nifty | Portfolio Yoga

An update on Nifty

Its been 9 months (nearly) since I wrote this post (link) and markets in the meantime has appreciated (with a couple of glitches on the way) by around 15%. A FD on the other hand would have yielded at best 6.75% and hence markets have for now hands down beaten my view of FD being a better bet (though since at one point we were down 8.5% from the point I wrote thus gives me some hope 😛 )

Before I write, a quote from the Oracle of Omaha which appeared in his recent annual Report

<Quote>

Forming macro opinions or listening to the macro or market predictions of others is a waste of time.

Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

<End Quote>

Of course, since Buffett has broken nearly every rule he has advocated, I am still hopeful that some day he may come around to accept that every investor and trader needs to have a macro view (regardless of whether one wants to implement it or not) 🙂

Last three weeks has been hectic for the markets with Nifty gaining around 7.8%. While 7.8% in itself is not a great achievement, the fact that we have broken the all time high is leading to a lot of bullish talk (compared to say in Jan – Feb of 2012 when we logged positive gains for 7 consecutive weeks which totally gave a gain of 19%) especially since this is a news driven (Election / Modi) rally than one based on pure fundamentals.

That is not to say, fundamentals aren’t showing any great promise. If one were to look at the Nifty PE Ratio (Standalone), we are at the median range – neither expensive nor cheap and this indicates that any upside from here will have fundamental blessing as well (any fall with make the market cheap & hence making it even more of a Buy)

Since the key driver to the markets for the time being is the Elections, let me Analyse how markets behaved prior to the previous two elections (when we had some amount of euphoria).

NDA called for early elections in January 2004 and the results were out in May. Here is the Gains / Losses of Nifty on a monthly time frame.

Month	Change
Jan-04	-3.9
Feb-04	-0.6
Mar-04	-2.2
Apr-04	1
May-04	-17.9

While on the face of it, it looks like the markets were slightly bearish going into the elections, one has to understand the larger context as well. Nifty after being bearish for 3 years since the Dot Com bust had recorded a rise of 73% in 2003. Hence the first few months of non performance could actually be seen as a consolidation playing out (especially since market was sure of a NDA victory). But we know how the story happened in reality.

2009 was a different case altogether with the 2008 crash still being fresh and markets worldwide were already revving up. Election dates were as this time around announced in March and results came in May. Since we looked at 5 months in 2004, lets look at the same 5 months in 2009

Month	Change
Jan-09	-2.9
Feb-09	-3.9
Mar-09	9.3
Apr-09	15
May-09	28.1

Markets worldwide bottomed out in March and started to move higher and hence our move in March and April can be attributed to that rather than election euphoria. The rise in May (where we saw markets frozen for the first time on the upper circuit) to me was more of a managed move than a move where participation was high.

Coming back to the present situation. My belief (based on my reading) was that BJP (Modi) would find it difficult to come to power. The current market move though has been based on evidence that is pointing out to the contrary. Yesterday I was talking to a person who is biased towards BJP (being a party worker) and he claimed that their caclulation was that there was very high probability of NDA making it across 300. Now, I do not know how the figures have come, but its sure that UP seems to be seen as the game changer.

In the last decade, we had 2 major bull rallies – 2003 and 2009. One way of anticipating the next would be to see how markets had performed before the period and whether we can see a similar situation now.

One way of doing it would be to look at 10 year rolling returns. On the Sensex (using it instead of Nifty due to the longer amount of data we have), we can see that at end of 2002, the 10 Year rolling returns had slipped to 0.93%. At end of 2008, 92.72%. At the end of 2013, the same is 220.64%.

Lets look at 5 year rolling returns. At end of 2000 (after the bust of Dot Com), the number was 1.15% while the same as of end of 2013 is 4.36% (lowest since 2001). The average of the 10 year rolling returns comes to 380% with Standard Deviation at 285. In a way, we are below the mean, but not below or even close to 1 Standard Deviation. In 2009, we were close to 1 Standard Deviation and in 2003 we were way below that.

