Bond Yields in 2015

The biggest factor driving assets this year would be the rate decisions by US fed, and the resultant bond yields globally. In spite of repeated warning from Fed over the potential rate hikes coming soon, US bond yields have started to move lower. This is primarily on the back of fall in crude prices globally. How this will play out would be anyone's guess, but things can get pretty complicated by mid year.

A crash in price of any asset drives volatility in the market, and it would be same this time with the fall in crude. A lot of sovereign wealth funds of the crude exporting countries have been big buyers of assets in last few years - both fixed income and equities. Now, some of these funds would need to offload these assets in the market. I would think this would drive a lot of high yield stuff lower - be it EM bonds or EM equities. Now, it would be interesting to see how Fed acts in the event of these EM selloffs - will they pause and give more time to the market, or begin with their normalization. This would be the single biggest event for the markets this year. 

Back home in India, RBI is widely expected to cut rates soon - either in the Feb meeting, or soon after the budget. Presently, the rate is 8%, and bonds yields have already started pricing in a cut (yields around 7.85%-7.9%, moving lower from ~8.5% last year). A fall in crude would lead to cut in deficit as well as inflation levels, and should be good for the bonds. I'm expecting 10 year yields to move to 7.5% by mid year, and to around 7% by mid of next year. There would be a sell off some time in the first half in risk assets globally, but my assumption is INR bonds may be a better bet here than equities. 

However, a sell off in the market may lead some pressure on INR bonds and RBI may be forced to not cut very aggressively in event of disorderly moves in the market. Lets see how this plays out - I'm buying some bond funds, and would see how their returns pan out over the next 3-6 months. My target by mid year is around 6-8% gain, and an annualized gains of around 14-16% by mid next year. 

The New Dawn

2014 was a great year for markets in Asia, with both India and China returning above 30%. Nifty has made lifetime highs, whereas China is still trading halfway down from its crazy highs reached in 2007.

2015 should be a promising year for markets here, with the two biggest markets finally getting their mozo back, after a year aimless years. The US is close to halting and reversing its QE, so expect some volatility from there too.

India should be interesting as RBI is expected to cut in Feb, and there are hopes from the budget in Feb as well. Expect good returns from banking names, specially PSU banking names - smaller names could be best placed as these are ones with highest beta. Also, autos and real estate names should be good bets, given their interest sensitive nature. 

Submerging Markets?

The world markets were in rude shock after the great rally in 2013, and haven't had the best of starts in January. Most big global indices are down, with China slowing down, and US just going on with the Taper plan. Emerging markets have taken both the news with a pinch of salt, and add to it the ongoing crisis in Argentina, Egypt, Turkey and Thailand, they should experience more outflows. 

However, things could get interesting here. With most data pointing towards a risk-off in EM assets, we may actually finally see EM outperforming DM this year. S&P is already trading at peak levels and peak valuations, and shouldn't see much of an upside. Some of the better emerging markets, like Korea or Taiwan, may see growth return back on healing economies, and can start outperforming.  I would think the markets with the strongest currencies should outperform ones with weak and volatile currencies, and hence I would think Korea and Taiwan could be the best performing markets here. 

To Taper Or...

Fed just had cold feet while it was expected to taper its QE last week. That caused huge covering in the markets, and everything from estonia to timbaktoo rallied. 

Well, the euphoria may be short lived when the talk start again. The consensus is now for a december taper, and it doesn't give much of a breathing space. The rally may be short lived, and we may soon be staring down the barrel again. 

Things are getting messier and messier, and doesn't look like it would have a happy ending. 

India Story - Just A Pipe Dream?

Past couple of days have been bad for Indian markets, equities have crashed and the currency is making a new low on daily basis. 

A little bit of context - it all started with the talks of tapering in US, which resulted into US yields moving higher. More than that, it also meant less free money to float around the world buying the risk assets, and led to outflows on funds from emerging market funds (both equity and bonds). Countries which have been financing their deficits from capital flows were ill-prepared for this, and have nose-dived. India is one of them, with over USD 180 billion of trade deficit (part funded by IT exports, part by NRI remittances, and remaining from capital borrowing), it was always going to be hit hard once the flows stopped. 

So, the pullout made FIIs sell bonds (more than USD 12 billion worth, out of total investments of USD 40 billion), and equities (little less at USD 2 billion, out of more than USD 100 billion). As a result, there was no way to match our deficits, and INR got killed, dropping a whopping 13-14% in little over 2 months. Post this crash, now anyone investing in India gets a slightly fairer deal with 10-year bonds at 9%+ yields, as against yields below 7.5% before this crash. For too long, we have been underpricing yields, and as a result overpricing equities, bonds, as well as real estate. As a result, investors were not compensated enough on their investments as yields were much below the inflation rate. Little wonder it made domestic savings move to gold and real estate. 

