Monthly Market Summary: November 2018

Monday, December 3rd, 2018

We look at returns of various asset classes such as equity, debt, gold, crude oil and the Indian rupee in our latest monthly market summary.

 

We use data for these charts from Investing.com

 

Global Equities

Monthly Market Summary

The Sensex and the S&P500 both outperformed their broader emerging and developed market peers respectively. The Indian market in particular bounced back strongly after a few months of correction. Meanwhile the broader emerging markets and developed markets have fallen sharply in the last year.

 

Fixed Income

Indian bond yields corrected in November from 7.88 to 7.65. The collapse in crude oil prices and an easing of the liquidity situation has led to some relief in the bond markets.

 

Gold

Gold stayed in range during the month. If the commodity moves strongly away from 1200-1400 dollars per barrel, it would give a better indication of the long term trend.

 

Oil

Oil continued to fall in November. From a value of 86 in early October, it fell to to just under 62 dollars per barrel at the end of last month. This is a positive development because of our large dependance on oil imports. It is important to keep an eye on this figure as it can have a destabilising effect on our macros.

 

Indian Rupee


The Rupee appreciated sharply against all major currencies in the last month, to the tune of roughly 5 per cent. This is probably linked to falling oil prices and a return to normalcy in the market from the earlier panic situation.

 

 


Linkfest – 96

Friday, November 23rd, 2018

Interesting commentary from across the web in the last few weeks:

 

Over dependence on cab aggregators is hurting auto profits – Scroll.in

No One is Crazy – Morgan Housel

Thriving With Systematic & Discretionary Investing – The Integrating Investor

How the contracting PE multiple stole 2018 – The Reformed Broker

Coffee Can Investing: Rajeev Thakkar – Money Control

Japan’s stockmarket is poised for a comeback – The Economist

Tiny Improvements, Big Results – A Wealth of Common Sense

The Surprising Power of The Long Game – Farnam Street

How Athleisure Conquered Modern Fashion – The Atlantic

The shopping revolution: Barbara Kahn – The Big Picture

The Wall Street Math Hustle – Institutional Investor

Trends & Time Lapses – A Wealth of Common Sense

Lending slowdown is affecting consumption – Bloomberg Quint

Zoom Out – Safal Niveshak

How the American Consumer Got Addicted to Choice – A Wealth of Common Sense

Life Insurance – Know What you are sold – Bala’s Blog

Fees continue to fall in US funds – Morningstar

Four Things Leonardo da Vinci Can Teach Us About Investing – Of Dollars And Data

 

The Myth of Private Equity – YouTube

 

 

How these penny pinchers retired in their 30s – YouTube

 

 

Aswath Damodaran: Making sense of market mayhem – YouTube

 


Monthly Market Summary: October 2018

Thursday, November 1st, 2018

We look at returns of various asset classes such as equity, debt, gold, crude oil and the Indian rupee in our latest monthly market summary.

 

We use data for these charts from Investing.com

 

Global Equities

Monthly Market Summary

Most major equity markets globally faced a steep correction in the month of October. While the S&P500 and the Sensex outperformed their developed and emerging market peers, they still recorded a correction of 5-7 per cent in the month.

 

Fixed Income

Indian bond yields spiked sharply in early October to roughly 8.20 but then fell over the course of the month to 7.82. The concerns over defaults on the systemically important IL&FS initially created an overhang on the market. This was amplified by concerns over oil prices spiking, the FED raising interest rates and the currency depreciating sharply. Post the MPC meet and post the government taking steps to change the board of IL&FS, there seems to be some calming of sentiment in the market.

 

Gold

Gold moved up in the month and closed above the 1200 dollars per ounce. If the commodity moves strongly away from the 1200-1400 range, it would give a better indication of the long term trend.

 

Oil

Oil corrected sharply in October. From a value of 86, it fell to to just over 74 dollars per barrel at the end of the month. Because of our large dependance on oil imports, it is important to keep an eye on this figure as it can have a destabilising effect on our macros.

