Are those the OMCs like IOCl or the producers like ONGC? Also for long term, do you prefer a OMC or a producer? Considering producers are battered badly for fall in crude but they were anyways not making proportionate profits because of subsidy. With fall in crude, their exploration costs would come down. And ongc now has a significant omc subsidiary as well. Would be nice to know your thoughts on omc vs explorers/producers with specifically to ONGC
ONGC is disadvantaged as its cost of production is high vs global players … ( I think it is around $35-40 per barrel - and with tax it comes to near $52 per barrel ) - So ONGC needs Crude to be > 60 to make profits
OMC are just converter so basic commodity prices have no meaning + they have distribution network which is difficult to replicate + Govt has allowed price to be a bit higher so that they can cover BSVI capex cost
In some bear market - Prices get depressed but valuation impact is minimal and hence we get bargains -
In some bear market - Prices and valuation both drop - this is becos there is generational impact on consumer behavior … Here you get value traps
In this bear market I see some industries may have generational impact on consumer behavior
So while it is great to be bull in bear market one needs to be mindful if there is significant consumer behavior change in businesses you buy in so one needs to be careful
Macros that can effect business dynamics & hence consumer / business behavior
- US loses reserve currency status
- Crude Oil prices are < $ 30 for long time
- Nationalisation / Localisation Drive
- Health care budgets
Interesting observations in lockdown
1)Godrej properties sell 500 home using digital tools and Sobha claims 50 crores sales during Lockdown ?? IE DIGITISATION & ECOMMERCE will be key part of future strategy for even durables and high value purchase categories
HPCL management says oil demand is lower by 60% - but refining output is > 50% - as Storage are used for excess product while at the same time LPG demand is very high depleting inventories … ie Supply Chain Management across companies will be key driver of success in next few months - Inventories , Woking capital Management and finally Logistics will get more attention/ money than Marketing & Advertising …
Bajaj Finance says stress is visible across categories of clients becos of variable income and constant EMI issues while HDFC banks says its client are primarily steady income earners and constant EMI is not an issue … Now for finance company besides ALM mismatches one need to map Client ALM mismatches too ??
Auto companies have not leveraged ecommerce as well as real estate ?? - Been stuck with inventories … It tells one business model where company can sell WIP goods is better than company that have to sell only finished goods … as Collateral risk is lower ??
The swing to optimism from pessimism has been very swift .
It has given a great chance to build portfolio and get rid of dead woods …
Now it is time to be extra careful also asset allocation has increased towards equity due to sharp rise. Might have to cash out few stocks to balance asset allocation
It does not matter what led to up and down of Nifty or whether Nifty will go down again .
What matters a lot is what will we do at different of level Nifty and stocks prices . This will move us to action mode from spectator mode.
I had outlined my intention in my thread Portfolio Analysis - Shailesh right in 2018 …
Here is a very good podcast https://www.theinvestorspodcast.com/episodes/tip300-current-market-conditions-w-preston-and-stig/
One of the things he talks about is the price in the context of money supply. (From 800 billions in 2008 to 7.1 T now.). So the money supply itself has increased by a CAGR of 23%. He says that price increase in last 2 month doesn’t mean anything since 3 trillion was added to the system. ( As per him, effectively the value is the same)
@kb_snn @edwardlobo Your thoughts on this?. I think this kind of reckless QE is very bad and its preventing price discovery in the market.
There are other problem in the system, which they’re trying to solve by injecting money. Injecting money is effective if the system has a liquidity problem, it’s not if the system has a solvency problem - which is the case now.
The way to go about it is to let firms and banks fail and then lets things grow up from the rubble, but the powers-that-be are trying to maintain status quo. What that is doing is the same as what’s been happening in Japan since 1990 and in Europe and Merican since 2008. All that money is going into financial assets.
For now long financial assets as long as they can ignore the real economy. But there is a huge problem of dollar shorts in the eurodollar markets and atleast USD markets won’t be able to ignore that for long (but we may have to wait an year for that).
QE in 2008-2010 helped US and world to avoid nasty depression .
Since we were in lockdown and the business were just not working - to avoid mass layoffs and business closures - leading to 1930s-32 kind of event QE does help .
What one may debate is quantum and velocity of QE … but these debate are endless with equally strong pros and cons
But what is imp for investors like us is – > what are actionable points /areas
The only key point for us is to buy good growing business at reasonable valuation
While we had some business at mouth watering valuation in March - May … by June the bargain options have dramatically reduced .
But such rallies gives one opportunity to get out of positions that you feel are overvalued or not great to hold on… thereby achieving planned asset allocation . That is what I am doing in June .
I am no longer as bullish as I was in last 2/3 months
It was great conviction at that time and high equity allocation helped PF to perform pretty well .
But it is good time to revisit the Portfolio again … It is interesting as now different sectors are in different phases of optimism .
