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There Is No Alternative

May 9, 2016

There Is No Alternative

On April 11th, we were optimistic about green shoots that were becoming visible in the domestic economy. The Nifty was at 7500.

On April 18th, with the Nifty 50 at 7847, we stated “prudence dictates chasing the market after a 1,000 point rally is an unwise choice.”

On April 25th, we stated “the medium term risk reward for investing in Equities at the index level is not compelling”, the Nifty 50 was at 7902.

Last week, we issued a piece titled “Achtung?” stating that market internals were worsening and our proprietary technical indicator was signalling Sell.

The market was in sell-off mode all week, with most sectors were down 2-4%, before staging a mild recovery. Medium term calls are one way we add consistent alpha to our portfolios.

Lies, Damned Lies & Statistics

Let us acknowledge that the untrained human brain turns into Homer Simpson when faced with vast amounts of challenging data interlaced with strong emotions.

For us, however, the data does not lie. We believe India’s economy is picking up. With a budding economic recovery, maybe Governor Rajan is right: something special is happening.

We expect index based investors will be left eating dust relative to actively managed portfolios.

We are with Rakesh Jhunjhunwala’s bullish bandwagon and Governor Rajan’s one eyed marvel, lies, damned lies and statistics notwithstanding.

There Is No Alternative. Acronym: TINA.

The One Eyed Marvel Rises – Domestic Air Traffic In India Is Up 27%… …Versus 3.3% in China, -1.7% in Japan & 4.1% in the U.S.

The One Eyed Marvel Rises

Our Proprietary Leading Indicator Is At a Three Year High, Up 25% Year Over Year

Proprietary Leading Indicator

Core Sector Growth Is Staging a Recovery

Core Sector Growth Is Staging a Recovery

Our India Leading Indicator Is At a 3 Year High

Our leading indicator tracks leading activity purely focused on Indian factors. After a lacklustre 2013, it showed life in April 2014 prior to P.M. Modi’s electoral victory. Further, by February 2015, it had shown significant declines, signalling a stall in activity. It bottomed in November 2015, well ahead of market turmoil in January 2016 and is now showing the strongest uptrend of the past three years, up around 25% year over year.

Weare aware of indicators galore demonstrating rebounding economic activity, but competitive factors give us pause in sharing them. Suffice to say the Indian economy is recovering and gathering momentum.

Domestic air traffic is up 27% year over year. Compare this with the rest of the world and there is something going on here. China is up 3.3%. The U.S. is up a reasonably impressive 4.4%.

Governor Rajan is not a man given to over-optimism. There’s something going on…


Choosing the Pond You Want to Play In

With leading indicators strong, we wanted confirming evidence in corporate performance. It has been missing at the Index level.

Nifty 50 earnings remain mired in the 365-370 range.

In the charts on the previous page, we eliminated PSU banks, heavily indebted metals stocks, and huge loss producing government owned or subsidised entities from the CNX 200.

The resulting data set is the pond we choose to play in. The results are reassuring.

  • 80% of the universe is delivering positive sales growth
  • The average sales growth is 10% year over year
  • Earnings growth is 15% on operating earnings
  • Almost every sector is delivering double digit operating earnings growth
  • Profit after taxes are up 16% year on year It doesn’t matter what the index does.

It doesn’t matter what the index does.

Growth is vibrant in most of our universe. The economy is improving. Growth will accelerate. We believe this puts a floor on our downside. There is always a wildcard, but investing – and for that matter, stepping out on the street – involves a certain amount of risk.

India has got a lot to be hopeful about.

Technical View

The Nifty Index declined 1.5% through the week, closing at 7733. The index breached 7700 levels during the week, however it managed to close above. As the Market was unable move above 7900 levels, call writing activity was seen at strikes below 8000, suggesting resistance around 7900 levels.

Unwinding of long positions was observed on the Index futures by FIIs, proposing that the decline was due to profit booking. On the downside 7700, which has highest OI for Puts, has been providing support to the market. Sustenance below this level, would see the Index further decline down to 7600-7550 levels. However looking at market activity, the Index is likely to trade in broader range of 7900-7600 levels and a breakout in either direction shall set the further trend for the market.

– Ashish Chaturmota



This image is used by academics to present Gestalt theories of perception. Some see an old woman, while others see a young woman, depending on the observer’s bias.

In the Indian economy, some indicators are expanding while others are contracting. As more data are becoming expansionary, we perceive the image of the young woman and the possibilities of growth.

Why Is Our Sliced Analysis Critical?

In our view, it’s an insurance policy against the excesses we see in parts of the developed world.

What price would you pay for accelerating sales growth, 15-16% earnings growth with declining inflation, accommodative policy and a demographically attractive fishbowl?

A simplistic back of the envelope calculation tells us that weare not very far from fair value if we apply a 15-16 times forward earnings multiple; moreover, we deserve a premium relative to the rest of the world.

Does this mean our market will not experience volatility and sell offs? That would be naïve thinking. You can bet the market is going to be highly volatile.

The Nifty 50 is burdened by deadwood. We will not name names, but we all know which companies we are talking about. This deadwood periodically excites, then turns into a falling knife and damages reputations.

When a great manager encounters a terrible business, it is the reputation of the terrible business that usually survives.

We believe the data are supportive for a very good period for sector and stock specific equity investing.

The market as a whole will continue to be weighed down by deadwood. Stock picking skills will be crucial for return contributions. Weare relatively sanguine from a longer term perspective. Valuations are expensive but supportive of growth and must be dealt with at the stock level. Wehave got a plan to handle volatility, using proprietary tools that have worked for years.

