After Ghostly October its December pain now…..

IWaiting GirlOctober was perceived to be a weak month for the markets based on past records, while it went on to be a fairly good month. Whereas November took a marginal hit & now comes the December pain. In the last 5 years, 2 years in December was negative. So, will this year turn out to be a weak one for our markets?
Now the dynamics have taken a different shape. December has a lot of events which will make the markets swing on both directions. Some important news flow are expected on the implementation of GST and FED interest rate hike and it is most likely that in December the markets are going to be volatile. SENSEX should re-test the 25100 levels reached in August to gain strength before any rally can happen, which has a fairly good chance to occur in December.
After the Bihar election results, the government at the center has an urgent need to bring some reforms into action, while the support at the Rajya Sabha to do that, will not let it happen smoothly. So, GST may or may not happen in the winter session of the parliament. This can be tricky on the markets.
Raguram Rajan has cleared that there is not going to be any positive surprise from his side in the December policy review, which is now confirmed that there is not going to be any good news to the markets from this front.
Gold Bonds, the brainchild of Rajan, did see some good take off with about ₹917 crores on investment coming in, over a period this product will gain some market share which is a very good change for our country as we need not import Gold and that much of FOREX is saved, boosting the Current Account Deficit numbers.
Again the FED issue is getting into limelight, with the jobs data in the US markets showing strength, there are fairly good chances that the FED will hike interest rates. As of now FII’s are on the side-lines having the positive expectation on the FED meet, which if interest rates are increased, though will not cause a bigger impact to our markets as the FII’s have already sold off. While on the other hand if the decision gets postponed or has come confirmation that it is going to be delayed, then, we should look at some inflows from the Foreign Portfolio Investors (FPI’s). With the domestic institutions already having a strong hand on the markets, any support from the FPI front will give an additional strength to the markets.
So, it is confirmed that there is a lot of confusion prevailing at the moment and the line of resistance in on the down side. If it so happens, which has a fairly good chance, it is good for the markets as it will build the strength required and move up. And this base building will not happen in a hurry; it will take its own time which, in the process will kill patience of traders and investors, who got into the market in the later part of the 2014-15 rallies.
Weaker hands in the market should get moved out to have a strong rally.

With such confusion prevailing what can happen to investments?
Our market is in a clear bull market trend, so all the corrections and consolidations are an advantage to accumulate on the investments, while it will require smart decisions. There are a good number of businesses which are very attractive based on their earnings, these stocks will move up and give opportunities to profit.
Pharma, NBFC, Textiles and some select technology stocks will have good runs in the coming month. Whereas the large cap stocks that form the broader indices like the SENSEX and NIFTY will have pressure. Banking is weak and is not in a hurry to run up. Metals are still weak, which might see some more consolidation and down ward pressure.
Stock investments are going to be volatile in performance; even the Equity Mutual Funds will have pressure on their performance. Baring few schemes like the ICICI Prudential Exports, which has a very dynamic portfolio, holding on to the best stocks.

Results of the September quarter was muted, sales growth was sluggish which did not bring out any businesses worthy of investment, some existing ones that were in the growth phase continue to hold on to their performance, while some prominent ones like Eicher Motors, Page Industries which had been commanding a major share of long term investment portfolios have moved out following slowdown in their business growth. These are stocks that have given its investors more than 1000 percent profits in the last 5 to 6 years and now it is correction time for them.
In the Pharma sector, front line stocks have taken a very big hit following USFDA issues, Dr. Reddy’s has lost more than 35% of its value in 2 weeks from the time the US authorities began questioning them. While bigger players have been losing the mid-caps in this segment are doing well. Stocks like Alembic Pharma, Aurobindo Pharma, Cadila etc., are getting more exposure in portfolios.

How is 2015 likely to end for the Indian Stock markets?
So far from January 2015, the major indices like the SENSEX are down about 4% and with no big booster dose available in the month of December, SENSEX is likely to close negative for 2015. After a gain of 40+ percentage in 2014, the very next year getting into Red is of a concern to the long term trend of our country.
One good advantage with a prolonged correction or consolidation as it should be fairly called, since the markets have begun to consolidate after a pretty strong rally is that the break out from the consolidation will have a higher chance of going into another very strong rally. With the prevailing economic conditions and the way India is positioned among the global markets, we will have some more super strong growth years to experience.

