Trumphatic and Unpresidented!!!

Donal Trump takes oath as the 45th US President and seems to makes strides on his declared agenda using his executive powers to repeal 'Obama Care'. The tone of the official twitter account hasn't changed any hues as it continues the Donald way. Revellers attending the swearing-in ceremony got a rude shock when the caps with caption of "Make America Great Again" were tagged with made in Bangladesh/Vietnam/China. So, the world continues to watch what the new administration unravels going forward on major economic & foreign policy issues.

History sure, could it be Dream?

This budget is already a history in the making for advancing the date by an almost a month and relegating more than a century year old tradition of separate railway budget. But, would it turn to be a dream one with more relaxations and exemptions especially coming back of the demonetisation drive and ahead of the crucial state polls. Like always, the common man has more expectations on the budget deliverables but any changes in the capital gains taxation could trigger an equity market turmoil in the short run. The roll-out of GST and the govt. commitment on this would be keenly observed.

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.

Protests to Mandate

The widening inequality has created a larger rift among populations across the world and especially in the western world. The consequences of which are the rhetoric turning into mandates like the case of Brexit and Trump wins.

As earlier mentioned in our Brexit brief, the constant wailing against globalisation and free trade would only create more harm. Any step towards protectionism is not a good sign. Hope President Trump lives up to his speech delivered after winning. Congratulations Mr. Trump !!!

Wa₹ on Black Money

The late evening PM's speech has awed most while bringing joy to the general public. A dedicated effort was made in the last few months by bringing in various bills & actions like Jan Dhan Yojna (bank a/c), Aadhar linking, UPI, NPA crackdown, Benami transaction bill, Voluntary IDS, increased IT raids & curbing shell Cos, etc. thus creating an infrastructure to fight out the black money. Also, the constant influx of the counterfeits has only made the decision more drastic and imminent.   

What's in it for you

Equity: The current knee-jerk reaction and the volatility stemming out of any global news is a welcome sign to enter or top-up the equity portions over and above the staggered investments.

In vogue: Large Caps, Hybrid equity (balanced)

Debt: With the structural changes of currency discontinuation and moderated fresh cash flows along with the rangebound oil, the inflation is well tamed. We expect the rates to further be cut in the coming months. This hence is the time to lock-in better longer term interest rates.

In vogue: MIP, Corporate FD

Commodities: Oil would continue to be under pressure despite the OPEC deal. Gold would see a bit of uptick due to both the domestic & international environment. Food prices would be subdued due to better harvest and larger base of last year.

“People are trying to be smart - all I’m trying to do is not to be idiotic, but it’s harder than most people think.” ~ Charlie Munger. 

Trend: This is a newer section we’re introducing from this month which captures our imagination of next big things in our lives, markets and/or business. 

Electric cars and Tesla occupy that distinction in this month’s commentary. Just at the month end, Tesla launched Model 3, their cheapest ever electric car at USD 35,000 with a goal to produce 500,000 vehicles. 

The pre-orders stand at 276,000 according to Elon Musk, the founder & CEO within two days of launch. Though, they’re notorious for their delays in delivery, they could probably end up with more cash issues this time. Watch out!!!

Terrorism: When the heart of the Europe was struck with terror attacks last month, the world markets remained unfazed - Was it a sign of defiance or an acceptance of such disasters is still unclear? 

But, these attacks along with the recent events of deporting migrants by Greece and the voices gathering for Brexit are only adding woes to the borderless sustenance of Europe. 

The continued rhetoric by Donald Trump, contender for Republican the US Presidential nominee is another nail drawing in for more protectionism. Of all, the central bankers in a bid to regain their importance in the scheme of things, are dangerously toying with the Negative Interest Rate Policies to prop up growth.

Italy: Europe and the world could soon wake up to additional financial risks posed by Italy. According to Euro stat, Italy comes 2^nd in the debt-to-GDP ratio with over 132%, a tad below Greece which continues to occupy the top slot. Greece being only the 44^th largest economy in the world has brought the global financial markets to the brink and what could Italy do being the 8^th largest economy? Save your thoughts.

Fed: Last December’s policy statement and the dot-plot predicted 3 to 4 hikes in to this year but we at Wealocity had our concerns expressed and have cautioned to a maximum of 1 rate hike at the best case scenario but with a bias towards the zero interest rate i.e. rolling back the hike Fed has done last year. We still maintain this forecast considering the larger than the anticipated fall in the commodities and the stagnant inflation (US) despite the job growth. 

China: As it struggles to transition from a manufacture-led economy to consumer-led, the forex reserves are evaporated faster than anticipated. The reserves reached to $3.3tn in Feb, a record $1tn has moved out of China in 2015. While the official deficit stands at 2.4% of the GDP for 2015 and 3% (estimated) for 2016, the Societe Generale puts it at 3.5% and 4% respectively.

What’s in it for you:

Equity: Domestic equities have recovered from this calendar year’s lows but ended up on net negative for the FY & YTD basis. As an asset class, these are attractive and staggered investments are recommended with top-up on dips. A good   monsoon is all it takes to see your portfolios bulge.

Debt: FMP (Fixed Maturity Plan) are attractive considering possible further cuts in the interest rates in the coming quarters. Also, dynamic bond MFs could take advantage of the evolving scenarios. Any tax-free bond issues to be lapped up especially by the investors at the retirement door-step

Commodities: In our last update, we’ve extensively covered why crude hovers within the current range and we reiterate the bottom’s done. Gold fights to shackle it’s resistance but faces hurdle while the rest of the metals remain humbled.

Disclaimer: The views expressed here are personal and any investment decisions to be made in consideration with the risk appetite, timelines and needs with an assistance from an advisor.