MyWay Wealth Weekly Update (Issue #30): Decoding the elections, corporate earnings revival & more

“If you can keep your head when all about you Are losing theirs and blaming it on you,”
“Yours is the Earth and everything that’s in it, And—which is more—you’ll be a Man, my son!” ~Rudyard Kipling (If, 1910)

The above verse is an excerpt from Rudyard Kipling’s collection and often quoted as Warren Buffett’s favourite poem that keeps him going through volatile times.

With many investors getting worried about the upcoming election results and the uncertainty it brings to the Indian political backdrop and consequently in the stock markets, this poem definitely offers some guidance.

Here’s an interesting perspective to how markets have reacted during the pre-election and post-election seasons in the past 38 years (10 General Elections).

Prima facie, one may concur either one of the following:

  • 70% of the times, SENSEX has either recovered from the pre-election slump or posted a growth spurt
  • 30% of the times, during problematic election results (eg: hung parliament), SENSEX dipped further

So, here’s the idea. Elections come & go, each time elections happen there are two events that manifest every single time – we always get a government and two, life goes on!

Equity, at a very basic level, is nothing but a part of a business and businesses do not come and go with elections. Businesses are here to stay, grow and create wealth.

And if you look at Q4 earnings this week, you’ll notice that we are perhaps at the cusp of an earnings revival and equity outperformance that comes along.

Company Name
Q4 Earning Result Date
Commentary
Results vs. Analyst Expectation
HDFC Bank
24-Apr-19
Reported a record quarterly net profit of 58.85 billion rupees ($848 million)
Reason: High fee & interest income
Beats Estimates
Ultratech Cement
24-Apr-19
Reported a quarterly net profit of INR.1,017 crore 
Reason: Acquisition of Binani Cements
Beats Estimates
Maruti Suzuki
25-Apr-19
Reported a quarterly net profit of INR.1,795 crore 
Reason: High foreign exchange rates and commodity prices
Beats Estimates
Axis Bank
25-Apr-19
Reported a quarterly net profit of INR.1,505 crore 
Reason: Provisions & Contingencies dropped by 62% Y-o-Y
Did not beat estimates
Tata Steel
25-Apr-19
Reported a quarterly net profit of INR.2,295 crore
Beats Estimates
Yes Bank
26-Apr-19
Reported its first-ever quarterly loss at ₹1,506 crore 
Reason: Total provisions during the quarter increased more than nine-fold. Bank has outstanding loan to Il& FS group
Did not beat estimates

 

For those wondering if it is the right time to invest given that elections are in progress and markets are volatile, here are my two cents:

Ask yourself another question – when would it be the right time to invest?
After the dust settles?
When will the dust settle? And, will it ever settle?

Equity markets are structured to be volatile and volatility is where real profit is made.

Governments come and go, but equities continue to grow.
Why sit on the fence when the field is so opportunistic?

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If you have any concern, please write to us at ask@mywaywealth.com or call at 080 48039999we would be happy to answer your query.

Thanks,
Nirav (Head of Research)
MyWay Wealth

MyWay Wealth Weekly Update (Issue #29): A sticky affair: What’s oil economics without crude politics?

I’m a free trader, the problem with free trade is you need smart people representing you we have the greatest negotiators in the world, but we don’t
use them, we use political hacks and diplomats.”
-Donald Trump (much before the recent sanctions on Iran)

Leaders of major Asian countries woke up to find themselves in deep water as the alleged poster boy for free & fair trade – Donald Trump made a not-so-free-and-fair announcement to cancel all waivers awarded to the sanctions on Iranian oil. While the reason for such an announcement was mentioned as – an attempt to curb terrorism financing; however, the United States’ equivocal stance on Pakistan does not add much credibility to their apparent concerns around terrorism.

Asia contributes to ~35% of the total global demand for oil and is incidentally a key importer of Iranian oil. Within Asia, China and India are the top two importers of the Persian oil.
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MyWay Wealth Weekly Update (Issue #28): Mutual Funds shift gears (& portfolios) this election season and more…

As the election season closed in and the pre-poll month of March’19 presented a rally – largely driven by foreign inflows, mutual fund managers capitalised on the rally to get rid of some slag and re-align portfolios in light of post-election expectations.

