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Demonetisation - The bigger picture

Alpha Edge, November 2016 - Black belted

Indian markets hit turbulence with two ground breaking news recently. One was of partial demonetization announced by Prime Minister Narendra Modi to rein in black money, which in our opinion is one of the boldest move by the current government and showcases the clear intent of the government towards bettering the economy. The second news that rattled the markets was of Donald Trump winning the US elections defying the polls that clearly gave Hillary Clinton the lead before US went in to voting. With the new developments, going forward we expect the volatility to continue or even rise warranting market participants to be on their toes. 

Globally, last month, markets around the world ended the month in negative due to rising anxiety w.r.t. the US presidential elections and perceived shits in global central bank policies and generally rising inflation expectations. With economist world over questioning efficacy of the recent monetary policies it seems like the central bankers too are re thinking their strategies. Last month we saw a change of tone from ECB. And in a surprising move Bank of England and Bank of Japan chose to hold their interest rates steady. In totality it will be tough months ahead globally as markets brace for US presidential, higher interest rates given the probability of a Fed rate hike in December is increasing, add to that the reducing intensity of rate cuts going forward.

Back home, we saw mixed numbers as IIP was still in negative territory although latest manufacturing PMI and service sector output strengthened. We did see rate cut by RBI at the beginning of the month. Rate cuts have become more of a sentiment booster rather than anything else. We have seen 150 bps of rate cut until now since Jan 2015 with fundamentals barely showing improvements. Another gauge of demand in the country is the credit growth to industrial sector which is still low showing excess capacities and unwillingness of private sector to take loans for expansion until demand picks up and current capacities are fully utilized. W.r.t. Q2 FY17earnings we have seen few companies come out with their results and many beating estimates. IT and banks has so far disappointed. Unlike the expectations with respect to the NPA issue of banks the worst doesn’t seem to be over. Overall volume growth is still lacking and now with commodity prices recovering, margins may again get squeezed warranting a growth in topline to drive bottom line.

 

With the new demonetization decision taken by the government we expect chaos to follow for some time before things fall into place. In the meantime, this development could hit consumption, especially rural consumption, given the large part of the transactions are cash based. This could mean further delay in the earnings recovery that we were hoping contributed by revival in rural consumption given good monsoons after two years. However, kudos to the government for taking such a bold move and Belting black money where it hits the most.      

 

Click here to read the report

Alpha Edge, November 2016 - Black belted

Indian markets hit turbulence with two ground breaking news recently. One was of partial demonetization announced by Prime Minister Narendra Modi to rein in black money, which in our opinion is one of the boldest move by the current government and showcases the clear intent of the government towards bettering the economy. The second news that rattled the markets was of Donald Trump winning the US elections defying the polls that clearly gave Hillary Clinton the lead before US went in to voting. With the new developments, going forward we expect the volatility to continue or even rise warranting market participants to be on their toes. 

Globally, last month, markets around the world ended the month in negative due to rising anxiety w.r.t. the US presidential elections and perceived shits in global central bank policies and generally rising inflation expectations. With economist world over questioning efficacy of the recent monetary policies it seems like the central bankers too are re thinking their strategies. Last month we saw a change of tone from ECB. And in a surprising move Bank of England and Bank of Japan chose to hold their interest rates steady. In totality it will be tough months ahead globally as markets brace for US presidential, higher interest rates given the probability of a Fed rate hike in December is increasing, add to that the reducing intensity of rate cuts going forward.

Back home, we saw mixed numbers as IIP was still in negative territory although latest manufacturing PMI and service sector output strengthened. We did see rate cut by RBI at the beginning of the month. Rate cuts have become more of a sentiment booster rather than anything else. We have seen 150 bps of rate cut until now since Jan 2015 with fundamentals barely showing improvements. Another gauge of demand in the country is the credit growth to industrial sector which is still low showing excess capacities and unwillingness of private sector to take loans for expansion until demand picks up and current capacities are fully utilized. W.r.t. Q2 FY17earnings we have seen few companies come out with their results and many beating estimates. IT and banks has so far disappointed. Unlike the expectations with respect to the NPA issue of banks the worst doesn’t seem to be over. Overall volume growth is still lacking and now with commodity prices recovering, margins may again get squeezed warranting a growth in topline to drive bottom line.

 

With the new demonetization decision taken by the government we expect chaos to follow for some time before things fall into place. In the meantime, this development could hit consumption, especially rural consumption, given the large part of the transactions are cash based. This could mean further delay in the earnings recovery that we were hoping contributed by revival in rural consumption given good monsoons after two years. However, kudos to the government for taking such a bold move and Belting black money where it hits the most.      

 

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

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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