Update on Equity, G-Secs and Precious Metals

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Dear Investor

Aha!! What a stupendous rise, Indian Market has given in last few months.!!! Truly, those who continued to invest amid pessimism( before election. Believing, in loge term, Indian Equity has potential to deliver) are now sitting on 40% to 150% returns.

I believe, this is how equity market compensates waiting period and put investor back on 15-18% annualised returns(tax free).

There is great optimism in market and economy. Huge flows are waiting to pour in India. Big bang announcements have happened and are expected to continue in time to come to ensure Indian Economy again ride on 8-9% growth rate.

Prime Minister Mr. Modi is about to announce slew of measures tomorrow ahead of his US visit ensuring to world that doing business in India is less cumbersome and easy.

One more side note of Economic Times worth mentioning at this point – Chidambaram is confident that India will be growing at 8-9% in next 2 years.!!

Across the world, there is a great sense of optimism about India’s rise from ineffective governance, policy paralysis and red tape to effective governance, red carpet and solid reforms. Mr. PM’s extensive travel and emphasis on this agenda has sent powerful signals.

Our Equity market at home has decently factored in this optimism. Equity market has given descent returns in last 6-8 months and is now trading at the level, hardly thought of before election.

But, I do not see wider participation. Even those, who are participating, are putting just marginal sum. Some have their portfolio still down 30% -50% even after decent rise(Those who invested in 2007-08 in Infra and Real Estate etc…).

It is also interesting to observe that if this is the initial(first) phase of rise of long term Bull run, as claimed by many analysts and researchers, then the kind of Euphoria we are seeing around( in Equity market) should have not been there. IPOs getting subscribed 60 times and on listing gains reaching 70% high. On Average, NFOs of Mutual Funds are collecting Rs. 700-1300 cr. First, 25000 then 27000, now 30000 and some are even forecasting 60000 level of Sensex, in next 3 years. I don’t doubt the strength and long term potential of our Equity market. But, we have hardly seen such Euphoria in very first phase. Initial phase of Bull market is always filled with scepticism. Retail Investors hardly participate in first phase.

It is prudent to ask some questions to ourselves

Will equity market continue to rise uninterruptedly?

Will not Global Markets correct after 4-5 years rise and thus our market, too?

Is rise in Dollar Index a sign of capital hiding behind stronger currencies and treasuries?

Let me start with, what BIS Said–

In its Annual report, BIS ( Bank of International Settlements) said:

“ The global economy has shown encouraging signs over the past year but it has not shaken off its post-crisis malaise. Despite an aggressive and broad-based search for yield, with volatility and creditspreads sinking towards historical lows , and unusually accommodative monetary condition, investment remains weak. Debt, both private and public, continues to rise while productivity growth has extended further its long-term downward trend. There is even talk of secular stagnation. Some banks have rebuilt capital and adjusted their business models, while others have more work to do . ”

“ To return to sustainable and balanced growth, policies need to go beyond their traditional focus on the business cycle and take a longer-term perspective – one in which the financial cycle takes centre stage. They need to address head-on the structural deficiencies and resource misallocations masked by strong financial booms and revealed only in the subsequent busts. The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth.”

BIS is strongly discouraging to solve debt crisis with more debt. But, it seems, Central Bankers are, decided to keep easing unless growth returns. It is also surprising and equally shocking when European Central Bank Chief says ” ECB will do whatever it takes to spur the Growth” after 5 years easing. A drug has not worked on patient for last 5 years, Doctor decides to increase the dosages further!!?

Equity Markets and Dollar Index:

US market is in uptrend for last 5 years and so has been the European markets too. It seems very likely that in next 1 year, US market will give no return and more likely negative returns with fall of 15-20% from current level. It looks very likely that Dow Jones will come down to test lower channel at 14000, from where it rose to current highs.

Fundamentally, too, there are reasons

1. After 6 years of easing and expanding balance sheet from $1.2 tn to $4.4 tn, FED is finally winding down.

2. With FED pulling out liquidity, Dollar Index has started rising. After 12 years downtrend and consolidation, it seems Dollar is now heading up for quite a long period, at least 1-1.5 years.

3. With FED withdrawing stimulus, US economy will take initial hit as now onus of levitating economy at higher altitude will be on the shoulders of private companies and market participants. They will sure need time as many of them have still not recovered from crisis and others have still leveraged balance sheet as BIS quoted in Annual Report.

4. Geopolitical tensions has dragged USA into war, which is right now limited to airstrikes and missiles but if widens, USA may participate with ground presence.

I do not think there is any need to justify that European economic growth is very weak. European Central bank cut the benchmark rate from 0.15% to 0.05%. ECB has already announced negative interest rates for Banks last month. If European Banks will keep access capital with ECB, ECB will not pay any interest on that instead will charge 0.15% to banks for parking with ECB and not lending to the people and Businesses.

