Category Archives: Stocks

Equity Market Dynamics

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Friends,

            Apologies for the long silence (excluding the folks for whom it might have been a bliss) – Some investors even asked me if I had stopped writing Blogs. Income Tax Filing and GST Registration took a toll on my time – Need some excuse, right?

I have realized that starting a new habit like walking, running, swimming, meditation is easy. But, sustaining it for a long period of time is extremely difficult. I am telling this in the context of publishing blogs on a periodic basis rather than adhoc.       

  • ‘Invest cautiously through dynamic asset allocation funds’
  • ‘Move from mid-caps to large cap’
  • ‘Lower your return expectations’
  • ‘Earnings continue to be muted’
  • ‘Cash holding and arbitrage positions have increased’
  • ‘Risk-Reward is unfavourable for Equities’
  • ‘GDP growth takes a hit’
  • ‘Foreign Money is chasing India’s Reform Story’

 

The above statements were made by key fund managers and analysts, both Indian and International, in the recent weeks. Has our reform story taken off or yet to take-off? Statements like price to earnings P/E is more than 10-year average; 1 to 15 is considered cheap, 16-20 is considered fair and greater than 20 is considered as expensive may not be relevant in the current context. Currently Nifty and Sensex are trading at close to 24 P/E. I would tend to argue that there are major changes to the investment pattern which will change the contour of equity investments and following are some of the points why I think so.

  • Retail Investor participation in markets through MFs and ULIPs is at all time high with inflows increasing month over month. Equity MFs had an all-time high net-inflow of Rs. 21,875 Crores in Aug 2017. How was it before? Equity MFs had an all-time high net-inflow of Rs. 14,480 Crores in July 2017. This highlights the appetite of Indian Retail Investors which was not the case earlier.
  • Other than MF Equity route, inflows are high from sources like National Pension Scheme, Provident Fund, ULIPs.
  • The reason attributed to this heavy inflow is not that Investors have started embracing equity but also due to stagnant Real Estate Sector, Gold still struggling to cross 2012 levels and lowering of Bank/Post Office/Company Fixed deposit rates.
  • Instead of yearly dividend payments which was the norm until a few years ago, Quarterly and Monthly dividends in Equity Funds are being paid to attract gullible investors.
  • Some Wealth Management firms and independent practitioners, enticed by the volume and immediate benefits, invest huge lump-sums of their clients, running into crores, even in the current market.
  • The argument of average 10-year Price Earning is something that I don’t subscribe as there will be demand-supply mismatches which inflates the PE of a good stocks with earnings visibility

So, as sensible investors, what is that we can do in this frenzied Bull Run:

  1. Investors who embark on direct equity in this period need to know that, during bull runs, even the worst of stocks do well. Warren Buffet, the Oracle of Omaha and considered as the god of equity investing quoted ‘Only when the tide goes out do you discover who’s been swimming naked’.
  2. Do not go for Lump-Sum investments and invest through systematic plans – SIP and STP – Almost all Chief Investment Officers and Fund Managers of Fund houses are unanimous with this message.
  3. Medium and Small Company stocks have become overvalued and the hit will be heavier during correction. Advice is to stick with Large Company Stocks or move allocation from Small and Mid to Large. This is also a unanimous message
  4. The Equity markets would have changed the asset allocation pattern – skewed towards Equity than Debt and this needs to be rebalanced.
  5. Cashing out of Equity, especially MFs, is not a good idea as it is extremely difficult to predict when the correction will happen and when the market will go back to the original high. I remember atleast 3 popular fund houses, that took cash calls during the 2008-9 global crisis and for a short period those funds were doing better as they contained losses. But the celebration for those funds was short lived as the markets turned around sharply, not allowing the funds to re-deploy the cash. Some of these funds are still languishing.
  6. Even if there is a 10 to 20% correction, the macro factors for India is good which will life the markets – Inflation down, GST Implementation, Current Account and Fiscal deficit, Government gaining due to low Crude Prices – The only reason to be cautious is if we get another shock like Demon. or Beef ban or unrest with neighbours

 

<Blog # PenguWIN 1055 – Equity Market Dynamics>

Does Sensex and Nifty Really Matter?

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Friends,

Hope this New Year 2017 brings in Happiness and Prosperity to all of us.

Investments in Mutual Funds have been increasing continuously due to money coming in from retail investors. The last quarter (Oct-Dec ’16) has seen significant participation, touching all-time highs (Domestic Institutional Investors includes MFs, LIC, Provident Fund).

