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. 

A Week Into 2013

Every year in different in markets, and new themes tend to emerge. The sooner one catches on to the theme, the better for the books. Like in 2012, the theme was increasing allocations in Asia, and the resultant fund flows. Almost all the markets received a boost, with huge flows taking the indices higher. Barring China, most major markets went up in double digits.

So far, this year has been high beta play, where investors are switching out of defensives into risky sectors. Can be a sign of revival for the broader markets, with both bonds and Gold disappointing last year. Yields are inching in US, and we may see average Joe trying to shift his portfolio into risk assest pretty soon. For, while the bonds returned around 2% last year, equities ran up 15%. Another year of similar returns, and we would definitely see US yields inching up.

This may finally be the year when China party begins. After years of frustrating investors with subdued performance, we may see Shanghai Composite flying soon.

Beyond The Cliff

So US has patched up some kind of an agreement over the fiscal cliff, and market expectedly jumped all over. Now as investors pour over the details of the deal, they will realize nothing much has actually happened.

They have increased the tax rates for super rich, and made permanent the tax rebates for everyone else. In the times of crisis, everyone must be ready to make sacrifices, but for some reasons none of the elected representatives around the world seem to be in a hurry for it. There is a big vaccum of leaders with spine and vision.

Anyways, back to the markets which seems to be flush with liquidity. I expect China to be the talk of the town for most part of Q1, and see more and more people jumping on the story. As for India, am not too optimistic for this year - think it would lag other regional markets this year. Only Metals and IT seem to be offering some values at these levels, most other sectors look over stretched.

Let me track Nifty, CNXIT and SHCOMP over the next three months, from January 7th to March 31. I would tend to think SHCOMP would outperform, followed by CNXIT, and Nifty to underperform.

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.