NEWSLETTER DATED: 06-04-2019
Greetings of the new financial year 2019-20 to all readers. After being consistently writing blogs up till Dec – 2018 every fortnight, here is a blog after 3 months of break. A lot has changed in financial world in last 3 months other than our bullish stance towards India & disciplined approach towards investing in equities.
International Snapshot: After a much touted talks about X number of rate hikes & tightening policy of Federal Reserve for the calendar year 2019 & expected consequential sell offs in emerging markets, Fed has realized; that any further rate hikes will slow their economy & has candidly changed the stance to ‘PAUSE’. In our opinion they might even go for rate –cuts again if the long term yields do not rise above the short term, which is a signal of looming recession.
How the yield curve works is fairly simple: When the economy is healthy, investors usually demand higher yields from long-term than short-term U.S. government bonds, in part because there’s a greater risk that growth will cause inflation to pick up down the line and eat into their interest payments. When the yield curve inverts, the opposite becomes true: The returns on long-term government bonds dip below those on shorter-term ones. That’s what happened last week, when yields on 10-year Treasury notes crossed under the yields on three-month bills—the two securities that economists and investors often compare to determine whether the curve has flipped. It’s a spooky reversal of the debt market’s natural order.
Does this mean the economy is about to crash? Not necessarily. Most analysts seem to be staying even-keeled about the whole thing, reassuring readers that it’s “premature” to panic and such. But it’s as good a sign as any that investors collectively sense some sort of trouble ahead.
With that said, it’s a bit early to be forecasting economic doom. One reason for calm comes from Campbell Harvey, the Duke University finance professor who first pinpointed the relationship between the yield curve and growth. (Harvey measured the spread between five-year and three-month bonds.) As he explained, the yield curve only becomes a recession indicator once it has been inverted on average for a full three-month period. Downturns also sometimes take a while to follow. The yield curve inverted eight months before the 2001 recession officially began. It inverted 22 months before the Great Recession kicked off in 2007. And of course, Harvey said, even if the yield curve has preceded recessions in the past, this time could be different.
What this means for rest of the world, is, if rate cuts starts again in US, in anticipation of weak $ and cheap money , funds will start flowing to emerging markets , especially stable ones, a higher allocation in emerging markets will spark rally, a trailer we saw in last 1 to 2 months.
Domestic Snapshot: While most of the our neighboring emerging markets started rallying from Feb 2019 itself, India did not participate mainly because of a) Election Uncertainty & b) our expensive valuation vis a vis other emerging economies. Than what changed suddenly & can this rally sustain.
Well attack in ‘PULWAMA’ by Pakistan residing and JEM leader Masood Azhar; and the reply given by Indian Army under the leadership of ‘MODI’ has changed the votes balance again in favour of BJP; and ruling out any chance of 3Rd front government. Again who will come at the center will be known only on 23Rd May 2019 but the Stock Indices are forward looking animals and as the days progress & state by state voting concludes markets will make probabilities & move, so waiting until election getting over & results out will not help much.
On market valuations the answer is yes they are expensive, but one should realize that foreign money sees dollar returns & a 5% stock indices up move with 5% rupee strengthening will fetch them 10% return, hence stocks can still go up further.
Also except for large-caps, there are lot of mid & small companies that are at appealing valuations & once the disparity widens amongst the indices they will start moving up.
Inflation in India being low & anticipated to remain low by the recent monetary policy committee, future rate cuts would continue giving support to indices time & again. For many the recent moderation in the equity mutual fund is a concern, but in our opinion the mood can swing very fast as markets start hitting new highs.
There are lot of factors globally & locally which are very dynamic & swing very fast, this phenomenon is not new, but only thing is that due to better communication facilities like whatsapp they reach us whether needed or not & prompts us to make opinions / decisions. However time & again speed bumps have come & will continue to come but important thing is to remain invested and a disciplined investor would continue to grow his wealth.
HAPPY GUDIPADWA!
- CA JAYESH GANDHI
Disclaimer: This is an informative document and opinions expressed in it are our own and not any advice. We are certified investment advisors yet to be SEBI registered. We are AMFI registered MUTUAL FUNDS DISTRIBUTOR.