With recent RBI measures making funding more dearer, and now almost in line with inflation rate, makes financial assets a little more attractive. With most fixed deposits now yielding over 9%, may be its the right time to switch over to the INR bonds. FIIs outflows may continue for some more time, and can take INR to 65, but in the long term I believe the lesson has been learnt. We should see financial savings increase from here, and see some softening of real estate prices as well. For too long, we have had stimulus in the market, and it has created a huge bubble in everything, and making households save less and less. 

I will wait on the equities a little bit longer, as they may have another 5-10% fall coming soon. Expecting Nifty to test 5000 levels if it doesn't bounce back quickly from here. However, on the debt front, we may be closer to the bottom. 

Asia's Manic Friday

Friday was as eventful a day in Asian Equities market as any in recent times, certainly in 2013. First was the flash spike in China, with rumours suggesting false buy orders of size more than USD 1 bn taking the market up more than 4%. There were all kinds of rumours flying around, and I would rather avoid the details as I don't believe in talking about things which are plain speculation. And later in the day, Nifty crahsed more than 4%. There was nothing spectacular about the fall, it was just a slow and painful drift lower. Having opened down 1%, market kept falling over the day on relentless selling. Apparantly, without any specific news on the day, apart from some more restrictions from RBI a day ahead. 

As US prepares for tapering, economies in Asia are looking more and more in trouble. Last time we had such a scenario, the Asian crisis happened. Things aren't looking too good this time as well. Currencies most at risk include India, Indonesia, and Malaysia. I think a good time to short these currencies against DM market currencies. 

Japanese March Continues

Japan continues to perform well, being the receipient of largest foreign inflows this year in Asia. A large section of market does tend to believe in Abenomics. I remain in the doubters camp, and think the best way to play this move is being short JPY. However, am not too sure on the equities. 

China is getting more and more interesting here. With most global markets in the bull phase, shanghai may break on the upside soon. I think we may see a sharp upmove in China pretty soon.

India may well have run ahead of its fundamentals, and may see a pull back. However, its still a buy on dips move, and we may break new highs pretty soon. 

Pre-Budget Rally?

Market has been lack luster in India in recent couple of weeks, with Nifty failing to move higher. After having outperformed most other markets last year, it has been a laggard this year. However, all hope is not lost, and the coming budget session may provide some fresh ammo for the bulls. 

Liquidity remains high in the market, and it should keep the downside limited. China has outperformed most markets this year, and we may see a technical pullback in coming few sessions. Post CNY data should be interesting to watch. I would expect a further 3-4% correction in China before the next leg up. 

Best markets to play the long side currently should be Korea. Kospi has been underperforming the other indices because of a couple of reasons - (a) weaker yen, and (b) vanguard selling. However, over the longer term, none of this seems much of a big deal, and when the noise dies down, things should look better for Korea. Another similar play could be Taiwan. Both the countries are good proxies for being long on technological sector, as well as on China. 

Preferred Longs: Korea, Taiwan, China, India

Preferred Shorts: Gold, US, Japan

January 2013: Expiry Week

The results have been pretty decent from companies so far, with INFO, RIL, LT, all beating forecasts. In fact, some of the worst performing names over past year have given pretty good returns in last few weeks. Market should continue to remain supported at these levels, and I don't Nifty breaking down to 5800-5850 levels over the next week or so. If S&P is any indication, actually we may see a new high pretty soon. 

With China performing, and none of the big global risks in the limelight, risk should continue to do good. Financials, Infra and Metals should do well over coming weeks, whereas I expect continued weakness in the consumers sector. With OINL and NTPC going under the hammer in next two weeks, INR should remain strong. I won't be surprised if 53 is broken as well before Feb end.

For the expiry, if the roll levels remain strong, will keep building longs  in a few names, and keep INR longs as well. There are quite a few scrips coming in for divestment, and it should keep USDINR under pressure. 

China: Finally Coming Of Age

Last few months have been very exciting for anyone who follows the Asian markets. China has announced a serious of reforms, and have been slowly expanding quotas for foreigners in its domestic A-share market. At the same time, its also moving ahead with internationalization of RMB (with the current plan of making it happen by 2017). I guess both the stock market and FX market reforms would go hand in hand, and one isn't possible without the another. 

There were apprehensions around the time of leadership transition, but now all those have gone away, and the new leadership is also dedicated towards financial reforms. We may be in for exciting times in coming months when more and more quota is released, and trading volume picks up. Already the futures trading volume in Shanghai has seen phenomenal growth over the past couple of years. Less than 3 years old as a product, they have already seen huge volumes being traded. 

The other giant, India has also embarked upon a series of reforms, opening up the country further for attracting FDI and FII inflows. India needs dollars, and hence it has no other option than opening up of economy further. However, the key difference here is INR on the ground very much reflects almost the true level of the currency - RBI hasn't been too aggressive or defensive with the currency movements, and has allowed the market to take it to its level. There have been interventions, but they mostly short term, and that too for preventing the volatility of the currency. 

I'm changing my stance of being underweight India for this year, and I think this may be another huge inflow year for all the emerging markets. We may see continued ETF flows in Asia, and have another 20% plus year for many indices.