Author: shyam

Macro Update July 2015

US TREASURIES VS. GILT SPREAD

The spread between 10yr US Treasuries and Indian Gilts remained within a tight range this month.

ust-ind-10yr-spread.2011-01-18

Long term US Treasury yields compressed.

ust-yield-curve.2015-06-30

Institutional investments

FIIs were net buyers in July. A welcome relief after June’s selloff.

fii-investments.2014-01-01.2015-07-31

DIIs joined the bandwagon as well.

dii-investments.2014-01-01.2015-07-31

Oil

Oil got shellacked.

wti-brent.2011-01-18

Gold

Gold got shellacked too.

gold.usd

Copper

Copper got shellacked three.

copper.usd

US Dollar

Here is the rally in US Dollar charted:

usd_fut_chart

Outlook

The fall in commodity prices should be a huge windfall for the Indian economy. However, the pace of reforms have come below expectations. The Monsoon Session of the parliament has been a disappointing mess. This has resulted in extended valuations in quality stocks. With a US rate-hike expected in September, we may see a bit of a wobble that might prove to be an excellent time to “buy the dip.”

Monthly Recap: How’s your macro?

world.2015-06-30.2015-07-31

Equities

Major
DAX(DEU) +3.33%
CAC(FRA) +6.10%
UKX(GBR) +2.69%
NKY(JPN) +1.73%
SPX(USA) +1.43%
MINTs
JCI(IDN) -2.20%
INMEX(MEX) -0.52%
NGSEINDX(NGA) -9.79%
XU030(TUR) -2.49%
BRICS
IBOV(BRA) -4.21%
SHCOMP(CHN) -14.34%
NIFTY(IND) +1.96%
INDEXCF(RUS) +0.87%
TOP40(ZAF) +0.90%

Commodities

Energy
Ethanol -6.07%
Brent Crude Oil -17.93%
Heating Oil -16.11%
Natural Gas -3.76%
RBOB Gasoline -15.34%
WTI Crude Oil -21.37%
Metals
Gold 100oz -6.50%
Copper -9.92%
Platinum -8.90%
Silver 5000oz -4.49%
Palladium -9.26%

Currencies

USDEUR:+1.41% USDJPY:+1.27%

MINTs
USDIDR(IDN) +1.50%
USDMXN(MEX) +2.68%
USDNGN(NGA) -0.13%
USDTRY(TUR) +3.48%
BRICS
USDBRL(BRA) +10.15%
USDCNY(CHN) +0.14%
USDINR(IND) +0.76%
USDRUB(RUS) +11.89%
USDZAR(ZAF) +4.18%
Agricultural
Cocoa -0.56%
Coffee (Arabica) -3.75%
Lean Hogs +3.36%
Cattle -0.95%
Corn -10.04%
Cotton -2.35%
Orange Juice +7.45%
Wheat -18.75%
White Sugar -5.81%
Coffee (Robusta) -13.05%
Feeder Cattle -1.44%
Lumber -12.67%
Soybean Meal -1.42%
Soybeans -7.29%
Sugar #11 -8.91%

Credit Indices

Index Change
Markit CDX EM +0.28%
Markit CDX NA HY -0.15%
Markit CDX NA IG -1.71%
Markit iTraxx Asia ex-Japan IG -3.67%
Markit iTraxx Australia -2.15%
Markit iTraxx Europe -13.99%
Markit iTraxx Europe Crossover -47.76%
Markit iTraxx Japan -5.14%
Markit iTraxx SovX Western Europe -2.34%
Markit LCDX (Loan CDS) -0.06%
Markit MCDX (Municipal CDS) -4.61%
Indian midcaps rallied; the bottom fell out of commodities and oil; China was a total shit show. Will the midcap party continue into August?

Index Returns

index.performance.2015-06-30.2015-07-31

Market Cap Decile Performance

Decile Mkt. Cap. Adv/Decl
1 (micro) +17.40% 76/54
2 +22.15% 87/41
3 +33.99% 97/33
4 +17.22% 98/31
5 +17.19% 89/40
6 +12.51% 85/45
7 +10.13% 78/51
8 +8.94% 81/49
9 +4.99% 74/55
10 (mega) +2.06% 64/66
Midcaps and smallcaps put in some impressive numbers…

Top Winners and Losers

ABIRLANUVO +23.12%
BANKBARODA +23.14%
HINDPETRO +26.40%
VEDL -25.21%
TATASTEEL -18.94%
NMDC -14.15%
Commodities were the most-hated sector…

ETF Performance

JUNIORBEES +6.42%
PSUBNKBEES +6.31%
BANKBEES +2.90%
NIFTYBEES +2.43%
INFRABEES +1.25%
CPSEETF -1.48%
GOLDBEES -6.20%
Hopefully, a crashing gold will wean us off it?

