send out clear signals. The markets are at the crossroads. Liquidity and its power to sustain equity valuations have been overestimated. You may wonder why this is happening. As a performance hugging universe, mutual funds have been caught off-guard on defensives.

This is a double whammy as they have already spent two quarters coping with their earlier misjudgment in midcaps. The lack of anticipation and the tendency to avoid risk cut both ways. When one refuses to move away from the herd, it can be costly as the market trends tend to shift away very swiftly. The sharp rally in IT stocks in Q1 caught the MF’s off-guard. Now, it seems to be pharma’s turn.

Clearly, overall capital flows towards defensives is gaining momentum. This puts the growth stocks at the risk of seeing outflows as performance chasing public investors will be left with no alternative but to buy defensives. The coming weeks will see more churn. The markets don’t seem to have the liquidity to even enable requirements of this churn.

Clearly, a lot of public investors seem to be caught off guard right now. The crossroads are approaching at a time when they aren’t ready to quickly decide which way to go.