This is completely my view. Pardon me if nobody else thinks like this. Does not matter, just my views. It is a difficult read, so be patient. If you are a MF investor only (and not interested in picking stocks or market timing, you should happily skip this).

In 2016 the Central Banks all over the world had kept interest at 0%. They were buying bonds worth Trillions. Now that has stopped. The short term interest rates (sarkari paisa) is competing with dividend yields of top corporate – in the USA. Not in India, but remember the world market cash flow provider is US not India. So expect that US cash flows may not be too great. However, also note that the US $ is very strong – and lo and behold the second strongest currency in the world is the Indian Rupee. Not great news for exporters. However I again want to tell you I cannot predict FII cash flow, but to me it looks like a tough question. Indian market has done well (even in US $ terms) in 2018. So I can give you 5 reasons why cash flow from FII will increase and 5 reasons why FII inflow will decrease. Seriously caught in between.

A growing number of indicators are also indicating that in India that many companies – like say Dhfl – are definitely de-leveraging. The bad thing about de-leveraging is that your sales are distress sale. I am not sure whether they wanted to sell their stake in the asset management business. Now if this is an indicator, they may be in a mood to reduce their stake in insurance and wealth business too. Now if more companies get out of amc and insurance business, it will be good news for all the concerned people. In the US interest rate (and inflation) are going up. However it is not so clear in India.

I believe that Fed will increase rate (growing economy, positive) and (inflation, negative) – and it will reduce the size of its balance sheet. Not so sure about how RBI will behave till the 2019 elections – and soon after. Yes in India we will have to wait for the new government to see what it does. If you are doing a SIP you should not be worrying about this. However for a stock picker one has to see how they react to EV, Solar energy, etc. that will decide which share to buy and which to short.

Look at the housing construction industry – RE is just refusing to budge. Rental yields are not improving. So with stagnant salaries (Amazon, Flipkart and Jio are killing a lot of small business), where will buying in RE come from? Difficult to answer.

In addition to  variables, such as inflation, interest rates, quantitative tightening, NPA, Npa recovery, and earnings growth, there are subjective variables emerging that also appear to be influencing the markets. For example, investor sentiment weakened during the Q3 2018 earnings season as investors appeared to be in a less forgiving mood. There are many examples of investors punishing stocks in response to lower than expected operating results. that is called “tired bull unloading” – and we may not have a clue why this really happened. However in the next quarter they were more forgiving. There are many possible reasons why investors and stocks are behaving differently at in the current stage of the market cycle. In addition to variables already discussed, sometimes it’s as simple as markets getting tired and falling on their own weight – tired bull unloading?  At higher market caps, and without the price insensitive bid from global central bankers, it’s likely becoming more difficult to muscle asset prices higher.

Historically funds come to the FM at the higher end of a market cycle and leaves at the end of a market cycle. However we have no great data about our SIP book. If we see another 3 years of non performance will the cash leave the market? Again a tough question to answer – will our SIP book keep growing even if the markets tank for a few months? Ok what if it tanks for a few years?

The worry is that debt has not done too badly either. Should the retail investor invest only in equity? Why not look at a SIP in a gilt fund? say the client has a 10 year view on debt? Or should I just stick to Modified Duration of 2/3 years. Risk will be less. I do not know.

Another new googly in the whole investment process is that a lot of money is going through Index fund. The more rigorous active managers may be allocating capital more sensibly (perhaps, there is not enough evidence though). So should markets worry about such mega trends in the world of investing.

Have I confused you enough?

Best of luck, and a happy new year…tomorrow

 

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  1. Subra sir, now you talking about big picture.. thank you.. what you discussed is applicable to MF investor also. where will MF fund manager invest in turn in this situation? -all saturated..

    If US increase rates, it will suck liquidity and thereby crashing their markets. If US does not increase rates, $ will weaken and de-value (unless the economy picks up to match the monetisation)

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