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Alpha Edge, October 2016 - Better be quick..!

As we end the September quarter, both, the equity and bond markets continue to be resilient and trading near to all time highs. Even though we experienced high volatility thanks to the multiple events be it the Fed meeting or the Geo political uncertainty faced towards the end of the month, we saw markets coming out unscathed and move higher. However, any temptation to be complacent could be challenged by forth coming events we see ahead, not least being the US presidential elections or the Fed meeting post that.

Globally, as we enter the eighth year of recovery after financial crisis, growth seems sluggish in most of the corners compared to pre-crisis levels, add to that, the political uncertainty that we have witnessed lately. We live in a world where the answer to every problem is loose monetary policy. There are $13 trillion worth of bonds floating promising negative returns if held till maturity. This has the potential to disrupt traditional business models which encourage savings or investment and question the solvency of the same. The latest case being the Deutsche bank which is trading at 10% of the value which was assigned during pre 2008 crisis . The slump in the market cap of Deutsche bank reflects the impact of negative interest rate policies. Saving the economy by killing the financial system does not sound like a prudent solution. Does it?

Coming back home, growth still eludes us. We saw poor IIP numbers coupled with lower than expected inflation numbers which built an expectation of an RBI rate cut and the mint fresh Governor obliged. Markets have been resilient in the face of lot of uncertainties lying ahead. It seems to have gobbled up every single good news and kept bad news at bay. Liquidity seems to be fighting away all concerns on the ground, but for how long? Yes, India is one of the most stable countries thanks to its reliance on domestic consumption and a comfortable current account. We have seen progress w.r.t. new policy announcements like the GST bill or the bankruptcy code, which would lead India in the right direction and improve ease of doing business. India’s growth story still remains from medium to long term. However the stretched valuations currently shows how the future growth that may come due to GST, 7th Pay commission, government spending and cuts in interest rates has been priced today. The concern currently is the lack of private spending which shows there is still lack of demand. Hence, what the markets going forward would like to see is performance of India Inc., especially uptick in volumes.

The situation we currently see is one of asymmetric risk. In this case we believe that if everything turns out well the upside potential is limited; if the outcome is negative, then the downside risk is greater. In such situations with no large positives to look forward to, it is better for investors to look at tactical allocation by taking some money off risky assets and keep their strategic allocation aside until such time passes. The positives of India being the only alternative is gaining ground nudging the valuations into a bubble territory. Unless of course, corporate results start to go through the roof too. They better be quick!

 

Click here to read the report

Alpha Edge, October 2016 - Better be quick..!

As we end the September quarter, both, the equity and bond markets continue to be resilient and trading near to all time highs. Even though we experienced high volatility thanks to the multiple events be it the Fed meeting or the Geo political uncertainty faced towards the end of the month, we saw markets coming out unscathed and move higher. However, any temptation to be complacent could be challenged by forth coming events we see ahead, not least being the US presidential elections or the Fed meeting post that.

Globally, as we enter the eighth year of recovery after financial crisis, growth seems sluggish in most of the corners compared to pre-crisis levels, add to that, the political uncertainty that we have witnessed lately. We live in a world where the answer to every problem is loose monetary policy. There are $13 trillion worth of bonds floating promising negative returns if held till maturity. This has the potential to disrupt traditional business models which encourage savings or investment and question the solvency of the same. The latest case being the Deutsche bank which is trading at 10% of the value which was assigned during pre 2008 crisis . The slump in the market cap of Deutsche bank reflects the impact of negative interest rate policies. Saving the economy by killing the financial system does not sound like a prudent solution. Does it?

Coming back home, growth still eludes us. We saw poor IIP numbers coupled with lower than expected inflation numbers which built an expectation of an RBI rate cut and the mint fresh Governor obliged. Markets have been resilient in the face of lot of uncertainties lying ahead. It seems to have gobbled up every single good news and kept bad news at bay. Liquidity seems to be fighting away all concerns on the ground, but for how long? Yes, India is one of the most stable countries thanks to its reliance on domestic consumption and a comfortable current account. We have seen progress w.r.t. new policy announcements like the GST bill or the bankruptcy code, which would lead India in the right direction and improve ease of doing business. India’s growth story still remains from medium to long term. However the stretched valuations currently shows how the future growth that may come due to GST, 7th Pay commission, government spending and cuts in interest rates has been priced today. The concern currently is the lack of private spending which shows there is still lack of demand. Hence, what the markets going forward would like to see is performance of India Inc., especially uptick in volumes.

The situation we currently see is one of asymmetric risk. In this case we believe that if everything turns out well the upside potential is limited; if the outcome is negative, then the downside risk is greater. In such situations with no large positives to look forward to, it is better for investors to look at tactical allocation by taking some money off risky assets and keep their strategic allocation aside until such time passes. The positives of India being the only alternative is gaining ground nudging the valuations into a bubble territory. Unless of course, corporate results start to go through the roof too. They better be quick!

 

Click here to read the report

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