Yield Curve

yield Curve.2015-06-30.2015-07-31

Bond Indices

Sub Index Change in YTM Total Return(%)
0 5 -0.08 +0.88%
5 10 -0.09 +1.12%
10 15 -0.05 +1.04%
15 20 -0.10 +1.57%
20 30 -0.15 +2.20%
The long-end rallied…

Investment Theme Performance

Equity Mutual Funds

Bond Mutual Funds

Thought to sum up the month

Hanging on every twist and turn of the headlines are a group of folks we call “macro tourists.” They are a terrific source of chatter at any cocktail party — such as “Tsipras may have just doomed the Greeks for the next decade.”

Why does this matter to investors? For two reasons: First, macro tourists are everywhere; and second, they seem to be terrible stewards of your capital.

Market-moving headlines would seem to present an opportunity to capi­tal­ize on the potential volatility that often follows.

But here’s the big risk for investors who try to game the headlines: Figuring out what just happened is hard enough; the macro investor must guess at what’s ahead — outcomes for the near and far future as well as the market reaction to those outcomes.

It’s no wonder the macro tourists, both professional manager and amateur investor alike, have been for the most part unsuccessful.

Source: Curse of the Macro Tourist

Weekly Recap: Pick a Valid Strategy, Stick With It

world.2015-07-24.2015-07-31

Equities

Major
DAX(DEU) -0.34%
CAC(FRA) +0.50%
UKX(GBR) +1.77%
NKY(JPN) +0.20%
SPX(USA) +1.15%
MINTs
JCI(IDN) -1.11%
INMEX(MEX) +1.26%
NGSEINDX(NGA) -2.93%
XU030(TUR) +1.96%
BRICS
IBOV(BRA) +4.31%
SHCOMP(CHN) -10.00%
NIFTY(IND) +0.13%
INDEXCF(RUS) +4.60%
TOP40(ZAF) +1.52%

Commodities

Energy
Ethanol +0.54%
Natural Gas -2.30%
WTI Crude Oil -2.89%
Brent Crude Oil -4.46%
Heating Oil -3.15%
RBOB Gasoline -3.34%
Metals
Silver 5000oz +2.76%
Copper -0.84%
Gold 100oz +0.62%
Palladium -2.60%
Platinum -0.48%

Currencies

USDEUR:-0.08% USDJPY:+0.14%

MINTs
USDIDR(IDN) +0.68%
USDMXN(MEX) -0.92%
USDNGN(NGA) -0.03%
USDTRY(TUR) +1.19%
BRICS
USDBRL(BRA) +2.20%
USDCNY(CHN) +0.00%
USDINR(IND) +0.15%
USDRUB(RUS) +5.57%
USDZAR(ZAF) +0.37%
Agricultural
Cattle +2.45%
Orange Juice -0.12%
Lean Hogs +1.09%
Wheat -2.73%
White Sugar +1.04%
Cocoa -0.05%
Coffee (Arabica) +3.41%
Corn -5.17%
Cotton -2.03%
Soybean Meal +0.31%
Soybeans -1.19%
Sugar #11 -0.80%
Coffee (Robusta) -8.77%
Feeder Cattle +0.95%
Lumber -5.54%

Credit Indices

Index Change
Markit CDX EM +0.20%
Markit CDX NA HY +0.10%
Markit CDX NA IG +0.56%
Markit iTraxx Asia ex-Japan IG +3.22%
Markit iTraxx Australia +3.07%
Markit iTraxx Europe +1.45%
Markit iTraxx Europe Crossover +6.61%
Markit iTraxx Japan +1.04%
Markit iTraxx SovX Western Europe +2.40%
Markit LCDX (Loan CDS) -0.04%
Markit MCDX (Municipal CDS) +1.72%
China did its thing and tanked 10%. Overall, not a good week for the commodity complex. Oil took it on the chin. The Nifty managed to end the week in the green.

