Wealocity's musings on what's happening. Edition 1/ Vol 7/ Jun '17

Mid Monthly Newsletter June 23, 2017 Crypto Currency and Alternative Assets With regulations and tracking of money across the countries by their respective agencies & govts, the demand for alternate currency has risen manifold in the last few years. The introduction of FATCA by the US and many signatories executing Inter Governmental Agreements (IGA) of type 1 where the tax data of the residents is reciprocated upon request, there is an increasing number of citizens trying to bypass their wealth through alternate routes. Also, the doubters of the current financial system and it’s reliance especially after the financial meltdown have started to explore counter assets and currencies bringing to limelight the cryptocurrency. Crypto Currency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. This makes the availability to a limit unlike where the paper money could be printed at the whims of the govts. It's designed to work as a medium of exchange using cryptography to secure the transaction and to control the creation of additional units of the currency. These are a subset of alternative currencies, or specifically of digital currencies. Bitcoin was the pioneer in this field and theses decentralised cryptocurrencies now provide an outlet for personal wealth that is beyond restriction and confiscation. There're a total of 747 currencies / 127 assets  across 4117 markets with a total market cap of $114,538,216,356 while on an average bitcoin contributes about 40% of the trade volume. This is according to NVO, a cross-platform modular decentralised exchange. After the successful Demonetisation drive by India, many countries coined the possibility of implementing similar strategies. This has spiked the demand for such assets and there has been a boom since the beginning of this year. Bitcoin, the most widely accepted digital currency was valued at $963.38 on 1st Jan '17 and zoomed to $2965.94 by 12th Jun '17 while Ethereum, the next kid on the block with 2nd largest market cap has moved from $8.27 to $356.64 during the same period. Ethereum is now penetrating the Bitcoin dominance and likely to pose a stiff competition to Bitcoin. While Golem is the largest asset with a mkt cap of $469,262,097 on the Ethereal platform with a price equivalent of $0.565886 Soon, Govts across the world would take notice of these as the usage increases and if found guilty of any illegal (read terrorist) activities through these transactions then the law enforcement agencies would swoop in and call for regulations. That would be the demise of this burgeoning movement. Godspeed, ABOUT WEALOCITY Asses situations both pro-actively and reactively to manoeuvre portfolios offering customised solutions at risk management   ArthSamvaad Our Mid-monthly newsletter Follow on Twitter Friend on Facebook Website Copyright © Wealocity, All rights reserved. Our mailing address is: dreams@wealocity.com Disclaimer: All the views expressed are strictly personal and we recommend consulting your financial advisor for making any investment decisions based on your risk appetite, timelines and goals.

We shouldn’t trust our own predictions – not because they’re never right – but because they’re irrelevant. Good investments can weather surprises. ~ Zach Shrier (Shrier Wealth Management)

Beginning of last year, the biggest risk factors were of oil crash, high-yield debt and China. Now, the risk landscape is dominated mostly by politics - be it Brexit, the new US administration and of course Demonetisation. What were earlier pure risks, both De-globalisation & Demonetisation have turned into trends this year with more politicians taking steps in that direction. So, predicting future or the market outcomes is turning in to a foolish errand. With the new US administration its positive for India on foreign policy (anti-China), military relationships & security (anti-terror) arrangements while it’s negative on manufacturing and IT, though on an overall level we score brownie points on immigration. Add to this the Russian mania, hard-Brexit, still simmering Syria & the UN conundrum are matters that could destabilize the global economy. We believe that the domestic economy would take about 15-18 months (from Nov’16) to get back to normalcy. This is of course, taking into account the new US policies and the possible ensuing global intricacies.

Even if you know the outcome of an event, you don’t necessarily know how the market will respond. ~ David Schawel (New River Investments)

What’s in it for you:   USD: This will be the main driver in the new year. It defines the movement of all other asset classes, though, it would be interesting to see how the Fed treads with the hikes as the dollar rises and the new President pushes for De-Globalisation. Could it lead to a Dollar crisis and could Trump stop it? Wait till next year!!!   Oil: The deal among the OPEC and non-OPEC members has lifted the prices of late. But, it still needs to be seen how the implementation works and how would these traditional players keep the shale players at bay and for how long?   Gold: If one were to look at gold as another currency and not as an inflation hedge then could spot a problem. A secular dollar bull would definitely hurt gold. Domestically though, the USD parity would decide the price movements.   EU: Though Europe continues to struggle with its banks (despite the Deutsche bank deal) and economy, there seems to be early signs of revival despite questioning its own identity & integrity and the larger trends of politics playing at it.  EM and China: How to show a tall line short, draw a taller one beside, this is the case with China. The debt has gone past 450% of the GDP but somehow has lost prominence due to larger new issues around the globe. The monetary adjustments the Chinese are employing wouldn’t be of any meaningful use for inspiring growth. If the recent (tit-for-tat) moves along with the protectionist theme by the new USA are any an indication the geo-political tension that ensues is unwarranted for. The rise of USD could spell deeper trouble to the already persisting corporate debt trap of the EMs. Interest Rates: The divergent trajectory between the US and the rest of the world (though EU has announced a cut in the stimulus) is at an interesting point. Domestically, we’re yet to reach the bottom of the interest rates and would continue to slide in the coming months.   Equity: Markets generally price in advance and so domestically we could see the second-half of the year to be rosier, though any black swan event could derail the applecart.

