Author: shyam

Rotation into debt continues

Indian institutional flows into debt has been relentless this year. DIIs have pulled ₹ 12,511 crore from equities and pumped ₹ 2,31,965 crores into debt during Jan-May 2013. It appears that as though the entire market has made a one-way bet that rates are going to fall this year… or have they gone so risk-averse that they have decided to ditch equities completely?

DII fund flows Jan-May 2013

 

FIIs however continued to hoover up equities. Pumping in ₹ 83,206 crores during the same period. Their interest in Indian debt was only a fraction of the domestic appetite.

 

FII flows Jan-May 2013

 

This is interesting because of the questions it raises. Do FIIs think Indian debt is too expensive compared to equities? Are they taking a contrarian stance to domestic institutionals? Is there something wrong with the way our policies are setup that incentivizes foreign investment in equities over debt?

Whatever it maybe, equity investors better pray that FII tide doesn’t turn too quickly.

Previously: The Great Rotation into Debt

 

 

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The value of publicly available information is zero

At StockViz, one of the ways in which we help investors is through maintaining “theme” based portfolios, categorized by risk, style, etc. This way, investors can browse through different model portfolios, inspect their historical returns and choose the style that they are comfortable with. This is diametrically opposite of the prevalent practice of “tips”, “calls” and “multi-baggers.”  Michael Harris over at Price Action Lab has an interesting post up about market calls made by analysts that resonated:

 

Anyone who relies on  selective calls made by analysts, no matter how well-known they are or successful they have been, may never profit in the longer-term, since by virtue of the law of large numbers the success rate of those calls will approach asymptotically 50% on the average.

 

I agree with him. Most “analysts” only have a surface knowledge about what they are talking about. And this is made worse by a lack of process.

 

Trading the markets and investing in financial assets for profit should rely on well-defined, reproducible models that have a proven edge. Unless an analyst can prove that he uses a well-defined procedure to generate market calls, he may be instead generating noise based on subjective criteria and possibly cognitive biases.

 

Unfortunately, for most investors, it is extremely difficult to separate out the signal from noise. But you know what they say: nothing worth doing is easy

 

Source: The Net Value of All Market Calls is Exactly Zero

 

 

 

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Japan: Wild-Wild East

The Nikkei Stock Average closed down 5.2% today, hitting a four-week low (but up 30.7% so far this year.) The market there has been on steroids ever since the launch of Abenomics: an aggressive easing program to rid the world’s third-largest economy of over 15 years of deflation. Its goal? To get inflation up to 2%.

But how much can a central bank do? Its 10-year bond yield is already sub 1% and debt-to-GDP ratio is expected to hit 245% this year. Its probably got the world’s worst demographics: average age is around 47 years… and shrinking: the fertility rate is 1.4 children per woman, vs 2.1 that is needed to maintain a stable population.

In fact, Japan’s economy collapsed into deflation just as its demographics ‘rolled over’ in the mid-1990s.

 

Japan - demographics

Back in 2010, Dylan Grice had predicted Abenomics:

So the path of least political resistance will presumably be to keep yields at levels which the Japanese government can afford to pay, and to stabilise JGBs at levels which won’t blow up the financial system. This will involve the BoJ buying any/all bonds the market can no longer absorb, probably under the intellectual camouflage of a quantitative easing program aimed at breaking Japan’s deflationary psychology. Economists might applaud such a step as finally showing the BoJ was getting serious about Japan’s problems. In fact, it will be the opening chapter of a long period of inflation instability.

 

Grab a box of popcorn, the show is just getting started.

Source:
Rethinking Abenomics
Dylan Grice on Japan

 

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A dose of realism

When the markets keep going up and to the right, it is easy to forget that most of the momentum in the markets is built on quicksand, or so says Ambrose Evans-Pritchard:

 

Interest rates are already near zero across the developed world, public debts are much higher than in 2007, unemployment is already at a post-EMU high in Europe and 27% in Spain. And HSBC says that they “see building evidence of a cyclical downturn.”

 

The last time, the BRICS were in the mid stages of a roaring boom, strong enough to weather the Lehman shock. China responded with what is probably the greatest loan spree in history – $14 trillion of extra credit in four years. None of this can be done again. The BRICS are now nursing post-bubble hangovers as well, and China’s Politburo has no intention of repeating what it deems to have been a serious error.

 

So if this is right and if OECD economies are headed for a cyclical downturn, then all this talk about “tapering” by the US Fed is just that – talk. The Fed is unlikely to risk premature tightening that might plunge the US economy back into a recession. And if reduced Chinese demand for commodities keep raw material prices down, then as Jefferies’ strategists said recently, its almost a global “goldilocks” from the Indian viewpoint.

 

Source: No saviour in sight as world credit cycle rolls over

 

 

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