Market Update 15/12/2013

The euphoria over the state-election results proved to be short-lived. The index ended lower for the last 4 trading sessions of last week. The Sensex closed 1.3% lower from the previous week.

Subdued growth numbers (IIP and Exports) and higher than expected inflation no's (CPI- 11.2%) dampened the market mood. There was also uncertainty over tapering in the US which decreased investor risk- appetite.

Technically we are close to the Bollinger center band and also the 50 DMA. A small bounce back is thus on the cards. But, a break beyond both these supports would mean that the market will move lower in the short term. The RSI and the MACD have moved in to the neutral territory with slight bearish over-tones.

The RBI policy review is expected on Wednesday. Markets will trade in a narrow range till then. The 10 year G-Sec currently trades at 8.91%, almost unchanged from the previous week. It is difficult to predict how the RBI will react as inflation continues to remain stubbornly high and at the same time economic growth continues to remain weak.

There is also a Federal Reserve meeting this week that will need to be tracked closely. US Treasury yields have moved  up slightly. This indicates that the debt markets are gearing up for an announcement around "tapering".

Crude Oil moved lower in the week on account of global macro-uncertainty. WTI closed the week at $96.6, while Brent closed at close to $108/ barrel.

The USD moved up sharply against the INR. The INR touched its resistance of 61 before giving up its gains to end at 62.15 to the dollar. Technical indicators suggest that the Rupee is over-sold and there should be a small bounce back.

Gold moved up slightly before ending the week at $1238/oz. Domestic prices will depend on the Rupee movement.

Market Update - 8/12/2013

The markets closed the week 1% higher than last week. Exit-poll results were perceived to be the main market drivers on Thursday and Friday. The verdict is out and along expected lines. A small bull rally is therefore in the offering. The Sensex is just shy of the all important 21,000 mark.

The market is well above its 50, 100 and 200 day averages. Bollinger bands seem to suggest that we've reached the "upper-end" of the short-term rally. It will be interesting to see if the market 'listens" to technicals or ignores the same on account of the exit polls. A small rally can be expected- but investors will be quick to book profits. The short term support is 20,550.

The MACD and the RSI are still in neutral territory. This suggests that the over-all bull rally that began in end August is still intact and will hold for the near-medium term.

On to fundamentals, GDP growth and the CAD have improved. Dec corporate earning reports are expected and will be closely monitored. Expectations are that earnings will continue to remain 'subdued'. This could take some steam out of the rally. Fed tapering talks continue to swing the market both ways and there is still no clarity yet on 'when' actual tapering will begin. The US dollar has weakened but the yield on the 30 year G-Sec has gone above. This is a clear indication that the bond markets in the US are getting ready for tapering 'soon'.

If tapering happens then the emerging markets will correct as FIIs have been the biggest buyers and the main reason for the bull rally. We might not see a sell-off, but there will be a correction and a good opportunity for long term investors 'to buy'.

An interesting development that has been reported recently is the 'retail interest' in the US markets. These are the classic 'early bull-market' signs. Retail participation in the markets has been positive this year, for the first time since 2008. However, the US economy is still recovering and a rally might be premature.

The 10 year Indian Govt G-Sec has moved up to 8.86%. Tapering expectations and high brent crude prices may have moved up yields. The RBI's policy review will need to be closely watched. Tapering fears could move yields higher.

The INR broke its resistance of 62 and went up to 61.18 before settling the week at 61.43 to the US dollar. With this move the trading range for the Rupee may have moved from 62-63.5 to 61-63. Tapering fears will weaken the Rupee. Bollinger bands and the RSI suggest a moderate bounce back by the dollar in the short term.

Gold is currently close to $1230/oz in the international markets. This is close to it's 52 week low. Technically gold continues to remain weak. In the event of a Fed taper gold will only continue to move down. In the domestic market gold is at Rs 2,770/gram. Movement is expected to be inverse to the INR.

WTI crude closed the week at $97 while brent has crossed the important mark of 110 and closed last week at $111.61. This will not be good for the CAD.  

