Investment Shastra

Caution is the word for the year 2016

We have seen high volatility in equity markets in first four months of CY2016. Chinese macro-economic data, US/EU/JPY monetary policies are in focus by money managers to make tactical changes in asset allocation. Since the government bonds in developed economics are trading at near zero or even negative interest rates, the institutions are going lower in risk curve to earn slightly better returns. This is evident from the response Argentina’s Sovereign bonds received despite very bad credit history. Asset allocation has increased towards emerging markets ETF (primary mode of investment for FIIs). Source: Top EM ETFs AUM.

We have seen phenomenal rally in Indian Equities in March and April. This is nothing to do with Indian Economy or Feb. Budget. We saw large FPI inflows in last two months, while Indian domestic institutions like Insurance and MFs were net sellers in the same period.

We do not predict market levels but focus more on individual stocks and valuations. We do not see a lot of value in the market. Many stocks are priced at higher end of fair value while a few are expensively priced. We do not know whether markets will correct or earnings will catch up. We leave this to market participants. As money managers, we only try to asses likely returns on the asset class based on current prices. We do not believe that Nifty has more than 6-8% p.a. upside in next 12-18 months. In that case, we find no reason to deploy our money in markets to earn risk free returns at market risk. At the same time, we do not factor in bearish scenario for the economy which has a blessing in form of above average demographics and rising disposable income.

In such situations, individuals and money managers should be cautious rather than aggressive in allocating funds towards equity. It wouldn’t be naive to allocate a part of equity portfolio in liquid/cash equivalents. This will limit draw-downs on portfolio if markets at all correct, at the same time this cash will be extremely helpful in accumulating stocks at bargain prices. If market do not correct, this will still ensure you earn market returns at very low risk (assuming Nifty quotes the optimistic 8500 level from current 7850 level). If markets happen to rise beyond optimistic level, we would term it as speculation unless secular earnings growth justifies such rise.

P.S. We are closely tracking banking sector for two things: 1) we may see some irrational pricing in some banks due to uncertainty about future which will throw up opportunities; 2) we believe that the credit growth is early sign (leading indicator) of economic revival. We strongly feel unless banks are out of the woods, there is no reason why India will enter a bull market.

If you liked what you read and would like to put it in to practice Register at You will get amazing FREE features that will enable you to invest in Stocks and Mutual Funds the right way.

Join our Telegram Channel:
Stock Investing
Mutual Fund Investing

Join our Telegram Channel:
Stock Investing
Mutual Fund Investing

Need help on Investing? And more….Puchho Befikar

Kyunki yeh paise ka mamala hai
Start Chat | Request a Callback | Call 020 6725 8333 | WhatsApp 8055769463


Ketan Gujarathi

Manager - Equity Research; Based in Pune, a Total of 7 years of work experience ranging from equity analysis, credit rating and banking. MBA in Finance and a Bachelor's degree in Engineering. Passionate about studying companies. Likes reading history & business books. Spends free time with friends and family.

1 comment

  • I have not checked in here for some time since
    I thought it was getting boring, but the last several posts are great quality so I guess I’ll add you back
    to my everyday bloglist. You deserve it friend 🙂