RBI policy, market up for 4th day

RBI policy kept rates unchanged, market was a little jittery with expectations that, there can be negative surprise. As nothing changed, interest rates kept at 5.15. It was joy for the markets which moved up for the 4th straight day after the budget day fall.

After a steep drop, getting to big rally is creating confusion in the minds of traders.

 

 

 

 

 

 

 

 

 

 

 

Nifty Daily chart

When there is a big drop and steep recovery, it brings confusion. Histogram on the chart has a deep bottom & now price has moved above the EMA. Price says market is bullish, indicator says there is strength on the bear side. And the chart is trending bearish (red lines on the top – indicate bearish trend)

This confusion should lead the markets to go nowhere. For few days it will hover around the range, find resistance at 12292 levels reached on 24th Jan. From here, going long will be a trade that has very less steam left in it. For a short we need price to close below the EMA, which again will be a trade that is half way through.

So, no trades for few days in Nifty. Even Bank Nifty is the same. If both indices are in confused state, in a market that is having strong bullish strength, where can a trade come through.

In a market that has made a good rally, best trades can come from the shorts. One can find stocks that are showing weakness at the top and short them.

Reliance, Hindalco & VEDL have potential shorts – 

 

 

 

 

 

 

 

 

 

 

 

All three charts having similar pattern. Price is in the zone between 2 EMA’s. Histogram has good depth & chart is trending bearish. Also all 3 have reached value zone( area between both EMA) in 3 to 4 days from their bottom.

Within 5 day’s from the peak or bottom is considered to be hot and more likely to reach back to the bottom.

These are for intra day trades.

Coming to trades for the next day, that is Friday 07-02-2020.

Balakrishna Ind – Stock is getting weak at the top, can have a short trade once the daily histogram ticks down. There was a false break out yesterday, which also adds to bearish strength.

Havells, is getting closer to its weekly value zone. A tick down on the daily will give a short signal. Target can be at 576.

Mindtree had a high rejected & ready for short below 898.

 

Budget 2019 – 1.34 lakh crore lifeline to NBFC sector

Government promising to bear the first loss of up to 10% of high rated pooled assets purchased by state run banks brings the much expected lifeline support to the NBFC sector, whereas banks will only be funding high quality NBFC’s. Big players who already have a good clout in the industry have continued to have good business growth.

Like Bajaj Finance, Bajaj Finserve kind of companies already have good growth and more over they are not much dependent on domestic borrowings. Most of the top NBFC’s have moved to foreign borrowings which gives them added cushion of lower interest rates.

Even considering currency risk, they are still at a good advantage when compared to their smaller counterparts who have to borrow at higher rates both due to their own performance issues on ratings as well as due to local borrowings.

The current move of lifeline by the FM, is not going to give a boost to the industry as a whole. It will make the big or quality players more bigger. In fact, this is what is required. “If you are genuine, I will help you get more rich.” This kind of approach by the government, for a shorter period may be against the economy as bad players will be left to die their own death. In the long run, it is going to be a huge positive to the industry and our country.

Liquidity issues in the market is likely to ease at a slower pace because the lifeline is less than half of what is required. And expecting government to bail out all kinds of corporate mess-up is not a good thought too. Let the industry figure a way out, through some support from the government.

Quality NBFC’s which are already enjoying very high valuations in the market will continue to attract capital from investor. So, if you are holding Bajaj Finance, Chola Finance kind of stocks, continue to hold, it will continue to go up for a long time.

RBI & Government in a tussle

Resignation by the RBI governor Mr.Urjit Patel after being in office for a little more than 2 years was a big surprise that has come after market hours on 10thDecember. 11th being a big event day with 5 state assembly election results where we are having shaky grounds and the markets having already lost ground, in line with the global markets.

Now, this new development will take a big blow in the markets. Though all the dark cloud will clear in a day or two, didn’t expect this to happen. In the recent weeks there has been a continuous tussle between the finance ministry and the RBI on PCA, Liquidity and Reserves issues.