How is BTT portfolio placed in the markets now?
Before the markets began to consolidate, the SENSEX reached its peak in April 2015, while our portfolio held on to its strength, reached a new peak in August, just before the Chinese market crisis, which showed that our portfolio was stronger than the SENSEX. As soon as the correction set in, we had a slew of exits from the investments which had given substantial gains and have begun to get slow on their growth, in our portfolio which brought down our exposure in the markets by 25%. Our performance for 2015 has mimicked the SENSEX.
Now, there is a question, with a strong portfolio and reduced exposure, why are we not outperforming the indices?
The stocks that form our portfolio are super strong on their fundamental strength, due to which the price increase was very high. We have stocks that have generated triple digit growths on their stock prices within 2-3 months from the date of our investment. Such high growth in price have the tendency to correct faster too when the whole market gets subdued, due to which the impact on the performance is high. This impact should have normally caused under perform to under perform the broader markets, while it was not. The reason that we are at par with the index in performance was due to the reduction in exposure.
September results did not bring out new investment opportunities and with the subdued sentiment in the markets even in the festive season, January results are also not likely to show any big surprises. We will be adding new investments only when the companies begin to report good numbers and until then, we will be light on exposure giving the best possible safety to the capital invested.

When will the market go up?

ConsolidatePost China crisis, our stock markets have moved into correction mode. There were continuous challenges in the form of disturbances like the Volkswagen scandal, Bihar election results, attack on Paris along with the regular nuances like the FED rate hike and the selling by the Foreign Portfolio Investors (FPI) in our markets, which has almost become like a monthly issue.

In October, there was the fear of the FED hiking interest rates which got postponed to December, now the fear has come back again on the thoughts that, whether there will be a re-thinking by Yellen. And every time there is this news about the interest rate hike, it gets followed by the withdrawal of the FPI’s from our market. We have been so much at the mercy of foreign investors to support our market; a small change in their thought itself creates a downturn in our markets. As an emerging market, we have got used to this foreign investment to support our markets.

While in reality, the present situation in our markets has taken a different direction. Dependency on foreign money to move our markets are slowly coming to an end. From the data that is available it is clearly visible that the foreign support is no more required for our markets. In the April to October period, domestic institutions and retail investors have bought stocks worth 51000 Crores, on an average the domestic funds are buying stocks worth 6638 Crores or just about $1 billion, every month since May 2014 as against the FPI contribution of $787 million in the same period.

These figures show that any kind of selling by FPI’s is getting absorbed by the domestic purchase. The investment dynamics of the Indian public have had a dramatic change; SIP’s used to be about 1000 crores per month before 2014, which has now got increased to 2500 Crores per month. The beauty here is that, all this money is going into the midcaps and not the large caps. When we talk about so much inflows and the market is still weak, doubts arise as to why it is so?

The FPI’s are mostly invested in the large cap stocks, which they are liquidating, apart from the fact that the reduced interest rates will become attractive for these investors to be invested in their economies; they are realizing the mistake of wrong investments. Large cap stocks have become poor performers in the present market. The SENSEX dropped 1.48% on 18th November 2015, while the mid cap index dropped only 0.68%, the reason was FPI selling in large caps. Stocks like Larsen & Toubro, ONGC, TATA Steel etc., have been losing heavily, while their mid cap counter parts like Eicher, Page etc., are gaining big time. In the last week alone Dr. Reddy’s lost more than 25%, along with it all the frontline Pharma companies losing a large portion of their value, while stocks like Aurobindo Pharma, Cadilla, Glenmark etc., did not lose much.

Pressure of the USFDA investigations have brought down the stock prices of most of the big names in the Parma Sector. Again, this USFDA is one another issue that has been haunting our markets often. There is too much of dependency by our frontline Pharma companies for their sales from the US markets and the US is commanding, this situation will change soon. Our companies will realize that there is a similar market available in the rest of the world and with the medical facilities getting improved in India, one of the biggest economies by population, India sales itself will have a bigger contribution in the years to come.

