BridgeMonte

Trust At Work !

Hopium! - Alpha Edge, July 2020

Nifty Index had a strong month with ~7.5% and the best quarter in 11 years, since June 2009. The rise has been as swift and steep as was the crash. The Nifty has surged over 35% from March lows even as the number of Covid-19 cases in the country have jumped from 500 to over 6 lacs during the period. Probably the fastest crash and recovery on record globally.

Indian equity market valuations have again reached a disconcerting level of 28.30 x as we speak. It seems to be supported by a narrative of falling yields in India and globally. However, the real reason for the rise is unprecedented liquidity. That has directly helped financial markets to price in an anticipated V-shaped economic recovery and / or discounting too far into the future – FY22. Over the last two decades we have seen consensus estimates underpricing growth only once, in 2005-2006. Every year before and after, the analysts estimates of Nifty EPS have mostly overstated and have been needlessly optimistic, creating ‘Hopium’ – hope induced by opium.

Globally, all Central banks have continued their expansionary stance. China has shown a very strong recovery. The economic activity and mobility data in the US, UK and Europe has improved in the last two months, but is flattening now indicating the recovery might be a more of a bumpy ride than a smooth one.

On the Domestic front, good recovery in 2 wheeler sales, GST collection of 90% of pre Covid levels are positive indicators. But the Nifty earnings have de-grown by ~23% YoY and Nifty Mid Cap Index has reported a loss at an aggregate level in Q4 FY20. The weakness in corporate earnings in the March quarter, when the impact of the lockdown was insignificant, clearly indicates the sluggishness in the economy even before the Pandemic.

FY21 Nifty earnings growth consensus estimates have already been downgraded to -10%, with a recovery expected in FY22. The reasons for the earnings downgrade has been subdued consumer demand, low capacity utilisation, and a stressed financial sector with likely NPA pressure after extension in the moratorium period is over. With valuations looking expensive again, we believe that the equity markets may remain range-bound and upside is likely to be capped from current levels. We do continue with our cash call of 50% and are closely keeping a tab on the ongoing developments. Were there to be evidence of sustainable earnings recovery and fair valuations or both, we look forward to becoming fully invested.

On the Fixed Income Front, RBI has been aggressive through its bond purchase program and has led to a contraction in Credit spreads within high quality (AAA and PSU) bonds. But the spreads remain high for bonds rated AA and below attributable to economic uncertainty and risk aversion.

We believe that there is some more room left for yields to fall, however, the juiciest period for government bonds seems likely behind. While the curve stays very steep, continued fiscal pressures provide resistance. Hence we believe that exposure to debt markets should be taken through short term funds for 1-2 years investment period and Banking and PSU debt funds for more than 2 year investment period. Credit spreads are elevated, but they also reflect the economic uncertainty and constraints in the financial system. Hence we continue to avoid credit risk even if the spreads are higher.

While structural view remains unchanged, we will take the advantage of tactical opportunities as and when possible.

Click here to read the report

Flash - Partial Exit from Equities : upto 50%

In our monthly newsletter ‘Alpha Edge’ released on the 13th of April, we had outlined our strategy of taking a cash call in the range of 30%-50% once the Nifty crosses the 9500 levels and comes closer to the ~50% retracement of the fall witnessed from the onset of the pandemic. 


Our observations:

(i). With the rally from March 2020 lows of Nifty 7500, the markets have rallied nearly 30%. The current valuations levels are at 22+ which do not seem to be pricing the earning deceleration ahead and look over valued. 2020 is clearly likely to be a year of flat to negative earnings growth. As the extent of such de-growth in earnings becomes visible, markets will keep adjusting lower, reflecting the incremental reality of economic downtrend. This process of adjustment could continue till an extreme where the index PE valuations possibly reach sub 15 levels, an area that typically marked the end of past bear markets. At such points markets tend to look forward rather than backward and a recovery in markets ahead of the economy begins once again. We are not there yet.