Slowdown in the economy which is forcing the government to resort to all possible ways to bring in growth. 11 out of 23 PSB’s not allowed to lend due to PCA. Liquidity not available in the markets due to curbing of NPA’s and reducing reserves of the RBI to fund governments deficit.

All of these are not good expectations. When we are fighting corruption and wanting to clean the economy, resorting to again funding without quality assessment will only result to further loss of capital. If the governor had resigned to ensure all of these claims do not happen, it is a good decision. At the same time a big blow to the government when elections are just a few months away.

We spoke about the market reaching the previous bottom in our recent video, didn’t expect it will go there in such a hurry. Probably these events and their outcomes might keep the markets down for some more time to come. Pain for portfolios likely to continue.

Lower inflation will cap income from debt investments

India’s developments have become visible in all areas of economic activity. For a very long time, I remember in my school days, teachers used to say that, inflation in our country is high which posses a big challenge to save money. Slowly this challenge is becoming a myth, we have successfully brought down the inflation rates to below 4% levels.

When Raghuram Rajan talked about this a couple of years back, media brushed aside saying that, it is not going to be easy. Now, as we have reached the goal and beyond, we are looking at a newer challenge. When inflation is low and bank rates are high, real return in the economy is also high. This brings the challenge of having to pay higher taxes on income earned from debt investments which qualify for indexation benefits as well as assets like Real Estate.

In 2014, the debt returns were at 8.7% and tax payable was NIL after indexation. In 2017, the returns is almost the same, where the taxable portion of the income has moved up to ₹15742. Which means more than 50% of the returns will be taxed at 20%, thereby bringing down the net returns by more than 10%.

It is interesting to note how new challenges are coming up in life. If inflation stays low and the bank rate does not come down, taxes on debt fund returns will go up making the net gains reasonably lower. Investors in debt funds will have to re-think their investments.

They will also look to Equity funds which is already getting over crowded. Presently running at about 6 lakh crores and with expectations that there is going to be big inflows due to poor FD returns. Fund managers will now have a bigger challenge on stock selection and allocation of funds.

As it is MF’s are holding cash to the maximum permissible limits, presently a scheme can hold 10% cash. When holding cash in anticipation of a correction, if the market keeps moving higher, all these funds or schemes will have under performance against the broad markets. To avoid investors wrath, fund managers will be forced to invest into stocks that are fundamentally poor, thereby attracting very high risk on the investments.

If markets change course, the retail money that has flocked the Indian Mutual Fund industry will begin to move out, again giving the next challenge of meeting redemption pressures.

As the returns from debt funds are going to become lower due to taxes, what can be the next best alternative. Arbitrage funds will be the next place where we will see high inflows. Arbitrage funds are giving returns that are about equal to the prevailing bank rates for Fixed maturities, the biggest advantage they have is the tax free status or Equity taxation status.

Whereas, Arbitrage cannot absorb big flows as the edge to get returns will move away with huge capital chasing the same instruments in the market, which will bring down returns. As every other door to big returns will get locked as an automatic process, investors will be facing a situation of having surplus liquidity and not knowing what to do with it.

Bank rates coming down or inflation moving up is a requirement to keep things as they are, even this condition will require that, the fund flows into the mutual fund market requires a slowdown. All of a sudden the whole country put all their savings into one asset class will for sure ensure that the asset collapses on its own weight. Beyond our inflows, foreign money is also chasing Indian markets big time. FPI limit of 51b$ has got exhausted as I write this article and RBI is thinking to open another 2b$ for FPI’s.

One more change that could come is the returns on debt funds will begin to decline, which is inevitable & get self adjusted.

Investors beware, quality of your investment needs to looked at on highest priority. Just going to a website and selecting the top ranked fund will no more give the best returns. People need to take help of advisers while doing their investments. soon, we will have analysts who will research and find good Mutual Fund Schemes for investments.

Neutral interest rate cycle.

