The China Puzzle

Nothing has baffled traders more in recent times than the price moves in Chinese Stock markets. Forever the favorite of value investors and analysts, the broader A-share market has underperformed almost all the other major markets. And to top it all, its precariously close to its 2008 low even today, when most of the other big global markets have almost doubled from their lows. 

What a difference a few years make, and it seems almost yesterday day when the market was going bonkers with Shanghai Composite making crazy new highs. The world had at last discovered China, and at its peak it traded at valuations above 60 (Price/Earnings). We are now far away from those times, and currently the market in spite of being a darling of many a traders, have failed to move higher. Much of it has to do with lack of domestic buying support, and very small QFII limits - so foreigners still can't buy much in the market. However, things seem to be changing with talks of further increase in QFII quotes in times ahead. We may see foreigners being allowed to purchase more of the market, and given the high growth rate in the economy, won't be surprising to see buyers queuing up for it. Even today, only a small proportion of the A-share market is owned by foreigners, and as the market opens up, there will be a re-valuation of the market. It may happen in 2013, with the leadership transition behind us. I think we would see a gradual up move in the Shanghai Composite, and can see the index bouncing off soon from its 2000 levels. 

It would further take a few more economies up alongside, notable ones being Australia and Taiwan. AUD is already trading at high levels (above 1.04), and can see further strength in the market on the back of china bottoming out. Taiwan being a big trading partner of China would see some demand as well, and things should improve there as well. 

This year end, should try to invest some in China dedicated funds - expecting the market to pick up some time around Q1 next year, and see the market reaching 2500 before 2013 year end. 

The Stock Operator

Reading a few trading books again, and think will start following some individual stock names to see how they perform. This time, won't bother with the value investing approach, and would go with the charts. 

As of now, am looking at some of the materials names, and think they would look to outperform in the next rally. 

Investing In The Of Time Of Easing

Last few years have been a nightmare for all the financial models. And some one needs to do some serious re thinking in terms of all the equations and financial market theories that were considered as holy grail of finance.

One of the worst affected theory could be the long term stock market returns. Many a books preach the fact that over a long term, stock markets always ted to outperform the bonds and other low risk assets. While the theory was all good in 80s and 90s, with US witnessing a secular bull market, it had been left wanting over the past few years. Starting with Japan, then the dot com companies, and now china, most of the long term investors are deep in red. Time for Finance 2.0.

The post crisis world is characterized by easing policies adopted by central banks of all major economies. This is akin to a recession in real terms, even though we may see some growth in notional terms. So, while our salaries may keep rising, because of devaluation of currency, our real purchasing power will keep going down. One of the prime reasons why most financial assets have performed badly in recent times, whereas the real assets continue to do well.

In these markets, real assets may be the best investments. So find something which may be valued in years to come and put your money on it. Be it Gold or Land, or even website addresses, anything which is a real asset and would be used by future generations would be a good bet.

Let me track how Nifty performs vis a vis Gold over the next couple of years. I would tend to think it would underperform.

Correction On The Cards?

I have usually been a bull in the market, even before many lost their shirts in the 2009 up-circuit. Over the past few years, though, market has gone almost nowhere. Post the 2009 post-election rally, the market reached about 4500 levels, and has been stuck around there for long. I would think that we would be breaking the all-time high some time this year - the flows have been good, and there are enough sectors which are driving the markets globally. 

For the short term, however, am not too positive, and we can see a break of 5200 levels on the downside next week. Being the last week of the month, we would see good volumes, and unwinding of large positions. The budget has been a disappointment, and there are now noise around some ratings action on India as well. While there may not be an immediate ratings cut, however, a positive action is now out of window for a good time. Plus, the noise around Vodafone tax settlement case is not helping matters either. 

Nifty View: March 2

Markets continued to consolidate around their new found highs, and is waiting for verdict from state elections. 5200 should be well supported on the downside, and I would be happy to play for the bounce. On the upside, any positive results from the local events would result into a break of 5400, and a potential re-test of february highs. There has been some weakness in the market post the spectacular run in the first few weeks, but the longer trend is still positive. Rate sensitives to see fresh action before the RBI policy meet.

