Archives 2021

It’s an interesting read for everyone about these two financial instruments, which has the potential to create a huge amount of wealth, over a medium to long term. ETF, Exchange traded funds and Index Funds are almost same with few differences as highlighted below.

Index funds are mutual funds associated with a particular index like,

• Sensex
• Nifty
• Nifty IT
• Nifty Bank
• Dow jones
• Nasdaq
• International Market, etc.

These funds buy securities in same proportion as they are in the above respective indexes, to create a mirror image of them.

This is done, so as to give a chance to an investor to take exposure in a particular theme for generating better returns, thus creating alpha.

If an investor thinks, that in coming time, NiftyBank will do better than Nifty, then they can go ahead  and invest in that particular index rather than investing in entire sectors through Nifty.

Also, risk for the invested amount gets diversified as the amount goes into multiple securities of that index. This means that if one security falters in its earnings and returns, it is made up by others.

There are also several criteria’s for stocks and securities to be a part of index like:

• Certain size of a company.
• Certain minimum number of volume in trades.
• Past performance.
• Growth potential in revenue and earnings.

Only, when all the above check boxes are ticked, a company becomes a part of an index. Thus, an investor doesn’t have to do that homework at his end for carving out quality companies to invest.

This also ensure that laggards in index are taken out from time to time and are replaced with new winners.

Hence, an index over a medium to long term will always give decent returns to an investor by minimizing risk.

Few of the index funds in India are:

• HDFC Index fund, Nifty 50
• Motilal Oswal S&P 500 Index fund
• Axis Nifty 100 Index fund, etc.

If above index funds are listed on exchanges and can be traded like securities, then these are called ETF, exchange traded funds.

Few of the advantages and differentiating factors of ETF’s are:

• They are traded like securities and hence can be bought and sold like a share.
• You get the price at which you buy or sell. Where as, in the case of Index funds, NAV’s are declared at the end of the day. Hence, depending upon time of your purchase, value of investment varies. This is a differentiating factor when there are days in stock market of big movements like 4-10%.
• In ETF’s, one unit can also be bought and investments can start with a very low amount too. However, in index funds, there might be a certain criteria for a minimum amount to be invested.
• In an index fund, there can be a condition of lock in. This is not the case with ETF’s.
• In ETF, cost is slightly higher as there is STT, securities transaction tax and other government taxes involved. This is not the case with Index funds.

Few of the ETF’s are:

• Kotak Gold ETF
• Motilal Oswal Nasdaq 100 ETF
• SBI ETF Sensex
• Nippon ETF Hang Seng

Hence, it is clear from above that index funds and ETF’s are a great financial instruments, which offers an opportunity to an investor to diversify his risk and ensure decent returns.

I would again like to highlight the biggest advantage of such funds is that laggard companies are replaced from time to time and better performing ones are inducted in it. This ensures much better returns and fund value grows over time, as compared to other styles of investing in secondary markets.

Blockchain is the latest technology which has come in Vogue and is there since 2009. It is the base and founding block of Cryptocurrency and the famous one – Bitcoin.

It is a shared e-ledger, which keeps a track of transactions that takes place on it and cannot be altered.

This facilitates the exchange between two entities swiftly, as the records become eternal and cannot be tampered with.

If there is a blockchain network, it can be accessed only by its members and all the details are shared and available, thus making it transparent.

It got its due in Jan’09, when Bitcoin was launched using it and the world saw its application and benefits.

Bitcoin, also called a cryptocurrency, has gained a lot of popularity since then and has moved from almost no value to a high of $60,500 in April’21, per bitcoin.

Please find the movement in price of Bitcoin in all these years below:

There are currently close to 4500 cryptocurrencies in the world and their king is Bitcoin because of:

• Value – Market capitalization of Bitcoin has touched $1 trillion in 2021.

