Saturday 9 December 2017
My article in the Mid Day news paper dated 13th November 2017 " Non Convertible Debentures : A good Investment Option in the current market scenario http://epaper2.mid-day.com/epaperpdf/mumbai/13112017/13112017-md-mn-26.pdf
http://epaper2.mid-day.com/epaperpdf/mumbai/13112017/13112017-md-mn-26.pdf
Sunday 12 November 2017
Sunday 17 September 2017
Monday 28 August 2017
Monday 10 July 2017
Monday 26 June 2017
Monday 12 June 2017
Wednesday 26 April 2017
Monday 20 March 2017
Saturday 25 February 2017
Saturday 21 January 2017
Strength of the Dollar: Will the Dollar become really Strong
Strength of the Dollar: Will the Dollar become really Strong
The most
anticipated trade of 2016, Trump or No Trump is over and Wall Street and other
markets have moved on to the second most anticipated trade on how strong would
the Dollar become. With the pre-election mood of made in America for America by
Americans, the Dollar looks to become very strong but how strong would it
really become and how strong would the Trump administration like it to become
is the question that would be guide the world markets in 2017. This would be
the Trump trade 2.0.
The first trade
was about a sudden swing away from positioning for deflation and an economy
dominated by monetary policy, in favor of readying for inflation and an active
fiscal policy. Having grown slightly excessive, that Trump trade has been
corrected somewhat and a second Trump trade starts.
This trade
will last and dominate a major portion of the way, markets trade in 2017. I suspect, until markets have learnt how to
interact with a novel means of policy communication. It will involve increasing
volatility, and the critical variable will be the dollar.
The
fluctuations so far have given the clearest taste of what lies in store. Donald
Trump, provided the fuel in an interview recently where he described the Dollar
as “Too Strong “. This was obviously
dollar negative.
Also, more
importantly he gave an idea on the border tax, the idea that taxes
should be based on cash flow, rather than income or profit, and be applied on a
destination basis. This would mean products exported outside the US would not
be subject to US tax, while imports would be taxed wherever they were produced.
This is a radical notion, supported by many Republicans in Congress, and very
much in line with the wishes of Mr Trump’s core electoral support.
After banks
and investors across Wall Street had published copious research on the possibly
profound effects of a border tax on both equity and foreign exchange markets.
The president make a few statements that a border tax would be complicated and
he himself would love it.
Most Analyst
on Wall Street and in other markets are of the consensus that border taxes are
complicated. Any version would create winners and losers among equities,
dealing a potentially critical blow to businesses whose model revolves around
imports, such as retailers, whose shares have been under pressure so far this
year. It would also have a direct impact on the dollar.
Market
Pandits at Wall street feel that dollar would go up one-for-one with a border
tax, which was “short-term right, long-term very wrong. The rise in the dollar
would counteract the higher cost of imports.
The border
tax would strengthen the dollar, at least until it stimulated US businesses to
substitute imports with goods built at home. While markets have moved to
discount some of the risk, positioning even before it actually happened.
There was enough interest on border tax for the
president’s comment to push down hard on the dollar, whose trade-weighted index
is down 3.44 per cent from its high two weeks ago, and back to a level it first
reached a week after the election.
Antipathy to
a strong dollar would make it harder to raise rates and the federal funds
futures market has pegged back the odds on three rises this year, as projected
by the Federal Reserve, to where they were before the Fed’s statement last
month. The yield curve, expressed as the gap between 10-year and two-year
Treasury yields, has tightened and is flatter than it was at the beginning of
2016. These are corrections to the first Trump trade.
Meanwhile
financial stocks, despite earnings figures solidly ahead of expectations so
far, have suffered in line with the shifting picture on rates and the dollar. The value stocks have had a rotten start to
the year, for a similar reason, while dividend earners have recovered slightly.
Progress
will depend on what gets passed in Washington — and investors will have to put
up with plentiful confusion and conflicting starts. Expect rising volatility
and reduced correlation between stocks as traders react to Mr Trump’s specific
comments as they arise. Investors will have to put up with plentiful confusion
and false starts.
_ Farzan
Ghadially
Wednesday 11 January 2017
The Trade for 2017 @ Wall Street
The Trade of 2017:
The three most recommended trades
for 2017 with market consensus are that most brokerage houses are recommending …
The first possible trade is buy US
banks this year and it will bring you great wealth. The second possible trade
of 2017, is to sell short overvalued
consumer staple stocks. But the single
most compelling trade that I feel would work out very well is to buy German government bonds.
Why could you possibly want to buy debt that
offers a minuscule or negative yield? Surely only a fool would pitch such an
idea is what most people would think.
Conventional wisdom has it that to
buy German government debt is at best unimaginative and at worst brainless. Bond
yields are low because growth in the Eurozone and inflation expectations are
subdued and interest rates are likely to remain low for many years to come. To
buy fixed income securities that offer such a poor return is viewed as a sad
admission of investment defeat, as though the best that can be hoped for is to
get your principal back more or less in one piece.
Looking at it in a different way,
the apparently dull investment is one of the most mispriced opportunities on
offer. The investor who buys Bonds today is in fact taking out a compellingly
priced and highly asymmetric bet on the break up of the Eurozone at some point
before the bond comes to maturity.