(ii). For instance, markets bottomed out at sub 15 PE multiples, towards the end of the bear markets of 2000-2002 and 2008 where prevailing growth was comfortable unlike the 2016 to 2019 period. The adjustment patterns and trends could repeat, as the world economy comes to a grinding halt with only a slow or gradual recovery likely owing to the severe unpredictability of how the health crisis will resolve and when full-fledged economic activity can resume. The structural dislocations that are unfolding currently will result in both demand and supply shocks alternatively and may take time to stabilise in a few quarters from now.

(iii). To summarise...with the prospects of near zero earnings growth for FY21, current high valuations - both on PE multiples and the Yield Gap models (attractiveness of equity Vs Debt), do not justify allocations to 100% equity with any degree of confidence.

Hence, further to our communication via Alpha Edge- April 2020 and the tweet shared yesterday by our founder, we would like to initiate a 50% partial exit from equities as per your risk profile (Nifty 50 at 9850).

As fundamentals improve or valuations become truly cheaper, we will re-evaluate the current cash call and update you proactively.

The cash call is being applied to equity allocations across all our model portfolios and the same will be available in our newsletter on our blog shortly. 

6988f5de-1e2b-4beb-a519-a7a8a1e2cf2e.png

 

81294088-0093-48dc-92c6-b6ee21e14c6e.png

Coronage! - Alpha Edge, March 2020

Is the significant fall of the 10 Year US G-sec to an all-time low of 0.34 bps and crude oil collapsing to $ 30 signaling to a US/Global recession? What seemed to be a normal correction due to the Coronavirus scare has been accelerating with the contagion effect across interest rates, currencies and all asset classes. Historically, we have seen that central bank policy actions have been able to halt the market downfall. However, the recent market fall, post the US fed cut seems to signal probable loss of control of Central banks. We shall await for a next leg of policy action and the market reaction thereafter to assess a structural shift in the direction of markets.

In February, equity markets have been on free fall with Nifty 50, Nifty Midcap 100 and Nifty Small cap 100 index falling 6.4%, 6.8% and 8.8% respectively. Markets all over the world have turned ‘risk-off’, as investors struggle with the economic ‘Coronage’ that is happening. With the advent of the novel virus spreading over to new territories with each passing day, global economic and corporate earnings forecasts are being revised sharply downwards.

On the global front, as an emergency response to any economic fallout from the epidemic, the Fed has announced a 50 bps rate cut on 3rd March. If the impact of the virus is not contained, central banks world over may follow suit. With the US elections not far away, a tax cut is also expected from the Trump government if the impact of the Coronavirus aggravates. Our allocation to Gold for many portfolios since 2016 has started to pay-off. The time may not be far away when we see US rates at near Zero and Gold crossing its previous highs and reach 2500 USD.

On the domestic front, the juggernaut has been hit hard, though with a delay. With the global interlinkages increasing and getting more substantial, we have no choice but to adapt to outside shocks affecting us. The current virus epidemic is yet another shock that will at a minimum have a temporary impact if managed well. And at a maximum, we tread into the unknown.

Certain industries such as auto manufacturing, and auto component industry may see tough times as raw materials inventory depletes in the next couple of months. On the other hand, due to the disruption in production of the chemical industry in China, Indian specialty and agrochemical players with global export footprints may benefit from a hike in international prices. Cool off in commodity prices will help improve margins for Industrial manufacturers, but the adverse impact of the virus on global demand might offset the benefit.

Markets may continue to experience volatility in the near term in such uncertain times.  Historically, whenever US Fed had to cut rates out of turn, i.e, inter-meeting, the year went on to be mostly turbulent. As we have highlighted earlier, this may provide mid & small caps better entry points than their larger counterparts for medium to long term investments, short term pain notwithstanding.

On the fixed-income front, the bonds have rallied, partially influenced by global softening of bond yields. Benchmark 10-year bond yield is at 6.18%, partially helped by the recent fall of US Treasury 10-year yield to 0.34% post a 50 bps Fed rate cut. RBI's stance on policy rate action remains accommodative, but action depends on the easing of inflation.