In the first 20 days in November, FI’s have sold in our markets to the extent of 7200 Crores while the domestic institutions have bought for 17360 crores. It is close to 150% more than the sales that have happened. Most of the selling was in the frontline stocks and the buying was in the mid cap space. To some extent the selling pressure is getting absorbed by the local institutions and that is the reason we have the markets going up and down in short periods. It is like a sort of confusion and will result in a prolonged consolidation.

FPI’s are forced to re-align their portfolio if they have to make money from our markets, hence the selling pressure. Whereas the domestic funds are already loaded into mid-caps which have had a very good run and are also adding to their portfolio taking advantage of the correction in the market. Our markets witnessed an above 40% straight rally after the new government got elected, from such a steep rise, it has to get re-adjusted before it takes off again and this readjustment will take a little more time. The way the charts are formed, the bullish sentiment is pretty strong. If the next round of bullish move has to be even stronger, like the experience we had in the 2003-2008 bull market, the markets have to consolidate and re-shuffle leadership.

happy-investorsLast year Automobile stocks had a great run supported by good earnings from the companies, while this year, they have a kind of taken back seat. Most of them have completed their dream runs. Now the leadership position is slowly getting shifted to Pharma and NBFC stocks. September quarter results were muted, the average sales growth has been around 1.50% while the earnings growth is at 7%, which shows that companies are cutting down costs to increase profits and this cannot continue for long. Soon, we will have sales numbers showing up.

This change in leadership is going to take some time to get aligned, maybe till the 3rd quarter results are out, in which there can be some positive surprises. Till that time, the markets will not turn bearish; it will consolidate at the present levels and then break out. The longer the consolidation, so much stronger will be the next rally, while in the consolidation period; it will kill the patience of anxious investors. For those who stay with patience, the next rally will be a bigger reward. The same happened in 2014, before the 45% rally we had between March 2014 and April 2015, the markets consolidated for a full long year staying within a 15% range in 2013.

With Money BagsPresently the consolidation is again at 15%, the more it gets stretched, and the chances of another 45% rally are higher. In such a scenario the SENSEX should be at 43500 and the NIFTY at 13150. At present these numbers look a little too over optimistic, while it was the same when there were talks of SENSEX to reach 30000, in early 2014, hard to believe, while it did happen. The SENSEX breached 30000 in March 2015.

As I complete this writing, I myself am getting euphoric, how throwing a little light on the hindsight has given a very beautiful picture to look at in the future. For those who have missed the 2014 opportunity, there is one more chance waiting to happen, take advantage and grow your savings faster.

Post Diwali…..Market Rally

dhamaka_stocksOctober was perceived by the media to be a ghost month, while it turned out to be wrong with the SENSEX gaining about 1.50% after a peak of 4.30% gain. It proved that, not every year is a bad year in October, particularly for India in the next 5 years, it is a Golden period. Every correction is an opportunity to get into the Equity markets. And take advantage of the current World leader in Economic growth.

Our portfolio managed to close with a 2.30% gain for the month of October 2015, having an Alpha of above 50% against the benchmark. We had good performance from the House Hold goods, Travel and Leisure, Support Services along with Computer Hardware, FMCG & Financial Sector stocks. The losers were from the Pharma & Textile space, which had marginal impact on the performance.

Deep Industries, Cosmo Films, FDC & ITD Cementation gave us more than 20% profits in October. Cosmo Films was added into our portfolio in June 2015, in 5 months this stock has given us 150% profits.

Bravisa Templetree, portfolio has managed to outperform the benchmark even with the lower exposure due to a good amount of exits following the market correction. We are 20% in cash at present and still have managed to do well due to the strength of the businesses we own. The dynamic nature of our system to move out of weaker stocks and add up to stronger ones as they show strength was the reason for the outperformance.

Biscuit packaging went into a total design makeover along with new varieties of films used in their packaging. Cosmo Films is the leader in this segment and has had a major benefit. Along with film manufacturers, packaging companies like Paper Products, SRF too had good gains.

After the Chinese market crash and followed by the Volkswagen scandal, where markets went into a tailspin, markets are getting ready for the next big run which is likely to happen after the next wave of correction just about the Diwali and post Diwali, Indian stock markets are poised for the next strong rally.

The reality sector which is one of the weak sectors at the moment is dragging other support sectors along with it like metals, home construction along with banking. Banking stocks have taken a bigger hit and there are no signs of slowdown in their weakness. So, the next rally is likely to be in the industrial sector.

