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AROUND THE GLOBE
Covid cases are still rising in Europe, but the Vaccine programmes are taking off.
Record money printing is being done by the Central Banks. The Fed Reserve sees the economy far from where it needs to be, and the accommodative policy is likely to stay until 2023. The objective is a labour market recovery and inflation at 2%.
Low interest rates support higher equity valuations. The US 10 year yield ended 2020 below 1% and this month it has been particularly volatile and even reached a 14 month (pre-covid) high of 1.7%.
The Level of Unproductive IPO issuances in the US have reached the Dotcom era. In India too, we are observing a similar trend of a large number of IPOs. Soft Commodities prices like Wheat, Corn, etc., have reached 6 year high. Hence there are some worrying signs of a correction in the US markets.
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EQUITY MARKET
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The Equity market has been very volatile this month. The main reasons were increasing Covid cases and hence fears of resumption of lock downs and the rising US 10 year yield and strengthening dollar. Generally it is said that the Central banks follow the market when it comes to interest rates. Inflationary expectations have led to the yields rising. Studies have shown that Optimal Inflation in the US is around 2-3%. Below the 3% mark but gradually rising inflation is the time when the Earnings rise, the valuations rise and are able to sustain this higher valuation. But beyond this level, the ability of equity to provide positive real returns gets impaired due to higher interest rates and inability to transfer additional cost.
After many years, we are seeing a revival of corporate earnings growth at about 30% over the 2019 December quarter due to cost management. However, Sales growth is flat to mildly negative. March end results have to be watched carefully to see if the trend continues.
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Ultimately the markets depend on 4 areas:
- Valuations: Which are no doubt high. We have to wait and see whether sustained earning recovery will make the valuations more reasonable.
- Economic Cycle: We are most probably at the beginning of an upturn in the economic cycle. Real estate cycle is definitely showing positive signs. Manufacturing is picking up.Government policies are supporting growth.
- Sentiment: Equity mutual fund investors have been booking profits for months. On the other hand, direct equity investors have increased manifold. In the beginning of the month, the FII were pumping money into India and in the last few days they have been withdrawing.
- Trigger Event: When the Federal Reserve finally indicates the end of the loose monetary policy and starts tightening the Federal Balance Sheet, there is definitely going to be volatility in the equity markets, reminiscent of the Taper Tantrum of 2013.
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DEBT MARKET
Last year was an unusual year. There was ample liquidity in the system, Rs. 6-7 lakh crores. Going forward, one expects it to be moderated. Further the likelihood of such repeated interest rates cuts is not likely to happen this year. We expect there to be a challenge of inflation too - which in the last few years have been within RBI's comfort level. With economic activity picking up and with the massive infrastructure stimulus increasing, inflation is very likely.
The return expectations on fixed income will be muted. Would have to look at accrual strategies and expect around 4-5% returns.
The changes due to SEBI limiting the amount of investments that the mutual funds can invest in perpetual bonds and the change in the valuations of the same, will cause some disruption over the short term. However there is a glide path to compliance which should soften the blow.
We feel there could be some interesting opportunities in the perpetual bonds which can be explored and accumulated for the medium term. Bonds of SBI and BOB could be added in the portfolio in the yield range of 7.0 – 7.90 % p.a
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GOLD
If there is '"risk off" trade - gold will rise. If there is "risk on", equities will rise and gold will go nowhere. This year however we do feel that silver will outperform gold. Eventually due to all the money printing throughout the world, inflation will happen and gold is a hedge against inflation and will resume its run up. Bitcoin has been seen as competition to gold as a store of value, but due to its high volatility cannot be seen as replacing gold - which has held its value for centuries.
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IN CONCLUSION
Maintain your asset allocation. Be prepared for volatility in equity and low returns on debt, Add to equity on dips. Take some exposure to global funds to diversify your equity risk. For aggressive investors, look to add an allocation to Japan - although a diversified global fund will include Japan too.
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Disclosure |
We are not registered as investment advisers and do not provide any investment advice. The information contained herein is for informational purposes only and does not constitute investment advice. We do not make any warranty (express or implied) as to information in this written material and do not assume any responsibility for, and shall not be liable for any losses or damages of any kind, resulting from investment in any investment product made on the basis of any information provided in this newsletter. Further, the information given herein is as of the date and time of this document/report/newsletter and there can be no assurance that future results or events will be consistent with this information.
Furthermore, certain data and other information may be obtained from a third- party feed, and we are not responsible for verifying the accuracy of the same. While we have taken due care and caution in the compilation of the data and the contents herein, no representation is made as to the reasonableness of the assumptions made within or accuracy or completeness of any data on past- performance of schemes or historical analysis and any other analysis of any investment products. We specifically state that we cannot be held liable for any damages (monetary, legal or otherwise) caused by any error, omission, interruption, deletion, defect, failure and that, we have no financial liability whatsoever to any user on account of the use of the information provided in this newsletter
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