Even after historical low interest rates and unprecedented negative interest rates, ECB could not lift up the economy. Recent, PMI and Sales numbers were quite below to the expectations and affirms the continued downtrend in European economy.

India Equity Market:

Indian equity market is in strong uptrend. Valuations are now rising above the long term PEs. CAD has been contained under 2% and inflation has cooled off. Recent GDP figure enthused market participants but following IIP data poured cold water on it. I think, we need to understand 3 things at this level.

1. In last, a few more than, 100 days, Mr. Modi Govt has announced many growth centric measures and promised reforms. I believe, they will continue this reform process as entire economic structure, laws, policies, governance and functioning of Govt needs radical reforms. Therefore, this is not a one day or one month process but continuous process for a long long period. But, it takes time to implement what has been announced. Promised action, reform or change in policy has to pass through many of Central and state level bureaucratic layers to get effected in public domain. This process usually takes 6-8 months. Therefore, I believe Market may consolidate at this level for some time with some correction in line with Global markets and will wait for real actions and execution at ground level.

2. But, I do not recommend to stop investing as market is known for nasty surprises on both sides. Investors should continue investing in line with what Mr.PM and Mr. FM have said. Immediately after swearing in, both said that our 5 years term will be like 2 years repairs and 3 years growth. As we know, Mr. Modi has been very consistent in following and executing what he promised. His speech before election, during election, in manifesto, after sworn in and on Independence day, speech(agenda and focus) has been the same. Hence, one should continue allocating during this repair in small chunks and complete your equity allocation by December, 2015, then wait for 3 years Growth ride.

3. India has been passing through high interest rates environment for last 4 years, effect is partly visible, now, as Inflation has cooled a bit, Rupee has stabilised and some moderation in demand. Credit offtake of Banks dipped to below 10% after many quarters, which usually hovered around 14-15%. Any rate hike or cut takes usually 6-8 months to percolate in economy. Past 4 years hawkish( anti inflationary policy – wherein interest rates are tightened )policy will continue to weaken demand, lesser employment opportunities and companies coughing off substantial portion of profits towards interest cost payment.

Thus, caution should be exercised at this level. Recent market movement resembles to last phase of last bull market(2007-08). Large swings have been seen in last few days instead of firm and steady rise.

I advise clients not to allocate large sum at this level but can continue to invest through SIPs with horizon of 5 years in diversified equity funds.

Indian G-Sec market:

G-sec market has gone through very high volatility in past few years. But, recently, it looks stabilising. With strong action and communication, RBI has ensured that Rupee stabilises around 60 with broad band of 58-62. RBI has also increased foreign reserves during FII and FDI inflows thus ensuring enough reserves to safeguard Rupee during exodus.

Globally, Inflation is cooling down with WTI Oil trading around $96. Iron ore, Copper and other industrial and precious metals including most of the Agri Commodities have been softening for last few months.

Very interestingly, recent reports of Bank of America and last year report of Citibank points at 5 years downtrend of commodities. The major reason cited is US energy developments. US has found enough oil and gas on its soil to satisfy domestic needs and talks are rounding on exporting oil, now. It is visible in Oil price trend, too. Though Oil producing nations( Iraq, Syria, Libya) are at war, though sanctions have been imposed on Oil producing nations(Russia and Iran), Oil continued to drift lower. Recent OPEC meeting concluded that demand of Crude Oil will remain low with possibility of further dip in demand.

Therefore the major concern of RBI to contain inflation and inflation expectations will have some external help too.

Economic Times reported–

“Sensing these macro improvements, FIIs have poured in huge money in G-sec market in last month exhausting $5 bn limit for them. Good part is, this time investment has been done in longer term maturities extending upto 28- 30 years. Central bank of Norway( Norges Bank)is among the largest debt market investors across the world having forex reserves of 3663 bn Norwegian Krone along with Canada based Pension funds have been lapping up G-secs.”

“Last month, foreign fund Franklin Templeton had bought bonds worth about Rs. 16,000 crore in the largest single day purchase of Indian Govt securities.”

Hence, I believe, G-Sec market should stabilise now. Though, it seems rate cut will not come before 2015. But, we should be reminded off that Central Bank do not change its course of action oftenly. Hence, once rate cut starts, cycle will run for next 1-3 years rewarding enough for the waiting period of last 1-1.5 years.

Gold and Silver:

Gold and Silver have corrected significantly. As expected, Silver is now close to Rs. 39000.

I would wait till month end to decide what to do further.

Thanks

Regards

Dhaval Shah

Blog: https://investmentacademy.wordpress.com/ Cell: 98255 28815

Office – Khushi Investments, GF-1, Shivalay Complex, Near Bank of India, Manjalpur Gam Road, Manjalpur, Vadodara.

Disclaimer: This is a free daily investment newsletter published by Investment Academy. This publication does not provide individual, customized investment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. Author might have open positions in the stocks and Indices recommended above.

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