  

Market Update 1/12/2013

The markets have had a positive week with both the Sensex and the Nifty closing 2.8% and 3% higher than the last week respectively. GDP growth at 4.8% came in better than the last quarter. A few international factors were also at play with the Fed indicating that tapering would not happen any time soon and also the Chinese announcing a slew of reform measures aimed at strengthening their economy.

The positive uptrend may continue over the short-term. Fundamentally, markets (Sensex & Nifty) are close to average valuations. As a long term investor this might not be the time to jump all in to equity.

While most analysts are predicting new all-time highs for the Nifty and the Sensex in the short to

Market Update- 21/9/2013

The markets have had a positive week ending 2.8% higher than the previous week The Rupee looks stronger now with the "Syria problem" having been solved and the Fed keeping off its "tapering" for the moment. It seems to be facing resistance @ 62.5.

Brent crude is at $109 odd. This is still high and could still play a major role in the Current Account Deficit (CAD). Keeping these in mind, and with the possibilities of "tapering" in the near future, the RBI had raised rates in it's policy decision yesterday.

Market Update 21/7/2013

The markets ended up marginally last week from the previous one (0.3%). Despite RBI' efforts at shoring up the Rupee, the markets seem to have found some support at 5900. These appear good levels to enter the market.

The fall in the Rupee has suddenly made everything in India 20% cheaper for everyone abroad. This analogy also plays out in the equity markets. We are seeing a lot of FII interest in the equity segment of the markets. Large caps, especially index scrips should do well in the interim as these are preferred for FII money.

Going forward, most market participants are already talking about the elections. It is therefore expected that the market will be range-bound at least till the elections are over. The up-side seems to be capped at 6150-6200.

Arbitrage Funds

Arbitrage is the practice of taking advantage of a price difference in two or more markets. For eg: if the price of rice in Mumbai is Rs 25/kg whereas in Chennai it is Rs 30/kg, then there is an opportunity to buy in Mumbai and sell in Chennai. This is a simple example of Arbitrage.

Arbitrage mutual funds are funds that take advantage of similar arbitrage opportunities between the equity spot and futures market. The spot market is where we purchase/sell shares. The futures market is where we trade in contracts to buy/sell shares at a future date.For eg: If one buys a 3 month futures contract to buy Reliance shares, then one is paying a rate today to take delivery of shares that will be delivered in 3 months.

Where do we go from here?

The past 1 year has been good to equity markets with both the Nifty and Sensex returning between 10-15%. However, they both seem to be struggling against long-term resistances of 6100 for the Nifty and 21000 for the Sensex. What are the chances that these points will be breached in the coming year?

Tax Planning through Debt Mutual Funds

Who wouldn’t like a steady source of income? A steady income allows us the freedom to plan our expenses and life-style forward. It is for this reason that debt instruments like fixed deposits & bonds are so popular.

But, there is a catch with debt. What we get is fixed, but, what we spend need not be fixed. The money we require is bound to increase over time due to the phenomena of inflation. So be careful and invest your money wisely to beat inflation.

There is another very important draw-back of debt and that is the taxation. As per Indian IT Laws interest income earned on fixed deposits/bonds is treated as ‘income from other sources’ and will be taxed at the highest slab of the investor. So if you are earning more than 10 lacs in an annum, then 30% of whatever interest you get is eaten away by tax. Ouch! That hurts!

So what can be done about this?

Should I buy Gold?

Gold is an excellent ‘calamity- asset’. When the world is in turmoil there is nothing like it. Take any war, famine, natural disaster or economic crisis and you will notice a spike in the price of the yellow metal coinciding with these times. The logic is simple- when you don’t know what currency to hold, you must go for gold. 

Take the case of the Jews during the holocaust. One morning they wake up to discover that it’s illegal to be Jewish. All their assets have been confiscated. Some make a run for freedom carrying what little gold and silver they can hide in their under-clothes to escape the Nazi persecution. In many cases those little bits of gold were the difference between life & death. 

