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Divergent! - Alpha Edge, March 2019

After a subdued 2018, the global equity market has come back strong in the year 2019. MSCI World gained by 10.7% during January-February. Within the emerging markets, China has been leading the pack with 18.04% amidst news on fiscal stimulus and expectation of probable trade deal.

However, India had underperformed its peers for the same period due to the uncertainty about the election outcome and even the Q3 FY19 have been a mixed bag which had adversely affected the investor sentiments.

We continue to experience a ‘Divergent’ trend in earnings across the market cap spectrum as Large caps have again disappointed but Mid-caps saw decent earnings and Small-caps have seen robust earnings.

The heavy correction in the Mid and Small-Cap space has shrunk the premium Mid-Caps (excluding PSU banks) had over Large Caps to fair levels. Such levels have often heralded an appreciating trend, as we have seen in the past.

With better revenue growth trends and corporate banks’ asset quality turning around are early signs of improving demand and should help boost earnings henceforth but dismal Auto and NBFC numbers have raised new concerns.

Going forward, monetary and fiscal policy, stable government and improvement in global demand and domestic consumption would be key drivers to determine earnings trajectory.

Globally, The US Fed’s swing to a more dovish stance and a probable truce between the US and China on trade war have surely helped push the global rally in risky assets. However, we believe most of the positives with respect to the trade deal have been captured. Further, the growth indicators have moderated in China and fiscal stimulus and monetary easing may take some time to revive the economy, improvement in economic activities in the UK hinges on Brexit.

We continue to stay cautious on equity markets as valuations have again steepened and general elections are just around the corner. However, any volatility in markets can be seen as an opportune time to increase your allocation to equities, preferably in the mid and small cap space can be done by staggering investments over next 3 months, as we believe that the broad underperformance of the mid-caps is overdone and interesting opportunities in selective pockets are now available in this space.

Due to the extreme valuations in January 2018, we reduced our allocations of the Mid & Small Cap Funds from 30% to 10% in our Aggressive Model Portfolio, anticipating a fall. It played out extremely well. We are now increasing allocation to Mid & Small Caps by 10% of strategic weights. This would take back the allocations to 20%.

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Darkening clouds! - Alpha Edge, February 2019

In the month of January, Indian markets started the year with a lot of caution due to early signs of moderation in major economies. Already we have seen China and Eurozone struggling to keep up the pace. The last man standing had been the US. But even the US corporate earnings were below expectations in the last quarter, sales number have been decelerating whereas earnings are declining due to higher interest rates and wage cost. This has led the Fed chairman to have a change of stance in its last monetary policy. The Purchasing Manager’s Index of major economies has seen a gradual deceleration since Jan 2018(an indicator of expansion/contraction of economic activities). We are meticulously monitoring the global economic indicators and its impact on offsetting the improving Indian fundamentals. We believe that the ‘clouds are darkening’ and as a matter of caution, would like to increase our cash allocation from 10% to 25% in our ‘Aggressive’ model portfolio.

On the Domestic Front, the markets remained volatile on corporate governance news-flows and moderation of growth in major economies. The interim budget announced on 1st Feb looks well balanced prima facie, but the huge borrowing of Rs 7.1 lakh crore and the shortfall in GST collection may keep market interest rates at elevated levels. An upward revision in Fiscal target is also making FIIs wary about interest rates scenario going forward.

On the Global Front, US Fed Chairman has changed its stance over the past month from a monetary policy standpoint. It will not only be flexible on its Balance sheet, but also the interest rates would be on hold due to a slowdown in consumer discretionary spending. Whereas, in China, economic growth has continued to moderate. The UK has been anxious as Brexit ultimatum closing in. Purchasing Manager’s Index (PMI) of major economies are already signaling a global economic slowdown.

India’s Q3 FY19 result season has been a mixed bag. Uptick on Revenue has been a positive surprise but the bottom-line growth has been disappointing. However, the fag end of the result season needs to be watched closely. IT may have surprised positively, but Auto companies have been a disappointment. The way to go about it is to stagger any fresh investments in equities, as markets could give enough opportunities to invest in the coming three to four months.

Going forward all eyes would be on Inflation, crude oil prices, fiscal pressure and global yields which would drive the movement in interest rates. We believe that the risk-reward ratio still is unfavorable for any duration play and exposure to debt markets should be taken through short term to medium term debt funds as the shorter end of the yield curve will realign to the new policy rate expectations whereas the long end will get impacted by higher supply.

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Bear with it! - Alpha Edge, January 2019


Wish you and your family a happy new year. Hope you had a great time welcoming it.

Exactly a year back, we predicted 2018 to be a ‘roller coaster ride’ and the year has turned out to be nothing short of it. Nifty seems to have just managed to stay afloat above the 2017 year end levels, but the ride has definitely not been a smooth one as the markets had to navigate through difficult terrain in 2018, quite contrasting to the one way ride in 2017.