Here’s what the portfolio rejigs for the month of March 2019 looked like:

As evident, the industry seems to be loading up on retail consumer-oriented sectors while majorly selling off bulky wholesale business sectors. The above graph illustrates only the top five sectors bought and sold; however, the total value of stocks bought & sold in Mar’19 was INR 2,350 Cr. & INR 1,645 Cr. – net buying of over INR 700 Cr. (more…)

MyWay Wealth Weekly Update (Issue #27): Ab ki Baar, Nifty 12,000 paar? & more…

India has begun conducting the world’s largest, democratic general elections this week. Opinion polls have swung towards reinstating faith in the current government, albeit with reduced majority.
Here’s what the opinion polls conducted in March’19 look like:

While the general elections typically induce capital market volatility as most investors choose to sit tight till there’s more certainty around the political situation, this time seems to be different.

Most times, foreign investors remain fence-sitters as the great Indian elections come into play, but this time, they’ve jumped the fence onto the field – right at the beginning.

Bellwether indices have been charting new highs – Nifty at 11,700 & SENSEX at 39,000.

 

 

 

 

 

 

So, is this all happening just because everyone is expecting the current government to be re-elected? Stronger election result anticipation is definitely a factor, but that’s not all of it.
Here are a few other factors that may be aiding investment growth in India:

Stronger Currency

INR strengthened by almost 2.3% in March 2019 making it the star currency in all of Asia.

This strengthening of the INR can be attributed to a multitude of factors including foreign portfolio buying stocks & bonds to a cumulative tune of $8 billion this year.

 

 

 

 

 

 

Softening bond yields

The 10-year government bond yield softened significantly as RBI implements a solid monetary easing policy through rate cuts and other measures like the swap auction.
This is expected to increase liquidity and promote credit & growth in India while inflation continues to be in control.
Decrease in yields can be interpreted as increase in price and profits for bond-holders

 

 

 

 

 

 

 

What lies ahead? What should an investor do?

While elections typically lend an air of increased volatility to stock markets but, quite frankly, volatility is where wealth is manufactured.
All indicators seem to point towards a fundamentally strong India and stronger Indian economy. This sets stage for a stronger future for Indian equities. Now is a perfect time to step-up SIPs and for investors with a lumpsum, it is advisable to go through the STP route – invest in a holding fund and periodically transfer to pure equity funds.
Feel free to reach out to understand more around what type of equity funds suit you best and what themes do we expect to play out post-election.

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If you have any concern, please write to us at ask@mywaywealth.com or call at 080 48039999we would be happy to answer your query.

Thanks,
Nirav (Head of Research)
MyWay Wealth

MyWay Wealth Weekly Update (Issue #26): Essel Group fiasco & the way ahead for you!

It is December 2018; the mutual fund industry is just recuperating from the mess created by IL&FS defaulting on its repayment & major AMCs & rating agencies being dragged into the sludge for their failure to recognise the imminent default – intentional or unintentional is a debate for another day.

Though AMCs were nursing wounds caused by an unprecedented event, their portfolios continued to stand bold with almost INR 8,000 cr. plugged into debt securities of an already troubled Essel Group. What’s more is that over 20% of this was held in portfolios of Fixed Maturity Plans and there was no visible attempt to dilute concentration.

Cut to April 2019.

Even as IL&FS taught the industry a great lesson in risk management, many failed to learn or perhaps chose not to. This is evident by the default on FMPs which has resurfaced for perhaps the first time after the 2007-08 fiasco.

What happened exactly?
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MyWay Wealth Weekly Update (Issue #24): The Great Indian Borrowing Programme & More

“The gross borrowing is higher because of the repayment programme. My recollection on net borrowings is that we are not even touching the highest that was touched in the last five years.” -S C Garg (Economic Affairs Secretary, Government of India)

Below is the government’s borrowing plan for the next fiscal year. If this starts seeming too technical for you, advisable to skip straight to the “What does this mean for you as an investor?” section.

The Government of India announced its borrowing calendar yesterday. Last month in its budget, the government had estimated that it would need to borrow ~INR 7 Lakh Crore in the next fiscal. However, seems like the government is prepping to borrow the same quantum only within the first six months of the upcoming fiscal year.

Here’s what the borrowing plan looks like in a nutshell:

 

Borrowing Split Mode Maturity Tranches
 

 

 

INR 7.02 LCr.

 

INR 4.42 LCr.

