The way ahead

As expected the markets have held on well and have continued to climb the wall of worry as is the case in bull markets. Most investors are still unconvinced and the biggest concern is valuations although everyone is confident of the growth trajectory of India. The IMF over the weekend upped the forecast growth for India to 9.4% for the current year and this is much higher than what the Indian Government and most economists are expecting today.
As far as I am concerned I have always maintained that it is economic growth and not valuations that we should be focused on. The reason is that in bull markets valuations expand and in bear markets they contract and as such valuations unless they are accompanied with growth analysis carry no real value.
As I wrote in my previous article the current decade is going to be the decade of India and at the end of the decade it really will not matter whether we invested at a NIFTY of 5400 to 5000. Every significant correction is a buying opportunity for me.
Looking at the way various assets are getting priced today, it seems like the greatest overvaluation in the near term seems to be for Government Bonds of Western economies, specifically the US, UK and Germany and also Gold. Given the fear factor that has been prevailing too much money flow has happened to these assets. Analysing the US 10 year bond technically it seems to be that the topout for the current year seems to have happened and we could see the yields climb back to the 3.75% levels by the end of the year from levels of 3% today. The key is to see how this will happen given the background of deflationary expectations and also expectations that growth is likely to fall back by the end of the year and that should actually be supportive of lower yields. The reason is that the current mid cycle slowdown has already been factored into the current low yields and as confidence grows on the pick up of growth going forwards yields are likely to move up.
Gold has also been an asset which has got disproportionate share over the last few months. The arguments of those who are pushing for gold is that one should avoid paper money and get into gold. However this logic is difficult for me to understand as the movement of currencies is relative and currencies go up and down vis a vis each other and as such the aim should be to identify the right currency and right asset to invest into rather than put excessive amounts into a not productive asset like gold. Historical evidence suggests that over long periods of time equities will outperform gold.
Overall a multitude of factors seem to be favouring a rally for the latter part of the year, which include –
An intermediate top for the USDollar index which should see the dollar lose value over the next few months and keep the USD carry trade alive.
The spike up and cooling off of VIX , where the VIX seems to have peaked out for now and as volatility reduces we should see greater flows into equity markets.
Investors asset allocation has been more towards bonds and gold and equities still have not got much flows in the current year both from domestic and overseas investors. This flow should pick up as money flows from bonds to equities.

At this point of time I find it difficult to put a value to where the markets will be by the end of the current calender year. The probability is high that they will be up 5-15% from where they trade today. However there is greater value outside the index and in specific stock investing and that’s where more wealth is likely to be created.

Leave a Reply

Your email address will not be published. Required fields are marked *