Wealocity's musings on the markets Edition 1/Vol 6/May '17

Mid-monthly newsletter May 22, 2017

Traversing the current markets India probably never had all the macros so well aligned the way we currently have. While inflation is under control with lesser chances of any upticks in the coming months, the stable lower interest rates, the resilient rupee and most importantly Oil at a sweet spot in 50’s is turning into a boon. Add to this an early monsoon with a possibility of normal rainfall is a blessing. Of course, the govt. efforts & policies over the past three years seems to slowly bear fruit with so many structural changes happening, the India growth story is now on the move. The only hiccup is the corporate earnings which continues to have mixed results but with some green shoots in many sectors. The biggest concern however, is about how long this fairytale continues? Would there be a correction, may be a deeper one. It’s difficult to gauge the mood while the markets set daily new records. It’s very difficult to decide whether to fence sit and lose out on the rally or be conservative and arrest the possible loss. This dilemma tears the mind. Certainly, the valuations are not at all cheap and this is not a go all out situation into equity but yes, to be overweight on equities. It’s very difficult to predict or asses where the market is headed in a mid-cycle except to be vigilant and cautious. Sectors interesting are those that have bottomed out their cycles like Metals, Power and Infra as a theme, though IT & Pharma would take a little while to reach there. So, it’s about having exposure in to these areas with a view of 2-3 years that would do good. Investment pick: ICICI Pru Value Series 14, with a hedging strategy to contain the downward risk in case of a fall whilst participating in the bull phase. Godspeed,

Wealocity Assess situations both pro-actively and reactively to manoeuvre portfolios offering customised solutions at risk management.    Arth-Samvaad Our Mid-monthly newsletter

Follow on Twitter Friend on Facebook Google Plus 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.

“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.

"The individual investor should act consistently as an investor and not as a speculator." - Ben Graham

  

While staring at the world of the past year, I was desperately trying to look for any bright spots and I found nothing much except my unwavering hope. The lower bids in the recent months at the AP Govt.’s & Indian Govt.’s auctions on the solar projects is an important and promising development in this field, esp. with the falling crude and commodity prices.

A New Neutral has set in the world with an overall lower trend growth rates. Global growth remained weak and at an uninspiring range of 2.5-3%. Falling oil prices, low interest rates, massive monetary accommodation and lower global aggregate demand has contirbuted to a continued sluggish growth. The effects of lower oil prices and expansionary monetary policy could prove much more dramatic than many anticipate.

Chinese engineered soft-landing seems to be having hiccups with a miscalculation of the ground level. This could mean not just a hard landing but also an inevitable crash though it has the tools to manage, only time would tell us how it fared.One shouldn't forget the fact that Chinese economy has always been managed. By concentrating more on the quality parameters, private/foriegn participation & transparancy the way forward won't be all that easy & controlled.

EU seems to be determined with its “whatever-it-takes-attitude” and pump in more liquidity. While Japan is unsure of its situation and its demographics are not helping much either. The US is a sole large economy seems to have put a brave face in this adversary.

Fed rate hike would be gradual and prolongedstretching into 2018-19 and follow a lower trajectory; the neutral policy rate is well below the historic levels – a new neutral. Post the initial hike, it would proceed very gradually, all the while attuned to the global implications of their actions.

On the domestic front, the lower commodity prices have been a big boon for the margins but the continued weakness in the demand is a concern. Capacity utilization is at multi-year low in the manufacturing and we could see a gradual improvement in the demand from the 2nd quarter of the year.

What’s in it for you?

This never-seen-before environment demands a more dynamic strategy and a multi-asset allocation is needed to beat the volatility.

Equity: The last leg Dec rally helped post positive returns on the monthly basis and covered some ground on the yearly basis, though generating negative returns. The major indices never delivered negative returns in consecutive years since 2001 and hope for the history to repeat.

The market provides ample opportunities for entry and any systematic approach is recommended with a horizon of 1 year.     

Debt: The central banker still has room for rate cuts, though he would keep an eye on the US Fed and the inflation greatly influenced by the oil/commodity prices.

Stay put in long duration funds with a play in the mid & short term for arbitration as the spread narrows between the repo and benchmark yield.

Commodities: Commodities would bottom-out this year along with Oil, limiting the volatility. Oil could well see a little uptick from the current sub-40 levels while gold would continue to be under pressure.

Currency: Strengthening of the USD continues and as the volatility settles across the other asset classes, it would reach equilibrium, another new norm.

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