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Commentary

Rolling into 2018

There is a lot of contradictory advise that keeps floating in the world of finance. One is told that rather than aim for higher returns, one should save more. Of course, saving more isn’t enough, is it, once you save, you need to deploy it intelligently to get a better return.

Regardless of your risk temperament or requirement, it’s Equity you are told that you should invest in for better returns. While it’s indeed true that Equity has provided better returns, this hasn’t been for everyone.

Markets have been at its best this year and yet this is not the Best year in our short history. This year doesn’t even figure in the top 10 yearly gains, so why all the hullaboo?

The answer to that question lies in the broadness of this year’s rally. 84% of listed stocks on the NSE closed on Positive Territory, 73% of stocks on the NSE closed above their 200 day EMA.  Save for Nifty Pharma, every other Index closed the year on a positive note.

Mutual Fund AUM increased by nearly 40% as extraordinary gains (compared to other asset classes) helped mobilize funds on a unprecedented level. Investments through monthly instalments (also known and referred to as SIP) now account for nearly 6000 Crore of fresh inflows every month.

Nifty Trailing four quarter Price to Earning Ratio is now closing on its all time high. While this is seen as Bearish, the anticipation that has been running for a long time now is that at some point we shall see growth return and hence this is a temporary phase. Also, make hay while the sun shines.

While Real Estate is still in the doldrums, stocks of the sector have made a comeback. Nifty Reality Index doubled over the course of the year recording its best ever move. Gold, the other major asset class in India closed more or less flat.

Interest rates which were on a rapid slide for many years across the world made a comeback of sorts with every country witnessing rise in yields. Based on one’s bias, this can be used to justify both higher and lower valuations.

Bitcoin, a crypto currency took the world by storm as it logged in unprecedented gains. What was supposed to be an alternative to Gold / Fiat money suddenly became the most speculative asset to trade in.

Despite all this, there is palpable fear in the air. From Individual Investors to Mutual Fund Managers, this fear has meant a rise in Cash holding. Quantum Long Term Fund, a fund that is one of the best in its class (over a 10 year period) was literally at the bottom thanks in no large part to missing out on the rally with a large chunk of its assets in cash.

Pharma and FMCG are seen as Defensive bets which generally underperform in strong bull markets. Not this time around. While Pharma Index recorded it second consecutive loss for the year, FMCG Index continued its winning streak as it shot up another 29% to record its 9th successive year of gains.

Rising Valuation meant that the Portfolio Yoga Asset Allocator kept dropping its exposure to Equity. Only time can tell whether this was a prudent move or one of foolishness. Personally, I intend to be 40% invested with additional investments flowing in if and when opportunities arise.

Where do we go from here on is a million dollar question. Strong momentum doesn’t end without there being a major negative trigger or a long period of consolidation. Foreign Institutional Investors who were once the key element of market cycles no more hold that power.

FII’s turned out to be Net Sellers in the Secondary markets in 10 out of the 12 months. While they did pump in money elsewhere, secondary market is where the real action is and this sign of lac of confidence could have had a major jarring impact if not for the huge flow of money from local institutions which more or less overwhelmed their selling.

A major signature of market tops is higher level of activity in the Merger and Acquisition space. In India, despite the markets being bullish like never before, most M&A’s that took place were one under duress.

Long term impact of GST and Make in India, both of which are supposed to be strongly positive for the Industry and Markets is yet to be known, but on the short term, Industry seems to have accepted the pain that has come with GST and Rupee Demonetization and it’s unlikely to have a big impact going into the future.

2018 will see three large states go into elections and the result of these shall have a bearing on the national elections since the current government had won out of out in two of the three states in the National Elections held in 2014.

This Governments full last budget will be the one that is presented on 1st of February and can have a major impact. With the United States deciding on a path to cut Corporate Taxes from 35% to 21%, this will have an enormous impact on countries across the world as they scramble to ensure that they don’t become tax disadvantaged.

For the risk taker, opportunities are always around the corner. It’s up to one to decide whether one wishes to take that risk or flow with the herd. The advantage of being with the herd is the satisfaction that when things go wrong, one is not the only one.

Years come and go, but what doesn’t change much is how we approach investing. You need to either save more by not living the kind of life you wish to live or take chances. If only there was an easier middle path.

Wishing you a Happy New Year.

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