The current week was no different from the last several weeks as far as the Indian Markets go. The markets continued to rocket up driven by an unprecedented flow of Foreign Portfolio Flows which have been averaging Rs 3000-4000 Crores a day. Nifty ended by around 2% and the midcap index by around 1%. However divergence in performance did build up across markets this week. While some markets like India, Korea etc continued to trend up we actually saw that the US & European markets actually saw cuts during the week.
A large part of the rally is being driven by ETF flows which are driven by several factors the key among which are
- A continued weakness of the US Dollar which is leading to flows into risky assets including equities, commodities, cryptocurrencies etc
- Extremely low interest rates globally. Bank interest rates in the USA are almost at zero and in some European countries also negative. This is driving money towards risk as if you can make 1% in a day then why keep in the bank?
- Momentum begets flows. Typically money flow continues till momentum continues and as FOMO sets in more and more people jump in
Then the argument would be that this is likely to continue going forward also so why should the markets not continue to rally. However this logic is given on either side of the market move i.e. when markets were falling in March the forecasts were that they will keep on falling.
Domestic investors have behaved quite in contrary to the global investors where they have been pulling out money from Equity MF’s and PMS products as the markets have continued to rally unabated. November outflows at Rs 13000 Crores were the highest in several years and the outflows are likely to continue this month too. In my view this is smart. Asset allocation has to have some meaning and if the current move has led to equity as a proportion move up beyond the strategically allocated levels reallocation is a good strategy. Ideally tactically investors should start going a bit underweight equities and allocate more towards debt. Current market valuations require a huge earnings uptick to justify which is unlikely if not impossible. Hold 20-25% cash. This way if markets continue to rally you are still in the game but if they correct you also have the ammo to deploy.
Industrial production data came out on Friday which was better than expectations at 3.6%. However this was at peak festival demand season. Sustainability needs to be seen going forward. Inflation data is still to come out and will be interesting to watch.
The other big news of the week was the listing of Doordash and AirBnB in the USA where the market frenzy was very much visible. For example AirBnB was valued at $ 40 billion last year pre covid. In March valuations dropped to $ 20 billion and eventually the stock listed last week at valuations of $ 100 billion. A similar frenzy was seen in Doordash the delivery company which is valued at $ 56 billion. Both these companies are still loss making after 7 years of operations in case of Doordash and 12 years for AirBnB. A good business and the valuation at which it trades are two different things
Overall as things stand it seems that the stock markets have factored in a large part of the recovery and end of Covid into the year 2020 itself. Although one would like to believe that as things clear out the year 2021 should be better than 2020 it might actually be more challenging from the stock market standpoint. Lives of people could be much better as complete normalcy comes in at some stage. Inflation will be a dynamic to monitor as many manufacturing companies have started talking of potential margin squeeze due to the huge spike in commodity prices.
Contrarian Investing will work going forward. For example in my twitter feed I had indicated buying ITC at Rs 166 and exiting last week at around Rs 210 at a 25% plus gain in less than two months. As someone pointed out to me people who have held ITC for years have also not made 25%. Last week I made a bet on a beaten down Infrastructure company where there are clear revival signs (only personally as high risk), the stock is already up 30%.
The year 2021 will be about stock picking more than the straight line run we have seen since the March bottom. There will be couple of rounds of brutal selloffs and the key will be to capture them. As a strategy I am combining short term momentum investing with long term investing at this stage. The more markets move up in a straight line the more it will be about identifying opportunities to cash out and increase the overall cash weightage.
Will write more next week.
“He that cannot reason is a fool. He that will not is a bigot. He that dare not is a slave.”