What the LoC Strikes Mean for Your Portfolio

Oct 1, 2016

In this issue:
» Two-wheelers take the cake
» Every 'name brand' hedge fund facing redemptions
» ...and more!
Radhika Pandit, Managing Editor of ValuePro

As the global economy gets more and more integrated, geopolitical risks will only rise. These risks affect stock markets all across the world.

This was visible during the Arab uprisings, the ongoing problems in the Middle East, and the Russia-Ukraine conflict. When these tensions erupted, stock markets were affected because of concerns related to oil. It is a well-known fact that oil prices are volatile, and geopolitical risks only add to the volatility. Indeed, even Indian stock markets faced selloffs during these conflicts.

Geopolitical issues have once again come to the fore. But this time, the crisis is homegrown. When the Indian Army conducted surgical strikes in PoK, the Sensex fell more than 400 points in a day. War, or even the prospect of war, is not perceived as good for business.

Is this pessimism justified? India is no stranger to events of this kind. We have had our share of problems with our neighbours. Such risks and events cannot be completely ignored. But at the same time, it is not easy to factor in such risks while we evaluate stocks. What we can say is that despite our history of international tensions in the past, Indian equities have certainly rewarded shareholders in the longer run despite near-term conflicts.

The immediate urge during these flare ups is to ditch stocks because everyone else is. But that would be a mistake. Depressed stock prices during these periods can actually be an opportunity to buy into the stocks of some fundamentally very good companies.

My colleague and Co-Head of Research, Tanushree Banerjee, had this to say:

  • As an investor looking to build wealth over the long term, you need to prioritise your actions. A focus on wealth preservation will give you an edge.

    Most investors fail to exit stocks when the fundamentals weaken or valuations overheat. In the bargain, they undo all the efforts that had helped create their notional wealth. So before you do anything else, weed out the problem stocks from your portfolio.

    And always keep enough cash. Being prepared to take advantage of a market correction is better than buying stocks in a frenzy. The choicest stocks will offer good entry points at the most unexpected times.

The focus has to be on quality stocks. And if their valuations start to look attractive during large-scale sell offs, then it's time to scoop them up and add them to the portfolio.

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02:31 Chart of the day

In the first five months of FY17, the Indian auto industry has put up a relatively decent show. This time, two-wheelers have done the best so far. Last year was pretty sluggish for two-wheelers as a poor monsoon season hampered crop production. As a result, incomes in the rural regions took a hit and hampered demand for two wheelers. Against this backdrop, the start this fiscal has been good for the two-wheeler industry. The management of the top two-wheeler players had indicated that things would pick up in the latter half of the fiscal. Given that monsoons have been good and the festive season has started, the numbers for the upcoming months are likely to be better.

The growth in passenger vehicles (PVs) was largely driven by utility vehicles (UVs). New product launches helped a lot. After several quarters of scorching growth in medium and heavy commercial vehicles (MHCVs), the performance in the first five months of this fiscal was sluggish, However, light commercial vehicles (LCVs), which have done badly in recent times, finally started showing noticeable signs of a recovery as volumes grew faster than MHCVs.

Exports fell during this period as conditions continues to remain weak in the African countries on account of non-availability of foreign exchange and currency devaluations.

Two-wheelers Take the Cake


Anyone who thinks size does not have a bearing on the performance is lying. This is what we have heard Warren Buffett say on numerous occasions. And he is of course right. When you are small and have only a limited corpus, you can have the agility and flexibility to move in and out of stocks based on performance. However, as you grow bigger, investment options keep shrinking and you need some big winners to make the needle of performance move. The one industry that can sympathize with Warren Buffet in this regard is the hedge fund industry in our view. Sample this. In 1990, a few hundred funds had around US$ 39 billion in funds under management.

This trickle has now turned into a deluge what with close to 10,000 funds managing US$ 3 trillion these days. This has put a very strong roadblock in the way of performance and sadly, it has begun to show in the funds flow data. As per CNBC, every 'name brand' hedge fund is facing redemptions to the tune of billions of dollars. And given how competitive the industry has become and how the funds are finding it difficult to outperform on a regular basis, the industry does look ripe for shrinking and perhaps substantially at that. And while the much needed consolidation takes place, it would also make sense for the fund to revisit their one-sided fee structure.


Majority of the world indices slipped in the negative territory in the week gone by. Barring Singapore and US, all the other global indices registered negative returns on weak cues.

Meanwhile, there were mixed signals from the US economy. The US consumer spending, that accounts for more than two-thirds of the economy, fell 0.1% in August for the first time in seven months. Even inflation showed signs of accelerating. These developments could keep the Federal Reserve cautious about raising interest rates. The Fed Chairman Janet Yellen had said last week that she expects a rate hike later this year to keep the economy from overheating.

On a positive note, China's manufacturing sector picked up pace in September. The official Purchasing Manager's index stood at 50.4 in September, similar to the previous month's level. A reading of over 50 shows growth on a monthly basis. However, profits remained uneven as heavy industries with surplus capacity such as steel struggled to grow. Crude prices gained on the back of planned output cuts by the Organisation of Petroleum Exporting Countries (OPEC). But profit-taking led to crude settling almost flat at USD$ 48 a barrel.

Back home, the Indian indices fell sharply towards the fag end of the week after escalating tension saw surgical attacks being conducted on select terrorist camps in Pakistan. The BSE Sensex was down by 2.8% for the week.

On the sectoral indices front, all the indices fell in the week gone by. Power, realty and capital goods witnessed the maximum selling pressure.

Performance During the Week Ended 30th September, 2016

04:55 Weekend investment mantra

"We really can say no in 10 seconds or so to 90%+ of all the things that come along simply because we have these filters" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst).

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