2 key reasons why the Retail Investors participation have increased in Equity are:

  • Increasing awareness level of investors that Equities have the potential to deliver the maximum returns (among all asset classes) and Mutual Funds offer the simplest and effective way towards wealth building. Even retail investors from smaller cities and towns have started participating. SIP (Systematic Investment Plan) has become the ‘buzzword’
  • The fall of Real Estate, Gold and recently, the Fixed Deposit returns have greatly reduced the charm in these asset classes, resulting in exposure to Equity MFs, a necessity

Another interesting trend is the volatility of the markets influenced by FIIs (Foreign Institutional Investors). The DII flows have been on the rise (See Chart 1) and able to counter the FII outflows, lending stability to markets.

The volatility (positive and negative swings) of the Sensex and Nifty influences the psyche of investors, inducing worry and panic that they have lost wealth when the Sensex turns red – greater the fall, greater the anxiety.

Chart 2 shows the returns of Sensex and Nifty over 1, 3 and 5 years along with Equity MFs Category average (Large and Multicap Funds). The difference or delta between the Indices and the Fund returns (Active MFs) is referred as Alpha, which is generated by the Fund.

Chart 3

Chart 2

The following illustrations demonstrate how a fund manager can generate Alpha over Sensex (Sensex-Stocks-and-Weights.jpg) is discussed below:

  • Among the 30 stocks in the Sensex, people who have some exposure to economy and business trends would know that Bharti Airtel has been going through a phase of dwindling margins and high capex investments, that has hit the entire Telecom segment. Another example is Tata Steel’s acquisition of Corus, UK which became a disaster. If the fund manager eliminates or doesn’t investment in them, the returns would be higher or Alpha is generated (Large Cap Equity Fund with Sensex as Benchmark).
  • Stocks like HDFC Bank, Asian Paints, Maruti Suzuki have been beating the Sensex consistently and increasing the weightage of these stocks in the fund portfolio will result in increased Alpha.
  • Most of the Large Cap Funds take exposure to a small proportion of stocks that offer high potential, other than stocks present in Sensex and Nifty thereby creating Alpha

 

When the Indices Fall or Increase by a significant level, the value of the funds too fall or increase. But the magnitude/percentage of fall or increase would be different as these are actively managed funds which have a different stock composition and weightage.

Chart 3 shows the returns of couple of top funds in Large and Multi-cap category where the Alpha is the highest between the Index and Fund.

There is a category of funds that mirrors the Indices which are referred as Index Funds. These funds are passively managed and replicate the stocks in the Index with the same weightage and charges low expenses. The Index investing is popular in developed countries like US and several European countries (Efficient Markets) where fund manager generating Apha is very difficult (Active funds have to make up for the additional expenses incurred, which is higher than Index Funds).

India does have quite a number of Index Funds. But we have a long way to go before Index Funds become popular as the Alpha generated by Active MFs is quite high, at present (Inefficient Market)

A very happy Pongal & Sankranti wishes to all of you!  Iniya Pongal Vazhthukkal!

 

<Blog # PenguWIN 1047 – Does Sensex and Nifty Returns Matter?>

Indian Equity Markets Update

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Dear Friends,

                             As I am writing this blog the Sensex has moved up by more than 400 points and Nifty by 130. This is subsequent to the fall of Sensex closing below 24000 and Nifty by 7250. Why are the markets behaving in a bizarre way with high volatility?

No one knows the precise answer as that is how Stock Markets around the world behave and you can attribute only a few factors to it. 3 key reasons that are attributed are:

  • China Degrowth
  • Fall in commodity prices to 10 year lows (including Crude Oil). Even this has a correlation to the 1st  reason of China Degrowth as China was one of the major consumers of commodities
  • Rumours spreading that that we are trending towards another 2008 kind of crisis across the world

 

If these are the reasons and stock market pundits across the globe are able to convincing say so, most of these people would sell their equity portfolio and move to a cash/ debt position so that the overall returns of their portfolio are optimum (less downside). The reason that it has not happened is no one is sure about it and that is the nature of Equity Markets. This is akin to buying gold or real estate knowing well that the price is going to fall.

A significant number of PenguWIN clients are first time equity investors who might not have experienced the gyrations of equity market. Hence this blog is mainly for their consumption and people who know or experienced this, please excuse me. I happened to attend the Chief Investment Officers (CIO’s) market outlook of several leading fund houses in the last 1 week and some of the messages are embedded in this blog.