Banking Frauds, NBFC’s Liquidity crisis, State election results, concerns over the impending general election in 2019, Oil prices, Fed rate hikes and US-China trade war played vital roles in the movement of the markets.

We believe that a tipping point has been reached in the global markets in 2018 and India too in August of 2018. And why not? The easy liquidity provided by Fed, ECB and others have been losing their effect for some time and has reached stall-speed. The December volatility is the first sign that something has changed in US markets setting the tone for 2019. Some sort of a bear phase may have started in US in 2018 and may become clear down the line, in its direction and scope.

2019 may be a tale of two halves. A turbulent first half and a recovery thereafter probably coinciding with post elections environment. By then the focus could shift back to corporate earnings recovery which seem on the mend and can accelerate depending on next Governments economic policies, stability in crude prices, the monetary policy of the central bank and the state of the global economy.

We believe that the unpredictability of 2018 will continue into 2019, as the first half of the year looks crowded with events such as Union budget, pre-election announcements that are likely to be populist, General elections, Brexit, key meetings on US-China trade deal and they will surely lend enough noise to the market and we simply have to ‘bear’ it out. 2019 is the year to build portfolios.

We are strongly considering to raise the cash allocations by another 15% or more as the market reaches 11,000 to 11,100 levels.

We are also turning bullish on medium duration funds and we strongly believe the time for Gold has come. Long duration funds could be the surprise pack of 2019 if investors retrench from equities and invest in G-Sec bonds like in 2008.If yields were to perk up to higher levels, we intend to increase the debt exposure to longer end of the yield curve. 

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Two steps forward, One step back! - Alpha Edge, December 2018


In the month of November, Equity markets bounced back strongly after a dismal performance in the previous month. The rally was fueled by improvement in macro-economic prospects due to a sharp fall in oil prices and a stronger currency. Further, Presidents Trump and Xi have called a truce in their trade war.

Although we have seen a majority of headwinds moderated or temporarily deferred, we believe events such as OPEC meet and the Fed Meet are very critical and could have a major impact on the further direction for the markets.

On the global front, US Treasury yield curve has inverted for the first time in more than a decade. Markets have always been vary of inverted yield curves as each of the seven recessions that the US has seen, the spread between short and long-term Treasury yields, the yield curve, has dropped below zero and started to invert.

On the domestic front, State election results are just a week away and the general election a few months from now, investors would prefer to stay on the fences and let the dust settle.

The market movement in November may have been ‘Two Steps forward’, but December might be ‘One step back’.

With corporate earnings falling short of market expectations and valuations expensive, the risk-reward ratio continues to be unfavorable for equities in the short term and we continue to be cautious on equities on a short-term basis. Any exposure towards equities should be done in a gradual manner.

On the Fixed Income front, until more clarity emerges on the durability of the recent decline in inflation, RBI could stay on ‘pause mode’. Accordingly, yields may continue to soften, while exhibiting some amount of volatility. We believe that the shorter end of the yield curve continues to offer better risk adjusted return than the longer end, and hence, we continue to recommend investments into short duration and accrual funds.

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Expect some Fireworks! - Alpha Edge, November 2018


First of all, we at Citadelle would like to wish you a very happy and prosperous Diwali.

The auspicious festival of Diwali does bring a lot of joy and happiness with it; however, some may find the jarring noise of the fireworks unpleasing. Going ahead, we too ‘expect some fireworks’ in equity markets which may cause a lot of noise (volatility). We believe that the political uncertainty related to impending state elections, earnings season falling short of expectations, slowing Chinese economy and global trade tussles will add a lot of noise in the near to medium term.

While the month of October has been unpleasant, for the investors, this experience has been less of a sucker punch correction and more of a protracted beating as some of the broader indices, certainly the small and mid-caps, have been trending downward since the beginning of the year.

On the global front, the growing rift between Italy and rest of the Eurozone and the growth concerns in China are weighing negatively on the market sentiments. The trade-talks between US and China still remain in gridlock. Incremental disagreement in the trade issues will weigh in not only on US and China but all other nations that are intricately linked to their supply chain.

On the domestic front, uncertainty on commercial papers rollover is the key concern. As the wholesale funded finance companies had gradually preferred short-term commercial papers (CPs) to lower their overall cost of funds and improve profitability.  Consumer discretionary spends may witness slowdown such as segments like housing, autos and consumer durables where NBFC’s lending has been a key driver of growth. However, if properly managed, the current NBFC liquidity crunch should boost Corporate Bank growth and profitability in the near term.

The Q2FY19 earnings season has not been up to the mark, whereas, the consensus expectation for FY19 earnings growth is high and the earnings season would provide a reality check.

With valuations still hovering near the +1 standard deviation, the risk-reward ratio continues to be unfavourable for equities in the short term and we continue to be cautious on equities market on a short-term basis. Any exposure towards equities shall be done in a gradual manner.

On the fixed income space, taking cognizance of the macro headwinds, we continue to recommend investments in Short-term and Accrual funds and avoid Credit risk funds.

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