• Popularity – It is a topic of discussion for every investment entity, with its vertical rise in last 2 years. It has gone up by 15-20 times since 2019. No other asset class has given such returns, not even close to it

• No control and tracking – If someone has cash or anything of value, it is always a subject of scrutiny in terms of its income source. There is also a fear of theft and a number of controls. Also, if you want to move it from one country to another, there is a tedious process for the same. Bitcoin is a single answer to all these problems. All you need is a login ID and a key. Then, no one can track your holdings. It can also be transferred to any person in the world using an electronic device and doesn’t attract any fees, attention, etc.

Above are few of the benefits and reasons as to why Bitcoin has become so popular in such a short span of time.

If someone wants to trade in them, there are various options in India through which a trade can be taken.

Although, RBI in 2020 has come out several restrictions on trading in Bitcoin, still it doesn’t barred people from taking a position in it.

If you want to take a trade in it, please do it with following caution points:

• Bitcoin doesn’t have any fundamentals attached to it. Its trading at $60k because someone is buying it at that price. It has seen a correction of close to 70% in 2018 and it can see it again. If we try to understand the reasons of decline, it would be difficult. Similarly, it will be difficult to ascertain the reasons of its rise.

• We are still a long time away when Bitcoin can, if it ever happens, be used for buying goods and services, just like we can do it with a normal currency. Although, Tesla has started accepting it as a form of payment, we are still far far away from a reality, where in, it can be used internationally as an alternate currency.

Above is a synopsis of history of Bitcoin and its benefits and challenges.

Our stance on investment in it is very very cautious. If someone wants to trade in it, please do it at your own due risk as its difficult for us to attribute any fundamentals to it and a price target.

Indian indices took a nosedive last march in 2020 amidst Covid concerns and nifty touched a low of 7500. Since then, it’s a vertical rally, what we call a V- shaped recovery and Nifty touched a high of ~ 15500 in 2021 overtaking its previous high of ~12400. Almost everyone thought that Covid 19 is over and we are out of the pandemic. Its just at this feeling and moment, the imminent second wave of Covid 19 has begin and is happening.

The sectors which were laggard from last 3-4 years:

-Metals

-Pharma

-PSU, etc.

turn out to be one of the best performers in last one year.

What changed after Mar’20 was the action by central banks to be dovish and coming out with monetary and fiscal support for their respective economies.

This leads to a reflationary scenario and leads to higher GDP and inflation.

In a inflationary scenario, the prices of products, commodities, services, etc go up and mostly its because of higher demand. This also means that margins of companies take a hit as raw materials prices go up and they cant increase the prices of finished products in same proportion, as it risks their volume and revenue.

Still, an overall economy does a lot better when there is inflation as compared to when there is deflation.

The classic case in hindsight for same is the period from 2002-08, when the whole inflation and reflation trade played out so well and it was a boom time for corporates, individuals, professionals, economies.

As we say that history doesn’t repeats itself but it do rhymes, this period from 2020 is believed to be the same case of higher inflation, higher monetary and fiscal support by major central banks across the world, to increase output, demand, sentiment, etc.

Hence, it’s expected that Indian and major developing markets will do well during this phase.

However, in India, from April’21, we have started seeing the second wave of Covid where in fresh daily cases have again spiked to more than 1 lac. The same situation of higher daily cases is also seen in US, Germany, Brazil, etc. This leads to restrictions and lockdowns, thus bringing down the pace of earnings recovery which was anticipated by street in 2021.  

Although a parallel argument of vaccines, available covid treatment, awareness of what needs to be done can be given, but it doesn’t takes away the fact that pace of recovery will be slow and not V shaped, as was in the consensus.

If we take a look at major markets across the world in April’21,

• Dow Jones –  Touched an all time high of 33,800
• Nasdaq – Is at an all time high of 13,845.
• S&P- Made an all time high of 4128.
• Dax- At an all time high of 15235.
• FTSE –  Is closer to 7000.

Its only Indian indices which are under performing and the reason is Covid’s second wave.