Nifty Heatmap

CNX NIFTY.2015-07-24.2015-07-31

Index Returns

For a deeper dive into indices, check out our weekly Index Update.
index.performance.2015-07-24.2015-07-31

Sector Performance

sectorperformance.2015-07-24.2015-07-31

Market Cap Decile Performance

Decile Mkt. Cap. Adv/Decl
1 (micro) +1.11% 71/64
2 +3.05% 72/63
3 +3.66% 69/66
4 +2.07% 72/63
5 +1.11% 73/62
6 +0.12% 68/67
7 +1.81% 70/65
8 -0.45% 66/69
9 -0.42% 67/68
10 (mega) -1.64% 64/71
Not a good week for large-caps.

Top Winners and Losers

UNIONBANK +10.66%
GODREJCP +11.97%
BANKBARODA +13.96%
NMDC -10.18%
TATASTEEL -6.85%
EICHERMOT -5.18%
Eicher Motors got dinged with a downgrade.

ETF Performance

PSUBNKBEES +4.89%
JUNIORBEES +1.11%
BANKBEES +1.00%
NIFTYBEES +0.21%
CPSEETF -0.49%
GOLDBEES -0.73%
INFRABEES -4.01%
A truck filled with free tax-payer cash just rammed into PSU banks. Party on…

Yield Curve

Bond Indices

Sub Index Change in YTM Total Return(%)
0 5 -0.06 +0.26%
5 10 -0.04 +0.33%
10 15 -0.03 +0.36%
15 20 -0.03 +0.42%
20 30 -0.03 +0.49%
Not a bad week for bonds…

Investment Theme Performance

Higher Relative Strength Spread translated into better investment strategy performance across the board.

Equity Mutual Funds

Bond Mutual Funds

Thought for the weekend

No strategy is magic; none work all the time. Don’t give up during the periods where it doesn’t seem to work, or when it occasionally blows up. The best time for any strategy typically come after a lot of marginal players give up because losses exceed their pain point.

Source: Pick a Valid Strategy, Stick With It

Profiting from PE Ratio Obsession

Background

We are not big fans of using the Price-to-Earnings ratio. We saw how funds that use the market PE to time the market are no better than a buy-and-hold strategy (sometimes B&H performs better,) and we followed that up with how every single “ratio” has a caveat. And PE is the dumbest of them all.

However, if a large group of market participants pay attention to single flawed metric, then there should be a profitable arbitrage strategy that exploits that anomaly?

Exploiting PE obsession

Researchers in the US figured out a way to do just that.

Active investors with limited attention and capital constraints use fundamental metrics to screen and sort potential investments. Price-earnings (P/E) ratios are extremely popular, and are typically calculated using four trailing quarters of net income. Changes in the rankings of published P/E ratios may influence investor attention and subsequent excess returns. From 1974-2013, decile long-short portfolios formed on characteristics of P/E rankings which are rebalanced monthly earn value-weighted monthly excess returns of 101 basis points with annual Sharpe ratios of 0.79. Decile long-short portfolios which are rebalanced daily earn value-weighted daily excess returns of 16.99 basis points with annual Sharpe ratios of 2.91. Excess returns are robust to size, value, profitability, investment, price momentum, earnings momentum, short-term reversals, and relative volume. Changes to a stock’s P/E ranking predicts excess returns even when the stock’s P/E ratio itself does not change. The return premium cannot be explained by fundamental risk, clustering of attention at round number P/E ratios, or autocorrelation in the regressors.

We haven’t tested this for the Indian market yet. But this is just too cool not to share!