A swing projection of Nifty seems to suggest to me that the current move can extend to around 6850 at the very least, but then again, its just a projection prone to error (though it has had its good days including projecting the likely low in Aug 2013 – we came pretty close before bouncing back.)

While anything can happen in markets, I am still wary of a run away bull market from this point on-wards without there being a long pause in between. For now though, if you aren’t a bull, you are missing it 🙂

As a saying goes (attributed to Keynes, but disputed). When the Facts Change, I Change My Mind. What Do You Do, Sir

Consecutive days of Wins and Loss in Nifty

When Nifty closed in Red on Friday (8th Nov 2013), it was the 37th occasion that we have seen Nifty Current Month running futures close in negative for the 5th day running. The chart below (which is plotted on Log Scale) shows the occasions of number of Winning / Losing streaks. 1 means that the Win / Loss was just one day before it turned around.

ATR for Nifty futures – 2008 to 2013 (Oct)

The intra-day volatility in Nifty has considerably reduced since the insane volatility we saw in 2008. But is this the calm before the storm?

Above pic shows the ATR of 14 days on Hourly data of Nifty Futures.

Are the markets expensive

With Nifty rising by nearly 23% from the low registered in late August, the question on top of the mind is whether markets are way over-valued compared to historical values.

One way to measure valuation is by PE and here I have plotted the CNX Nifty PE since 2000 with Standard Deviations (1,2) on either side. As on date, we are still at average valuations suggesting that while markets are not expensive, they aren’t cheap either.

Market thoughts on Samvat 2070

With Diwali around the corner, it’s once again time for all the Charlie’s to start picking up stocks that one should buy and which would do well in the coming year. If only predicting the markets were so easy as 1-2-3, you would be reading about them on Forbes Richest 100 instead of seeing them appear on TV.

Let’s first look at the broader picture of how the markets have performed since the last Diwali session. CNX Nifty closed at 5666.95 and while we are strongly above the close of that day as on date, the move has not been easy to digest for many what with the huge swings we have seen develop on either side with the recent slide to 5118 levels marking the low not just for the Diwali to Diwali time frame but also for now marking the low of 2013.

The picture is not so great when one looks at a broader index such as the CNX 500. While that index too is sitting on small gains at the moment, the divergence between CNX Nifty and CNX 500 is pretty clear.

Here is a relative performance comparison between the indices

A 6.74% return by a broad index isn’t much to talk especially in an era where Inflation has been consistently stayed above 9%. And even this had taken quite a hit with returns being in –ve 10% just a couple of months back.

What is interesting is the list of big losing companies which form part of the CNX 500. Topping the list is Core Education which lost a mammoth 94% during the year. Government owned MMTC comes a close second losing 92.42%. Third on the list is Innoventive industries, a company that was strongly recommended not just by a few big brokers but also later was bought by Kenneth Andrade’s IDFC Mutual Fund. Educomp and Gitanjali take the 4^th and 5^th place in terms of percentage of fall in the last one year. Interestingly both these stocks were investors / traders delight.

Of course, it’s not a losers market all the way with stocks like RCOM, PVR and McDowell giving extraordinary strong gains. While the net result for the index has been positive, the number of stocks which closed in negative outguns those which closed in positive.

Markets have closed above their 2008 highs for the first time signalling an attempt to break-out after a pretty long span of time. The last time we had such a multiyear breakout was in when Nifty broke above the 2000 high in the last week of 2003. While markets travelled a bit higher, the rally petered out and we spent the whole of 2004 more or less in a range bound fashion.

This coming year shall see the biggest and the most vindictively fought elections that we may not have seen since the elections of 1977. I really doubt that we will see a runaway markets since the global scenario still remains weak despite the continued infusion of funds and any rebound that we are seeing in few economies are selective at best. The best hope for a rally will come in only post elections if we can get to as close to a single party majority as possible though even that may not guarantee that we go along the path that bodes well for us.

