Monday, August 24, 2015

The Bull 'gets stuck' in a China Shop

The first serous correction of the current bull market has understandably shaken investors and market participants. At the outset let me allay fears being created regarding the termination of the bull market based on a single day crash. Bull markets are known to create panics and steep corrections. That is primarily the process by which stocks move out of weak hands and get consolidated with large, stronger players. In the previous big bull market of 2003 - 2007, the markets had about 3-4 serious corrections and two of them saw the indices fall more than 30% from the peak. However in both these major corrections of May 2004 and May 2006, the indices bounced back and went on to make new life time highs within 6 months of creating a panic bottom. Even the Bull Market of 1998-2000, popularly known as the Software Rally, had a 20% crash in October to November of 1999. To put things in perspective, we have after today's crash given up about 15% from the peak of 9100 Nifty Levels. It is highly unlikely that we will go all the way down to a 20% crash (Nifty level of 7100) or more, but at the same time given the serious mayhem happening in the Global Markets it cannot be ruled out. Important point is to keep your nerves calm and stay invested. You may not like to buy more till things stabilize but do keep your long term funds ready to be deployed as and when the volatility subsides. What makes me confident about the bull market continuing further? Well nobody has ever been accurate at predicting markets and my confidence in retrospect might look misplaced after a few months. However there are a number of indications suggesting that both the limited downside risk and the amazing upside potential are not only intact but are likely to get better once the global sell off abates. Bull markets usually peak off when the underlying Economic Fundamentals are very attractive and valuations are somewhere near their historic highs. Also retail participation is in frenzy with every second person on the street advising you on stocks. None of that has happened so far. Economic Recovery is still not visible, retail participation is mainly through mutual funds, leverage in the markets is not significant and valuations even at the recent peak were not astronomical. Downside risk is protected because domestic inflows are significant, economic fundamentals are likely to get a boost with Crude at $43 and commodity prices at multi year lows. Even with the most pessimistic growth forecasts we are the Safe Haven where global money should find its way considering a very comfortable fiscal and current account deficit, economy largely influenced by domestic consumption and benefits of low commodity prices yet to get factored in. Therefore while we are likely to continue getting butchered in the near term, keep calm and stay invested. To end on a funny thought - China never produces anything which lasts long so expect the panic manufactured by them to also fade out soon...

Tuesday, June 30, 2015

EPFO to invest in equity markets – a laudable policy reform

Amidst the Greek Scare, most investors did not take notice of a landmark announcement by the Labor Minister last week - allowing Employees’ Provident Fund Organization (EPFO) to invest 5% of their incremental deposits into equity markets. The Central Government and the Minister deserve applause for pushing a long awaited and extremely important policy reform, amidst stringent opposition from politically significant labor unions. This proposal initiated by the Finance Ministry during the previous NDA regime has always been opposed by the Labor Ministry due to political reasons. The falling returns from Fixed Income Securities make it very important for the EPFO to diversify into equities to manage an overall return equal, if not better, than the guaranteed 8.75%. Over a period of time one can expect various privately managed provident funds to take a cue from this and start investing in equities to improve their overall returns.

Most relevant and momentous benefit is that this will automatically increase domestic retail participation in our equity markets, making them broad based and less vulnerable to Global Swings and Sentiments.     

Thursday, June 25, 2015

This Bull Market will climb a wall of worry!

The Greek Crisis, impending reversal of interest rate cycle in US, ebbing of FII interest in emerging markets, emergence of China as a more lucrative option, domestic political problems, Bihar elections and weak quarter one results likely to be announced in July. There are for sure no dearth of problems and worries confronting investors in the current scenario.
It is often said that a bull market climbs a wall of worry. My take is that this bull market is no exception and will also play to the same script. In the background of all the above mentioned troubles, markets will find enough traction as equities always tend to look forward. So while the current economic conditions are dismal the road ahead is certainly promising. Government seems to be finally getting into a good momentum with various initiatives like development of smart cities, housing for all by 2022 and Digital India. Economic turnaround whenever it happens is likely to be on a very solid base. Therefore despite all the bad noises have the courage to buy whenever you see any down tick.

Tuesday, June 23, 2015

Market in a trading range but declines offer fantastic buying opportunities on the back of positive domestic cues.

Hopes of an early resolution to the Greek Crisis have resulted in a decent relief rally in nearly all global markets including India. Any resolution at this stage would at best postpone the crisis by some months as the root cause of the Greek Problem cannot be resolved without some outstanding fiscal reforms and restructuring. Hence in all likelihood this rally would get sold into sooner than later. Domestic situation, though, is far more encouraging. Not only have the monsoons picked up but the Finance Minister has finally announced the much awaited capital infusion into public sector banks. The first leg of this infusion over the next 3-6 months should revive credit growth and help turn around the economy. A very reasonable MSP increase is also extremely positive as it shows willingness of the government to take politically tough decisions.
Therefore while from a trading or short term perspective we are likely to hit a ceiling soon, declines should be used to buy with a six months or more perspective.

Friday, June 19, 2015

Go against the herd – you might reap a bonanza

For the last two months the narrative amongst hedge funds has been to reduce India exposure and increase allocation to China. While Shanghai Composite were inching higher, Indian Bourses witnessed their first serious correction of the Current Bull Run. Last week this ‘China Long and India Short Play’ was like a crescendo with near consensus opinion amongst all analysts. A consensus opinion is usually a dangerous thing and offers great opportunities for smart investors and traders. After hearing continuously and repeatedly by various wise men on business channels as to how Indian Markets were headed lower and China was the favored market for the near term, we close this week with a 3.5% unexpected gain. A bigger surprise the Shanghai Markets collapsed by  a whopping 13% - the biggest weekly drawdown in this index in the last several years. A contrarian strategy to go against the consensus opinion needs a lot of conviction and guts but in many cases, including this week, results in mind boggling gains. So next time when all noises are pointing towards one direction try and be brave and go the other way……