As per me, in this quarter, with some help from weakening rupee, sectors which will render support are:

• Metals – The cycle has just begin after a lull of many years and will last for atleast 2-3 more years.
• Information technology – Digitilisation is the the new disaster recovery plan and buzz strategy for every entity. This will ensure good deal wins, consistently high revenue and better margin for these companies.
• PSU
• Pharma
• Capital Goods
• Cement
• Real Estate
• Auto’s –  As the demand for personal mobility would be on rise amidst covid concerns.

The sector which are high beta and could take time to deliver are :

• Banking
• Consumer discretionary like Malls, Cinemas, Cruise, etc.
• Restaurants
• Small retailers
• Small and medium enterprises

as they are affected by lockdowns and sentiment.

But here also looking at the stance of RBI and favorable credit cycle, it’s a matter of time, before they join the list of performers.

Our stance is cautiously positive on Indices with major action happening on individual stocks like Adani group, MF companies, Life insurance plays, JSW steel, Sail, Hindustan copper, Hindalco and the likes.

Be cautious and look at the range of 14250-15000 on Nifty.

The decisive movement on any side will be seen in direction of the point where this range is breached.

RBI came out with its policy on 7’th April and kept the key interest rate unchanged.The highlight of the monetary meeting and policy is dovish stance by Indian central bank too, following its international peers.

The Repo rate stands at 4% and reverse repo at 3.35%.

[ Repo rate is the rate at which RBI lends to commercial banks and Reverse repo rate is the rate at which banks lend to RBI].

The key takeaways were:

. The dovish stance by central bank saying that they are in line with the target for higher growth with inflation target of 4%, plus minus 2% for coming few years.

. They are committed to ensure that there is ample liquidity in system so that corporates and any entity who is worthy of credit gets it. This will ensure that key macros like credit growth, core sector growth, lower unemployment, etc. remains intact.

. GDP estimates for FY’22 is kept at 10.5%. This is very conservative from my view and I think India is on its path to achieve a credit growth of 13-15% in this financial year. Even IMF this week up the global growth forecast to 6% and estimated India’s growth at 12.5%.

. The central bank announced that they will be buying government securities worth 1 lakh crore from secondary market in Apri-June’21 quarter.

This along with other factors like higher trade deficit of close to $15 billion in March’21 and Covid 19 concerns took USDINR to 74.5 from 73.5 in a day. It’s the biggest fall which was seen in Rupee in last 20 months.

. Above announcements also soothed the bond market and 10-year G-Secs cooled down from a high of 6.17% to 6.08%.

If we try to decode above announcements for our bond/debt portfolio, following will be the key takeaways:

. Interest rates on 10-year G-secs will be around 6% and RBI participation will mean that interest rate rise will be checked.

. Thus, a long-term( 3-10 years) bond portfolio will give a return of around 6-7% for one year, if excess risks are not taken.

. Hence, for fresh investments, looking at the credit cycle, investments can be made in ultra-short term or liquid funds which will fetch around 5.5-6.8 % return for one year.

. Floating rate bonds can also be considered, which looking at current juncture and the range of interest rates, can give an average of 8% returns.

In continuation to our last post on 30’th Mar’21, when we expressed our bullish stance on gold, it has rallied close to 3%. There was a huge consumption demand for Gold in March 2021, breaking all previous records. In Feb’21, India imported close to 56.5 tons of Gold. This is highest for India for any month since April’19. The big surprise came in March’21 when India’s gold imports surged by 471% on an annualized basis and was 160 tons.

Goldm Jun Fut in India is closer to 45700 on MCX and international prices are at $1738. If they stay above $1725, then the next level to be tested is $1765, which is a 3-4% upside from current levels.

In our opinion, we are extremely bullish on gold because of the following reasons:

1. Higher Government Debt across the world – Please find approximate current debt of few major countries in the world,

This high level of debt leads to fiscal uncertainty and inflation outbreak. This is positive for gold prices. Also, as the size of Fed balance sheet keeps increasing because of debt monetization, it leads to an extended time and era of negative real interest rates, which is again a bullish case for gold prices

2. Higher Stimulus – Since April’2020, governments across the world have come out with huge stimulus packages to support their economies against the ramifications of Covid 19 pandemic. The case in example is of US. It has given close to $8 trillion dollars in total relief packages since Mar’20. This has again increased debt and creates inflation, which leads to gold buying as a safe haven. Also whenever there is a major relief package announced by US Fed, it leads to a lower dollar value which is a spur for higher gold prices.