 

GoI – dated securities

 

Varying maturity
of from 1 to 4 years to 25 years and above.

 

first six weeks – 6 tranches of
INR 17,000 Cr. each;
over 6 months – 26 tranches of
INR 17,000 Cr. each

INR 2.6 LCr. T-bill auction 91d, 182d, 364d INR 1.2 LCr. Through
91 day T-Bills

(Source: financialexpress; GoI announcement | LCr. = Lakh Crore)

What does this mean for you as an investor?
We can expect a marginal impact as yields increase, albeit marginally. The opportunity still continues to be around debt funds with an average effective maturity below ~3 years – lower, the better. It would be best to ensure a high credit quality till there’s not further clarity around the liquidity situation in India.

Meanwhile, call it a relief rally or perhaps the build-up to a bigger story, Indian equities seem to be reflecting really strong growth in the time to come. Here’s how nifty move in the week that went by:

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If you have any concern, please write to us at ask@mywaywealth.com or call at 080 48039999we would be happy to answer your query.

Thanks,
Nirav (Head of Research)
MyWay Wealth

MyWay Wealth Weekly Update (Issue #23): What Moved My Market?

Indian markets opened on a positive note this week for the sixth consecutive session on the back of energy & financial service sector positive performance but settled lower on Friday as investors booked profits.

Both Sensex and nifty went up by 0.37% and 0.26% respectively during this week.

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MyWay Wealth Weekly Update (Issue #22): Here’s how RBI is trying to kill two (or more) birds with a single stone!

“There is always the potential for a central bank to engage in discretionary monetary policy and to break the one-to-one link between changes in foreign reserves and changes in the money supply.”- Steve Hanke (American Economist)

Late evening, this Wednesday, RBI announced that it would conduct a USD/INR swap auction for $5 billion. We view this as an exceptionally well-thought implementation by RBI to infuse liquidity and manage INR rates with a single move.

How does the swap work?

Eligible banks will bid a premium (an additional amount they are willing to pay RBI) to avail the opportunity to exchange their US Dollar reserve for a Rupee equivalent from RBI. This swap allows the bank to utilise the INR for banking activities and are expected to return this INR amount to RBI along with the committed premium at the end of three years to get their USD reserves back.

How does this help India?

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MyWay Wealth Weekly Update (Issue #21): Geopolitical tensions and your portfolio

“Be fearful when others are greedy & greedy when others are fearful” -Warren Buffett

Amidst rising military escalations between India & Pakistan, it is only natural for Indian investors to worry. But, a closer look at how the Indian markets reacted in similar situations should lend a better perspective to today.

As evident by the above graph, markets have reacted negatively but for a brief period. Looking at these periods from a different perspective, one would realise that investors who held tight or perhaps purchased more during the slump emerged as the biggest winners in only a year.

But, what about the coinciding elections? Does it add fuel to the fire?

‘Elections’ are often misquoted as a major investor concern. However, the real fear is always about a change in the policy along with the government. But regulatory risks continue to exist, irrespective of the political party in power.

Think of it this way, businesses do not stop functioning post-elections, the general public do not stop demanding goods & services; then why should the value of a company deteriorate?

Sure, there will be a temporary adjustment but in the long term, equities reflect the real value of a company. (more…)

MyWay Wealth Weekly Update (Issue #20): India & Mr. Market fight back and more..

“As history has repeatedly proven, one trade tariff begets another, then another – until you’ve got a full-blown trade war”-Mark McKinnon

Early this week the Indian government decided to withdraw the ‘Most Favoured Nation’ status given to Pakistan with a view to facilitate robust and economically favourable trade between the nations. This status was revoked in light of Pakistan’s alleged support to terrorism and infiltration activities against India.

Also, condemning Pakistan’s support to such national threats, the Indian government imposed an import duty of 200%. This essentially implies that anyone buying goods from Pakistan into India would have to pay 200% of the product’s value as import tax. This has effectively result in a steep drop in imports from Pakistan and consequently withdraws meaningful economic support the country received in form of revenues.

Is this economically feasible for India?

Pretty much, yes. A HBL article stated India imports ~$500 million worth of goods every year from Pakistan while India exports goods worth ~$2 billion to Pakistan. This reflects the fact that India makes a net revenue from this bilateral trade that is almost 3x the value of what is paid to Pakistan. (more…)