RBI in their recent credit policy stated that, they will go “Neutral” as against the “Accomodative” stand that they were in, while this move triggered a huge surge in bond yields, affecting the debt investors who were taken by surprise. This move has made fund managers to shift their stance and look for lower duration’s in their investments. And this will take some time to settle. The bond yield charts show that, though there might not be a bigger damage coming, chances of Bond yields reaching 7.00 which there are some rumors about have a fairly good chance. And from there, it should take a fall.

 

While, that is the region where the opportunity will come in, interest rate cycle will bottom out and then our economy will witness interest rate rise cycle. Now, this throws up a lot more interesting thought. If interest rates move up, what will happen to the economy which is soon to settle into the lower single digit interest regime, (an expectation), if we have to become an economy that is at par with the western peers. Will this mean the transformation will take longer period?

As of now the questions don’t get a clear answer, probably the up cycle can also be the reason for the end of bigger growth for India.

Stock markets ready for its next euphoric rally

bravisatempletree-stockgrowth

Expectations….expectations. Expectations, towards the end of a Government term which did not have the confidence to decide on any plans that will allow the economy to grow. Expectation on the team that was coming to power, which was aggressive. Expectation on Narendra Modi, who was presumed to be a strong decision maker, as the next Prime Minister. Expectation that, the new government will clear all the infra projects awaiting clearance, which will drive the economy into a robust growth phase.  Indian economy staged a pretty strong recovery and went on to give a robust growth.

Favourable RBI policies, supported by Raghuram Rajan’s strong commitment to revive the Indian economy with his bold decisions on the interest front along with the cleaning up the banking system. His decision to impose curbs on Gold consumption, bring transparency into the Real Estate markets.

Almost all the external factors supported the expected growth. Crude Oil prices crashed, never to see the high’s that it went through. Favourable monsoon, good automobile sales followed by growth in profits of companies in competence. 2014 was a wonderful year for investors as the SENSEX surged more than 40%.

This expectation fizzled out earlier than it was to, things changed. As markets grew leaps and bounds, businesses did not see growth in sales. People began to complain that, “only the stock markets are moving up, money flow is not seen yet. No visible developments in the economy.”  Soon, it was followed by the historical crash of the Chinese markets. Volkswagen case and normal to flat growth from the businesses, markets turned down, went into a tailspin throughout 2015.

After the March quarter results, there are glimpses of change visible. One of the most important factors in the results announced so far is that, sales growth has been still at a slower pace, while profits are showing good growth numbers. Such number growth is possible only if operations are controlled. On one side it is a negative, as controlling operational expenses cannot give continuous growth, it can become counterproductive.

While, on the other side, there are green shoots visible, if the companies who have managed to bring down their expenses, continue to maintain the same tightness on their expenditure and along with that when the sales numbers improve, the profit margins are going to be phenomenal. And that would mean a euphoric rally in stock prices.

As many analysts say on the media, “we are in a cusp of a great bull market” the future looks very attractive for India. It is time to give more exposure to Equity investments. For those who have missed the 2014 rally, now there is an even bigger price move waiting to happen. Those who have maintained a wait and watch on their stock investments, now it is the right time to begin investing. One can even think of adding to their existing investments. Those of you who had stopped their SIP’s or had moved to the debt markets for safety of capital can now think of venturing into the Equities segment to have very good gains.

If things pan out well, we might witness a rally in stock prices, which we had not seen so far in the Indian Stock market history. The next 5 years are going to be a boon to all those investors who venture into the markets.

Take advantage of the markets next move; at the early stage itself, waiting for more confirmation will only result in lost opportunities.

Arbitrage funds are more attractive.

bankslockerRBI reduced interest rates, banks were forced to follow, and now, arbitrage funds have become more attractive for various reasons. At this period, there are other tax free bond issues which have hit the markets, another attractive investment competing against the bank deposits. And due to this banks have lost more than 41000 crores of deposits.

Now, this opens up some concerns. Banks have suddenly hit a vacuum. Today bank rates hover around 8% and all the income from bank FD is taxable at the hands of the investor, which brings down the real returns to a little above 5.50% after taxes for a person who is in the highest tax slab. Compare this with about 7.50-7.60% tax free returns from bond issues and about 7.41-7.50% returns from the arbitrage funds. Tax free bonds are locked in and are very much illiquid when someone wants to sell their holdings, whereas Arbitrage funds are tax free after 365 days and carry zero risk. So the choice of the investment community has changed for good to Arbitrage Funds.

