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May 1, 2016


Achtung was a memorable refrain for all Commando comic book readers, and is German for alert or warning. While the media obsessed about the soaring Yen, it’s the economic data out of the U.S. that merits an alert or warning. The chart below should concern any investor, and particularly emerging markets investors. The US economy appears to have grown at a slower than expected 0.5% pace in the first quarter, the slowest in two years, on account of sluggish consumer spending, dwindling exports and tepid industrial investments. This is bad news for Indian Equities and while certainly not the end of the world, the rapid deceleration is worrisome.

Does Global Trump Domestic?

That is a million dollar question. We’ve been talking about green shoots in the domestic economy, the many positive actions the government has taken, the recovering consumer, declining inflation, benign macro environment. Can the Indian economy – and markets – survive a worsening global environment. To date, the U.S. was certainly one of the brighter stories in the developed world. That story appears to have run its course and after trillions in quantitative easing, the economy is worse off than ever before. Achtung, baby? We’ll share our strategy in the outlook section, but let’s cover some additional data first. U.S. GDP Over the Past 4 Quarters Has Decelerated Dramatically us jdp

Large Cap IT, Materials and Telecom Are Off to a Strong Start in Earnings Releases…

us jdp

…Mid Cap Financials & Materials Look Strong In the Early Stages…

us jdp

…While Materials, Staples and Consumer Discretionary Lead the Way on the CNX 500

consumer dictionary lead

As Expected, Mid Caps Are Outperforming Their Smaller & Larger Peers

consumer dictionary lead

Fixed Income

The Fed left its benchmark rate unchanged and indicated that it was in no hurry to tighten monetary policy further. Domestic bonds erased early losses and gained for a third straight session as strong demand at a weekly auction of notes improved sentiment. The benchmark 7.59% bond maturing in 2026 closed at 7.44%. The Reserve Bank of India auctioned four bonds worth 150 billion rupees last week, including 80 billion rupees of 7.59% 2029 bond and 20 billion rupees of 7.72% 2055 bond. There was aggressive participation for the liquid 2029 bond. Bonds have been supported in recent weeks by the central bank’s open market purchases. The RBI bought 150 billion rupees worth of six government notes through an open market operation yesterday, the second such operation in this fiscal. We expect RBI to hold at least one OMO purchase every month which should continue to provide support to bonds. Further, the liquidity situation is expected to improve, providing further cushion especially to the short end of the curve. We remain wary of global risks that may lead to a spike in risk aversion and a corresponding rise in risk premiums.


Implications of a Soaring Yen

The obvious implication of a soaring Yen is a more expensive currency on the Carry Trade and declining profits. Separately, it’s indicative of the raod ahead for the U.S. which is essentially following the policies of Japan, with a 15 year lag. The BoJ decided to stay pat on monetary stimulus, defying market expectations for action, even as muted global demand, unsolicited rise in the yen and tepid consumption threatened to wreck the fragile Japanese economy. Following the unwarranted move, the Nikkei fell nearly 4%. The BoJ Governor highlighted his willingness to “deepen negative interest rates much further” and do whatever it takes to achieve their 2% inflation target.

The Fed Backs Off

The US Federal Reserve exhibited a dovish stance maintaining status quo on interest rates,

Commodities & Precious Metals

We clearly articulated our views last week. Crude oil prices rose, hitting near six-month highs, on lower U.S. output and a weaker dollar. Oil prices have surged nearly 80 percent since hitting 12-year lows of around $27 a barrel for Brent in late January. Brent rude remains in an uptrend, a worrying development for India indeed. Brent, Crude and Gold are all up over 20% year to date. Precious Metals soared last week. Gold tested $1300. The reason we would surmise is scepticism about the banks exposure to Energy and a recognition that the U.S. may be barrelling into a recession. From a domestic perspective, none of these is good news, putting further pressure on the economy, the currency, hurting consumer disposable income and sentiment.

Technical View

After a volatile week, the Nifty Index settled to closed at 7847, down by 0.66%. The Market attempted to breach the key resistance level of 8000, but failed, suggesting selling pressure at higher levels. Thus, strength will be seen once market sustains above 8000 level on closing basis. Rollovers were high in Nifty at 74% compared to 3-month average of 67% along with higher rollover costs, indicating long positions carried forward to May series. The volatility index India VIX is at its lows and coupled with heavy rollovers could lead some correction in the near term. Selling pressure may emerge if the market breaks below 7750. Expect the market to continue in a broad range of 8000 and 7750.

The Nascent Recovery in Earnings Is Fragile…

nacent recovery

Declining Bond Yields and Declining Inflation Are Major Positives…

declining bond yields …Unfortunately, Valuations Are High & Our Proprietary Oscillator Suggests Short Term Caution valuations-are-high


Prudence Was Right

A couple weeks back, we wrote that prudence dictates chasing the indices post a 1000 point rally is usually an unwise choice. Prudence was right. The indices have done nothing since massive optimism pervaded the markets. Last week, we saw market internals worsening, the macro environment deteriorating, and Crude, Gold and Silver each telling a story.

Does Global Bad News Trump Domestic Good News?

That is the key question we attempt to answer. The lacklustre U.S. GDP performance raises questions about the efficacy of the path that Central Banks are on. Coming back to the Nifty, the index is struggling to push past 8,000. We’re moving into the meat of earnings season and Nifty earnings have barely budged from the 365 level, now to the 369 level. It is always okay to miss out on an opportunity, as opportunities come along often. However, it is our core philosophy to avoid losses first and foremost.

Global Worries Du Jour

What worries us today is the U.S. is staring at the possibility of a recession, with equity valuations at high levels. Adding to angst is the return of Greece, Brexit and failed NIRP experiments. In the event of a recession in the U.S., exports will suffer. We are already seeing signs of this. Exports in 17/30 sectors were negative in March. Falling for a 16th straight month in a row, exports dipped 5.5 per cent to $22 billion in March. Domestically, the realization per megabyte of data in telecom data plunged, the airline sector has reported lacklustre revenue and earnings growth. It’s a mixed bag in terms of economic news in India as well with certain pockets doing well while others are struggling. In the event the U.S. heads into a recession, short term downside is a given. Central Bankers will want a panicked populace pleading for help to move forward with yet another hackneyed stimulus package. This downside would inevitably be accompanied by a flight to quality – Treasuries – and a weakening of the Rupee. The domestic economy would be asked to shoulder the twin burdens of rising Crude and slowing global demand, amidst a weakening currency. We’re doubtful that the domestic economy would survive a worsening global economy and a sluggish and struggling rural economy.


  • Tactical asset allocation is going to be a key determinant of portfolio return.
  • We would look to be buyers of domestic equities on a market selloff.
  • Just buying and holding the equity index is likely to be a disappointing affair.
  • We would look to accumulate liquidity to deploy at more attractive levels.
  • We would look towards mid and select large cap, domestic focused, growth opportunities at reasonable valuations.
  • We choose to remain patient on a nearer term basis based on our technical models.
We would avoid expensively valued ideas. We’re not big proponents of tweaking asset allocations frequently. Each transaction brings about a taxable event, penalties, exit fees and hurdles that must be overcome. Our strategy is best encapsulated as a growth oriented portfolio, tactical macro calls and opportunistic strategies to protect portfolios while generating consistent alpha. Stay tuned.