3. High Demand – With prices of Gold having corrected by 20% since Aug’20, the demand has spurt in two major consuming countries, India and China. Data and reports suggested that Switzerland, which is world’s biggest gold refining centre, exported huge quantities of gold to Thailand in 2021, which is a regional trading hub in Asia.

In Feb’21, India imported close to 56.5 tons of Gold. This is highest for India for any month since April’19. The big surprise came in March’21 when India’s gold imports surged by 471% on an annualized basis and was 160 tons.

This support by high demand leads to a base formation in gold prices and it gears up to move higher when other supporting criteria’s moves in its favor.

4. Negative Real Yields –  As highlighted above in points 1 and 2, negative real yields with high inflation and lower interest rates are here to stay and this will drive Gold to new highs. We expect this to continue for an elongated time for at least 3-5 years.

5. Geo Political Risk –  World has not been a safer place in last so many centuries and current times are no different.

The world saw World war 1, World war 2, Cold war, Vietnam war, Afghanistan war, Asian crisis, Gulf war in the last century. This century started with dot com bubble burst, 9/11 attacks, Global financial crisis, Covid 19 pandemic, etc. All these scenarios lead to investors and liquidity rush to Gold and the coming times will be no different, with many geo political risk coming to life.

Hence , with so many factors turning positive for gold in last couple of years, we would like to conclude that it presents a decent opportunity to invest for medium to long term at the current juncture.

It was just on Thursday, 1’st April’21, when everything was looking bullish and happy on indices and here comes the Covid jitters for Indian stock markets. Nifty was down by almost 400 points at one point. It finally closed at 14637, down by 229 points.

Last week, out of three days of trading, Nifty closed above 14850 on two occasions, which is a key resistance level and after the announcement of:

1. US Infrastructure package of $2 trillion last week.
2. Much better than expected employment data on Thursday where in the US economy added close to 9 lakh jobs against the expectation of 6 lakhs.

The expectations were of a higher opening.

I understand that these are US announcements and the usual thought is that how come we will be affected by it.

Well, looking at last 3 decades, barring companies which perform exceptionally well and their growth reflects in their share price, we are influenced by global factors in short term.

Please find the sector wise break up of Nifty:

It is evident from above that sectors like Pharma, IT, Metals which are much more closely related to US and global economy, drives and control a significant portion of nifty earnings and valuations.

Also, the role of FIIs and foreign money plays a major part in driving our stock markets and we can’t be insulated from mother market, which is US.

Over the weekend, India became a no 1 country in terms of daily Covid cases with 1 lakh count and thus it was followed by very strict lockdown guidelines in Maharashtra and Rajasthan. This spoofed the markets and the fear drove them lower.

With earnings that will start coming in from next week and optimistic US economy scenario, we are cautiously positioned on the markets.

As we have highlighted before, please watch out for earnings and from technical stand, keep an eye on sectors and stocks which are correcting less than the market, as they are the ones which will drive the next leg up.

Our bias is also towards PSU basket with latest announcements by Indian government in budget’21 and certain stocks can be looked at like PSU banks, Gail, BPCL, etc.

At an index level, keep an eye on the range of 14250-15000 for Nifty.

In a truncated week from 30’th Mar – 1’st Apr’21, Nifty closed at 14867. It is above the 20 day MA of 14820-14850 zone. It did the same on 30 Mar too but then the selling at higher levels dragged it lower. The important point to note is that bulls are still not giving up and every low has turned out to be a buying opportunity in last one year. The tussle in between bulls and bears of Nifty 50 continues.

With rising dollar index above 93 and US 10-year bond yields at 1.7%, I guess the market still wants to bet on earnings and inch up.

Our all-time highs on Nifty was closer to 15400-15500 levels.

With several attempts that were taken by market to cross all-time highs in last few weeks have failed, we are continuously making lower lows and lower highs.