2nd quarter results so far has been bleak for the large cap stocks. Most of the public sector banks have shown more weakness on their earnings. Automobile stocks which were the leaders in the 2014 rally have begun to show tiredness in their earnings. In our portfolio, exposure to Auto stocks have got considerably reduced baring few stocks like Eicher Motors, which continues to have good growth numbers. Sales numbers of Royal Enfield has shown 73% increase in the second quarter, while the stock is showing correction which may result in its exit from the portfolio.

Coffee Day listing did what it has to, down more than 20% as per expectation. Indigo IPO which went through with over subscription too is likely to open weak and the issue was pricey.

Bihar elections and FED interest rate hike will put some pressure on the market for some days after which the markets are likely to go into rally mood. Our portfolio is all set with the right stocks to participate in the rally.

A very Happy Diwali to all our patrons, clients and well wishers.

Anticipation & caution as markets go volatile.

lower-interest-ratesAfter the August sell off post China Crisis, September began with a consolidation while our PM met with the Industry leaders, bankers and economist to get ideas on managing the prevailing global turbulence. He had requested the industry captains to increase their risk and step up investments. The industry leaders used this opportunity to ask for policy actions that will improve the ease of doing business and the need for the interest to be reduced at the earliest.

This action brought strength into the markets which got supported by the European and Asian markets showing recovery along with some strength in the Indian Currency. Following which Government approved several reforms including the allowing of telecom companies to sell radio waves, added as a booster to hold support for the strength in the markets. The European markets charged further following the rise in exports and imports in Germany.

However there was still a lot of caution in the markets as investors were anxious on the outcome of the US Federal Reserve policy, which turned to be subtle as the cut was postponed. There is expectation that the strong fundamentals of India will provide enough protection from the global developments.

Then came, the sudden news of Volkswagen cheating the US markets with a fake emission report which shook the automobile stocks worldwide, Volkswagen lost 48% of its stock value in 2 days, which also impacted many of the prominent Indian companies having big presence in the European markets like Motherson Sumi, Bharat Forge, Bosch etc.,

The reports that the inflation went down to 3.66% and the Wholesale Price Index being negative at -4.95%, was a good stimulus to the markets and then followed the surprise from the RBI with a 0.50% interest rate cut, after which markets went into rally mode.

The ambitious goal to have the inflation at 6% by January 2016 looks like an achievable target. The RBI has now started working towards having the inflation at 5% in 2016-17. All these developments will take our economy to levels which we haven’t seen so far in our life.

Even after all these developments FII’s were net sellers while the Mutual Funds kept continuing with their buying spree in the markets. There are fairly high chances that the FII’s will return back and with a higher allocation for India.

In the meantime, Saudi Arabia withdrew about $70 billion from global asset managers to bring down the widening deficit & reduce exposure to volatile economies as their economy is going into a recession. On the other side of the globe Prime Minister Naredra Modi’s bilateral meet with the US president Mr. Barrack Obama concluded on a high note. Among the countries present like Pakistan & China, India became the centre of attraction. Business captains in the US committed to more investments in India which is a very nice development for our economy.

What was done on the portfolio?

There were 5 exits, 2 reduction of exposure, 6 additions and 2 increases in exposure. Our portfolio is going through a dramatic shift. In the first week of September we moved out of MM Forgings and Bharat Forge well before the Volkswagen news hit the markets, thus saving bigger losses. SKS Micro was exited after the company missed the Small Banking license. Schneider and Sun Pharma Advanced Research moved out of our portfolio. We brought down exposure in Cadila and Welcorp by 100 basis points following their ratings coming down on our ranking tables.

MaduraBrandsOn the additions side, we had 0.50 basis points increase in exposure to Aegis Chemicals and Cosmo Films and have added 100 basis points new exposure to Britannia Industries, Himatsingka Seide, JMC Projects, FDC, Aditya Birla Nuvo and Deep Industries.

Auto sector exposure is getting reduced considerably and is getting replaced with companies having good exports revenue and consumer centric businesses. Weakness in the Rupee is an advantage for companies having export revenues.

This festive season, as you shop for your Van Heusen, Louis Philippe, Allen Solly, Peter England and Planet Fashion for your clothing needs, you will be making a small profit to yourself due to your ownership in Aditya Birla.