The logic behind this trade is as
follows. Although it is impossible to quantify, there is a risk that the single
currency will split, whatever form the break-up would take. What can be stated
more certainty is that in such an event a future German currency, call it the
Deutschmark 2.0, would trade at a far higher level against rivals than the
euro.
Germany’s current account surplus
as a percentage of gross domestic product has risen steadily since the adoption
of the single currency it was 8 per cent last year and its current account has
strengthened relative to that of the US. A standalone Deutschmark should trade
at a significant premium to the euro when priced in US dollars.
In the event that a German currency
was set free from the artificially low single currency, the value of the
redenominated German government debt should appreciate significantly. This
means anyone buying Bonds today is in fact buying an embedded option on this
potential future appreciation.
The question is how aware is the
wider market of the existence of this embedded option, and what value can be
ascribed to it?
Unlike a regular option, buying
German government bonds does not involve paying an expensive premium and losing
money to time decay. A 10-year Bond can be purchased today at a yield of 0.3
per cent, meaning that a position can be held for a decade with a positive cost
of carry, at least in nominal terms.
A second advantage is the asymmetry
of the risks involved in holding the position. You are unlikely to lose money
but retain the possibility of a significant pay-off should a Eurozone break up
occur. Provided you keep faith in the creditworthiness of the federal German government,
the greatest risk is a sharp rise in Eurozone inflation, which erodes the value
of your principal.
You also risk a mark to market loss
should German yields rise from your purchase price, but holding the position to
maturity would negate this.
The final advantage to the trade is
tactical the position is highly liquid and cash like so there is little
opportunity cost in holding it. In the event of more attractive investments
arising over the duration of the bond, it can be easily sold and the proceeds
reinvested.
Many smart investors have over the
years come up with complicated ideas to bet on the break-up of the single
currency, with mixed results. It may be that the simplest and most effective
has been staring them in the face all along.
The big risk of this embedded
option trade is if inflation jumps in the block.
_ Farzan Ghadially
Monday 2 January 2017
No Short Term Crisis coming in 2017 in the Chinese Markets
Western Concerns
Justified on the Chinese Markets, but no Short Term Crisis coming in 2017.
When the direct
trading link between stock markets in Shenzhen and Hong Kong opened last month the
international investors ready to take advantage of what was billed as a big
opportunity to buy into Chinese equities.
The link offers
foreign investors greater access to shares on the Shenzhen stock market, home
to some of China’s up comming technology companies. However, flows reached
just a fifth of their daily limit on the link’s debut and have failed to match
that since.
Judged by the money,
international interest in Chinese stocks remains anemic. Yet talk to
strategists focused on the country and many think the worlds second-largest
capital market could be on the brink of another bull run.
A lot of international investors still like the
China market . There’s incredible
dispersion in this market and a lot of change, whether it is driven by
regulation or reform, but also change driven by technology and within that we
can find some fantastic opportunities is the overall call on a broad basis.
The skepticism of
international investors is understandable. It has been more than a year since
Chinese stock markets were synonymous with anything other than headaches. The
last big bull market in early 2015 was eye-popping in scale and it caught most
fund managers off-guard. The bust that followed was brutal and those whose
money was trapped when about half the listed market suspended trading still
bear the scars.
Since then, angst
about China’s currency policy has triggered two episodes of global market
turmoil and concerns about its weakness are growing once more.
Small wonder that Hong
Kong-listed Chinese companies still the broadest means of gaining exposure are
trading on a soggy 8 times expected earnings, compared with a ratio of 15 times
for the MSCI Asia-Pacific.
Yet leading brokerages
like Morgan Stanley recently upgraded China to “overweight” for the first time
in 18 months, looking for a rally led by earnings growth.
Others have focused on
potential misunderstandings by western investors of changes in China.
There is a lot of
concern about the financial systemic risk for the whole banking system; the
second is the big concern about the property tightening related downside risk
this year. And, thirdly, a lot investors and analyst underestimate the China
reform process.
The economy’s debt
mountain is a long-running concern for China watchers. Overall debt has risen
to more than 250 per cent of gross domestic product from about 150 per cent 10
years ago a very high increase.
But the bulls argue
this may be peaking and in key areas, beginning to ease.
I do acknowledge that the overall gearing
level is high but I do not believe there is an imminent risk of a short-term
crisis, in my opinion.
One of the biggest
risks for China, however, may be outside its control namely the action of US president
Donald Trump. Mr Trump has threatened to label China a currency manipulator and
impose 45 per cent tariffs on Chinese imports.
In my opinion if this danger does play out, which could take more than a percentage point off Chinese
growth by some estimates but think the likelihood of Mr Trump making good on
his threats is slim since it would hit the US too, raising the prices of
everyday items.
This year the Shanghai
Composite and its Shenzhen counterpart are down 12 per cent and 15 per cent.
Crucially, however, neither has broken below its average valuation of the past
five years, implying sentiment this time has not been so thoroughly crushed as
it was in the four-year bear market to 2014.
China’s bulls are
counting on it and I do not believe there is an imminent risk of a short-term
crisis.
_ Farzan Ghadially
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