 

Indian Rupee


The Rupee seemed to stabilise against most major currencies in October.

 

 


Linkfest – 95

Monday, October 29th, 2018

Interesting commentary from across the web in the last few weeks:

 

MIB: Howard Marks, Oaktree Capital – The Big Picture

Confessions of an equity analyst – Value Research

The impact of NBFCs on fund flow to the economy? – Bloomberg Quint

The $80 Trillion world economy in one chart – Visual Capitalist

The next recession – The Economist

The future of healthcare – The Economist

Beware of market timing rules of thumb – Insecurity Analysis

The land challenge underlying India’s farm crisis – Livemint

Amazon’s private label business – CNN

The NBFC scare isn’t over yet – Bloomberg Quint

Public sector enterprises are poor investments – Mihir Sharma and Aarati Krishnan

Warnings mount for leveraged-loan market – FT Alphaville

Decoding the NBFC bailout – Capitalmind

23 charts and maps that show the world is getting much, much better – Vox

A lost decade of dollar cost averaging – A Wealth of Common Sense

Oil’s rally isn’t over yet – Bloomberg Quint

Moral investments aren’t outperforming – FT Alphaville

Slowing US momentum- The Reformed Broker

What happens when interest rates rise? – Morgan Housel

Haste Makes Waste – Morgan Housel

The electric future will start on two wheels – Bloomberg

Credit Risk Funds pose a problem – INR Bonds

Investing is Hard – YouTube

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The global tightening of financial markets

Saturday, October 20th, 2018

2018 has seen tightening in financial markets across the globe. This is having divergent effects on growth for different economies. This trend is in sharp contrast to to the synchronised recovery and easy liquidity conditions we were seeing in 2016 and 2017.

The US economy continues to have strong momentum. The FED has gradually removed accommodation and has raised rates every year since 2015. As a result, the term spread has started to narrow and yield curve has started to flatten. The BIS has captured this in its latest quarterly review in the following chart:

 

The “flight to safety” effect has kept long term yields low in the US. It has also probably contributed, along with escalating trade tensions, to the rally of the US dollar. This has put further pressure on emerging market economies. India is not alone in that a number of such economies have been experiencing portfolio outflows with policy or political uncertainty compounding market stress and currency depreciation.

From the BIS:

 

And:

The long and unprecedented run of 16 consecutive months of net inflows to EME investment funds was cut short in May (Graph 4, centre panel). The slowdown had actually started in February for hard currency bond funds, and then extended to equity and local currency bonds as the US dollar appreciation accelerated in late April. This in turn reduced the returns on those assets for dollar-based investors. Unusually large EME carry trade returns fell precipitously as from April, dropping in August below the low levels of November 2016 (Graph 4, centre panel).

A number of these emerging economies benefitted from loose monetary policy of the developed economies over the last decade. Now that the liquidity is being withdrawn, the economies that have not addressed structural issues are feeling the most pain.

Even in more developed European economies, corporates started to see higher borrowing rates because of euro area sovereign financial stresses resurfacing.

The expectation is that global liquidity and credit conditions will continue to tighten, especially in the USA. A flat yield curve generally portends a recession. With other markets already showing signs of losing momentum, what does it mean if even US growth starts cooling off?


How does the balance of payments affect demand?

Thursday, October 18th, 2018

How does a balance of payment problem affect demand in the economy? Neelkanth Mishra of Credit Suisse puts it in an elegant way in an interview with Ira Dugal.

To paraphrase, if you think of it like a household budget: suppose a family has a consumption expenditure of Rs. 120 and an income of Rs. 100. The difference of Rs. 20, which would need to be borrowed from someone, would be the equivalent of the current account deficit. If, say oil prices go up, the consumption basket then becomes Rs. 140 and you would have to borrow more. Quite often it is the case that no one will be willing to lend the family more and therefore their consumption has to be brought back down to Rs. 120. This is the demand adjustment that the economy will have to face.