The government has ensured there are limited alternatives to grow wealth today and equities for us is at the top of the list.

Strong management is at the helm of the country, the RBI and many corporates. The domestic consumer market is strengthening.

Corporate Sector Debt: Worst Is Behind Us

Very importantly, barring a global shock, the worst seems to be behind us in the corporate debt sector as India shows the world how to deal with a debt crisis.

To summarise, we are increasingly bullish on the positive demand trends we are witnessing in various economic data series.

We are buoyed by the strong relative performance by companies in what was expected to be an earnings trough quarter.

Investors should avoid index and index related products, while building high quality, sector driven, growth portfolios with an investment horizon of 3-5 years.

Select active managers will outperform the indices by wide margins. Select stocks will deliver returns far in excess of the index.

We advise wealth managers and investors to deploy money in tranches to build or add to exposure in equities.


A Brexit decision looms. There is no change to our global view.

The PMI data out of Europe show that the ECB’s stimulus is having a positive effect, with a composite reading of 53.

Similarly, the U.S. Services PMI was revised higher to 52.8. The global situation is not as dire as imagined by the naysayers.

Commodities & Precious Metals

Crude oil price remained steady near the psychological 45-per-barrel mark. It had risen to near six-month highs last week. India imports 80% of its crude oil requirements.

With a relatively calm PMI number coming out of the U.S. and domestic acceleration, we’re less interested in the precious metals space.

Post a scorching 20% YTD return for Gold, wehad been looking to lock in incremental profits and trim allocations back to strategically neutral. Price action over the next few days will determine whether we want to reduce our weighting further.


India’s foreign exchange reserves rose to a record $363 billion this week, compared with $361 billion a week earlier, the Reserve Bank of India said on Friday.

Bullish bets on the Indian rupee hit the largest since mid- April 2015 as local financial markets were set to see net offshore fund inflows for a second consecutive month.

However, the rupee ended mostly flat at 66.55 against the US currency on fresh dollar demand from banks and importers. Fresh foreign capital outflows were also offsetting factors.

Fixed Income

Rationale for Easing Weakens

With the economic fundamentals improving and inflation just below the RBI’s 5.0% target for March 2017 and likely to edge up over the coming months, the RBI will be well aware of the improving fundamentals and unwilling to risk further easing beyond one additional expected rate cut.

RBI governor Rajan will closely watch inflation developments as well as monsoon rain forecasts and keep the language accommodative.

Fiscal Borrowings at 16.8% of 2016/17 Budget

The government plans to raise 6.75 trillion rupees through market borrowings in the fiscal year 2016/17, which is the budgeted gross government borrowing for 2016/17 and includes government bonds and inflation indexed bonds.

So far in the financial year the gross market borrowing stands at 870 billion rupees which includes 750.000 billion rupees – or 16.8% of the gross amount – borrowed through 20 Government Bond issues, and 120 billion rupees through 2 Treasury Bill issues.

Fed On Hold for Hikes

As we suggested last week, the Fed left its benchmark rate unchanged and indicated that it was in no hurry to tighten monetary policy further. Central banks have no end game, it is a figure it out as you go along strategy now.

The jobs data out of the U.S. was weak, further adding to our view that the economy is weakening.

Foreign Exchange Reserves Rise

India’s foreign exchange reserves rose by $1.5 billion to $363 billion, a record high and the fifth straight weekly rise in the country’s reserves.

The increase was driven by a rise in foreign-currency assets to $339.02 billion from $337.54 billion. Foreign investors have contributed a net $1.7 billion towards Indian Equities since the beginning of the calendar year.

However, foreign investors have been net sellers of debt since January 1st, selling $362mil of Indian Debt this year. Foreign investors remained sellers month to date in May as well, selling $85.6mil.

14 Year Govt Bond Auction Slightly Weak

The bid/cover ratio for the 80 billion INR auction of a new 14-year government bond was lower compared with previous week’s auction, as participation from state-run insurance companies was weaker-than-expected.

Total competitive bids for 14-year paper were INR252.51 billion for a bid/cover ratio of 3.16 for the 2029 bond.

The benchmark yield traded in a narrow range last week around 7.44%, the least volatile since November.

There aren’t many cues next week as well, so we may see range bound movement.

The benchmark yield ended flat on a weekly basis as well, amid lack of fresh cues on interest rates.


The Reserve Bank of India will purchase 100 billion rupees worth of government securities under open market operations on May 10. The securities to be purchased are 7.28% government bond maturing in 2019, 7.16% bond maturing in 2023, 7.72% bond maturing in 2025, 8.26% bond maturing in 2027 and 9.20% bond maturing in 2030.

This is the third such auction in the current financial year that started Apr. 1. The RBI had purchased securities worth 300 billion rupees via OMO last month.

Analysts expect the RBI to hold OMOs worth at least one trillion rupees in the current fiscal year. Last month, the RBI cut its policy rate by 25 basis points to 6.50% and also announced a move to neutral liquidity from liquidity deficit in the banking system.

Call rates fall

Overnight call money rates ended lower at the money market due to lack of demand from borrowing banks amid ample liquidity in the banking system.


We expect the benchmark yield to trade in a narrow band pending additional news flow.

With the increase in economic activity, bonds could stabilize at these levels.

A strong monsoon will further spur economic recovery, reduce inflation, decrease the likelihood of rate eases. The debt problems are being addressed. We would assess the risks about even for a downside or upside move on bonds from these levels.

Given our duration neutral preference, we are comfortable in the shorter duration accrual bond space. Our preference remains for accrual funds and shorter term exposure.