Gold To See New Highs?

I have always been a bear on Gold, and like so many traders, always viewed the yellow metal as some kind of a bubble. But I have been proven wrong so many times in the past few years on this that I have lost count. Apart from human population, perhaps the yellow metal is the only thing which has been following an upward trajectory for a long period now (may be Apple shares as well, but thats a whole different level of madness). 

As I think more over it, fundamentals aside, the demand for Gold has been rising. Earlier it was just from India, but now China has also joined the race and is expected to surpass India to become world's largest gold consumer. Everything thats being valued and demanded by Asians should keep moving up, and Oil is one prime example. So, may be, the prices have been right (as they always are), and Gold bull run is here to stay. We may see higher and higher prices on Gold in coming days. 

I would start adding a little gold to my portfolio, and see how it performs over the next few quarters. I'm hoping it would outperform the bonds over the next five years period (bonds being a nominal return asset). 

Markets From Here

The second tranche of LTRO has been announced, and now officially the world is floating in cash all over. We have the US, which started this race to the bottom, and now being joined by Europe and Japan. US may have got itself a pretty good deal by getting in the game first, and hence recovering before everyone else. Europe may be the last one to react here, and hence find itself on the wrong end at the wrong time. No one bothers about Japan anyways. 

Which leaves us to the emerging markets (which for some weird irony of fate have been taking far too much time to 'emerge', if that was the intension of putting a present continuous tense in the name). China has remained an enigma to everyone, loved by everyone, and now universally acknowledged as being the next superpower, the stock markets there however have just not moved. Till today, Chinese stock index has lagged almost every tom dick and harry markets. If I have to choose one market to bet on, I would bet on China. And may be there lies the problem, its too much of a consensus trade. 

India, on that other hand, has been a beneficiary of the cheap capital flowing globally now. The government has done everything it can scare away the potential investors in the markets, and yet people have been putting money in the markets. The latest blunder being made by the government came today in the form of ONGC auction issue, with failed to be covered fully. With stock at 283, government had a bright idea to auction the shares at 290 (not withstanding the fact that it isn't 2007 now, and FIIs are not exactly lining up to put more money). There is a mix up incompetency and arrogance in this government, and I can't make my mind which of these is causing more harm. 

Anyways, as the cheap money keeps flowing, its Game On, and Nifty continues to move up. Next week should be interesting with state election results. I would put my money on the results being marginally positive for the markets, and would keep the long position here. RBI meeting on the week following next, and widely expected to cut another 50bps in CRR. Dance till the music is On, anyways no one bothers about what happens when the music stops. Its 2012 anyways, and you will never realize what hit you. 

Don't Blame The Quants!

Much of the past few years have been spent in trying to analyze the crisis, and the causes of recession. Banks have been the obvious targets for many, and more specifically, the quants. The financial world has turned very complicated, with numerous quantitative analysis, and all the models. So, its very easy to just take a look around, and find the scapegoat in people who created these complexities. 

However, what may be appear very simple at first glance may not be entirely true. Over years, complexity has indeed increased in the financial tools, but along with it, the size of the industry also increased. So, whereas earlier only say top 1% of the class were selected for top markets jobs, as the industry boomed we had top 5% being getting selected. When profits rose in the industry, hiring standards nosedived (I can't elaborate this further, but one can easily get the drift), and as a result, analysts raced to bring coffee for bosses instead of working hard. The models were not the problem, over time their users were less and less sophisticated. And as it should have happened, everything went belly up. All the so called correlation hedges blew up when they have actually needed. Blaming quants for the crisis would be akin to blaming Sir Alfred Nobel for Hiroshima, or Wright Brothers for 9/11 attacks. 

So next time you meet someone who blames the quants for the crisis, you will know you are meeting someone who actually caused it.