Neelkanth commented that the demand adjustment may be nearly 2 per cent of GDP and this could be the reason for the current panic in the currency. The balance of payments adjustment also puts a question mark on medium term growth rates. He estimated that even seven per cent growth rate is not sustainable. This is because our energy import bill is at an all-time high even though oil prices are at half the levels seen in the prior peak.

 

The entire interview is worth a watch:

 

Other discussion points from the conversation:

  • With the MPC not hiking rates, the burden of the balance of payment adjustment has fallen to the currency. In the run up to an election year, fiscal policy is unlikely to give much relief either.
  • Price transmission not happening in petrol and diesel will kick the can down the road and make the problem worse
  • Our capital inflows as a percentage of GDP have stalled and are back at 2002 levels. There has been a cyclical decline in capital flows globally over the last few years. The reason for this is that the countries that have been exporting capital are the ones that have a current account surplus. Each country deploys this differently; for example, Japan and China deploy them for strategic interests while Germany may deploy it through banks to help prop up lending. As of now there are no signs of these flows picking up.
  • FCNR-B scheme is only meant to stall a stampede. Even if you use the scheme, it will solve the problem for a few months and then will again come back because investors will take back their money
  • Term spread continues to be high, 10-year bond yields much higher than repo rate in spite of RBI providing liquidity via open market operations.
  • If you see the progression of financial markets in India, there have been phases where the NBFCs have grown very rapidly and then a very large number of them have disappeared. Many smaller NBFCs may actually have to look at shutting down. The assumptions on growth of NBFCs and the market size they could get to would be challenged.
  • Earlier five buckets of financial institutions that were doing lending. There were the large PSU Banks, the smaller PSU banks, the private sector corporate lenders, the private sector retail lenders and the NBFC segment. One by one each of these legs have started to fall. The smaller PSU banks are grappling with NPA issues, the private sector corporate lenders are facing promoter and management issues, now even the NBFC segment is hampered. What this means now is that the banking system capacity is constrained.
  • FPIs have 80 per cent of their holdings in the top 60-70 stocks. They hold roughly 27 per cent of the top 50 stocks. They own 60 per cent of the free float of those top 50 stocks. The recent correction appears to be a stampede out for foreign investors i.e. basket selling. Domestic flows are mainly in the smaller stock scripts and now those flows are starting to get tested.


RBI Annual Report 2017-2018 – Part 2

Monday, October 15th, 2018

The RBI Annual Report generally has a lot of interesting charts and data that give good insights into the state of the economy. In this second post, we cover five charts that we found quite informative from the latest report.

 

1. India’s Comparative advantage in exports

RBI Annual Report

A measure of a country’s export performance is to track its share of world sports over time. According to the RBI report, India’s share of world exports have grown by about 2.5 times between the year 2000 and 2017. When we look at relative increases in particular goods, we see that India’s relative comparative advantage (RCA) “eroded considerably” in the pearls and precious stones segment but has seen some improvement in textiles. The chart above shows the  RCA for the top 5 exports from India and an RCA value greater than 1 indicates a comparative advantage.

 

2. Large trade deficit with China

We can see from the chart above that we have a large and growing trade deficit with China. Possibly a large contributing factor is the import of smartphone and other electronic goods. On the other hand we have a trade surplus with the US and this is probably why we hear rhetoric from Donald Trump about India having unfair terms of trade with America.

 

3. Imports of electronics and pearls and precious stones has risen sharply

From the report:

Non-oil non-gold imports accounted for 65.1 per cent of total import growth on a weighted contribution basis as a part of domestic demand spilled into imports (Box II.6.3). Electronic goods, pearls and precious stones, coal, chemicals, machinery and iron and steel together contributed more than half of the growth in this segment (Chart II.6.4)

(…)

With import growth largely outpacing that of exports throughout the year, the merchandise trade deficit expanded to a five-year high. Since 2011- 12, the trade deficit has averaged 7.3 per cent of GDP, making it pivotal in the overall balance of payments.