The banks on the other hand are put to some more new challenges due to the interest rate change. Banks normally used to have about 4% spread between the deposit rate and disbursal rate. That is, they borrow at 8% and lend at 12%. Making a cool 50% gain for themselves, for an effort which most of us know about the quality of assets the banks hold. Banking sector was enjoying a grand lifestyle by doing nothing. Now, things have changed, they cannot continue to be lethargic, there is a need for value addition, be more accountable and face the competition.

Corporate bonds give about 9-11%, so when corporates want funding for their businesses, they will not go to the banks as they get funds at a cheaper rate through direct bond issues. For some time now banks had large funds and were finding it difficult to find borrowers to lend their funds and earn, now, very soon fund inflows will dry up and help them do away with the difficulty to find borrowers for their funds. To that extent, they are free of work now. And, who will now want funds from the banks? Small business people, where credibility is a far bigger concern and with the way our banks do due diligence, more defaults are guaranteed.

IMG_2672Arbitrage funds are the best choice; it is liquid and has the tax free status after 365 days from investment. Far less risky, when compared to bank deposits. And how is this now? Off late we have had very big defaults n bank lending, cases like Deccan Chronicle, Kingfisher Air were examples. Banks have lost big time, no doubt government will pay back depositors money, while how long can the government support mistakes made by the banks. Soon, there will be a norm that they have to defend themselves and with that banks have two choices, either perform and deliver or close down. This may take time to come through, until then, invest in a place where you earn more and also enjoy the pain the banking system will go through in the coming years.

6 out of 11 top earners in our portfolio

11 earningBoosters

The second quarter results are likely to be subdued and will impact the markets in the coming weeks as results get announced. The list published in ET on 9th October 2015 shows some companies that have the potential to outperform the current quarter on the growth front. Among the 11 companies that are listed above, our portfolio have 6 of them.

As we can see in the list of expected top performers, the highest concentration is from the Pharma sector followed by the NBFC sector. In our portfolio too, we have increased exposure towards Pharma and NBFC segments a couple of months back & this happened as a dynamic process.

In 2014 our portfolio had more exposure into Auto Ancillary companies, as months passed the stock price movement of these stocks began to slow down, showing signs of tiredness. About 2 weeks before the Volkswagen issue came to light, almost all of our Auto segment exposure began to take exit. When Volkswagen issue got reported and the market collapsed, where most of the ancillary companies having presence in Germany took a big hit, out portfolio sustained lower damage. Just about that time the₹15000 Crores,  Amtek Auto default got reported, which shook the debt Mutual Fund market where JP Morgan fund had big exposure and they had to split the fund and bring controls on redemption. There are many PSU Banks which are likely to take a hit from this default.

Following our exits, the overall exposure in stocks got reduced to 75% of the capital, thus protecting the portfolio from the negative bias the markets had prior to RBI policy announcement reducing interest rates.

RBI decision came as a surprise, which Raguram Rajan has made us accustomed to since September 2013. Markets began to rally; mostly short covering, took the market to higher ups, while the strength seems to be waning now as the expectations from result season is tepid. Following results announcement, if there is going to be any weakness; our portfolio has got fairly protected due to our lower exposure and having investments into companies that are likely to give out good results. While the market began to gain strength, a couple of new stocks like BEML, Deep Industries, India Bulls housing have got added to our portfolio.

As the result season unfolds, there would be more clarity about which companies have greater strength in performance and those companies will automatically get added to our portfolio, from where, we will be prepared for our next big journey in the market rally. Being invested into the best businesses gives great confidence about the performance. In the last 3 years since we have been tracking the portfolio performance, we have achieved 68.50% gains, whereas in the same period the SENSEX has grown 38%. We have managed to achieve twice the return provided by the benchmark.