In financial markets, it’s not the news that matters, nor is it the reaction to the news. As we learned during Brexit, and again during the U.S. presidential elections, it’s the reaction to the reaction that matters. ~ Jonathan Krinsky (MKM Partners) Our recommendations:   Gold: Not to exceed 10% of the portfolio. Gold bonds are better placed than physical gold as they would at least earn a decent interest rate over the price.   Debt: Enough of fixed income rally has played out and hence returns would moderate from now-on. Dynamic funds would outplay the traditional fixed income strategies in the three-year horizon.   Equity: The broader valuations of the indices reflect a buy-zone currently and could go moderately overweight on equities with a two-year perspective. However, the triggers would be the new US admin taking reins and the domestic budget. The state elections could also infuse fluctuations to the existing volatility. Unlike the earlier situations, not all the global event-risks are opportunities for exposure while the first-half seems better for lumpsum infusion.

“The future is already here, it’s just not evenly distributed.” ~ William Gibson

Demonetisation and IDS

As the initial brouhaha settled, the merits and demerits are emerging with better clarity. Also, the under-preparedness from the govt. and scarcity of the cash is glaringly visible despite new note introductions by RBI. The IDS is slowly turning into a sham with more skeletons tumbling out each passing day.
 
The RBI's monetary policy also reflects this wait & watch mode while being accommodative.

Us & the US

There's suddenly a divergence in the way the economies are moving. The US is on a gas peddle while the rest of us are still pondering. The possible expansionary policies is driving the appreciation of the USD.

This with the European bank woes incl the world's oldest, BMPS are only adding fuel to the uncertainty. China's growth remains sluggish while India's internal issues forced to take a breather.

What's in it for you:

Equity: The domestic markets tend to consolidate at these levels  with intermittent opportunities available, though. Despite the uncertainty of the impact of the demonetisation the equity-class remains attractive in the 15-24 month timeframe.

Debt: Contrary to the market expectation, the RBI retained status-quo on the rates. The impact of the latest govt. moves are unclear yet and so the waiting game. Dynamic funds seem attractive in the short to medium term horizons.

Gold: The run-up could be curtailed, at least, thanks to the appreciating USD. The concern is due to the counter-productive happenings in the Europe and the ECB actions that could lift the prices up. 

Crude: Though the recent OPEC deal has lifted the oil price, the implementation would decide the extent of price support, which seems negligible considering the history and also the waning influence of Saudis.

Arth-Samvaad - Fortnightly Newsletter

While investing in the markets somehow we tend to ignore the regulatory risk, making our own interpretations of the government commentary. So, when the central govt. has taken a call on the demonetization of the higher denominations, the systematic risk is being felt hard. Even after almost couple of weeks, we’re still grappling with the estimates of its impact on the economy.

The activity across sectors like Real Estate, Asset Finance, Consumer Durables, Auto Finance, Micro Finance, Housing Finance have taken a huge hit. Also are the operations of the SME segment that use high levels of cash transactions. In all of the above sectors, the transactions have reported a slump of at least 50% ranging up to 80% of the usual activity. Of course, these are temporary and short term excepting for Real estate where the outcome is still unclear with the PM warning further action through the Benami Law, which was earlier passed.

The positive outcome from this drive is an improved CASA of banks, elimination of counterfeits, increased tax base, advanced or recovered tax dues, boosted formal transactions and also migration to highly efficient digital payment modes. The move had multi-dimensional results which the govt. has struggled to achieve in the past few decades.

The near-term discomfort (availability of new currency) gives out to lower interest rates - a good for all discretionary & consumer spending while it brings agony to the retired savers where the options are closing-in quick. Though, the short-term volatility persists as the new US administration shapes up and Fed rate hike seems inevitable, the medium term to long term i.e. 6mth to 2 year timeframe is good for domestic equities. A robust portfolio is thus the need of the hour.

Equity: Hybrid and large caps
Debt: Dynamic bond funds and Corporate FD

Godspeed,