 

4. The steady rise of Bank Frauds in India

From the report:

The number of cases on frauds reported by banks were generally hovering at around 4500 in the last 10 years before their increase to 5835 in 2017-18 (Chart VI.1a). Similarly, the amount involved in frauds was increasing gradually, followed by a significant increase in 2017-18 to Rs. 410 billion (Chart VI.1b). The quantum jump in the amount involved in frauds during 2017-18 was on account of a large value fraud committed in gems and jewellery sector, mainly affecting one public sector bank (PSB).

 

5. And the Public sector banks are mostly to blame

From the report:

During 2017-18, PSBs accounted for 92.9 per cent of the amount involved in frauds of more than Rs. 0.1 million, as reported to the Reserve Bank while the private sector banks accounted for 6 per cent. As regards cumulative amount involved in frauds till March 31, 2018, PSBs accounted for around 85 per cent, while the private sector banks accounted for a little over 10 per cent. At the system level, frauds in loans, by amount, accounted for more than 75 per cent of frauds involving amounts of Rs. 0.1 million and above while frauds in deposit accounts were at just over 3 per cent (Chart VI.2). Within the loan category of frauds, PSBs accounted for a major share (87 per cent) followed by the private sector banks (11 per cent). The share of PSBs in frauds relating to ‘off-balance sheet items’ such as Letter of Credit (LCs), LoU, and Letter of Acceptance was even higher at 96 per cent. New private sector banks accounted for more than 20 per cent of the frauds related to ‘cash/cheques/clearing’ and ‘foreign exchange transactions’. New private sector and foreign banks accounted for 36 per cent each of all cyber frauds reported in debit, credit and ATM cards, among others. Out of the seven classifications of frauds in alignment with the Indian Penal Code, ‘cheating and forgery’ was the major component followed by ‘misappropriation and criminal breach of trust’. In ‘cheating and forgery’ cases, the most common modus operandi was multiple mortgage and forged documents. Mumbai (Greater Mumbai), Kolkata and Delhi were the top three cities in reporting of bank frauds through ‘cheating and forgery’. In respect of staff involvement in frauds, banks reported that it was prominent in the categories ‘cash’ and ‘deposits’, which had a much smaller share in the overall number of fraud incidents and the amount involved.


Quarterly Equity Valuations: October 2018

Thursday, October 11th, 2018

We take a look at equity valuations and find that they have moved into even more expensive territory.

We use data from the NSE website starting from when it is available in January 1999 to look at the P/E Ratio, P/B ratio and the dividend yield of the index and compare it to past history.

 

Price to Earnings (P/E)

Equity Valuations

 

In the chart above, the red areas highlight when the PE ratio is significantly higher than normal implying that markets are expensive and future returns are likely to be lower than in the past. On the other hand, green areas show when the PE ratio is significantly lower than normal implying that markets are cheap and returns from equities should be higher than average.

On 9th October 2018, the Nifty PE Ratio was at 24.9 which is more than one standard deviation from the historical average of approximately 19. Market valuations have corrected from the value of 28.1 seen in August, but continue to remain expensive territory from an earnings point of view.

 

Price to Book (P/B)

Similar to the PE chart above, red areas in the PB chart denote times when markets are expensive whereas green areas show when markets are cheap relative to history.

The price to book ratio of the Nifty has moved down to 3.3 and is just below the long term average of 3.5. On the basis of book value, markets are trading in the normal range. The difference between valuation indicators in the PE and PB could be due to cyclically suppressed earnings. Part of this could be due to low capacity utilisation and part of this could be attributed to structural NPA issues with public sector banks that are depressing earnings. Therefore, even though the price is expensive on the basis of current earnings, it could be that an increase in utilisation levels or a normalisation of the NPA situation could give a bump to earnings in the future and normalise the PE.