In the year just gone by, the highest gains were made by sector stocks such as Pharma and FMCG. While they aren’t way outpriced (in historical sense), they still are well in the higher brackets of valuation that we have seen then in quite a few years. This in my opinion should limit the rewards that are on offer by stocks belonging to those sectors.

On the other hand, despite the rise we saw in last couple of days, PSU Banks were one of the worst hit and the valuation gap between private and public sector banks have widened phenomenally. This could over a period of time start to converge to their historical levels though with there being strong doubts on the asset quality of many public sector banks, we may not see a run-away rally either.

Like Analysts on TV, I too can say that action will be stock specific but without actually mentioning the stocks on the horizon which can yield better than average returns, the words speak of emptiness at best and hypocrisy at worst and since my time frame and risk appetite can be different from the readers, I shall refrain from posting any stock recommendations other than saying that the simplest way to be in the market is to trade using ETF’s by buying when we are cheap by historical standards and sell when expensive.

A thought on the Longterm prospects of the market

By nature, I am a pretty optimistic person and that has meant that in the markets, I am more willing to take a bullish bet than a bearish one. In fact, if I were to go back to all my postings I have made here since the start of the group, the tone is one of bullish with markets ready to be bought or the time just about to come. In that sense, I think this will be a bearish post written after a real long time.

My last long post I wrote here was about how India story was not dead and one should buy at current levels and add if markets drop down to 5100 or 4600. I wrote that on April 16 and in the coming weeks, markets rose by over 10%. But with bearishness enveloping much of the world, we are now back to where we started from.

But during the time in between, I have had a major change of heart. For the first time in my trading career, I sold out my portfolio completely (save for those physical shares for whom there are no bidders 🙂 ). The reason for the action was that One, I did not seem to have the time or the inclination to follow up on my portfolio and the stocks to be added / sold on a regular basis and Two, I felt that the net risks I took there did not match to the net reward I could gain (unless I got lucky and invested a big amount in one company which then took off vertically – but then again, I know Luck has never favored me and I don’t see why it will change now 🙂 was wroth the risks I took

But the bigger change in me has been to question as to whether we are dreaming as to the rise of India once again and one that would give us absolutely great returns of the kind that say United States had back in the 1980’s.

Much of the growth in the world has been due to the policies and the actions of one country and one country alone – The United States of America. And the de-growth which I am anticipating is also because of that one country.

After the World War II, only one country escaped unscathed – United States. Europe was devastated while much of Asia and Africa were still under colonization and had very little industrial infrastructure of knowledge to speak off. Japan lost not just much of its young population to the war but also its Industrial cities which were thoroughly destroyed by the US.

This left US as the key to future growth of the entire world and US Dollar the one and only safe haven among the plethora of currencies (though it did not happen till a couple of decades later)

While Europe did recover from WW-II, it never has been able to regain its prescience in the world economy. While the US economy continued to dominate, we saw the emergence of 3 countries from Asia who have come to dominate in the last 40 – 50 years.

The first country to rise was Japan – aided extensively by a weak yen, Second came South Korea – again a weak currency helped and third China – well once again a weak currency helped here too. Other than weak currency, all three had one more thing in common – they all focused on manufacturing led exports and for all three countries the biggest country for their products was US.

While we talk about our Current Account Deficits, the US too has followed a similar path with ever growing negative trade balance. But what tilted the favor for them was that unlike India or for that matter, any other country, US paid by its own currency which meant that in the worst case basis, all they needed to do was print more and print they have been doing – more extensively than ever before after the 2008 crash.

For a long time (in the heady days of the bull market of 2003 – 2008) it was felt that even if US slowed down, it would not affect the growth of the world economy since China and India will be able to replace the demand and hence sustain the net growth.

