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!
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