With less expectation from duration funds and credit space still being a cause of worry, any exposure to debt markets should be taken through short term to medium term debt funds with a non-negotiable high-quality portfolio.

Click here to read the report

A longer pit-stop? - Alpha Edge, December 2019

Rallying on the record breaking FII flows, Indian markets have scaled new highs in the month of November even as Indian macro data continues to disappoint, both IIP & GDP numbers.

We sense that the stronger FII flows and catch up in corporate earnings that is underway, could probably give the markets a longer pit-stop than anticipated earlier. And we are closely watching.

While global economic data has not been deteriorating further, policy stance stays more than accommodating thus leading to a congenial situation for financial markets. Our medium-term expectations are based on continuation of policy support with a significant number of central banks turning dovish and cutting rates, prospects of fiscal support in select economies, cyclical uptick in manufacturing, and forward movement in US-China trade discussions.

On the domestic front, some sectors that have been contributing to large pools of losses appear to be on the mend now with corporate banks and telecom being two of the largest. However, a delay in the revival of domestic demand, a further slowdown in global economic activity and geopolitical tensions are downside risks.

On the markets front, the recent run-up has been very strong, but has also taken valuations closer to +2 standard deviation mark. With valuations once again hovering near its peak, we may see profit booking soon.

We believe that any declines hereon shall be seen as opportunities to invest for better returns in the next 2-3 years. As we have highlighted earlier, we continue to believe that mid and small cap provide relatively better entry points than their larger counterparts for medium to long term investments.

On the Fixed income front, RBI decided to keep the policy repo rate unchanged and continue with the accommodative stance 'as long as it is necessary to revive growth’, while ensuring that inflation remains within the targeted range. Given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture.

The bond yields have strengthened post corporate tax cut and have remained range-bound with a steepening bias. Government fiscal is under stress with tax revenues falling short, even as government tries to meet budget expenditure targets to support growth. This kind of coordinated response has increased uncertainty in the bond duration space.

We continue to believe that the term premium may remain elevated in the near term and any exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

Click here to read the report

A longer pit-stop? - Alpha Edge, December 2019

Rallying on the record breaking FII flows, Indian markets have scaled new highs in the month of November even as Indian macro data continues to disappoint, both IIP & GDP numbers.

We sense that the stronger FII flows and catch up in corporate earnings that is underway, could probably give the markets a longer pit-stop than anticipated earlier. And we are closely watching.

While global economic data has not been deteriorating further, policy stance stays more than accommodating thus leading to a congenial situation for financial markets. Our medium-term expectations are based on continuation of policy support with a significant number of central banks turning dovish and cutting rates, prospects of fiscal support in select economies, cyclical uptick in manufacturing, and forward movement in US-China trade discussions.

On the domestic front, some sectors that have been contributing to large pools of losses appear to be on the mend now with corporate banks and telecom being two of the largest. However, a delay in the revival of domestic demand, a further slowdown in global economic activity and geopolitical tensions are downside risks.

On the markets front, the recent run-up has been very strong, but has also taken valuations closer to +2 standard deviation mark. With valuations once again hovering near its peak, we may see profit booking soon.

We believe that any declines hereon shall be seen as opportunities to invest for better returns in the next 2-3 years. As we have highlighted earlier, we continue to believe that mid and small cap provide relatively better entry points than their larger counterparts for medium to long term investments.

On the Fixed income front, RBI decided to keep the policy repo rate unchanged and continue with the accommodative stance 'as long as it is necessary to revive growth’, while ensuring that inflation remains within the targeted range. Given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture.

The bond yields have strengthened post corporate tax cut and have remained range-bound with a steepening bias. Government fiscal is under stress with tax revenues falling short, even as government tries to meet budget expenditure targets to support growth. This kind of coordinated response has increased uncertainty in the bond duration space.

We continue to believe that the term premium may remain elevated in the near term and any exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

Click here to read the report

counter for blog