But the events past 2008 showed that absent US growth, there was not much anywhere else with almost all countries going with one or the other kind of stimulus. But stimulus is like a drug, it boosts the performance in the short term but costly in the long term (as India is currently finding with high inflation which has resulted in higher interest rates).

Both the initial recovery post 2008 and the recent recovery in markets (developed markets) has been due to the quantitative easing in US. Almost all countries enjoyed the flow of money which came from US due to the attractive arbitrage that was available.

The broader opinion was that with US economy getting back on its rails, world economy will be good once again. This seems to have been proven right to an extent going by the falling unemployment and rising housing prices. But somewhere,something has gone wrong.

One, while US housing prices are going up, one saw a reversal in May after falling for the last 5 months. Second, the assumption was that once growth came back in the US, it will result in growth for all export oriented countries and we will be back to where we were prior to the crash. But the recent carnage in developing markets seem to have put a spanner in such views.

While US markets seem to be booming, economies which are dependent on commodities for a large part are seeing massive problems (Brazil / Russia / Nigeria / Australia among others). Now, growth without commodity growth is something that cannot be visualized.

India had not been affected since we export services rather than commodities but we seem to be facing another problem. Since we run a large CAD, we require continuous inflow of US Dollar. Other than exports, major source of Dollars is via FII investment in Debt (much larger than equities) as well as investments by NRI’s.

The problem we are facing is that since Interest rates are rising in US, FII’s are finding it not as attractive as before to invest in India. This pullout has led to a massive fall in Rupee with the Rupee touching 60 against the US Dollar. While a depreciated currency is beneficial for an export led economy, we having a Current Account Deficit will see whatever advantage lower commodity prices give being washed away due to the weak rupee.

The recent US rise has been once again led by housing but with interest rates firming up there as well, it remains to be seen as to how long they sustain since its one thing to borrow at 3.75% and yet another to borrow at 5.0% especially when the economy itself is growing at less than 2%. Another reason for the housing boom was due to a large number of big players entering the market (Blackrock for example). But as price goes up, they will be willing to sell and hence one should or may not see the rise in price to continue.

Then there is the Japanese Syndrome. Way back, in the heady bull makets of 70’s, Japanese were pretty big spenders but after the economy went into doldrums, life has never been the same again. Japanese are happy to keep the money in bank deposits at virtually no return rather than take risks or spend the amount. In fact, this attitude is not just of individuals but also banks who prefer to buy Japanese Government Bonds than try to lend it out side.

While Americans may not just yet stop buying, I believe this is a concern that should not be overlooked. After all, the damage to American families of the fall of 2008 has been severe and one cannot expect them to make merry even though their savings are absolutely nil.

One major expectation in India is that once Modi becomes the Prime Minister, the worst maybe over and India will tread the golden path. But how true is that. Vajpayee was one of the best Prime Ministers one could have expected but the markets didn’t budge much other than the brief rise in 2000 due to the global IT boom. MMS arrived in 2004 and while he did nothing much, markets more than tripled. The reason for the difference – International Markets once again.

Indonesia became the first country to raise interest rates to try and stabilize the Ruppiah. With Rupee now closing in on 61, its no wonder than Bond markets in India seem to feel the same. If and if that happens, that should be the final nail in the coffin of the growth story of India.

My own sense is that markets may not go anywhere in the forseeable future and in that I mean for the next 2 – 3 years. While that does not mean there would not be opportunities for the trader, for an investor, it could continue to be a painful time ahead.

Disclaimer: I am not an Economist or have even studied much of Economy and hence I can be very well wrong with my hypothesis (and I will be happy to be wrong). But I believe that if my logic is right, the best place for investment in the current climate will be Banks and Inflation Indexed Bonds via Mutual Funds. On a Risk Adjusted basis, there will be no other asset class that can come close to it in terms of Risk Adjusted Return.

Share this:

Share this:

Share this:

Share this:

Share this:

Share this: