On its own gravity!

Gold is an asset class on its own and is the only commodity cum currency that has delivered positive annual returns for a decade now. In the last five years the yellow metal has generated a CAGR of 19.66%. Unlike the exponential return seen in its earlier bull market (as in early 1980s), it now seems, for the time being at least, the reservoir of reserves from this asset class is exhausted as no asset classes can give you positive returns perennially. The water has to sink low enough and then start to refill back. It may take few months or quarters for the lakes to refill back to reach an overflow level.

When the asset allocation pattern changes, the fund flows into USD and other developed equity markets; and gold will fall on its own gravity given the unprecedented rally witnessed all these years. This of course would be a short term phenomenon and the yellow metal will eventually rise. In today’s world, gold is viewed as a currency and as the USD strengthens for whatever is the reason, the XAU/USD shall drift down, implying lower dollar denominated gold prices.

Indians have accepted higher gold prices; but don’t like the volatility in prices. Jewellery consumption in India in 2011 has been affected by concern over inflation and the level of the rupee and will have an impact going into 2012. India and China shall continue to be the big markets for precious metals jewellery segment in 2012. But, higher gold prices, an uncertain economy and fluctuating exchange rates (read dollar strength) will continue to affect buying habits. Nevertheless the recent hike in import duty and tariff value in India will only arrest the fall and shall not stop it. This does not mean gold is on the path to a long term bear market. All it gives is a pause on a long marathon that started way back in 2001. The rally will continue for many years and gold is just refilling its reservoir and its energy for the best of years that is yet to come.

For those of us who have seen gold from close quarters now knows for a fact that we are entering an interesting phase on the long Bull Run.

The Risk on Trade is on!

It’s official now. Fed will hold the interest rates at current levels until end of 2014. The assumption is that dollar will earn nothing and money will flow into risky asset which should outperform dollar deposits. As I have mentioned in my earlier blog, the year 2012 would be the year of multi asset; and one can see the reversion in performance of most of these assets. And quite understandably, the performance of risky assets in January caught many by surprise.

Indian market (Nifty) corrected ~25% last year. And, the current bounce from the December level of 4600 is a welcome move that came on the back of oversold markets following a global risk-on trade. But, an YTD return of 15.17% is quite fast and furious. While every one of us welcomes this uptick in Indian equities, market pundits are skeptical about this pace and the magnitude of the rise and question the sustainability of such a rally. I would say the Fed announcement was the major game changer for the year 2012 and as the rates continue to remain at the current levels until 2014; smart money has started to move towards safer bets including commodities and such assets that would outperform dollar deposits. And, higher commodity prices are always a bad news for equities. But, the good news is that tap is open for emerging markets as well. The MSCI Emerging Market Index returning YTD of 14%. Similarly, dollar gained 18.70% against rupee last year while this was reverse now as rupee appreciated 8.24% against dollar on YTD basis.

After gaining for the 11th consecutive years, gold continued its uptrend in 2012. Rupee denominated gold gained 3.7% YTD. The sheen on the domestic rupee denominated gold was taken away by the rupee appreciation despite gold in dollar denomination generating an YTD return of 12%.

The recent break out in gold from its consolidating triangle cum trading range is an vindication of that. The current gold holdings of 2,384.8 tons in bullion-backed exchange-traded products are within 0.4 percent of December’s all-time high, indicating added bullishness to this counter. And, this gold sharp up move implicitly indicates the probable things that may unfold. With Greece and its creditors struggling to reach an agreement on a debt swap and market buzzing that creditors might take a bigger cut than earlier planned; and a superficial assumption of Greece moving out of Euro if not now, later; the global and domestic equities’ next trajectory largely depends on the events that might unfold in Europe.

On the flip side, the landmark judgement by the Supreme Court of India has turned things from bad to worse for the ruling government and the party in power as this might open another set of can of worms in this election season. While all eyes are on for the UP elections and its results, the domino effect of this and the subsequent judgements in the 2G case might cap the upside on the equities and shack the stability of the already weak ruling congress government.

Given this global and domestic macros, the time and the market level currently seems to be quite apt for the conservative investors to either position his portfolio accordingly so that he is not badly hit when such events unfold or protect his existing portfolios so that he can generate absolute positive return when things go the undesired way. I am not calling black now; but prevention is always better any given day as black swans often don’t come in our way and are not visible to our eyes.

Mean reversion and tactical allocation should be the strategy to play this year. The current favourable equity market sentiments are a hugely positive and I hope this rally continues so that investors position his portfolio accordingly and in all probability hedges against such Black Swan events.

All set for an exciting 2012!

2012 - The Year of Multi Assets!

I was on a personal errand for a while; and it took me this New Year to be back to my markets and its mayhem. Year 2011 was almost an Annus Horribills for most of us in the markets across the globe, and for the economy as a whole. I wish not to start with a negative tone this year, but little I could resist given the global macros. 

2011 was the year, more often than not; I was proved right for my convictions and my call on the investment climate as a whole. This was also the year, the status of long term equity investment was questioned; the compounding effect of equity appreciation came under the scanner; under the much amplified lenses of the savvy investors who for better part of these last few years have seen much of the market horrors in Europe, US and Asia.

In the last five years, the emerging market (MXEF Index) ended up nowhere with a CAGR of 0.08%; while Nifty generated only 3.11% and Shanghai Composite generated a negative 3.84%. On the flip side, S&P 500 and Dow Jones Index generated a CAGR of -2.37% and -0.40% respectively. In the zero sum game of financial markets, if one loses somewhere, someone has to win. And, that someone is the investor who bet on commodities and currencies (if one is on the right side of the trade). On a five year basis, the dollar denominated gold generated 19.66% and Crude (again in $ terms) appreciated 10.10% on a compounded basis. The returns are amplified in the domestic market on account of rupee depreciation.  

The return on a 3 year basis is strikingly different from the one discussed above (refer to the table). This clearly highlights the fact that in the event of extreme macro situations like the one we are witnessing now, tactical allocation strategies perform far superior than the strategic asset allocation strategies. Five years may not be long term for some; who might be willing to wait for another 10, 15, 20 years and inherit the wealth to his son or daughter. Clearly, I am not taking about them.

And, to me it now appears that there is no such thing called “strategic allocation or strategy” and it will be suicidal to have one in ever changing global dynamics where winners change very often. Positioning your investment according to the global force is the key to successful trading and no wonder that the structured products is gaining traction in India (more on this in subsequent blogs).

Year 2012, in all probability will be the year of Multi Assets! 

Operation Twist

It was the Friday night on my way back home from a party, the drive on the highway reminded me that our life too was just like a black highway at night.

Quite often than not, I wondered to whose tune we may be dancing to. Now, move the time machine 50 years' back. The one thing that made the entire world go crazy is the "Twist" - a dance inspired by the rock and roll music. It was a madness amongst youth; drew fierce criticism for its proactive style and the seed to many club dance forms of today.

Now, come to the year 2011. It was the same Twist that the entire world danced to this week, but for a music composed by Uncle Ben. This Operation Twist is far more fierce and crazy than the original rock and roll in the early 1960s and shook global markets, wiped out billions of dollars.

Operation Twist is the mechanism where the Fed can sell the medium term bonds up to 3 years and purchase the long term bonds, say 10 and 30 years, thereby trying to keep long term rates lower in a hope to boost consumer credit and make Americans spend which could revive the Economy. This may be the best tool available without increasing the government debt, especially after the S&P downgrade.

Though it seems like Uncle Ben has arrived probably with best possible solution, it was rather too late as the damage was already done to the financial system. Take this. The 10 year rates are already below the inflation. The short term rates are close to zero. Unemployment rates are nearing double digit and so called QE1 and QE2 have only treated the symptoms rather than the disease, further aggravating the problem in hand. We haven't seen any meaningful demand uptick. And in all probability, the yield curve would flatten out rather than inverting and the actual outcome from this Operation Twist may not be met.

Fed has already taken the wind by commenting on the Economy, taking global markets for a roller coaster ride. Unless the Americans spend, the dust won't be settled anytime soon. It's a classic case of a chicken and Egg story. The search continues. Until then, our future is a journey on a black highway at nights, waiting for a new dawn.

Gadget Guru

I recently took a break away from the dazzling world of derivatives.  Much away from the glare of the world of finance and the busy crowded Mumbai streets; and moved closer to the heavenly nature.  The air was fresh and water was as pure as one could think of. The mind was fresh and thoughts were free flowing. Yet, I was not completely isolated from my professional world. Thanks (?) to BB. Our life has changed, may be for good. I know life was easy when Apple and Blackberries were mere fruits. Who would have ever imagined that our life will change forever with the advent of Apple and Blackberry? I often wondered what could be the best use of Apple ever since the Adam. Who would have used Apple as one would never thought of. Steve Jobs did.

I am a BB user and a Nokia fan till a few years back, but what Steve did with Apple was incredible. He is a true visionary who changed the world; changed our life; and changed the way we communicate and entertain ourselves. Without doubt he is the only soul on the earth who utilised globalisation to the fullest, turning Apple into the most valuable company on this planet. He might have been a chief executive, but he wore the shoes of the customer for most part of his career. He knew what the customer wants; rejected may be half of dozen gadgets or more that are class apart from any competitive products that would have been available.

I am not a tech expert, but as an Apple enthusiast, keeping my markets and its mayhem aside for a while, I can say words would fall short before the experience of the i-Phone or the i-Pods or the i-Pads or the Mac for that matter. The way Apple integrated its operating system with the hardware and the apps are remarkable. Blue Ocean Strategy, I would say so. Apple made competition irrelevant. The Nokia’s and Motorola’s of the world are still struggling and failing to understand what really works. Quite smartly, Steve heightened the expectations of the customers across the globe and redefined smartness with his out of box thinking. Since 1997, Apple has sold over 200 million iPods, a billion iTunes songs, 26 million iPhones, and over 60 million computers.

Debate and discussions are on ever since Steve Jobs stepped out on how successful Apple would be without him. I was told he visualized and planned i-Pad much before the i-Phone and people often stunned by his clarity of thoughts. Only a true visionary can plan that far ahead and when he stepped out, he obviously would have thought how Apple should be in the next, if not 20 years, at least for a decade.

Steve Jobs turned Apple into Gold. Edison might have had over 1800 patents in his name, but Steve Jobs proved that he can be as innovative with an Apple. I am learning my lessons; ever one has something to learn from Steve Jobs, a true visionary leader. The world was changed and man who was the catalyst of this change would be remembered forever.

Adam would still gift an Apple to Eve, but this time it will be a different one; and she, in all probability would love it, better than the first.