Couple of things to monitor to realign PF
Indian & US Macros are at record best , while China is struggling → Things can change fast post Winter Olympics
Fed tapering and interest rate reversal in Next year
++ good time to Revisit mistakes done and strategies that worked in last 18 months …
Will share this over next month …
My views & action 2022
- Liquidity : Last 2 years market has gone up on strength on liquidity . For the first time in last 2 years incremental Liquidity flow is under threat . $1 trillion treasuries held by Fed will mature this year and US govt annually has over $2 trillion budget deficit . If Fed winds down treasury purchases - this will lead to market absorbing this kind of debt flow leading to liquidity shortfall for emerging market . So this might lead to following
a) Good scenario - >Market collapses big time - This will force FED to reverse tapering and yield hikes leading to sharp recovery for equities esp emerging markets
b) Bad scenario : Market knows about fed action so grinds slowly down or undergoes time correction . This will not pressurise both Fed and US Govt for any action leading to low to negative equity returns for longer duration
- Inflation -
a) Transient : Most analysis on inflation is that it is driven by supply chain bottlenecks and hence will correct post COVID … If this is so then market will have good economic growth post COVID and businesses should do well …
b) Inflation shift is structural - High Expectation of inflation enters into wage negotiation leading permanent reset in wages w/o increasing productivity , Anti globalisation ( nationalisation , China +1) etc leads to sub optimal production location and higher production cost - Young people instead of entering workforce blow money on speculative non productive activities including fraudulent Ponzi schemes . If this situation plays out this will lead to lower corporate profits and possible even lead to stagflation in not addressed on time
- Geopolitical Risk : China + Russia versus Rest … This is very big risk that can happen if politicians get desperate when esp if economic growth is bad or inflation is very high …
The right strategy now is to have
One year of expenses as cash/ equivalents , have 2/3 years expenses in debt funds and rest in equity + real estate. . Focus on Asset allocation more than stock picking in this year
If in Debt - Reduce Debt as much as possible
Excellent points & thought process. Out of above points, for me - Inflation is the biggest risk…as that is the only one which would directly impact performance of the businesses I hold. Similarly, for some other businesses, Geopolitical may impact business performance. Liquidity is important from market movement perspective but it doesn’t impact my businesses’ performance - so I am relatively good with it…
I liked the way you have mentioned the good & bad cases…intrigued that in first case - is it good because you anticipate recovery to newer highs? and also good from perspective of utilizing the crash opportunity?
For me, either scenario looks more or less similar as in long term, business performance will chart out the actual path…Thanks
To revisit what I said in Jan 2022
The Market and Fed have played guessing game as discussed in Bad scenario … This is bad for market returns over medium terms … We may see slow de rating of risky and high priced assets , while value stocks which generate cash will give good return …
Asset allocation strategies where in key last year as Macro / timely sector rotation gave max Return … As a result Portfolio returns relative to benchmark indices were excellent last year .
Starting Sep 2022 I am reducing opportunistic stock allocation ( energy , auto and shipping ) and they have run their course and have started increasing long duration bond allocation and Pharma from Sept 2022 onwards …
Fed Powell Remarks is slowly indicating we are in last phase of LT bond bear market … Rather we may be we have already stepped in first phase of LT bond bull market …
It is time to lock in funds for LT in fixed income esp if you are looking into Gsec etc .
In 2013 -2016 - in matter of 3.5 years many Government securities bonds gave > 50% return ie near 17% pa and after considering indexation benefits - Post tax returns of near 15% …
It is time to move mutual funds from Liquid to long duration bonds
Hi Shailesh - Request you to elaborate more on it. Below mentioned GSec is available for investing in my Demat.
Name| Government Of India Bonds (G-Secs)
Min. Investment | 10,600
Tenure (years) | 7
Coupon / Indicative Yield (%) | 7.10 / 7.27
If held till maturity, one would definitely earn the Indicative Yield (%). During this tenure, any decrease in the interest rates compared to the current rate will add to the returns as the Bond price will appreciate in that scenario, and the holder of the bond will be able to sell and book the capital gain before maturity.
Is that what you meant?
It is better to play this through Mutual funds for better tax efficiency …
There are multiple Gilt funds and GSEC ETF offered by Mutual funds
Thanks for resharing the post and it has been one of most relevant ones!
Curious what exactly you refer to as risky assets here…would be nice if you can elaborate and give some stock examples to understand the essence of your thoughts…
For 2-3 years period of expenses, which is better - FD or debt funds? How much maybe the positive divergence for the relative risk we might take in debt funds?
This cannot be answered unless the tax bracket one belongs is mentioned.
Money market funds or UST funds can be looked at, which can give better returns than FD, considering the low duration bonds they hold, and the indexation benefit if they are held for 3 years.
The default of a bond or a couple of bonds always exist, so one has to be prepared for this. Although to decrease this or even eliminate this, one can look at all the bonds in the PF of the funds and see if any bonds are downgraded, one can even look at the AUM decrease in correspondence with the downgrades, which could indicate a default. Tedious but helps.
Invested in debt funds.
If you have horizon of 2/3 years … This is right time to lock funds in long term Gilt funds ( > 10 years duration ) . The default risk is zero as they are Govt securities plus any future interest rate reduction will enhance your returns … 3 years will mean you will get indexation benefits
In debt funds for few extra % one should not take credit risk … It is better to be in Govt Securities
This also means that any future interest rate hikes will diminish the returns.
Haven’t you witnessed volatility in the NAV with these funds, even notional capital loss just like equity?