So, it is important to understand gold as a calamity asset. When the world is about to end, there’s only so much you can carry with you.  You are not going to be able to run wearing all your gold ornaments at a time of crisis. Be smart, you are probably better of buying some small gold bars. It is important to understand that you will have to trade this gold for food, shelter or security and buy only for that specific purpose. How much to buy? Well, only what you can grab and run.

I can imagine the reader telling me- ‘don’t give me this end of this world gyaan, I’m looking at gold as an investment’. I’d still tell you that it’s better to be prepared than be sorry. But, I will also analyze it as an investment.

It’s a calamity asset, does well during calamities. The recent spike has coincided with the global economic crisis. That explains the stupendous returns these past few years. But, the big question is, will it continue?

That depends on whether the economic crisis will continue. If it does, then gold should go up. If it doesn’t then gold won’t. From my understanding, the global economy is still weak and it could take at least 3-4 years to regain some sort of stability.  But, investor confidence is improving, and so we may not see gold accelerating the way it has.

There have been endless ‘end of the world crises’ over the past many years and each time the world has only come back better and stronger. It’s not being optimistic, it’s being realistic. Tough times do not last. To put a lot of money in gold in the belief that the global economy will never recover would not be being pessimistic. It would be fatalistic. 

Savvy investors consider investing in gold as a relic from a barbaric age. The reason being gold is considered to have no value. Let me define what we in the investing world see as value. 

Value is anything that improves the quality of life. If I have a bike that I can ride around to reach places, then the bike is valuable to me. I use it to improve my life. Things like cars, washing- machines, TV’s, homes, banks, roads etc. are seen to be valuable. When we invest, we usually look to something that adds value in some way to life. It’s a very simple and sensible way of investing. If the product/ service are valuable then obviously people will come to buy and as a consequence business will do well. So we invest in the business. 

Gold in no way improves my quality of life. It is of no commercial use. There is a possibility that somebody in the future might discover that gold is the answer to all our energy problems. But, till that day comes, it is just a shiny yellow metal. It has been a store of wealth in the past due to its attractive and non-corrosive properties. But, with the arrival of fiat money (currency as we know it today), gold has slowly lost its importance. That’s why we consider it as a relic of the past.

However, I must acknowledge, that people who have invested in gold in the past few years have made money. If they had invested with the knowledge that the world would soon plunge in to a prolonged crisis, then I must salute their skills. If not, then they just got plain lucky! 

One ‘go for gold’ theory that is doing the rounds is that India is becoming rich again and therefore the demand for gold is going to increase. We are after-all the largest consumers of the yellow metal. Sound economic logic. But, go back to my earlier point about value- if Indians continue to waste their money buying gold in large quantities, then we are going backwards and not forwards. 

We will not go on buying gold with no limit. Our basic necessities are food, shelter and clothing. If the price of gold becomes so exorbitant that we have to compromise on these basics then it will be natural for anyone to ditch gold. You can’t eat gold and it doesn’t give you any shelter. You can wear it but it doesn’t really protect you from the elements like clothing is intended to do. 

The other theory doing the rounds is that central banks are hoarding up on the metal. This is true and central banks have been buying up huge quantities of the metal. And this, more than anything else, is the reason why gold prices have rallied in the past few years. The dollar is not seen to be as resilient as it once was, so nations are trying to protect themselves with other assets, mainly gold. 

But, the central bankers in the world know that gold is a useless asset. They are slowly realizing that they are better off with other assets that could help improve their economies in the long- term- which is why many nations of the world have launched sovereign wealth-funds. This enables them to buy all sorts of assets for their long-term economic stability. There is a conscious move among central bankers in the world to diversify their asset basket. So gold is only going to be one portion of this and not necessarily the central portion.

Some amount of gold is okay in a portfolio. But, too much and you could be in trouble when the gold cycle turns. Some of you will still have to buy gold to please the women in your family. Pleasing women follows no logic (and it shouldn’t!), so keep the women in your family happy. Only don’t go over-board.