Let’s wait and see the direction of index next week, when we will have full 5 days available.

Looking at fading momentum on the up side and various indicators like:

1. USDINR testing its resistance of 73.5-73.8 where in the expectation was of lower levels earlier.
2. Rising Covid cases and fresh stricter lockdowns.
3. Slower pace of vaccination.
4. Margins getting impacted because of high inflation.

 It will be a cautious watch and next strategy and action should be taken after watching certain key levels like 15100 on the upside and 14250 on lower side.

On a long-term basis, we are in a bull market in India but looking at the short term, we can be due for some correction.

As it will be a result season and month in April, earnings and valuation based Buy/Sell calls can be taken for long term investment.

Joe Biden announced a $2 trillion infrastructure package bolstering the much-needed revamp in US across ports, roads, etc. This will translate into a huge support to US and world economy

As per the observations and trends, the spent by US in last many years out of their budget in Infrastructure has been low and with the rise of china as an infrastructure and a manufacturing hub of the world, US turn was long awaited.

This was taken up by current US President, Joe Biden on 31’st Mar’21.

This is significantly positive for steel which is a ferrous metal. It is estimated that for every billion-dollar spent on infrastructure, proportionate requirement for steel is 50,000 ton.

Also looking at the current unemployment levels, infrastructure package also addresses it. Every trillion-dollar spent on infrastructure ends up creating 11 million jobs.

Going by the announcements, there will be a greater focus on energy and electrification too and it will be hugely positive for Nickel, Copper, Silver, etc.

Some of the plans are for 500 thousand new charging stations and similar number for conversion of school buses to zero emission. This will alone require close to 200 thousand tons of copper. Also, renewable sources of energy require an estimated 5 times more copper than conventional sources.

All in all, positive for base metals and steel.

Base metals are like spartans in the current environment, standing tall and resilient in front of Persians in the form of:

1. 130 basis point rise in US 10 year bond yields in last one year to 1.77%.
2. Dollar Index at 93.4
3. Higher Covid cases with third wave in Europe and second in India and Brazil. This leads to uncertainty in economic recovery and thus lower demand for infrastructure and industrial related metals.

With Dow Jones, Nasdaq, Nifty, Sensex, DAX, FTSE, Hang Seng, etc taking hit in last 3-4 weeks because of the above-mentioned reasons, base metals are standing tall. With the exception of Nickel which has seen a decline of more than 10% from higher levels, other metals like Copper, Aluminum, etc. have not taken a double digit correction.

Looking at their strength and other macros, it looks like that they are consolidating and gearing up for the next move.

Our bias will be towards Copper here

and Steel in Ferrous metals.

After yesterday’s fierce move on Nifty 50 when the benchmark was up by almost 2.4%, its time for some consolidation today. It will be a wait and watch mode for Nifty 50.

Double whammy and twin concern in the form of US 10 year bond yields at 1.75% and Dollar Index at 93.4 is not giving positive signals for developing markets like India.

Also, Nifty took resistance at 20 day MA ( Moving Average ) at 14850 and has retraced from there.

Hence the call would be to wait and watch levels of 14850-15000 on up side and 14250 on downside to call some sense of direction.

On cash side, few of the interesting calls and bets can be taken on:

1. IT- Stocks like TCS, Infosys, HCL tech, etc which will benefit from depreciating INR and higher Dollar index. Also because of the digitalization wave after pandemic, the revenue pipeline and earnings for last quarter of FY 21 would be good.
2. Pharma – Pharma as a sector is in a consolidation zone since 2015-16 and broke out in 2020 because of Covid. This also benefits from higher conversion rate of USDINR. Also, the overhangs in sector because of US FDA has trimmed down because of higher demand for medicines and India is a key exporter. Hence, stocks like Sun, Lupin, Dr Reddy looks good from current levels relative to the overall market.
3. Consumer Staples – Evergreen defensives like HLL, Colgate, Dabur, etc. seems to gain in the current uncertainty and can be looked for accumulation.