 

Dividend Yield

 

The dividend yield chart denotes value in a manner that is opposite to the PE and PB charts above. When the dividend yield is higher than normal, it means that markets are cheap. Similarly when the dividend yield is lower than normal, it is a sign that markets are expensive. The dividend yield is around the same levels in the last quarter, at 1.3 per cent. This is still close to the long term average of 1.5 per cent.


Linkfest- 94

Tuesday, October 9th, 2018

Interesting commentary from across the web in the last few weeks:

 

How high is EM corporate debt? – Advisor Perspectives

Global cost of housing – Bloomberg Quint

The framework of the MPC – Bloomberg Quint

The bond market in a rising rate scenario – A Wealth of Common Sense

The performance of PMS in this market – Bloomberg Quint

 

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Is growth set to slow down?

Monday, October 8th, 2018

Over the last few quarters, growth in the Indian economy has been quite robust. The MPC, in its latest policy statement, talked about how growth “surged to a nine-quarter high of 8.2 per cent in Q1:2018-19, extending the sequential acceleration to four successive quarters”. But the macro environment has now changed substantially, throwing a cloud over the outlook going forward.

First, export growth may not be as supportive as people expect. The world experienced a phase of synchronised recovery between 2016 and 2017. Unfortunately India did not fully participate in this growth story due to domestic policy changes including the GST and demonetisation. The issues related to those events are behind us. But now, there is significant divergence now in the growth of major economies. The EU and Japan have started to slow in 2018 whilst the US continues its momentum. Incremental data also points to a slowdown in China which could have a knock on effect on other ASEAN countries. The global rhetoric on tariffs and trade wars are unlikely to help either. Even though the recent fall in currency should give a boost to exports, we do not have a conducive global environment to take the most advantage of it.

Second, on the domestic front, rising oil prices and the depreciation of the currency are likely to have an effect on growth and inflation. The monetary policy report has some guidance in this matter. According to Manas Chakravarty in the Mint:

The MPR also provides some clues and numbers about how underlying factors affect inflation and growth. For instance, it says that a 10% increase in the international price of a barrel of oil for the Indian crude basket is expected to reduce growth by 15 basis points (bps) and push up headline inflation by 20 bps. The price level also matters—the same percentage increase at a higher price point increases the impact on inflation. For example, an increase from $100 a barrel to $110 a barrel could pull up inflation by around 22 bps. Perhaps more importantly in these times, RBI estimates that for every $1 increase in the price of a barrel of crude, India’s current account deficit could widen by $0.8 billion.

How will changes in the exchange rate affect inflation? Says the MPR: “Assuming a depreciation of the Indian rupee by around 5% relative to the baseline, inflation could increase by around 20 bps, while the likely boost to net exports could push up growth by around 15 bps.” On the other hand, an appreciation of the INR by 5% could soften growth by 15 bps in FY19 and lower inflation by 20 bps

The monetary policy statement had taken average price of the crude oil basket to be $80 and a dollar rate of 72.50, both levels which have already been taken out.

Third, the tight liquidity and credit scenario will also mean NBFCs will be unable to lend very aggressively. The public sector banks are awash with the NPA mess and would be unwilling to lend more and therefore the growth in credit would largely fall to private sector banks. Unfortunately, while these banks would pick up some of the slack, they would not be able to offer the same products and terms as the more aggressive NBFCs. Hence credit growth and therefore demand will likely moderate.

Finally, capital flows have been drying up, with net FPI turning negative both in the equity and debt segment. Additionally, GST revenues have been lower than projected and the government is struggling to meet its fiscal deficit targets. This means that we are staring at a balance of payments problem which would prove to be a dampener on aggregate demand and hence growth.

All in all, this points to an environment which is not conductive to growth going forward.


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