Britannia has made a packaging change and has gone into a new promotion, its business is growing, and so, the next time you pick a ‘GOOD DAY’ biscuit pack in the store, you will be contributing a small profit to yourself.

We also have exposure in Hindustan Petroleum, every time you fill gas at the HPCL bunk, you make a small profit.

Feels good that our portfolio owns companies that produce most of the daily use products, just our consumption will not have an impact on the profit of the company, while we can take pride that we are using the products of companies that we own, is it not a good feeling?

Mid Cap stocks are stronger than their large cap peers.

FIISelling TableThe interest rate hike fear has come again this year after it had created a tantrum in 2013. A comparison of FII selling in our markets against what was in 2013 has been marginally higher. In 2013 they had sold to the tune of 22639 Crores, now it is 22693 Crores, just surpassed the previous numbers.

The situation now is entirely different from what it was in 2013. This time when FII’s were selling, we have had the Domestic Institutions (DII) buying, from 13K Crores in 2013; they have increased it to above 21K Crores in 2015. Domestic buying was possible because there was money available with the Mutual funds, which means there has been good retail participation in the markets. Indian public’s contribution to mutual funds.

Even though there were good amount of purchases made by the domestic institutions, the SENSEX has taken a bigger hit this time. The dynamics here was totally different. FII investments were mostly into the large cap stocks, while the domestic purchases were from the mid cap space.

Now, who is smart among the both?

I have been tracking MF purchases for the last 5 years, and all this while the domestic participation will always be on the wrong side. While, this time it is different here too. FII’s have been caught on the wrong foot. Their investments have largely been on the frontline stocks. There is a reason that the large cap stocks are not performing.  It is both they have a bigger base and growth from there is a challenge or there is de-growth visible in their balance sheet.

For example: Banking stocks do not have any kind of growth visible in them, this was more clearly known last year itself. Banking has hit the highest impact in the current downturn. FII’s splurged heavily by being invested in these stocks.

So, when they sold out, there was no saviour for large caps, hence the fall is 8.77% on the SENSEX this time when compared to 5.77% loss in 2013.

Have the MF’s become smarter on their own or the retail participation made them do it, we do not know. The inflows into mid cap mutual funds were higher compared to large caps and hence, the DII buying was concentrated on the Mid-Caps. It springs about good news; the retail investors of India have gone smart. This is news to celebrate.

I used to always think about, why foreigners are taking away all our wealth through stock market profits, while our people being the creators of this wealth are not enjoying it? Now, there is relief. People of India are enjoying the benefits of their growth.

The Rupee has also been strong when compared to 2013 Taper Tantrum, now it is down only 2.29% as compared to the 9.70% drop in 2013. Thanks to Raguram Rajan’s wonderful policy decisions.

All these data numbers throw out some predictable moves in the coming months.

  1. 1.       Currency is strong, so, the bounce back is going to be strong for India.
  2. 2.       Mid-caps show more strength, they are going to outperform in the next rally.
  3. 3.       Large Cap investments will take time to pay returns.
  4. 4.       FII’s cannot do much damage from here. They can only multiply the bullish effect.

If tapering of interest rate is happening in the US, FII’s will take time to come to India. There is no fear of big sell out, as they have already moved out considerable funds from our country.

In case the situation is opposite and the FED postpones tapering, the FII’s will rush back to our markets and this time they will buy more into Mid-caps as they have already burnt their hands on the large caps.

FII buying into Mid-caps will take the stock valuations to levels one cannot imagine off. The reason behind this is that Mid-caps don’t have the float that large caps have; which would simply mean that there will be very high demand for quality Mid-cap stocks while the supply is going to be minuscule. Unless the DII’s get into a selling spree, there cannot be much liquidity available for the FII’s to absorb. And it is unlikely because it is the public who have to decide on moving the funds out of the Mid-cap funds to provoke selling pressure.

What a beautiful situation we have come into?

Investors, sit tight with your mid-cap exposures, you will see astronomical valuations coming in a few months from now.

Out Bravisa Templetree portfolio is loaded with the best of quality Mid-cap stocks, which is likely to take us to the moon….. I suppose.

Let’s laugh all the way to the bank, enjoy our money growing in a super-fast manner. A speed that we have not experienced so far in our life.