Paper: Rankings of published price-earnings ratios and investor attention

Weekly Recap: Roller Coaster Investing

world.2015-07-17.2015-07-24

Equities

Major
DAX(DEU) -2.79%
CAC(FRA) -1.31%
UKX(GBR) -2.88%
NKY(JPN) -0.52%
SPX(USA) -2.03%
MINTs
JCI(IDN) -0.27%
INMEX(MEX) -2.26%
NGSEINDX(NGA) +0.14%
XU030(TUR) -4.70%
BRICS
IBOV(BRA) -6.06%
SHCOMP(CHN) +2.87%
NIFTY(IND) -1.03%
INDEXCF(RUS) -3.30%
TOP40(ZAF) -2.54%

Commodities

Energy
Ethanol -4.06%
RBOB Gasoline -4.46%
Brent Crude Oil -4.02%
Heating Oil -1.74%
WTI Crude Oil -5.35%
Natural Gas -2.77%
Metals
Gold 100oz -3.05%
Palladium +1.49%
Platinum -1.18%
Silver 5000oz -1.35%
Copper -4.80%

Currencies

USDEUR:-1.16% USDJPY:-0.19%

MINTs
USDIDR(IDN) +0.70%
USDMXN(MEX) +2.26%
USDNGN(NGA) -0.03%
USDTRY(TUR) +3.28%
BRICS
USDBRL(BRA) +4.95%
USDCNY(CHN) +0.00%
USDINR(IND) +0.90%
USDRUB(RUS) +2.83%
USDZAR(ZAF) +2.53%
Agricultural
Coffee (Arabica) -4.47%
Coffee (Robusta) -0.56%
Corn -6.67%
Cotton +0.03%
Wheat -7.62%
White Sugar -3.08%
Orange Juice +2.83%
Feeder Cattle -2.46%
Cattle -2.62%
Cocoa -3.88%
Lean Hogs +2.41%
Lumber -4.10%
Soybean Meal -1.83%
Soybeans -2.34%
Sugar #11 -5.94%

Credit Indices

Index Change
Markit CDX EM -0.39%
Markit CDX NA HY -0.72%
Markit CDX NA IG +3.51%
Markit iTraxx Asia ex-Japan IG -0.56%
Markit iTraxx Australia -2.39%
Markit iTraxx Europe -0.14%
Markit iTraxx Europe Crossover +7.87%
Markit iTraxx Japan -1.57%
Markit iTraxx SovX Western Europe +1.59%
Markit LCDX (Loan CDS) +0.00%
Markit MCDX (Municipal CDS) +0.01%
An uneasy week that saw most indices weak. The entire commodity complex came crashing down. Gold, copper, silver, oil, grains… pretty much every commodity was down.

Nifty Heatmap

CNX NIFTY.2015-07-17.2015-07-24

Index Returns

For a deeper dive into indices, check out our weekly Index Update.
index.performance.2015-07-17.2015-07-24

Sector Performance

sector performance.2015-07-17.2015-07-24

Market Cap Decile Performance

Decile Mkt. Cap. Adv/Decl
1 (micro) -1.58% 73/62
2 +0.74% 69/66
3 +8.28% 69/66
4 -0.03% 71/63
5 +1.95% 70/66
6 +0.73% 65/70
7 +0.40% 72/63
8 +1.34% 70/65
9 -0.35% 63/72
10 (mega) +0.01% 70/65
Looks like there was an outlier that bumped up a microcap stock…

Top Winners and Losers

INFY +8.56%
ABIRLANUVO +8.56%
IBULHSGFIN +8.86%
LUPIN -15.25%
SUNPHARMA -11.76%
CONCOR -11.74%
Sunpharma’s warning, Lupin’s disappointment and Infy’s optimism…

ETF Performance

INFRABEES +1.50%
JUNIORBEES -0.66%
NIFTYBEES -1.12%
CPSEETF -2.56%
PSUBNKBEES -2.76%
BANKBEES -2.94%
GOLDBEES -3.13%
Gold got shellacked…

Yield Curve

yield Curve.2015-07-17.2015-07-24

Bond Indices

Sub Index Change in YTM Total Return(%)
0 5 +0.02 +0.12%
5 10 -0.04 +0.35%
10 15 -0.01 +0.22%
15 20 -0.02 +0.34%
20 30 -0.02 +0.36%
The long end of the curve was in the green after a long time…

Investment Theme Performance

A mixed bag. Momentum ended flat as Kitex got whacked…

Equity Mutual Funds

Bond Mutual Funds

Thought for the weekend

Big money is in buying and holding great businesses acquired at reasonable valuations. Owning such businesses will produce gut-wrenching roller coaster rides which the investor has to have the willingness to take. They can’t avoid those rides by jumping out and trying to get back in, and attempts to do so are likely to be unsuccessful. So, the best strategy is to stay put and bear it.

Source: Sanjay Bakshi