MARKETS HAVE KISSED AND RETREATED!

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sebi

Nobody has missed this headlines from two days ago and am sure that you have clients calling you to –

  1. Shall we book profits; and / or
  2. What is the market outlook.

I have tried to answer the second question in my article that I have published in the social media platforms. I hope you find this interested.

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Ab Kya Hoga? (what happens next…)

 

Ab Kya Hoga is a series that I had written many times in the past and at this opportune when several events that have been unfolding; I thought it prudent to write another piece surrounding this ubiquitous question as to where are we heading?

  • From a market perspective, stocks, bonds & alternatives
  • From a currency perspective – ab idhar se kidhar (from here whereto)
  • From a global perspective – US, China and what IF

The Indian stock market indices are scorching the pace reaching all-time highs now on a daily basis for the past few days, and this has caused many emotions for many people and simultaneous emotions to a few. Investors and pseudo-investors have experienced agony (why didn’t I invest in that Mid-cap fund), ecstasy (what the!! 25% return in 1 year!!), disbelief/shock (how is this possible, 15% returns in 4 months), greed (if this continues, market would end up with 40%-50% returns this year), fear (this is unsustainable, there is a sharp correction coming) and / or awe (this is a pure gamblers market, not for real people).

To market to market

What is pertinent to ask before we go anywhere is – how did we get here? The current levels (all-time highs of indices) are a mix of several factors that have played out in the past few months.

  1. Continued resilience of the corporate earnings or expected earnings based on the data we have so far
  2. The very stable and robust Indian consumer
  3. Our relative positioning amongst anything of comparable nature (economically speaking) – notably BRICs or emerging economies in general

#1 & #2 have been delivered in the past several months of data which has demonstrated this resilience. Airline traffic, passenger vehicle sales, consumption of staples, durables and savings and investments. This has been despite the short term strategic hiccups such as the demonetization exercise or slower than expected economic recovery post this. #3 is more from the perspective of the two poles that have acted over the past 12-15 months. Commodity economies have shot like rockets during 2016 only to stagnate during 2017 and appears that the low hanging fruits have been picked up. The developed has seen respectable growth primarily driven by the US and pick up on corporate earnings on the back of stable consumer. As expected, China has been great disappointment; which is likely to continue, given the stretch that has already occurred in the past several years. In contrast, India now appears to be in the global spotlight given many things going for it. Despite strong consumer, earnings and growth the participation in the 2016 global rally has been absent and might just push it in favour throughout 2017.

Currency gamble

The rapid rise of the INR may not have surprised everyone, but has certainly made life a complete mess for certain sections of the economy. All exporters, grappling with already weak demand in the overseas markets were hoping for a slow rise in end-use demand, now have been put to severe test and further pressure on earnings as a result. The largest exporting sector –  IT has more reasons to worry. Domestic competitive challenges, unexpected regulatory changes in importing countries, protectionist policies and rapidly changing customer preferences and technology has almost paralysed the think tanks of largest IT players. The tensions are already palpable, with top management rejigs at the drop of a hat.

The importers though are making merry. Largest importing category of crude oil has double barrel positive lift of softening commodity prices and stronger currency, thereby making a case of sustained earnings stability and better visibility. If anyone takes a bet on where the currency is expected to be in the next 12 months, good luck to him. Currency fluctuations are part and parcel of economic uncertainty and I believe that the right approach would be to make the most of the current situation.

This strength in the INR in the recent months has been on the back of strong and sustained inflows into the markets (the witness of which is the financial asset markets) and through various routes. The most popular of course is the FPI and a generally stable FDI investments over the past 12 or so months. Given the fickle nature of the FPI inflows in the past, one would argue that this strength is a blip on the otherwise strategic weakening trajectory. That said, the fact before us have made it possible for the INR at this moment to rise around 6%-7% in a short timeframe of 3-4 months.

I would imagine that there are no linear roads on any asset price and INR is also expected to gyrate through the year; however, at this moment we believe that unless large uncontrollable events don’t derail the India thesis, it appears that INR could stabilize in the range of 62-67/USD through 2017.

This Global surge in risk-on!

A cursory look at the world risk asset class indices point to above average annual returns (in excess of 20%) over the past 12-15 months’ timeframe. This of course is driven by what is happening to US consumer, western/developed world monetary policies and continued higher liquidity in the global markets. What is stark is that not everyone has clearly benefitted from it. The emerging markets (the smaller economies segment) did witness significant movement (50%-90% returns) in the same timeframe, however the economies that matter (read – BRICS, developed markets) barring China has seen decent returns. The China story is different though. Uncontrolled excesses of the past and sustained export led thrust is bound to have sapped out appetite of the end-users and this causes water-logging (inventory pileup) in China. This in-turn does have disruptive effect across the supply chain and the commodity markets with spill over impact to other asset classes and finally financial markets across the world.

The Indian equities market has similarly seen a sharp rise in the past 12 months on the back of this very liquidity that has fuelled this rally in strong fundamental markets. The million-dollar question (rather billions’ of dollar question) is where we go from here. Do we stagnate at current levels for some time, do we keep rising up from here and make significant highs due to continued tailwinds or do we stop here only to retreat back to levels seen 6 or so months ago, before we move anywhere?

I believe that each such upsurge in the past has had sceptics proved right most of the times since rallies where entirely on fickle funds flow, large driven by foreign funds or without real backing from micro level fundamentals. I am not saying that ‘this time it’s different; it is only that the more time we are spending, the more pressure we are building on the upside due to the simple fact that the Indian consumer has been far more resilient through the economic shocks of the past. Sure, micro pockets economic sector such as real estate or an IT and its labour force are having a tough time for the past few quarters and the pain is not going away. However, rural economy, manufacturing and services largely have withered a lot of turbulence along the way and has created safety pockets of investible surpluses, which are now getting channelized into the financial markets. How else do we explain the sustained and continued rise to the month SIP book that the MF industry is running quarter after quarter. Or for that matter the strong and sustained surge in HNI/UHNI portfolios over the past several quarters. These flows typically are long term unless of course there is a coming collapse of the global financial system, then it would be another story.

Themes for FY18 as a result

  • Continued thrust on the financial savings.
    • Individuals would accelerate the investments from traditional banking channels to the tried & tested MF schemes. There would be significant interest in the high-risk products such as the mid-cap funds. But therein lies the risk. Ideally the inflows into short term funds and ultra-short term funds should be the entry point and migration up the risk ladder is what should be recommended by the investment advisor. However, this is easier said than done.
    • Rising flows in portfolio accounts would be a common feature. This is now an irreversible trend. The only difference being who wins and who loses. Both on the client side and the money manager side. There would be a section of clients who are certain to lose monies, and a bunch of money managers going out of business.
  • Real estate as an asset class is going for a walk.
    • All the second and third home purchases by HNI / UHNI and flipper segment has all but ended and is not coming back for the next 3-5 years
    • Action is moving into the commercial real estate segment driven by strong capital flows into businesses and better yields in this segment.
  • Smart investors always concentration on asset allocation
    • It is not about equities all along, it normally is about risk adjusted annual rate of return for an investor on funds deployed over the past 3, 5 or 7 years. The faster investor realized this the better
    • There is no anti-dote for not diversifying. Diversification and maintaining a healthy asset allocation is the means to a sustained and consistent return on capital. Chasing returns and falling prey to temptation to ride the wave put capital at risk and investor then worry of ‘Return of Capital’’
    • Asset allocation is the only way to deal during current times. 2017 would emphasize this more than any other past years due to positioning of risk-on trade.

 

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