Sensex moved from 3,390 to 20,823 between Jan 2003 and Jan 2008, during the great Bull Run. i.e more than 6 times. Now comes the interesting point: During this period, there were 11 occasions when Sensex corrected by close to 10% and 2 times by close to 25%. The reason why I am quoting these facts is that, markets tends to be volatile and unpredictable like the current scenario and this is not a new phenomenon. 

Volatility is inherent to all Asset Classes

Until a few years back, 2012 to be precise, most of the investors in India were of the opinion that money invested in Gold and Real Estate can move only in one direction – Up! In 2012, gold prices went up to Rs. 3000+/gram. If we factor inflation to this (7%) and taking a time frame of 3.5 years, the gold price should have been 3800/- per gram today if there was no price raise and purely adjusted for Inflation. The reality is that Gold is trading around 2500/gram.

The case of Real Estate prices is quite similar. The prices have remained the same in most part of the countries whereas if you factor in Inflation of 7% it should be 26% more than 2012 prices.

Most of us did not sell our Gold nor our houses. We think that if not now, in future the prices will go up. But when it comes to Equity Markets, the investor behaviour is different. Retail investors react in a manner where, when they should be investing more when valuations are attractive, but in reality they sell and exit making huge losses, and say that they burnt their fingers investing in Equity.

When companies grow and the profits increase, the stock prices should increase logically. A good example is Cognizant stocks which has grown at a 20% CAGR since they got listed in 1997. But does it always go up. The answer is no as it took the pounding on several occasions. The same is the case with Infosys, TCS, and Microsoft etc.

Fundamentals of India are strong

China, Brazil, Russia, Japan, South Africa and pretty much all the countries have issues in their fundamentals like GDP growth slowdown, recession due to oil prices and commodities. The only 2 countries that seem to have these going in their favour are US and India.

India GDP is growing at 7.5% which is significantly higher than other countries, our Fiscal and Current Account are in control, and Government has saved 5 Lakh crores per year due to oil lower prices. This money can be used for Country’s development.

An interesting data point that I would like to share is, in the past decade, Indians have imported around $221 billion worth of Gold, Silver and Diamonds while the money that has come in through FIIs in only $190 billion.  The impact of FIIs pulling out is clearly evident but the good thing is from last year retail investors have started investing significant amount of money in Indian Markets and this has helped balance the FII sell-off to a great extent.

So the question is whether our markets continue to be heavily dependent on FII flows? The answer is, no from a long term perspective. The government has been able to push the Pension and Provident funds to invest in Equity markets which the workers union have been opposing in the past. It is not possible for government to take a hit by these players clamouring for higher interest than the market determined rates. Please note that Government has already decided on lowering Post office deposits, PPF etc and it will happen over the next few days. Today I read an article that said the interest rates would be rest every quarter (like oil prices) to coincide with market determined rates. The investment from these channels is about 5000 crores this year and is estimated to be 10 Lakh crores in the next 5 years

Some of our clients were keen on reading the Quick Updates from PenguWIN in our website itself rather than going to our Facebook page. So we have decided to provide quick updates both in Facebook page and a separate page in the website under the blogs menu. 

Do not ignore Asset Allocation

Almost all the Investment heads (CIOs) of the AMC (Asset Management Companies) emphasized this point to get the optimum returns from the portfolio. The detailed write-up of Asset Allocation can be read from http://penguwin.com/all-about-asset-allocation/ which we had already published. Just to refresh our memories, Asset Allocation is maintenance of agreed % of different Asses classes, periodically, every calendar year or financial year. Financial year is better as the person would rebalance the portfolio after March and the tax implications can be planned with a year to go.

Let’s just consider Equity Mutual Funds, Stock options, Debt Mutual funds, EPF, Bank FDs and Postal Deposits. Let’s assume that the investor’s risk tolerance and capacity are assessed and a 50:50 Equity: Debt is arrived at. By March 31st the value of the portfolio in terms of Equity and Debt are determined. Let’s assume that Equity portfolio got reduced to 45% and Debt portfolio increased to 55%. The investor needs to sell off the debt to an extent of 5% and invest the amount in Equities. It may sound difficult to sell the portfolio which has done well and reinvest the money in a portfolio that hasn’t performed well. But for optimum returns from the portfolio this is very pertinent.

During these testing times please reach out to your Financial advisors (me in case of PenguWIN clients) so that you don’t take decisions that will impact your wealth in the long term

 <Blog # PenguWIN 1038 – Equity Markets Update>